FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2006 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 9, 2006
------------------------------------- ------------------------------------
Common Stock 3,441,551 shares
FORWARD LOOKING STATEMENTS
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and
other words of similar meaning. In particular, these include statements relating
to intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies, such as
bankruptcy and other legal proceedings, and financial conditions. These
statements do not relate strictly to historical or current facts. These
forward-looking statements are based on American Biltrite Inc.'s expectations
and American Biltrite Inc.'s understanding of its majority-owned subsidiary
Congoleum Corporation's expectations, as of the date of this report, of future
events, and American Biltrite Inc. undertakes no obligation to update any of
these forward-looking statements, except as required by federal securities laws.
Although American Biltrite Inc. believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Any or all of these statements may
turn out to be incorrect. By their nature, forward-looking statements involve
risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. Any forward-looking
statements made in this report speak only as of the date of this report unless
the statement indicates that another date applies. It is not possible to predict
or identify all factors that could potentially cause actual results to differ
materially from expected and historical results. Factors that could cause or
contribute to American Biltrite Inc.'s actual results differing from its
expectations include those factors discussed in Item 1A of Part II of this
Quarterly Report on Form 10-Q and in American Biltrite Inc.'s other filings with
the Securities and Exchange Commission.
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets - Assets as of
September 30, 2006 (unaudited) and December 31, 2005......1
Consolidating Condensed Balance Sheets - Liabilities and
Stockholders' Equity as of September 30, 2006
(unaudited) and December 31, 2005.........................2
Consolidating Condensed Statements of Operations
(unaudited) for the three months ended September 30,
2006 and 2005.............................................3
Consolidating Condensed Statements of Operations
(unaudited) for the nine months ended September 30,
2006 and 2005.............................................4
Consolidating Condensed Statements of Cash Flows -
Operating Activities (unaudited) for the nine months
ended September 30, 2006 and 2005.........................5
..
Consolidating Condensed Statements of Cash Flows -
Investing & Financing Activities (unaudited) for the
nine months ended September 30, 2006 and 2005.............6
Notes to Unaudited Consolidating Condensed Financial
Statements................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................40
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..............................................57
Item 4. Controls and Procedures..................................58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................58
Item 1A. Risk Factors.............................................59
Item 3. Defaults Upon Senior Securities..........................68
Item 6. Exhibits.................................................69
Signature .........................................................71
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
September 30, December 31, September 30, December 31,
2006 2005 2006 2005
-----------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 22,035 $ 29,184
Restricted cash 10,220 11,644
Accounts receivable, net 50,665 41,742 $(407) $(455)
Inventories 82,691 77,127 (121) (166)
Assets of discontinued operation -- 3,142
Deferred income taxes 18,036 18,036
Prepaid expense & other current
assets 27,375 24,062
----------------------------------------------------
Total current assets 211,022 204,937 (528) (621)
Property, plant & equipment, net 108,017 115,336
Other assets:
Insurance for asbestos-related
liabilities 8,950 8,950
Goodwill, net 11,475 11,726
Other assets 20,463 15,895 (135) (147)
----------------------------------------------------
40,888 36,571 (135) (147)
----------------------------------------------------
Total assets $359,927 $ 356,844 $(663) $(768)
====================================================
Congoleum American Biltrite
September 30, December 31, September 30, December 31,
2006 2005 2006 2005
----------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 19,722 $ 24,511 $ 2,313 $ 4,673
Restricted cash 10,220 11,644
Accounts receivable, net 26,731 17,092 24,341 25,105
Inventories 34,062 34,607 48,750 42,686
Assets of discontinued operation -- 3,142
Deferred income taxes 16,735 16,735 1,301 1,301
Prepaid expense & other current
assets 23,555 20,139 3,820 3,923
-------------------------------------------------------------
Total current assets 131,025 124,728 80,525 80,830
Property, plant & equipment, net 68,002 73,207 40,015 42,129
Other assets:
Insurance for asbestos-related
liabilities 8,950 8,950
Goodwill, net 11,475 11,726
Other assets 10,515 9,412 10,083 6,630
-------------------------------------------------------------
10,515 9,412 30,508 27,306
-------------------------------------------------------------
Total assets $209,542 $207,347 $151,048 $150,265
=============================================================
See accompanying notes to consolidating condensed financial statements.
1
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations
September 30, December 31, September 30, December 31,
2006 2005 2006 2005
-----------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 25,907 $ 22,144 $ (407) $ (455)
Accrued expenses 42,874 42,976
Asbestos-related liabilities 16,635 28,369
Liabilities of discontinued operation -- 200
Notes payable 34,504 19,062
Current portion of long-term debt 2,379 20,451
Liabilities subject to compromise 31,965 23,990
-----------------------------------------------------------
Total current liabilities 154,264 157,192 (407) (455)
Long-term debt, less current portion 9,597 1,963
Asbestos-related liabilities 9,860 9,500
Other liabilities 29,633 29,625
Noncontrolling interests 1,119 1,365
Liabilities subject to compromise 136,021 138,714 (135) (147)
-----------------------------------------------------------
Total liabilities 340,494 338,359 (542) (602)
Stockholders' equity
Common stock 46 46 (93) (93)
Additional paid-in capital 19,581 19,570 (49,294) (49,126)
Retained earnings 32,731 31,913 35,342 35,129
Accumulated other comprehensive loss (17,793) (17,912) 6,111 6,111
Less treasury shares (15,132) (15,132) 7,813 7,813
-----------------------------------------------------------
Total stockholders' equity 19,433 18,485 (121) (166)
-----------------------------------------------------------
Total liabilities and stockholders'
equity $ 359,927 $ 356,844 $ (663) $ (768)
===========================================================
Congoleum American Biltrite
September 30, December 31, September 30, December 31,
2006 2005 2006 2005
--------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 14,566 $ 12,245 $ 11,748 $ 10,354
Accrued expenses 23,578 22,703 19,296 20,273
Asbestos-related liabilities 16,635 28,369
Liabilities of discontinued operation -- 200
Notes payable 14,286 9,404 20,218 9,658
Current portion of long-term debt 2,379 20,451
Liabilities subject to compromise 31,965 23,990
------------------------------------------------------------
Total current liabilities 101,030 96,711 53,641 60,936
Long-term debt, less current portion 9,597 1,963
Asbestos-related liabilities 9,860 9,500
Other liabilities 16,735 16,735 12,898 12,890
Noncontrolling interests 1,119 1,365
Liabilities subject to compromise 136,156 138,861
------------------------------------------------------------
Total liabilities 253,921 252,307 87,115 86,654
Stockholders' equity
Common stock 93 93 46 46
Additional paid-in capital 49,294 49,126 19,581 19,570
Retained earnings (64,992) (65,405) 62,381 62,189
Accumulated other comprehensive loss (20,961) (20,961) (2,943) (3,062)
Less treasury shares (7,813) (7,813) (15,132) (15,132)
------------------------------------------------------------
Total stockholders' equity (44,379) (44,960) 63,933 63,611
------------------------------------------------------------
Total liabilities and stockholders'
equity $ 209,542 $ 207,347 $ 151,048 $ 150,265
============================================================
See accompanying notes to consolidating condensed financial statements.
2
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended September 30, 2006 and 2005
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------------
Net sales $ 108,474 $ 114,152 $ -- $ 54 $ 57,460 $ 60,507 $ 51,014 $ 53,591
Cost of products sold 81,575 85,841 (107) 2 44,562 47,270 37,120 38,569
Selling, general & administrative
expenses 24,223 23,938 10,681 10,556 13,542 13,382
--------------------------------------------------------------------------------------------
Income from operations 2,676 4,373 107 52 2,217 2,681 352 1,640
Other income (expense)
Interest income 213 91 104 91 109 --
Interest expense (3,560) (3,241) (2,916) (2,670) (644) (571)
Other (expense) income (721) 417 (125) (67) 77 223 (673) 261
--------------------------------------------------------------------------------------------
(4,068) (2,733) (125) (67) (2,735) (2,356) (1,208) (310)
--------------------------------------------------------------------------------------------
(Loss) income before taxes and
other items (1,392) 1,640 (18) (15) (518) 325 (856) 1,330
(Benefit from) provision for
income taxes (555) 481 (94) -- (461) 481
Noncontrolling interests (21) (71) (21) (71)
--------------------------------------------------------------------------------------------
(Loss) income from continuing
operations (858) 1,088 (18) (15) (424) 325 (416) 778
Discontinued operation 6 (80) 6 (80)
--------------------------------------------------------------------------------------------
Net (loss) income $ (852) $ 1,008 $ (18) $ (15) $ (424) $ 325 $ (410) $ 698
============================================================================================
Basic Diluted
2006 2005 2006 2005
------------------------ ------------------------
(Loss) income per common share
from continuing operations $ (0.25) $ 0.32 $ (0.25) $ 0.31
Discontinued operation -- (0.02) -- (0.02)
------------------------ ------------------------
Net (loss) income per common share $ (0.25) $ 0.30 $ (0.25) $ 0.29
======================== ========================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,441,551 3,475,154
======================== ========================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
----------------------------------------------------------------------------------------------
Net sales $ 337,660 $ 331,118 $ -- $ 178 $ 173,440 $ 176,245 $ 164,220 $ 154,695
Cost of products sold 253,218 246,630 (458) (81) 133,661 135,577 120,015 111,134
Selling, general & administrative
expenses 73,622 88,428 31,338 48,416 42,452 40,012
----------------------------------------------------------------------------------------------
Income (loss) from operations 10,652 (3,940) 458 259 8,441 (7,748) 1,753 3,549
Other income (expense)
Interest income 694 320 387 273 307 47
Interest expense (10,522) (9,772) (8,517) (7,788) (2,005) (1,984)
Other (expense) income (196) 2,582 (413) (191) 124 638 93 2,135
----------------------------------------------------------------------------------------------
(10,024) (6,870) (413) (191) (8,006) (6,877) (1,605) 198
----------------------------------------------------------------------------------------------
Income (loss) before taxes and
other items 628 (10,810) 45 68 435 (14,625) 148 3,747
(Benefit from) provision for
income taxes (76) 1,436 22 -- (98) 1,436
Noncontrolling interests (34) (632) (34) (632)
----------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 670 (12,878) 45 68 413 (14,625) 212 1,679
Discontinued operation (20) (193) (20) (193)
----------------------------------------------------------------------------------------------
Net income (loss) $ 650 $ (13,071) $ 45 $ 68 $ 413 $ (14,625) $ 192 $ 1,486
==============================================================================================
Basic Diluted
2006 2005 2006 2005
----------------------- ------------------------
Income (loss) per common share from
continuing operations $ 0.19 $ (3.74) $ 0.19 $ (3.74)
Discontinued operation (0.01) (0.06) (0.01) (0.06)
----------------------- ------------------------
Net income (loss) per common share $ 0.18 $ (3.80) $ 0.18 $ (3.80)
======================= ========================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,460,429 3,441,551
======================= ========================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS - OPERATING ACTIVITIES
(Unaudited) For the Nine Months Ended September 30, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
------------------------------------------------------------------------------------
Operating activities
Net income (loss) $ 650 $(13,071) $ 45 $ 68 $ 413 $(14,625) $ 192 $ 1,486
Net loss from discontinued operation 20 193 20 193
------------------------------------------------------------------------------------
Income (loss) from continuing operations 670 (12,878) 45 68 413 (14,625) 212 1,679
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Depreciation and amortization 12,471 12,669 8,031 8,371 4,440 4,298
Stock compensation expense 180 169 -- 11 --
Gain on sale of property -- (2,280) -- (2,280)
Charge for early extinguishment of debt 860 -- 860 --
Asbestos-related charge -- 15,454 -- 15,454
Change in operating assets and liabilities:
Accounts and notes receivable (8,680) (10,706) (195) (537) (9,639) (8,538) 1,154 (1,631)
Inventories (4,691) (3,564) (45) (68) 545 2,558 (5,191) (6,054)
Prepaid expenses and other assets 683 (1,323) 479 577 204 (1,900)
Accounts payable and accrued expenses 8,082 6,932 195 537 8,215 2,703 (328) 3,692
Asbestos-related expenses (17,752) (20,819) (17,752) (20,819)
Asbestos-related reimbursement from
insurance settlement 3,684 6,091 3,684 6,091
Noncontrolling interests (246) 737 (246) 737
Other (2,863) (1,588) (2,703) (1,838) (160) 250
------------------------------------------------------------------------------------
Net cash (used) provided by operating
activities of continuing operations (7,602) (11,275) -- -- (8,558) (10,066) 956 (1,209)
Net cash used by operating activities
of discontinued operations (79) (300) (79) (300)
------------------------------------------------------------------------------------
Net cash (used) provided by operating
activities $ (7,681) $(11,575) $ -- $ -- $ (8,558) $(10,066) $ 877 $(1,509)
====================================================================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
INVESTING & FINANCING ACTIVITIES (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------
Investing activities
Investments in property, plant and equipment $ (4,714) $ (5,425) $ -- $ -- $ (2,537) $ (3,640) $ (2,177) $(1,785)
Proceeds from sale of property 680 2,327 680 2,327
-------------------------------------------------------------------------------
Net cash (used) provided by investing
activities of continuing operations (4,034) (3,098) -- -- (2,537) (3,640) (1,497) 542
Financing activities
Net short-term borrowings 25,009 4,307 4,882 3,095 20,127 1,212
Payments on long-term debt (20,196) (2,611) (20,196) (2,611)
Penalty payment on early extinguishment of debt (860) -- (860) --
Net change in restricted cash 1,424 (1,441) 1,424 (1,441)
-------------------------------------------------------------------------------
Net cash provided (used) by financing
activities of continuing operations 5,377 255 -- -- 6,306 1,654 (929) (1,399)
Effect of foreign exchange rate changes
on cash (811) 686 (811) 686
-------------------------------------------------------------------------------
Net decrease in cash (7,149) (13,732) -- -- (4,789) (12,052) (2,360) (1,680)
Cash and cash equivalents at beginning
of period 29,184 34,691 24,511 29,710 4,673 4,981
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 22,035 $ 20,959 $ -- $ -- $ 19,722 $ 17,658 $ 2,313 $ 3,301
================================================================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
September 30, 2006
(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, provisions for
discontinued operations and provisions to effect the proposed amended plan of
reorganization of Congoleum Corporation, a majority-owned subsidiary of the
Company, to settle asbestos liabilities) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 2006 are not necessarily indicative of the results that may
be expected for future periods, including the year ending December 31, 2006. For
further information, refer to the consolidating financial statements and the
notes to those financial statements included in American Biltrite Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2005.
The consolidating balance sheet at December 31, 2005 has been derived from the
audited financial statements as of that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.
Certain amounts in 2005 have been reclassified to conform to 2006
classifications. The Company has separately disclosed the operating, investing
and financing portions of the cash flows attributed to its discontinued
operations, which in prior periods were reported on a combined basis as a single
amount.
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. 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. In
April 2006, the Company completed the sale of Janus' remaining building and land
(see Note D). Subsequent to the sale of the property, the resulting note
receivable and deferred gain have been classified as a non-current asset and
non-current liability, respectively.
7
Note A - Basis of Presentation (continued)
As discussed more fully below and elsewhere in these footnotes, on December 31,
2003, the Company's majority owned subsidiary Congoleum Corporation
("Congoleum") and two of Congoleum's subsidiaries filed in the United States
Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court")
voluntary petitions commencing cases for reorganization relief under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). 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 and expects to continue to control Congoleum while it is in
reorganization proceedings.
In January 2004, Congoleum filed its proposed plan of reorganization and
disclosure statement with the Bankruptcy Court. In November 2004, Congoleum
filed a modified plan of reorganization and related documents with the
Bankruptcy Court (the "Fourth Plan") reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee (the
"ACC"), the Future Claimants' Representative (the "FCR") and other asbestos
claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures in December 2004 and Congoleum obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of the
Fourth Plan. In April 2005, Congoleum announced that it had reached an agreement
in principle with representatives of the ACC and the FCR 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 agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code (the "Plan Trust") to
pay asbestos claims against Congoleum. In July 2005, Congoleum filed an amended
plan of reorganization (the "Sixth Plan") and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan, and the
Sixth Plan was subsequently withdrawn. In November 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. In March 2006, Congoleum filed a
new amended plan of reorganization (the "Eighth Plan"). In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, "CNA"), filed a plan of reorganization and the
Official Committee of Bondholders (the "Bondholders' Committee"), representing
holders of Congoleum's 8 5/8% Senior Notes due August 1, 2008 (the "Senior
Notes"), also filed a plan of reorganization. In May 2006, the Bankruptcy Court
ordered all parties in interest in Congoleum's reorganization proceedings to
participate in global mediation discussions. Several mediation sessions took
place from June through September 2006. During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
8
Note A - Basis of Presentation (continued)
agreeable definitive documentation, with the ACC, the FCR and ABI, on certain
terms of an amended plan of reorganization (the "Ninth Plan"), which Congoleum
filed and proposed jointly with the ACC on August 11, 2006. CNA and the
Bondholders' Committee jointly filed a new, competing plan on August 18, 2006,
and each withdrew its prior plan of reorganization. Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders' Committee
reached agreement on terms of a new amended plan (the "Tenth Plan"), which
Congoleum filed jointly with the ACC on September 15, 2006. Following the
Bondholders' Committee's withdrawal of support for CNA's plan, CNA filed an
amended plan of reorganization (the "CNA Plan"). On October 23, 2006, Congoleum
and the ACC jointly filed a revised version of the Tenth Plan (the "Eleventh
Plan") which reflected minor technical changes agreed to by the various parties
supporting Congoleum's plan. On October 26, 2006, the Bankruptcy Court held a
hearing to consider the adequacy of the disclosure statements with respect to
the Tenth Plan and the CNA Plan and to hear arguments on the respective summary
judgment motions as to whether the Tenth Plan and the CNA Plans are not
confirmable as a matter of law. The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court's ruling on the respective summary judgment motions which are
pending. Because the Tenth Plan and Eleventh Plan are substantially identical,
Congoleum believes rulings issued with respect to the Tenth Plan will also apply
to the Eleventh Plan.
There can be no assurance that Congoleum will not amend the Eleventh Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court and the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued protracted litigation over its plan of reorganization. It is
unclear whether the Bankruptcy Court will approve the CNA Plan or whether the
CNA Plan, if confirmed, would be feasible. Moreover, it is unclear whether any
other person will attempt to propose a plan or what any such plan would provide
or propose, and whether the Bankruptcy Court would approve a plan other than
Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eleventh Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eleventh Plan. Furthermore, an ad hoc committee of
bondholders claiming to hold 44.96% of the aggregate outstanding principal
amount of the Senior Notes has threatened to vote against the Eleventh Plan.
While Congoleum intends to seek to obtain the required acceptances of the
Eleventh Plan from all necessary classes of creditors (if the insurers' pending
summary judgment motion, seeking a ruling from the Bankruptcy Court that the
Tenth Plan is not confirmable as a matter of law, is denied or withdrawn), the
Eleventh Plan provides an alternative treatment for holders of the Senior Notes
and stockholders in the event sufficient holders of the Senior Notes do not vote
to accept the plan, which would materially affect the recoveries of these
9
Note A - Basis of Presentation (continued)
classes. In the event that the holders of the Senior Notes do not vote to accept
the Eleventh Plan by the requisite number and amount required by the Bankruptcy
Code, then Plan confirmation will be sought in accordance with the cram down
provisions of the Bankruptcy Code (the "Cramdown Treatment"). Pursuant to the
Cramdown Treatment, the Senior Notes and Congoleum's existing Class A and Class
B common stock (including the shares of Congoleum common stock owned by ABI)
would be cancelled and the holders of the Senior Notes would receive their pro
rata share, with the Plan Trust, of newly issued shares of common stock of
Congoleum, as determined by the Bankruptcy Court in the confirmation order.
The terms of the Eleventh Plan could be amended or modified as a result of
further negotiations with various parties. The terms of the CNA Plan are
materially different from the terms of the Eleventh Plan, and the CNA Plan may
also be amended or modified or may be withdrawn. There can be no assurance that
the terms of the reorganization plan that is ultimately confirmed, if any, will
not materially differ from the terms of the Eleventh Plan. Congoleum expects
that it will take until some time in the first quarter of 2007 at the earliest
to obtain confirmation of any plan of reorganization.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $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 Congoleum's rights under its applicable insurance coverage
and payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced an omnibus avoidance action and a sealed avoidance action
(collectively, the "Avoidance Actions") seeking to void the security interest
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006, and the Avoidance Actions remain pending.
The Eleventh Plan incorporates a compromise and settlement of the asbestos
personal injury claims that were settled prior to the petition date under the
Claimant Agreement and other pre-petition settlement agreements. Under the terms
of the Eleventh Plan, after the establishment of the Plan Trust, the assets in
the Collateral Trust would be transferred to the Plan Trust, and any asbestos
claims would be channeled to the Plan trust and paid in accordance with the
terms of the Eleventh Plan. Settlement values under the Eleventh Plan differ
from values under previous plans, the Claimant Agreement, and other pre-petition
settlement agreements. As a result of such differences, the liability associated
with the asbestos personal injury claims against Congoleum may be materially
different than the present estimates of such items. As a result of tabulating
ballots on the Fourth Plan, Congoleum 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 approximately $512 million based on the settlement values
10
Note A - Basis of Presentation (continued)
applicable in the Sixth Plan. Based on the Eighth Plan, Congoleum has made
provisions in its financial statements for the minimum amount of the range of
estimates for its contribution to effect its plan to settle asbestos liabilities
through the Plan Trust. Congoleum recorded charges aggregating approximately
$51.3 million in prior years and is not yet able to determine the amount of the
additional cost that will be required to complete its reorganization as based on
the Eleventh Plan. Actual amounts that will be contributed to the Plan Trust and
costs for pursuing and implementing the Eleventh Plan or any other plan of
reorganization could be materially higher than currently recorded. Congoleum may
record significant additional charges should the minimum estimated cost
increase. Delays in proposing, filing or obtaining approval of the Eleventh Plan
or any new amended plan of reorganization or the proposal or solicitation of
additional plans by other parties could result in a proceeding that takes longer
and is more costly than Congoleum has estimated. Congoleum may record
significant additional charges should the minimum estimated cost increase.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note K.
Although there can be no assurances with respect to the terms of any new amended
plan of reorganization for Congoleum, the Company believes, that there is
reasonable basis to expect it will maintain control of Congoleum under the terms
of any plan proposed by Congoleum, subject to Congoleum obtaining the necessary
acceptances and approvals required for confirmation of the plan, including not
seeking confirmation of the plan by means of the Cramdown Treatment.
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 K,
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.
11
Note A - Basis of Presentation (continued)
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, the Plan Trust. 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 related
to pre-petition matters.
Recently Issued Accounting Principles
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans ("SFAS No. 158"), which
amends SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits, SFAS No. 106, Employers Accounting for Postretirement
Benefits Other Than Pensions, and SFAS No. 132R, Employers' Disclosures about
Pensions and Other Postretirement Benefits (revised 2003). SFAS No. 158 requires
companies to recognize an asset or liability for the overfunded or underfunded
status of their benefit plans in their financial statements. SFAS No. 158 also
requires the measurement date for plan assets and liabilities to coincide with
the sponsor's year end. This standard provides two transition alternatives
related to the change in measurement date provisions. The recognition of an
asset and liability related to the funded status provision is effective for
fiscal years ending after December 15, 2006, and the change in measurement date
provisions is effective for fiscal years ending after December 15, 2008. Based
on the funded status of the Company's pension plans as of December 31, 2005 and
assuming the same December 31, 2005 actuarial assumptions, such as discount
rates and asset returns, and plan experience, the Company estimates that the
impact due to the recognition at December 31, 2006 of previously unrecognized
amounts would reduce shareholders' equity by approximately $2.0 million, before
the recognition of any tax effect, which the Company believes is not material.
The actual impact of the recognition provisions of SFAS No. 158 will not be
known until year-end valuations are available. Actuarial assumptions used for
valuations of the Company's pension and other postretirement plan liabilities as
of December 31, 2006 may differ from actuarial assumptions used as of December
31, 2005.
12
Note A - Basis of Presentation (continued)
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An interpretation of FASB Statement No. 109 ("FIN 48"). This
Interpretation provides for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The Company will adopt this Interpretation in the
first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will
be recorded as an adjustment to retained earnings. The Company is currently
assessing the impact of this Interpretation on its financial position and
results of operations.
Note B - Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), Share-Based Payment, and related interpretations ("SFAS No. 123(R)")
using the modified prospective method and, accordingly, has not restated prior
period results. SFAS No. 123(R) establishes the accounting for equity
instruments exchanged for employee services. Under SFAS No. 123(R), share-based
compensation cost is measured at the grant date based on the calculated fair
value of the award. The expense is recognized over the employees' requisite
service period, generally the vesting period of the award. SFAS No. 123(R) also
requires the related excess tax benefit received upon exercise of stock options
or vesting of restricted stock, if any, to be reflected in the statement of cash
flows as a financing activity rather than an operating activity.
The Company has elected to continue to use the Black-Scholes option pricing
model to estimate the fair value of stock-based awards. The use of a
Black-Scholes option pricing model requires the input of assumptions determined
by management of the Company at the measurement date.
These assumptions include the risk-free interest rate, expected dividend yield,
volatility factor of the expected market price of the Company's common stock and
the expected life of stock option grants.
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock
options to employees in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company also provided the disclosures required under SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosures. As a result, no expense was reflected in the Company's operating
results for the nine months ended September 30, 2005 for stock options, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant.
13
Note B - Stock Based Compensation (continued)
The table below reflects the pro forma net income and earnings per share for the
three and nine months ended September 30, 2005 had compensation for stock
options been determined based on the fair value of the stock options at the
grant date, consistent with the methodology prescribed under SFAS No. 123.
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
---------- ----------
(In thousands, except per
share amounts)
Net income (loss):
As reported $ 1,008 $ (13,071)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effects (99) (293)
---------- ----------
As adjusted $ 909 $ (13,364)
========== ==========
Net income (loss) per share - basic:
As reported $ 0.30 $ (3.80)
Pro forma compensation expense (0.03) (0.08)
---------- ----------
As adjusted $ 0.27 $ (3.88)
========== ==========
Net income (loss) per share - diluted:
As reported $ 0.29 $ (3.80)
Pro forma compensation expense (0.03) (0.08)
---------- ----------
As adjusted $ 0.26 $ (3.88)
========== ==========
The pro forma expense for the three and nine months ended September 30, 2005
represent the vesting of options previously granted by ABI and Congoleum. The
impact of the adoption of SFAS No. 123(R) on the Company's consolidated net
income per share was to reduce net income by approximately $0.01 and $0.03 per
share for the three and nine months ended September 30, 2006, respectively.
On July 1, 2006, ABI and Congoleum granted 4,000 and 2,500 options,
respectively. The exercise price and estimated fair value of the ABI option was
$10.97 and $5.16, respectively. The exercise price and estimated fair value of
the Congoleum option was $2.11 and $1.68, respectively. The options granted by
ABI and Congoleum vest on January 1, 2007. During the three and nine months
ended September 30, 2006, the Company recognized compensation expense related to
14
Note B - Stock Based Compensation (continued)
the vesting of ABI and Congoleum options of $70 thousand and $168 thousand,
respectively. At September 30, 2006, the unrecognized compensation expense
related to unvested options previously granted by Congoleum was approximately
$100 thousand. This compensation expense will be recognized as the options vest
over a weighted-average period of 1.0 year.
On November 10, 2005, the Board of Directors of American Biltrite approved the
vesting of all outstanding and unvested options held by directors, officers and
employees under the Company's 1993 Stock Award and Incentive Plan, as amended
and restated as of March 4, 1997, and 1999 Stock Option Plan for Non-Employee
Directors (together, the "ABI Stock Plans"). As a result of the acceleration of
vesting, options to acquire 195,600 shares of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable in full. This action was taken to eliminate, to the
extent permitted, the transition expense that the Company otherwise would incur
in connection with the adoption of SFAS No. 123(R). The exercise prices of all
of the unvested options were lower than the closing trading price of the
Company's common stock on the modification date. Under the accounting guidance
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the accelerated vesting resulted in a charge for stock-based
compensation of approximately $22 thousand in 2005.
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of up
to 50,000 shares of ABI common stock upon exercise of options granted under the
plan to ABI's non-employee directors. Under the terms of the plan, options
granted are nonqualified and have an exercise price per share equal to 100% of
the fair market value per share of the Company's common stock at the date of
grant. Options granted under the plan are exercisable nine months after the date
of grant.
ABI maintains a stock award and incentive plan which permits the issuance of
options, stock appreciation rights (SARs), limited SARs, restricted stock,
restricted stock units and other stock-based awards to selected employees and
independent contractors of the Company. Upon adoption of the plan, 400,000
shares of common stock were reserved for issuance upon exercise of options
granted under the plan. The plan provides that the term of each award be
determined by the compensation committee of the Board of Directors (the
"Committee") charged with administering the plan. During 1997, the Board of
Directors approved an amendment to the plan to increase from 400,000 to 550,000
the number of shares reserved for issuance upon exercise of options granted
under the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price per share, determined by the
Committee, may not be less than the fair market value of a share on the date of
15
Note B - Stock Based Compensation (continued)
grant. SARs and limited SARs granted in tandem with an option shall be
exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. In
addition, the Committee may grant restricted stock to participants under the
plan at no cost to them (other than any applicable taxes). No SARs or restricted
stock have been granted under the plan since its adoption. Other than the
restrictions that limit the sale and transfer of these SARs and restricted
stock, participants are entitled to all shareholder rights with respect to SARs
and restricted stock granted to them.
Congoleum Stock Option Plans
Congoleum maintains a stock option plan for its officers and key employees and a
stock option plan for its non-employee directors (together, the "Congoleum Stock
Option Plans"). Under these plans, options to purchase up to 850,000 shares of
Congoleum's Class A common stock may be issued to directors, officers and key
employees. These options may be either incentive stock options or nonqualified
stock options, and the options' exercise price must be at least equal to the
fair market value of Congoleum's Class A common stock on the date of grant.
Treasury shares of the applicable company may be issued in consideration of
stock option exercises under the ABI Stock Plans or the Congoleum Stock Option
Plans.
Stock Option Information
Stock option information for the ABI Stock Plans and the Congoleum Stock Option
Plans as of and for the nine months ended September 30, 2006 was as follows:
Congoleum Stock
ABI Stock Plans Option Plans
------------------------------ -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------ -------------------------------
Outstanding at December 31, 2005 483,000 $15.42 693,500 $2.04
Granted 4,000 10.97 2,500 2.11
Exercised -- -- (600) 0.36
Forfeited (1,000) 9.65 (32,400) 2.03
-------------- --------------
Outstanding at September 30, 2006 486,000 15.40 663,000 2.04
============== ==============
Exercisable at September 30, 2006 482,000 $15.44 511,500 $2.05
============== ==============
Available for grant at:
December 31, 2005 100,020 142,900
September 30, 2006 97,020 172,800
Weighted-Average Remaining Contractual
Life at September 30, 2006 (Years)
Outstanding options 4.89 5.77
Exercisable options 4.89 5.77
16
Note B - Stock Based Compensation (continued)
The intrinsic value of outstanding and exercisable stock options issued under
the ABI Stock Plans and the Congoleum Stock Option Plans as of September 30,
2006 were as follows (in thousands):
ABI Congoleum
------------------ ------------------
Outstanding options $107 $36
Exercisable options 107 23
Stock option information related to nonvested shares for the Congoleum Stock
Option Plans for the nine months ended September 30, 2006 was as follows:
Weighted-
Average
Grant Date
Shares Fair Value
--------------------------------
Nonvested at December 31, 2005 292,900 $1.67
Granted 2,500 2.11
Vested (140,500) 2.09
Forfeited (3,400) 1.85
--------------
Nonvested at September 30, 2006 151,500 $1.28
==============
The intrinsic value of Congoleum's stock options that vested during the nine
months ended September 30, 2006 was $23 thousand.
Note C - Inventories
Inventories at September 30, 2006 and December 31, 2005 consisted of the
following (in thousands):
September 30, December 31,
2006 2005
------------- ------------
Finished goods $56,248 $50,515
Work-in-process 13,624 10,370
Raw materials and supplies 12,819 16,242
------------- ------------
$82,691 $77,127
============= ============
17
Note D - Sale of Property
In April 2006, the Company completed the sale of a building and land owned by
Janus, a discontinued operation (see Note A). The building and land were sold
for $5.0 million Canadian dollars ("C$"). The Company received C$1.0 million in
cash and a C$4.0 million note. Commissions and other expenses incurred in
connection with the sale totaled C$200 thousand, resulting in net cash proceeds
of C$800 thousand. Payment of the note is contingent upon obtaining an
environmental certification on the land sold. In order to obtain that
certification, the Company expects to incur approximately C$200 thousand to
remediate the property. Remediation is expected to be completed during the first
half of 2007. As of September 30, 2006, the Company has recorded a deferred gain
of approximately C$1.0 million. The Company expects to recognize a final gain of
approximately C$850 thousand after the completion of the remediation in 2007 and
the incurrence of related expenses.
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 of 2005. After taxes and non-controlling interest, the increase in
first quarter 2005 net income as a result of the sale was $887 thousand or $0.26
per share.
Note E - Accrued Expenses
Accrued Expenses at September 30, 2006 and December 31, 2005 consisted of the
following (in thousands):
September 30, December 31,
2006 2005
------------- ------------
Accrued advertising and sales promotions $ 22,212 $24,089
Employee compensation and related
benefits 10,187 9,499
Interest 4 265
Environmental matters 1,276 1,124
Royalties 749 806
Income taxes (316) 1,330
Other 8,762 5,863
-------- -------
$ 42,874 $42,976
======== =======
See Note H for Liabilities Subject to Compromise.
18
Note F - Financing Arrangements
American Biltrite Inc.'s primary source of borrowings are the revolving credit
facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of
America, National Association ("BofA") and BofA acting through its Canada branch
(the "Canadian Lender") pursuant to an amended and restated credit agreement
(the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc.
and its subsidiary K&M Associates L.P. with (i) a $30.0 million commitment under
the Revolver with a $12.0 million borrowing sublimit (the "Canadian Revolver")
for American Biltrite Inc.'s subsidiary American Biltrite (Canada) Ltd. ("AB
Canada") and (ii) the $10.0 million Term Loan. The Credit Agreement also
provides for domestic and Canadian letter of credit facilities with availability
of up to $5.0 million and $1.0 million, respectively, subject to availability
under the Revolver and the Canadian Revolver, respectively.
On September 25, 2006, American Biltrite Inc. entered into an amendment and
restatement to the Credit Agreement with BofA and the Canadian Lender. Pursuant
to the amendment and restatement, the Term Loan was added to the Credit
Agreement and the amount of the Revolver was increased by $10.0 million to its
current $30.0 million amount. In addition, the availability for domestic letters
of credit issued under the Credit Agreement was increased from $4.0 million to
$5.0 million. In connection with that amendment and restatement, American
Biltrite Inc. used approximately $17.0 million of new borrowings from the
proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which is included in other expense.
On September 29, 2006, American Biltrite Inc. entered into swap agreements to
convert the interest rates on the Term Loan and $6.0 million of borrowings under
the Revolver from floating rates to fixed rates of interest. The swap agreement
for the Term Loan (the "Term Loan Swap") has a five year term with the same
quarterly payment dates as the Term Loan and reduces proportionately in line
with the amortization of the Term Loan. The swap agreement for the $6.0 million
outstanding under the Revolver (the "Revolver Swap") has a three year term with
quarterly settlement dates beginning December 31, 2006. The Company expects its
borrowings under the Revolver to remain above $6.0 million through September 29,
2009, the termination date of the Revolver Swap. The Term Loan Swap and the
Revolver Swap are carried at fair value. Changes in the fair value of the swap
agreements are recorded in Other Income (Expense). At September 30, 2006, there
were no unrealized gains or losses associated with the swap agreements.
19
Note G - Other Liabilities
Other Liabilities at September 30, 2006 and December 31, 2005 consisted of the
following (in thousands):
September 30, December 31,
2006 2005
----------- ------------
Pension benefits (less current portion) $ 2,202 $ 2,557
Environmental remediation and product
related liabilities 4,215 4,259
Deferred income taxes 20,635 21,343
Deferred gain on sale of Janus property 1,083 --
Other 1,498 1,466
------- -------
$29,633 $29,625
======= =======
See Note H for Liabilities Subject to Compromise.
Note H - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and K), 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 K for further discussion of Congoleum's asbestos liability. Liabilities
subject to compromise at September 30, 2006 and December 31, 2005 were as
follows (in thousands):
September 30, December 31,
2006 2005
------------- -----------
Current
Pre-petition other payables and accrued interest $ 31,965 $ 23,990
Non-current
Debt (at face value) 100,000 100,000
Pension liability 14,215 16,871
Other post-retirement benefit obligation 8,528 8,407
Pre-petition other liabilities 13,413 13,583
--------- ---------
136,156 138,861
Elimination - Payable to American Biltrite (135) (147)
--------- ---------
136,021 138,714
--------- ---------
Total liabilities subject to compromise $ 167,986 $ 162,704
========= =========
20
Note H - 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 I - 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 September 30, 2006 and 2005 (in thousands):
Three Months Ended September 30,
2006 2005
-------------------------- --------------------------
Other Other
Pension Benefits Pension Benefits
-------- -------- ------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 368 $ 46 $ 519 $ 46
Interest cost 1,338 128 1,446 130
Expected return on plan assets (1,169) -- (1,370) --
Recognized net actuarial loss (61) 15 (60) 15
Amortization of transition obligation -- -- (9) --
Amortization of prior service cost 525 9 255 (47)
------- ---- ------- -----
Net periodic benefit cost $ 1,001 $198 $ 781 $ 144
======= ==== ======= =====
21
Note I - Pension Plans (continued)
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the nine months
ended September 30, 2006 and 2005 (in thousands):
Nine Months Ended September 30,
2006 2005
-------------------------------- -------------------------------
Other Other
Pension Benefits Pension Benefits
--------------- ------------- --------------- -------------
Components of Net Periodic Benefit Cost:
Service cost $ 1,578 $ 97 $ 1,690 $ 138
Interest cost 4,329 266 4,334 390
Expected return on plan assets (4,032) -- (3,908) --
Recognized net actuarial loss (141) 18 (181) 45
Amortization of transition
obligation -- -- (45) --
Amortization of prior service
cost 1,243 32 976 (141)
--------- --------- --------- ---------
Net periodic benefit cost $ 2,977 $ 413 $ 2,866 $ 432
========= ========= ========= =========
The weighted average assumptions used to determine net periodic benefit cost for
the three and nine months ended September 30, 2006 and 2005 were as follows:
2006 2005
------------------------------ ----------------------------------
Other Other
Pension Benefits Pension Benefits
---------------- ----------- -------------------- -----------
Discount rate 6.00% 6.00% 6.10% - 6.25% 6.25%
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% - 5.00% --
22
Note J - 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 the Company's and 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. Provisions in the financial statements
have been recorded for the estimated probable loss associated with all known
general and environmental contingencies for the Company and Congoleum. 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 that would 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.
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.
23
Note J - Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,314 pending claims involving
approximately 1,661 individuals as of September 30, 2006. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Nine Months
Ended Year Ended
September 30, December 31,
2006 2005
-------------- ---------------
Beginning claims 1,703 1,838
New claims 444 621
Settlements (26) (24)
Dismissals (807) (732)
------ ------
Ending claims 1,314 1,703
====== ======
The total indemnity costs incurred to settle claims during the nine months ended
September 30, 2006 and twelve months ended December 31, 2005 were $2.5 million
and $1.3 million, respectively, all of which were paid by ABI's insurance
carriers pursuant to ABI's applicable insurance policies, as were the related
defense costs. The average indemnity cost per resolved claim was approximately
$3 thousand for the nine months ended September 30, 2006 and $1.7 thousand for
the year ended December 31, 2005.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable.
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum), based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2005, 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 December 31, 2005, the
estimated range of liability for settlement of current claims pending and claims
24
Note J - Commitments and Contingencies (continued)
anticipated to be filed through 2011 was $9.5 million to $18.8 million. The
Company believed no amount within this range is more likely than any other, and
accordingly, recorded the minimum liability estimate of $9.5 million in its
consolidated financial statements at December 31, 2005. At September 30, 2006,
the Company has recorded $9.9 million for the estimated minimum liability. The
Company also believes that, based on this minimum liability estimate, the
corresponding amount of insurance probable of recovery is $9.0 million at
September 30, 2006 and December 31, 2005, which has been included in other
assets. The same factors that affect developing forecasts of potential indemnity
costs for asbestos-related liabilities also affect estimates of the total amount
of insurance that is probable of recovery, as do a number of additional factors.
These additional factors include the financial viability of some of the
insurance companies, the method in which losses will be allocated to the various
insurance policies and the years covered by those policies, how legal and other
loss handling costs will be covered by the insurance policies, and
interpretation of the effect on coverage of various policy terms and limits and
their interrelationships. These 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
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 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 six 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 reorganization 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, 2005 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 five sites located in four separate states
(the "CERCLA Sites"). There has been no material developments relating to these
sites during the nine month period ended September 30, 2006.
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.
25
Note J - Commitments and Contingencies (continued)
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 thousand 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
aggregate amounts due from ABI and TBC 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 2006 will be approximately $7.2 million. For costs
beyond 2006, ABI has estimated the range of total response costs for the site to
be between $15.7 million and $45.3 million. As of September 30, 2006, ABI has
estimated its potential liability to Olin to be in the range of $3.5 million to
$10.8 million after allocation for the annual reimbursement of $100 thousand for
Olin's internal costs but before any recoveries from insurance and TBC. Costs
are expected to be incurred over the next 10 years. In January 2006, the United
States Environmental Protection Agency assumed the responsibility for the
oversight of the Olin Site from the Massachusetts Department of Environmental
Protection.
The State of Maine Department of Environmental Protection (the "Maine DEP") has
put Miller Industries, Inc. ("Miller"), the present owner of a former ABI sheet
vinyl plant in Lisbon Falls, Maine, on notice to clean up a dumpsite where there
is exposed asbestos from sheet vinyl waste along with other hazardous
substances. In September 2005, a lawsuit was brought by Miller against ABI,
which alleged that ABI and one other named defendant are liable for costs to
clean up the dumpsite ("Parcel A") and a second parcel of land ("Parcel B"),
which is alleged to contain polychlorinated biphenyls ("PCB's") in the soil. The
lawsuit, captioned Miller Industries, Inc. v. American Biltrite Inc. et al, was
filed on September 22, 2005 in the Androscoggin Superior Court of Maine. Miller
sought indemnification or contribution from ABI for the clean-up of both parcels
of land (together, the "Maine Sites"). The lawsuit was dismissed by the Superior
Court of Maine on February 3, 2006 for lack of subject matter jurisdiction and
failure to state a claim upon which relief can be granted. In January 2006, ABI
was notified by the Maine DEP that the Maine DEP believes ABI is a potential
responsible party with respect to the clean up of Parcel B.
Prior to the commencement of the lawsuit by Miller, the Company had been
investigating and reviewing the condition of Parcel A and its potential
liability for its share of any clean-up costs. The Company believes, at this
time, that the total cost of site investigation, remediation, maintenance and
monitoring for Parcel A will be between approximately $1.2 million and $1.5
million. Prior to the filing of the lawsuit, the Company was also in the process
of reviewing the condition of Parcel B and its potential liability for its share
of any clean-up costs. The Company cannot determine at this time the cost of
26
Note J - Commitments and Contingencies (continued)
site investigation, remediation, maintenance and monitoring for Parcel B.
Furthermore, at this time, the Company is not able to determine what its
potential liability will be with regard to the Maine Sites. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of costs incurred by ABI for the
Maine Sites.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at all of the CERCLA and state supervised sites.
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 four of its
insurance carriers whereby the carriers have reimbursed the Company $6.5 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, $66 thousand of which was
reimbursed through September 30, 2006 and 37.5% of the amount of that
reimbursement was shared with TBC pursuant to the Company's agreement with TBC.
ABI and one of its insurance carriers continue to discuss ABI's remaining
demands for insurance coverage for these sites.
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 thousand 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 Company's business, results of operations or financial condition.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary reorganization case
under Chapter 11 of the Bankruptcy Code. See Note K.
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 and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
27
Note J - Commitments and Contingencies (continued)
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 for which Congoleum has been named a PRP relates
to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund
Site"). The PRP group at this site is made up of 81 companies, substantially all
of which are large financially solvent entities. Two removal actions were
substantially complete as of December 31, 1998 and a groundwater treatment
system was installed thereafter. The United States Environmental Protection
Agency has selected a remedy for the soil and shallow groundwater (Operable Unit
1 or OU-1); however, the remedial investigation/feasibility study related to the
deep groundwater (Operational Unit 2 or OU-2) has not been completed. The PRP
group, of which Congoleum is a part, has entered into a consent decree to
perform the remedy for OU-1 and resolve natural resource damage claims. The
consent decree also requires the PRP group to perform the OU-2 remedy, assuming
that the estimated cost of the remedy is not more than $10.0 million. If the
estimated cost of the OU-2 remedy is more than $10.0 million, the PRP group may
decline to perform it or they may elect to perform anyway. Cost estimates for
the OU-1 and OU-2 work combined (including natural resource damages) range
between $22 million and $34 million, with Congoleum's share ranging between
approximately $1.0 million and $1.6 million. This assumes that all parties
participate and that none cash-out and pay a premium; those two factors may
account for some fluctuation in Congoleum's share. Fifty percent (50%) of
Congoleum's share of the costs is presently being paid by one of its insurance
carriers, Liberty Mutual Insurance Company, whose remaining policy limits for
this claim are expected to cover approximately $300 thousand in additional
costs. Congoleum expects to fund the balance to the extent further insurance
coverage is not available.
Congoleum filed a motion before the Bankruptcy Court seeking authorization and
approval of the consent decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual
Insurance Company and Congoleum to make certain payments that have been invoiced
to Congoleum with respect to the consent decree and related settlement
agreements. An order authorizing and approving consent decree and settlement
agreements was issued by the Bankruptcy Court on August 22, 2006.
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 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.3 million for Congoleum's expected portion of those
remediation funding obligations, including capital outlays and future
maintenance costs for soil and groundwater remediation, are primarily based on
engineering studies. Of this amount, $300 thousand was included in current
liabilities subject to compromise and $1.0 million was included in non-current
liabilities subject to compromise as of September 30, 2006 and December 31,
2005.
28
Note J - Commitments and Contingencies (continued)
At September 30, 2006 and December 31, 2005, Congoleum had recorded a total of
$4.8 million and $4.3 million, respectively for estimated environmental
liabilities that are not reduced by the amount of insurance recoveries. At
September 30, 2006 and December 31, 2005, such estimated insurance recoveries
are approximately $2.1 million and $1.9 million, respectively. 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 of
the costs by Congoleum 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 Congoleum's and the Company's business, results of
operations or financial condition.
Other
In addition to the matters referenced above and in Note K, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings in connection with 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.
Note K - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into the Claimant Agreement, a settlement agreement with various
asbestos personal injury claimants. As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing the Collateral Trust to
distribute funds in accordance with the terms of the Claimant Agreement and
granting the Collateral Trust a security interest in Congoleum's rights under
its applicable insurance coverage and payments from Congoleum's insurers for
asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
29
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories, which motion
was denied in June 2006, and the Avoidance Actions remain pending. Settlement
values under the Eleventh Plan differ from values under previous plans, the
Claimant Agreement and other pre-petition settlement agreements. As a result of
such differences and the potential results of the Avoidance Actions, the
liability associated with the asbestos personal injury claims against Congoleum
may be materially different than the present estimates of such items.
In October 2003, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, Congoleum filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the ACC,
the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004,
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR 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 agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
30
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed the Eighth Plan. In addition, CNA filed
a plan of reorganization and the Bondholders' Committee also filed a plan of
reorganization. In May 2006, the Bankruptcy Court ordered all parties in
interest in Congoleum's reorganization proceedings to participate in global
mediation discussions. Several mediation sessions took place from June through
September 2006. During the initial mediation negotiations, Congoleum reached an
agreement in principle, subject to mutually agreeable definitive documentation,
with the ACC, the FCR and ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC on August 11, 2006. CNA and
the Bondholders' Committee jointly filed a new, competing plan on August 18,
2006, and each withdrew its prior plan of reorganization. Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders'
Committee reached agreement on terms of the Tenth Plan, which Congoleum filed
jointly with the ACC on September 15, 2006. Following the Bondholders'
Committee's withdrawal of support for CNA's plan, CNA filed the CNA Plan. On
October 23, 2006, Congoleum and the ACC jointly filed a revised version of the
Tenth Plan (the Eleventh Plan) which reflected minor technical changes agreed to
by the various parties supporting Congoleum's plan. On October 26, 2006, the
Bankruptcy Court held a hearing to consider the adequacy of the disclosure
statements with respect to the Tenth Plan and the CNA Plan and to hear arguments
on the respective summary judgment motions as to whether the Tenth Plan and the
CNA Plan are not confirmable as a matter of law. The Bankruptcy Court
provisionally approved the disclosure statements for both the Tenth Plan and the
CNA Plan subject to the Bankruptcy Court's ruling on the summary judgment
motions, which are pending. Because the Tenth and Eleventh Plans are
substantially identical, Congoleum believes rulings issued with respect to the
Tenth Plan will also apply to the Eleventh Plan.
The Eleventh Plan incorporates a compromise and settlement of the asbestos
personal injury claims that were settled prior to the petition date under the
Claimant Agreement and other pre-petition settlement agreements. Settlement
values under the Eleventh Plan differ from the values under previous plans, the
Claimant Agreement and other pre petition settlement agreements. Under the terms
of the Eleventh Plan, after the establishment of the Plan Trust, the assets in
the Collateral Trust would be transferred to the Plan Trust, and any asbestos
claims would be channeled to the Plan Trust and paid in accordance with the
terms of the Eleventh Plan.
There can be no assurance that Congoleum will not amend the Eleventh Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan, that its plan will not be modified further, that its
plan will receive necessary court approvals from the Bankruptcy Court and the
Federal District Court, or that such approvals will be received in a timely
31
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
fashion, that its plan will be confirmed, that its plan, if confirmed, will
become effective, or that there will be sufficient funds to pay for continued
protracted litigation over its plan of reorganization. It is unclear whether the
Bankruptcy Court will approve the CNA Plan or whether the CNA Plan, if
confirmed, would be feasible. Moreover, it is unclear whether any other person
will attempt to propose a plan or what any such plan would provide or propose,
and whether the Bankruptcy Court would approve a plan other than Congoleum's
proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eleventh Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eleventh Plan. Furthermore, an ad hoc committee of note
holders holding 44.96% of the Senior Notes has threatened to vote against the
Eleventh Plan. While Congoleum intends to seek to obtain the required
acceptances of the Eleventh Plan from all necessary classes of creditors (if the
summary judgment motion regarding the Tenth Plan is denied), the Eleventh Plan
provides an alternative treatment for holders of the Senior Notes and
stockholders in the event sufficient note holders do not consent to the plan,
which will materially affect the recoveries of these classes. In the event that
the holders of the Senior Notes do not vote to accept the Eleventh Plan by the
requisite number and amount required by the Bankruptcy Code, then Plan
confirmation shall be sought in accordance with the Cramdown Treatment. Pursuant
to the Cramdown Treatment, the Senior Notes and existing Class A and Class B
Common Stock would be cancelled and the Senior Note holders would receive their
pro rata share, with the Plan Trust, of Common Stock of Congoleum, as determined
by the Bankruptcy Court in the Confirmation Order.
During 2005 and 2006, Congoleum has entered into a number of settlement
agreements with excess insurance carriers over coverage for asbestos-related
claims. In May 2005, certain AIG companies agreed to pay approximately $103
million over ten years to the Plan Trust. This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code. An insurer appealed the
approval order granted by the Bankruptcy Court to the U.S. District Court. The
District Court, however, entered an order on September 8, 2006 that
administratively terminated the appeal. AIG has recently reserved the right to
argue that the Plan, if confirmed, could lead to the possibility that the AIG
settlement may be declared void; for its part, Congoleum has reserved its rights
to oppose any such argument. The AIG settlement further provides that any party
may declare that the settlement agreement is null and void if the confirmation
order fails to become a final order by May 10, 2007. In June 2005, Congoleum
entered into a settlement agreement with certain underwriters at Lloyd's,
London, pursuant to which the certain underwriters paid approximately $20
million into an escrow account in exchange for a release of insurance coverage
32
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
obligations. The escrow agent will transfer the funds to the Plan Trust once a
plan of reorganization with the Section 524(g) protection specified in the
settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. In August 2005, Congoleum entered into a settlement
agreement with Federal Insurance Company pursuant to which Federal will pay $4
million to the Plan Trust, subject to certain adjustments, once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds. The FCR has appealed the approval order granted by the Bankruptcy Court
to the U.S. District Court, where it is pending. The FCR, Federal and Congoleum
have reached an agreement to resolve the appeal pursuant to which the Federal
settlement agreement will be amended to fix the settlement amount payable by
Federal at $2.1 million and to delete from the settlement agreement the
adjustment mechanism, which operated under certain circumstances to reduce the
settlement amount. In October 2005, Congoleum entered into a settlement
agreement with Mt. McKinley Insurance Company and Everest Reinsurance Company
pursuant to which Mt. McKinley and Everest paid $21.5 million into an escrow
account. The escrow agent will transfer the funds to the Plan Trust once a plan
of reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective, and the Bankruptcy Court approves the transfer of the
funds. An insurer and the FCR have appealed the approval order granted by the
Bankruptcy Court to the U.S. District Court, where it is pending. In March 2006,
Congoleum entered into a settlement agreement with Harper Insurance Limited.
Under the terms of this settlement, Harper will pay $1.4 million to Congoleum or
the Plan Trust once certain conditions are satisfied, including the
effectiveness of a plan of reorganization containing the Section 524(g)
protection specified in the settlement agreement. The Bankruptcy Court approved
this settlement in April 2006. In April 2006, Congoleum entered into a
settlement agreement with Travelers Casualty and Surety Company and St. Paul
Fire and Marine Insurance Company (collectively, "Travelers"). Under the terms
of this settlement, Travelers will pay $25 million in two installments over
thirteen months to the Plan Trust once a plan of reorganization with the Section
524(g) protection specified in the settlement agreement goes effective, and the
Bankruptcy Court approves the transfer of the funds. The FCR sought, and was
granted, limited discovery with respect to the Travelers settlement. A hearing
to consider the Travelers settlement has been adjourned until such time that
such discovery can be reasonably completed. In April 2006, Congoleum also
entered into a settlement agreement with Fireman's Fund Insurance Company. Under
the terms of this settlement, Fireman's Fund will pay $1 million to the Plan
Trust once a plan of reorganization with the Section 524(g) protection specified
in the settlement agreement goes effective, and the Bankruptcy Court approves
the transfer of the funds. The settlement was approved by the Bankruptcy Court
in September 2006. In August 2006, Congoleum entered into a settlement agreement
with Century Indemnity Company and its affiliates ("Century"). Under the terms
of this settlement, Century will pay $16.95 million to the Plan Trust in four
installments over a three-year period commencing 60 days after all conditions to
the agreement have been satisfied. The Bankruptcy Court approved this settlement
in September 2006. Certain insurance companies have appealed the Bankruptcy
Court approval order to the U.S. District Court, where it is pending. It is
possible that one or more of the settling insurers may argue temporal,
Plan-related, and other conditions to payment have not been satisfied and
therefore such insurer is relieved of certain of its settlement obligations.
33
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
Congoleum expects that it will take until some time in the first quarter of 2007
at the earliest to obtain confirmation of the Eleventh Plan.
Under previous plans, Congoleum's assignment of insurance recoveries to the Plan
Trust was net of costs incurred by Congoleum in connection with insurance
coverage litigation, and Congoleum was entitled to withhold from recoveries, or
seek reimbursement from the Plan Trust, for coverage litigation costs incurred
after January 1, 2003 and for $1.3 million in claims processing fees paid in
connection with claims settled under the Claimant Agreement. A receivable was
recorded for these costs as they were paid. Under the Eleventh Plan, Congoleum
would be entitled to reimbursement of only the $1.3 million in claims processing
costs and would not collect the balance of these receivables ($18.8 million at
September 30, 2006). The write-off, as well as forgiveness of indebtedness
income pursuant to the Eleventh Plan and any other applicable charges or credits
are expected to be recorded at a future date, the net effect of which cannot be
determined.
The Eleventh Plan provides for the channeling of asbestos property damage claims
in addition to asbestos personal injury claims to the Plan Trust. There were no
asbestos related property damage claims asserted against Congoleum at the time
of its bankruptcy filing. The Bankruptcy Court approved an order establishing a
bar date of May 3, 2004 for the filing of asbestos property damage claims. The
claims agent appointed in Congoleum's bankruptcy proceeding advised Congoleum
that, as of the bar date, it received 35 timely filed asbestos property damage
claims asserting liquidated damages in the amount of approximately $0.8 million
plus additional unspecified amounts. Congoleum objected to certain claims on
various grounds, and the Bankruptcy Court ultimately allowed 19 claims valued at
$133 thousand. The Eleventh Plan will provide for payment of those claims in
full from certain insurance proceeds.
Under the terms of the Eleventh Plan, on the effective date of the Eleventh Plan
(the "Effective Date"), the Plan Trust will provide a loan to Congoleum, which
loan is intended, when combined with cash on hand and available drawings under
the revolving credit facility, to provide Congoleum with $18 million of total
liquidity, on a pro forma basis as of December 31, 2006 (the "Plan Trust Note").
If the Effective Date occurs after December 31, 2006, the total liquidity
required by Congoleum, and thus the amount of the Plan Trust Note, will be as
mutually agreed among the ACC, the FCR, the Claimants' Representative and
Congoleum. The proceeds of the Plan Trust Note will only be used for working
capital and general corporate purposes. The Plan Trust Note will be due and
payable on December 31, 2011, shall bear interest at 10% per annum payable
semi-annually until the maturity date, and will contain such covenants,
warranties, and representations as agreed among Congoleum, the ACC, the FCR and
the Claimants' Representative. The principal amount of the Plan Trust Note,
which is subject to review and approval by the FCR and the ACC, may not exceed
$14 million unless both the FCR and ACC agree. There can be no assurance either
or both would agree to any such request from Congoleum, or that Congoleum would
obtain any other consents that might be necessary to increase the amount of the
Plan Trust Note.
34
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
On the Effective Date, if the holders of the Senior Note Claims (as a class)
vote to accept the Eleventh Plan, Congoleum will issue and contribute a
convertible promissory note (the "New Convertible Security") to the Plan Trust
in satisfaction of section 524(g) of the Bankruptcy Code. The New Convertible
Security will have the following terms: (i) an initial aggregate principal
amount of $2,738,234.75, such principal amount being subject to increase in the
amount, if any, by which 36% of Congoleum's market capitalization based on
average trading prices for Congoleum's Class A Common Stock at the close of
trading for the 90 consecutive trading days beginning on the one or two-year
anniversary of the Effective Date (depending on the reset date selected by the
Plan Trust), exceeds such initial principal amount; (ii) an initial interest
rate per annum equal to 9% of the principal amount, payable semi-annually in
arrears, with such interest rate per annum to reset to the rate of 5% of the
principal amount on the tenth anniversary of the Effective Date and payable at
such reset interest rate per annum until maturity; (iii) redeemable for the
principal amount at the option of the Plan Trust or Congoleum on or anytime
after the tenth anniversary of the Effective Date; (iv) a maturity date on the
fifteenth anniversary of the Effective Date if not redeemed or otherwise paid
earlier; (v) convertible into the number of shares of Class A Common Stock (on a
fully diluted basis with all Class B Common Stock converted to Class A Common
Stock), when combined with the number of shares of Class A Common Stock held by
the Plan Trust immediately prior to the conversion date, will result in the Plan
Trust owning 51% of the voting common shares outstanding on a fully diluted
basis immediately after the conversion on the conversion date and 51% of the
total economic equity value of Congoleum outstanding on a fully diluted basis
immediately after the conversion on the conversion date, such conversion to take
place at the option of the Plan Trust upon the occurrence and at any time during
the continuance of an event of default of the obligation to pay interest; (vi)
secured only by a first priority lien and security interest, pari passu only
with the security for the Plan Trust Note, on distributions of recoveries from a
law firm that are to be pledged to the Plan Trust; (vii) no voting rights except
upon conversion and (viii) contractually subordinated in priority and payment to
the New Senior Notes; provided, however, that in the absence of a default under
the New Indenture, payments due under the New Convertible Security will be made
in the ordinary course in accordance with its terms. The principal adjustment
feature could result in the principal amount of the New Convertible Security
increasing materially.
Under the terms of the Eleventh Plan, if holders of the Senior Notes vote to
accept the Plan by the requisite number and amount required by the Bankruptcy
Code, the Senior Notes would be cancelled, and Congoleum would issue new notes
(the "New Senior Notes") in the aggregate principal amount of $100 million.
Interest on the Senior Notes would be payable semi-annually at the rate of 10%
per annum until maturity in August, 2011. The New Senior Notes would be secured
by a lien on or security interest in all of Congoleum's assets (subject to
certain limitations), which security interest will be subordinate in priority
only to the security for Congoleum's working capital credit facility. The New
Senior Notes would be contractually senior in priority and right of payment to
the Plan Trust Note and the New Convertible Security, with the exception of
certain litigation recoveries from a law firm that are to be pledged to the Plan
Trust. In addition to the New Senior Notes, holders of the Senior Notes may
receive an additional $5 million from Congoleum, to be paid from insurance
recoveries, contingent upon Congoleum consummating certain insurance recoveries,
which $5 million will be held in escrow and paid to the note holders if certain
contingencies occur and conditions are met.
35
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
While Congoleum intends to seek to obtain the required acceptances of the
Eleventh Plan from all necessary classes of creditors (if the summary judgment
motion regarding the Tenth Plan is denied), the Eleventh Plan provides an
alternative treatment for holders of the Senior Notes and stockholders in the
event sufficient note holders do not consent to the Eleventh Plan. This
alternative treatment will materially affect the recoveries of these classes. In
the event that the holders of the Senior Notes do not vote to accept the
Eleventh Plan by the requisite number and amount required by the Bankruptcy
Code, then Plan confirmation will be sought in accordance with the Cramdown
Treatment. Pursuant to the Cramdown Treatment, the Senior Notes and existing
Class A and Class B Common Stock would be cancelled, and the Senior Note holders
would receive their pro rata share of Common Stock with the Plan Trust, as
determined by the Bankruptcy Court in the Confirmation Order.
As part of the Eleventh Plan, Congoleum has agreed to indemnify representatives
of holders of pre-petition secured asbestos claims (the "Claimants'
Representative") and the trustee of the Collateral Trust in connection with the
negotiation on and implementation of modifications to the Plan documents
contemplated by the Ninth Plan, the Tenth Plan and the Eleventh Plan, for claims
and costs, including attorneys' fees, up to a maximum of $3 million.
Under the Eleventh Plan and related documents, ABI has agreed to make a cash
contribution in the amount of $250 thousand to the Plan Trust upon the formation
of the Plan Trust and to forego certain indemnification rights it has from
Congoleum for asbestos claims. Under the Eleventh Plan, 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 Eleventh
Plan does not provide that any other asbestos claims that may be asserted
against ABI would be channeled to the Plan Trust.
There are sufficient risks and uncertainties related to Congoleum's efforts to
confirm a plan of reorganization such that no assurances of the outcome can be
given. In addition, the remaining costs to effect the reorganization process,
consisting principally of legal and advisory fees and contributions to the Plan
Trust, are expected to be approximately $19.2 million at a minimum, not
including any Additional Principal Amount arising from revaluation of the New
Convertible Security or the principal amount of the Plan Trust Note, and could
be materially higher.
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Eleventh Plan.
Congoleum is not yet able to determine the additional costs that may be required
to effect the Eleventh Plan or any other plan, and actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing any plan
of reorganization could be materially higher than currently recorded. Delays in
proposing, filing or obtaining approval of the Eleventh Plan or any new amended
plan of reorganization, or the proposal or solicitation of additional plans by
36
Note K - Congoleum Asbestos Liabilities and Reorganization (continued)
other parties could result in a proceeding that takes longer and is more costly
than Congoleum has estimated. Congoleum may record significant additional
charges should the minimum estimated cost increase.
Note L - Comprehensive Income (Loss)
The following table presents total comprehensive income for the three and nine
months ended September 30, 2006 and 2005 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------- -------- -------- --------
Net (loss) income $ (852) $ 1,008 $ 650 $(13,071)
Foreign currency translation adjustments (37) 151 119 429
Minimum pension liability adjustment -- -- -- --
-------- -------- -------- --------
Total comprehensive (loss) income $ (889) $ 1,159 $ 769 $(12,642)
======== ======== ======== ========
Note M - 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 N - 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.
37
Note N - Industry Segments (continued)
Net sales by segment for the three and nine months ended September 30, 2006 and
2005 were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales to external customers:
Flooring products $ 57,460 $ 60,494 $ 173,440 $ 176,232
Tape products 25,058 24,043 79,768 71,873
Jewelry 13,574 16,907 43,582 46,583
Canadian division 12,382 12,708 40,870 36,430
--------- --------- --------- ---------
Total net sales to external
customers 108,474 114,152 337,660 331,118
Intersegment net sales:
Flooring products -- 13 -- 13
Tape products 4 23 10 81
Jewelry -- -- -- --
Canadian division 1,255 1,309 4,117 4,114
--------- --------- --------- ---------
Total intersegment net
sales 1,259 1,345 4,127 4,208
Reconciling items -- -- -- --
Intersegment net sales (1,259) (1,345) (4,127) (4,208)
--------- --------- --------- ---------
Total consolidated net sales $ 108,474 $ 114,152 $ 337,660 $ 331,118
========= ========= ========= =========
Segment profit or loss is before income tax expense or benefit. Profit (loss) by
segment for the three and nine months ended September 30, 2006 and 2005 was as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
-------- -------- -------- --------
Segment profit (loss)
Flooring products $ (518) $ 325 $ 435 $(14,625)
Tape products (17) 600 1,250 1,522
Jewelry 350 1,531 232 1,859
Canadian division (240) (445) 435 (1,042)
-------- -------- -------- --------
Total segment profit (loss) (425) 2,011 2,352 (12,286)
Reconciling items
Corporate expenses (949) (356) (1,769) 1,396
Intercompany profit (loss) (18) (15) 45 80
-------- -------- -------- --------
Total consolidated income
(loss) before income
taxes and other items $ (1,392) $ 1,640 $ 628 $(10,810)
======== ======== ======== ========
38
Note N - Industry Segments (continued)
Corporate items for the three and nine months ended September 30, 2006 include a
charge of $860 thousand for early payment of debt (see Note F). Corporate items
for the nine months ended September 30, 2005 include a gain of $2.3 million from
the sale of the Tullahoma property (see Note D).
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
September 30, December 31,
2006 2005
--------------- ---------------
Segment assets
Flooring products $209,542 $207,347
Tape products 62,689 51,679
Jewelry 38,398 39,421
Canadian division 42,142 43,139
--------------- ---------------
Total segment assets 352,771 341,586
Reconciling items
Assets of discontinued operation -- 3,142
Janus note receivable from property sale 3,580 --
Corporate items 30,604 33,080
Intersegment accounts receivable (26,771) (20,650)
Intersegment profit in inventory (122) (167)
Intersegment other asset (135) (147)
--------------- ---------------
Consolidated assets $359,927 $356,844
=============== ===============
39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization as a means to resolve claims
asserted against it related to the use of asbestos in its products decades ago.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code. In January 2004,
Congoleum filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004, and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR 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 agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust. In July 2005, Congoleum
filed the Sixth Plan and related documents with the Bankruptcy Court which
reflected the result of these negotiations as well as other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures and Congoleum commenced solicitation of acceptances of the Sixth Plan
in August 2005. In September 2005, Congoleum learned that certain asbestos
claimants were unwilling to agree to forbear from exercising their security
interest as contemplated by the Sixth Plan and the Sixth Plan was subsequently
withdrawn. In November 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In
addition, CNA filed a plan of reorganization and the Bondholders' Committee also
filed a plan of reorganization. In May 2006, the Bankruptcy Court ordered all
parties in interest in Congoleum's reorganization proceedings to participate in
global mediation discussions. Several mediation sessions took place from June
through September 2006. During the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with the ACC, the FCR and ABI, on certain terms of the Ninth
Plan, which Congoleum filed and proposed jointly with the ACC on August 11,
2006. CNA and the Bondholders' Committee jointly filed a new, competing plan on
August 18, 2006 and each withdrew its prior plan of reorganization. Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders' Committee reached agreement on terms of the Tenth Plan, which
Congoleum filed jointly with the ACC on September 15, 2006. Following the
Bondholders' Committee's withdrawal of support for CNA's plan, CNA filed the CNA
Plan. On October 23, 2006, Congoleum and the ACC jointly filed a revised version
of the Tenth Plan (the Eleventh Plan) which reflected minor technical changes
agreed to by the various parties supporting Congoleum's plan. On October 26,
2006, the Bankruptcy Court held a hearing to consider the adequacy of the
40
disclosure statements with respect to the Tenth Plan and the CNA Plan and to
hear arguments on the respective summary judgment motions as to whether the
Tenth Plan and the CNA Plan are not confirmable as a matter of law. The
Bankruptcy Court provisionally approved the disclosure statements for both the
Tenth Plan and the CNA Plan subject to the Bankruptcy Court's ruling on the
respective summary judgment motions which remain pending. Because the Tenth and
Eleventh Plans are substantially identical, Congoleum believes rulings issued
with respect to the Tenth Plan will also apply to the Eleventh Plan.
There can be no assurance that Congoleum will not amend the Eleventh Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court and the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued protracted litigation over its plan of reorganization. It is
unclear whether the Bankruptcy Court will approve the CNA Plan or whether the
CNA Plan, if confirmed, would be feasible. Moreover, it is unclear whether any
other person will attempt to propose a plan or what any such plan would provide
or propose, and whether the Bankruptcy Court would approve a plan other than
Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eleventh Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eleventh Plan. Furthermore, an ad hoc committee of
bondholders claiming to hold 44.96% of the aggregate outstanding principal
amount of the Senior Notes has threatened to vote against the Eleventh Plan.
While Congoleum intends to seek to obtain the required acceptances of the
Eleventh Plan from all necessary classes of creditors (if the insurers' pending
summary judgment motion, seeking a ruling from the Bankruptcy Court that the
Tenth Plan is not confirmable as a matter of law, is denied or withdrawn), the
Eleventh Plan provides an alternative treatment for holders of the Senior Notes
and stockholders, in the event sufficient holders of the Senior Notes do not
vote to accept the plan, which would materially affect the recoveries of these
classes. In the event that the holders of the Senior Notes do not vote to accept
the Eleventh Plan by the requisite number and amount required by the Bankruptcy
Code, then Plan confirmation will be sought in accordance with the Cramdown
Treatment. Pursuant to the Cramdown Treatment, the Senior Notes and Congoleum's
existing Class A and Class B common stock would be cancelled (including the
shares of Congoleum common stock owned by ABI) and the holders of the Senior
Notes would receive their pro rata share, with the Plan Trust, of newly issued
shares of common stock of Congoleum, as determined by of the Bankruptcy Court in
the confirmation order.
The terms of the Eleventh Plan could be amended or modified as a result of
further negotiations with various parties and how the Bankruptcy Court decides
the pending summary judgment motions that seek rulings as to whether the Tenth
Plan and the CNA Plan are not confirmable as a matter of law. The terms of the
CNA Plan are materially different from the terms of the Eleventh Plan, and the
CNA Plan may also be amended or modified or may be withdrawn. There can be no
assurance that the terms of the reorganization plan that is ultimately
confirmed, if any, will not materially differ from the terms of the Eleventh
Plan. Congoleum expects that it will take until some time in the first quarter
of 2007 at the earliest to obtain confirmation of any plan of reorganization.
41
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing the
Collateral Trust to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories, which motion
was denied in June 2006 and the Avoidance Actions remain pending. Under the
terms of the Eleventh Plan, after the establishment of the Plan Trust, the
assets in the Collateral Trust would be transferred to the Plan Trust and any
claims subject to the Claimant Agreement would be channeled to the Plan Trust
and paid in accordance with the terms of the Eleventh Plan. The Eleventh Plan
incorporates a compromise and settlement of the asbestos personal injury claims
that were settled prior to the petition date under the Claimant Agreement and
other pre-petition settlement agreements. Settlement values under the Eleventh
Plan differ from values under previous plans, the Claimant Agreement, and other
pre-petition settlement agreements. As a result of such differences and the
potential results of the Avoidance Actions, the liability associated with the
asbestos personal injury claims against Congoleum may be materially different
than the present estimates of such items. As a result of tabulating ballots on
the Fourth Plan, Congoleum 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 approximately $512 million based on the settlement values
applicable in the Sixth Plan.
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Eleventh Plan.
Actual amounts that will be contributed to the Plan Trust and costs for pursuing
and implementing the Eleventh Plan or any other plan of reorganization could be
materially higher than currently recorded. Congoleum may record significant
additional charges should the minimum estimated cost increase. Delays in
proposing, filing or obtaining approval of the Eleventh Plan or any new amended
plan of reorganization, or the proposal or solicitation of additional plans by
other parties could result in a proceeding that takes longer and is more costly
than Congoleum has estimated. Congoleum may record significant additional
charges should the minimum estimate increase.
42
Please refer to "Risk Factors - 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," "Any plan of reorganization for Congoleum will likely result in
substantial dilution of Congoleum's equity holders, including the Company" and
"Congoleum's Eleventh Plan of reorganization could be confirmed in accordance
with the cram down provisions of the Bankruptcy Code which would eliminate ABI's
controlling interest in Congoleum" included in Part II, Item 1A of this
Quarterly Report on Form 10-Q for a discussion of certain factors that could
cause actual results to differ from the Company's and Congoleum's goals for
resolving its asbestos liability.
On August 18, 2006, an explosion and fire caused extensive damage to components
of a major production line at the Congoleum's Marcus Hook facility. By
implementing a seven day operation on its other production line and purchasing
base material from a competitor, Congoleum has been able to meet all production
requirements. Congoleum expects its insurance carrier will pay substantially all
excess costs (beyond a deductible) for replacing the damaged equipment and lost
production capacity. Fabrication of replacement equipment is underway, and
Congoleum anticipates that the line will be operational by the end of 2006. The
financial impact in the third quarter of 2006 as a result of lost overhead
absorption, lost sales and deductibles and uninsured expenses is estimated to be
approximately $0.8 million. Congoleum does not anticipate any impact to
operating results as a result of this incident in the fourth quarter of 2006.
However, if Congoleum experiences any significant unforeseen delays or
difficulties with its alternative production arrangements, the procurement and
installation of replacement equipment, or obtaining insurance reimbursements for
the excess costs associated with the loss, it could have a material adverse
impact on its business, results of operations, and financial condition.
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. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M Associates L.P.) and Canadian division segments as well as
Corporate items and Janus. Congoleum is the flooring products segment.
43
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
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, 2005, filed with the Securities and Exchange
Commission.
There have been no material changes in what the Company considers to be its
critical accounting policies or the applicability of the disclosure the Company
provided regarding those policies in that Form 10-K.
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended September 30 Nine Months Ended September 30
2006 2005 2006 2005
--------------------------------------- ---------------------------------------
(In thousands)
Net sales $ 51,014 $ 53,591 $ 164,220 $ 154,695
Cost of sales 37,120 38,569 120,015 111,134
----------- ----------- ----------- -----------
Gross profit 13,894 27.2% 15,022 28.0% 44,205 26.9% 43,561 28.2%
Selling, general &
administrative expenses 13,542 26.5% 13,382 25.0% 42,452 25.9% 40,012 25.9%
----------- ----------- ----------- -----------
Operating income 352 1,640 1,753 3,549
Interest expense, net (535) (571) (1,698) (1,937)
Other (expense) income, net (673) 261 93 2,135
----------- ----------- ----------- -----------
(Loss) income before taxes
and other items (856) 1,330 148 3,747
(Benefit from) provision for
income taxes (461) 481 (98) 1,436
Noncontrolling interests (21) (71) (34) (632)
----------- ----------- ----------- -----------
(Loss) income from
continuing operations $ (416) $ 778 $ 212 $ 1,679
=========== =========== =========== ===========
44
Net sales in the third quarter of 2006 were $51.0 million compared to $53.6
million in the third quarter of 2005, a decrease of $2.6 million or 4.8%. Tape
division sales increased $1.0 million or 4.2% over year earlier levels as a
result of increased selling prices averaging approximately 5%, which offset
lower sales volumes in HVAC and electrical product lines. Canadian division
sales decreased $0.3 million or 2.6% from the third quarter of 2005 due to
decreased sales of commodity commercial tile and industrial rubber products.
Jewelry sales decreased $3.3 million or 19.7% primarily as a result of sales
declines resulting from department store consolidations.
Net sales for the first nine months of 2006 increased $9.5 million (6.2%) to
$164.2 million from $154.7 million for the first nine months of 2005. Tape
division sales increased $7.9 million or 11.0% due to increased selling prices
coupled with higher sales volume of automotive products, paper and film.
Canadian division sales in the first nine months of 2006 were up $4.4 million or
12.2% over year earlier levels due to increased sales of specialty commercial
flooring products. Jewelry sales for the first nine months of 2006 were down
$3.0 million (6.4%) as the loss of sales from department store consolidation
offset growth in sales to the mid-tier and specialty category and $2.0 million
in sales from its Jay Jewelry business, which K&M acquired in late 2005.
Gross profit decreased from 28.0% of net sales for the third quarter of 2005 to
27.2% for the third quarter of 2006. The decrease in gross profit as a percent
of sales was due to cost pressures and the effect of lower jewelry sales, which
has higher gross profit margins than other segments, in the overall sales mix.
All operations have experienced significant cost increases for freight, energy
and raw materials used in manufacturing, although the Canadian division has seen
offsetting benefit from the greater purchasing power of the Canadian dollar
relative to the U.S. dollar. Only a portion of these cost increases have been
passed through in the Company's sales pricing to date. Tape division margins in
the third quarter of 2006 were below the same period in 2005 due to the raw
material and energy cost inflation in excess of price increases. Canadian
division margins improved due to a more profitable sales mix consisting of less
commodity products, and Jewelry margins improved due to a lower proportion of
less profitable department store business.
Gross profit for the nine months ended September 30, 2006 was 26.9% compared to
28.2% for the first nine months of 2005, a decrease of 1.3 points. This was due
to an overall less profitable sales mix (due to a lower proportion of jewelry
sales), together with lower margins at the Tape Division which offset a
favorable sales mix within the Jewelry division and improved margins at the
Canadian division.
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 September 30, 2006 and 2005 would have been
26.7% and 27.6%, respectively. The gross profit margins for the nine months
ended September 30, 2006 and 2005 would have been 26.4% and 27.8%, respectively.
45
Selling, general and administrative ("SG&A") expenses in the third quarter of
2006 increased by $.2 million or 1.2% compared to the third quarter of 2005. The
increase was primarily due to inflation on wages and benefits. As a percentage
of net sales, SG&A decreased from 25.0% to 26.5%.
SG&A expenses for the nine months ended September 30, 2006 were $42.5 million
(25.9% of net sales) versus $40.0 million (25.9% of net sales) for the first
nine months of 2005, with the dollar increase due to inflation on wages and
benefits as well as higher freight and commissions.
Net interest expense for the third quarter and first nine months of 2006 was
lower compared to the same periods in 2005 due to lower average borrowings.
Other income (expense) for the third quarter of 2006 includes $860 thousand of
yield maintenance fees paid in connection with the prepayment of outstanding
debt, which is the reason for the change versus the third quarter of 2005. Other
income (expense) for the nine months ended September 30, 2005 includes a gain of
$2.3 million recognized on the sale of a warehouse.
The loss from continuing operations in the third quarter of 2006 was $416
thousand compared to income of $778 thousand in the corresponding prior year
period, reflecting the decrease in operating income coupled with the debt
refinancing costs incurred in the quarter. For the nine months ended September
30, 2006, income from continuing operations was $212 thousand compared to $1,679
thousand for the same period last year, with the decrease resulting from the
combination of the decreased operating income, the warehouse sale gain in the
prior year income, and the debt refinancing costs incurred in the third quarter
of 2006.
Congoleum
Three Months Ended September 30 Nine Months Ended September 30
2006 2005 2006 2005
--------------------------------------- ---------------------------------------
(In thousands)
Net sales $ 57,460 $ 60,507 $ 173,440 $ 176,245
Cost of sales 44,562 47,270 133,661 135,577
----------- ----------- ----------- -----------
Gross profit 12,898 22.4% 13,237 21.9% 39,779 22.9% 40,668 23.1%
Selling, general &
administrative expenses 10,681 18.6% 10,556 17.4% 31,338 18.1% 32,962 18.7%
Asbestos-related
reorganization charges -- -- -- 15,454 8.8%
----------- ----------- ----------- -----------
Operating income (loss) 2,217 2,681 8,441 (7,748)
Interest expense, net (2,812) (2,579) (8,130) (7,515)
Other income, net 77 223 124 638
----------- ----------- ----------- -----------
(Loss) income before taxes (518) 325 435 (14,625)
(Benefit from) provision for
income taxes (94) -- 22 --
----------- ----------- ----------- -----------
Net (loss) income $ (424) $ 325 $ 413 $ (14,625)
=========== =========== =========== ===========
46
Net sales for the three months ended September 30, 2006 totaled $57.5 million as
compared to $60.5 million for the same period in the prior year, a decrease of
$3.0 million or 5.0%. The decrease primarily reflected the impact of weak retail
demand for residential sheet products and lower sales in the commercial tile
category partially offset by selling price increases. Net sales for the nine
months ended September 30, 2006 were $173.4 million as compared to $176.2
million for the nine months ended September 30, 2005, a decrease of $2.8 million
or 1.6%. The decrease reflected the impact of lower sales in the mid- to
high-end resilient sheet category, lower sales of commercial tile and less
demand for promotional product. Selling price increases instituted in late 2005
and September 2006 partially offset this decrease.
Gross profit for the three months ended September 30, 2006 totaled $12.9 million
or 22.4% of net sales, compared to $13.2 million, or 21.9% of net sales, for the
same period last year. The improvement in gross margin percent reflects the
impact of selling price increases (6.6% of net sales) partially offset by higher
raw material and utility costs which reduced margins by approximately 2.5% of
net sales and an unfavorable product mix (which reduced margins by 2.8% of net
sales). Gross profit for the nine months ended September 30, 2006 totaled $39.8
million, or 22.9% of net sales, compared to $40.7 million, or 23.1% of net
sales, for the same period last year. The major factors leading to the
deterioration in gross margin were the increases in raw material and utility
costs experienced during the second half of 2005, which reduced margins by
approximately 3.0% of net sales. In addition, the lower sales of high priced
sheet products negatively impacted product mix and gross margins by
approximately 1.3% of net sales. This was partially mitigated by a 4.1%
improvement in gross margins resulting from selling price increases.
Selling, general and administrative expenses were $10.7 million for the three
months ended September 30, 2006, as compared to $10.6 million for the same
period last year. The reduction in expense reflects lower merchandising expenses
(down $0.2 million) and lower freight expense ($0.1 million) partially offset by
higher medical and pension expenses ($0.2 million). As a percent of net sales,
selling, general and administrative expenses totaled 18.6% of net sales for the
third quarter of 2006 versus 17.4% for the same period last year. Selling,
general and administrative expenses were $31.3 million for the nine months ended
September 30, 2006 as compared to $33.0 million for the nine months ended
September 30, 2005, a decrease of $1.7 million. The reduction in expenses
primarily reflects lower merchandising related expenses ($0.6 million), lower
compensation costs related to workforce reduction ($0.6 million) and lower
freight costs for shipments to home centers ($0.2 million). As a percent of net
sales, selling, general and administrative costs were 18.1% for the nine months
ended September 30, 2006 compared to 18.7% for the same period last year.
Income from operations totaled $2.2 million for the quarter ended September 30,
2006, compared to an income from operations of $2.7 million for the same period
last year reflecting lower gross margins. Income from operations was $8.4
million for the nine months ended September 30, 2006 compared to a loss of $7.7
million for the nine months ended September 30, 2005 after a charge for asbestos
reorganization costs of $15.5 million. The improvement in operating income in
2006 reflects the reorganization related charge taken in 2005, coupled with
lower selling, general and administrative expenses experienced in 2006.
47
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased $2.4
million in the first nine months of 2006 to $2.3 million. Working capital at
September 30, 2006 was $26.9 million, up from $19.9 million at December 31,
2005. The ratio of current assets to current liabilities at September 30, 2006
was 1.50 compared to 1.33 at December 31, 2005. The changes in working capital
and current ratio are primarily attributed to the classification of ABI's term
note payable. Subsequent to a refinancing (see below and Note F of Notes to
Unaudited Consolidating Condensed Financial Statements included in Part I, Item
1 of this Quarterly Report on Form 10-Q), $8 million of ABI's borrowings was
classified as non-current under a new term loan. In addition, the sale of the
Janus property (see below and Note D of Notes to Unaudited Consolidating
Condensed Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q) contributed to the change in working capital. The assets
and liabilities of the discontinued operations were classified as current assets
and liabilities prior to the sale of the property. Subsequent to the sale of the
property, the resulting note receivable and deferred gain have been classified
as a non-current asset and non-current liability, respectively.
Capital expenditures in the first nine months of 2006 were $2.2 million compared
to $1.8 million for the first nine months of 2005. It is anticipated that
capital spending for the full year 2006 will be approximately $4 million.
During the second quarter of 2006, the Company completed the sale of a building
and land owned by Janus, a discontinued operation for $5.0 million Canadian
dollars. The Company received net cash proceeds of $800 thousand (Canadian),
which was used to reduce borrowings, and a note for $4.0 million (Canadian).
Payment of the note is contingent upon obtaining an environmental certification
on the land sold. In order to obtain that certification, the Company expects to
incur approximately $200 thousand (Canadian) to remediate the property.
Remediation is expected to be completed during the first half of 2007.
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. 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 five 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 any such costs could be passed along to its customers.
48
American Biltrite Inc.'s primary source of borrowings are the revolving credit
facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of
America, National Association ("BofA") and BofA acting through its Canada branch
(the "Canadian Lender") pursuant to an amended and restated credit agreement
(the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc.
and its subsidiary K&M Associates L.P. with (i) a $30.0 million commitment under
the Revolver with a $12.0 million borrowing sublimit (the "Canadian Revolver")
for American Biltrite Inc.'s subsidiary American Biltrite (Canada) Ltd. ("AB
Canada") and (ii) the $10.0 million Term Loan. The Credit Agreement also
provides for domestic and Canadian letter of credit facilities with availability
of up to $5.0 million and $1.0 million, respectively, subject to availability
under the Revolver and the Canadian Revolver, respectively.
On September 25, 2006, American Biltrite Inc. entered into an amendment and
restatement to the Credit Agreement with BofA and the Canadian Lender. Pursuant
to the amendment and restatement, the Term Loan was added to the Credit
Agreement and the amount of the Revolver was increased by $10.0 million to its
current $30.0 million amount. In addition, the availability for domestic letters
of credit issued under the Credit Agreement was increased from $4.0 million to
$5.0 million. In connection with that amendment and restatement, American
Biltrite Inc. used approximately $17.0 million of new borrowings from the
proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which is included in other expense.
The amount of borrowings available from time to time for American Biltrite Inc.
and K&M Associates L.P. under the Revolver may not exceed the lesser of (a)
$30.0 million less the then outstanding amount of borrowings by AB Canada under
the Canadian Revolver less any outstanding borrowings under the domestic letter
of credit facility and (b) the applicable borrowing base. The formula used for
determining the domestic borrowing base is based upon inventory, receivables and
fixed assets of the Company and certain of its subsidiaries (not including,
among others, AB Canada and Congoleum), reduced by amounts outstanding under the
Term Loan.
The amount of borrowings available from time to time for AB Canada under the
Canadian Revolver is limited to the lesser of (a) $12 million less any
outstanding borrowings under the Canadian letter of credit facility, (b) AB
Canada's borrowing base amount, which is based upon AB Canada's accounts
receivable, inventory and fixed assets, and (c) $30.0 million less the amount of
domestic borrowings outstanding under the Revolver on behalf of the Company and
K&M Associates L.P. AB Canada may borrow amounts under the Canadian Revolver in
United States or Canadian dollar denominations; however, solely for purposes of
determining amounts outstanding and borrowing availability under the Revolver,
all Canadian dollar denominated amounts will be converted into United States
dollars in the manner provided in the Credit Agreement.
49
Interest is payable quarterly on the Term Loan and Revolver borrowings by
American Biltrite Inc. and K&M Associates L.P. under the Credit Agreement at
rates which vary depending on the applicable interest rate in effect and are
generally determined based upon: (a) if a LIBOR based rate is in effect, at a
rate 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
Agreement, (b) if a fixed rate is in effect, at a rate between the fixed rate
plus 1.0% to a fixed rate plus 2.75%, depending on the Company's leverage ratio,
as determined under the Credit Agreement, and (c) for loans not based on a LIBOR
or fixed rate, the higher of (i) BofA's applicable prime rate and (ii) 0.50%
plus the federal funds rate, as determined under the Credit Agreement. Under the
Credit Agreement, American Biltrite Inc. and K&M Associates L.P. may generally
determine whether interest on domestic revolving loans will be calculated based
on a LIBOR based rate, and if BofA elects to make a fixed rate option available,
whether interest on revolving loans will be calculated based on a fixed rate.
Interest is payable quarterly on revolving loans under the Canadian Revolver at
rates which vary depending on the applicable interest rate in effect and are
generally determined based upon: (a) if a LIBOR based rate is in effect, at a
rate 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
Agreement, and (b) if a LIBOR based rate is not in effect, for outstanding
revolving loans denominated in Canadian dollars, the higher of (i) 0.50% plus
the applicable 30-day average bankers' acceptance rate as quoted on Reuters CDOR
page and (ii) the Canadian Lender's applicable prime rate for loans made in
Canadian dollars to Canadian customers, and for outstanding revolving loans
denominated in United States dollars, the higher of (i) 0.50% plus the federal
funds rate as calculated under the Credit Agreement and (ii) the applicable rate
announced by the Canadian Lender as its reference rate for commercial loans
denominated in United States dollars made to a person in Canada. Under the
Credit Agreement, AB Canada may generally determine whether interest on Canadian
revolving loans will be calculated based on a LIBOR based rate.
American Biltrite Inc. has entered into interest rate swap agreements that
effectively fix the LIBOR rate component of the Term Loan and $6.0 million of
the Revolver at 5.18% and 5.15% respectively.
The Term Loan principal is payable in 20 quarterly installments of $500 thousand
beginning December 31, 2006 and ending on September 30, 2011. All indebtedness
under the Credit Agreement, other than the Term Loan, expires on September 30,
2009.
The Credit Agreement contains certain covenants that the Company must satisfy.
The covenants included in the Credit 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 requirement that there be no consecutive quarterly losses
50
from continuing operations, and a maximum level of capital spending. Pursuant to
the amendment and restatement to the Credit Agreement entered into on September
25, 2006, certain of the financial covenants under the Credit Agreement were
amended to, among other things, (i) increase the permitted ratio of the
Company's consolidated total liabilities to consolidated tangible net worth to
200%, (ii) to provide for a higher threshold for satisfying the consolidated
tangible net worth test and (iii) to provide a higher permitted aggregate amount
for capital expenditures in any fiscal year. The Credit Agreement also requires,
for each fiscal quarter ending on and after September 30, 2006, the Company's
consolidated adjusted EBITDA for the four consecutive fiscal quarters then
ending to exceed 100% of the Company's consolidated fixed charges for the
12-month period ending on such date, as determined under the Credit Agreement.
Pursuant to the Credit Agreement, the Company and certain of its subsidiaries
previously granted BofA and the Canadian Lender a security interest in most of
the Company's and its subsidiaries' assets. The security interest granted does
not include the shares of capital stock Congoleum or the assets of Congoleum. In
addition, pursuant to the Credit Agreement, certain of the Company's
subsidiaries have agreed to guarantee the Company's obligations (excluding AB
Canada's obligations) under the Credit Agreement.
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. While the Company does not
anticipate that it will need to amend its current debt agreements to avoid being
in default at some future date, there can be no assurances in that regard, and
any required amendments, if obtained, could result in significant cost to the
Company.
Under the terms of the Eleventh Plan, ABI expects to contribute $250 thousand in
cash to the Plan Trust on the effective date of the plan. In addition, ABI will
forego certain rights it has to receive indemnification payments from Congoleum
for asbestos claims pursuant to a joint venture agreement that ABI and Congoleum
are party to.
Under the Eleventh Plan, ABI would receive certain relief as may be afforded
under Section 524(g)(4) of the Bankruptcy Code from asbestos personal injury
claims that derive from claims made against Congoleum, which claims are expected
to be channeled to the Plan Trust. However, the Eleventh Plan does not provide
that any other asbestos claims that may be asserted against ABI would be
channeled to the Plan Trust.
Under the Eleventh Plan, the Company will release and forgive, as part of ABI's
contribution to the Plan Trust, the rights ABI has to receive indemnification
from Congoleum under the joint venture agreement that both ABI and Congoleum are
party to, and which they entered into in connection with the contribution by ABI
to Congoleum in 1993 of the Company's tile division, for asbestos-related
claims. To the extent that the Company pays material amounts for
asbestos-related 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.
51
The Eleventh Plan provides that confirmation of the plan would be sought by
means of the Cramdown Treatment if the holders of the Senior Notes do not vote
as a class to accept the Eleventh Plan by the requisite number and amount
required by the Bankruptcy Code. Under the Cramdown Treatment, all existing
common stock of Congoleum would be cancelled and ABI would longer control or own
any equity interest in Congoleum. An ad hoc committee of note holders claiming
to hold 44.96% of the Senior Notes has threatened to vote against the Eleventh
Plan, which threat, if carried out under the terms of the Eleventh Plan, would
result in the elimination of ABI's equity interest in Congoleum. While the
Company does not believe the loss of the value of its equity interest in
Congoleum would have a direct material adverse effect on ABI's liquidity, it
could have a material adverse impact on Congoleum's business, operations and
financial condition, and directly or indirectly, a material adverse impact on
the business relationships between ABI and Congoleum, which in turn could have a
material adverse impact on ABI's business, operations and financial condition.
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 Agreement, aggregate dividend
payments (since June 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 Agreement, earned from June 30,
2003.
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, Congoleum's
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Part I, 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.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and K of the Notes to Unaudited Consolidating Financial Statements contained in
Part I, 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
nine months of 2006, Congoleum paid $17.8 million in fees and expenses related
to implementation of its planned reorganization under Chapter 11 and litigation
with certain insurance companies. Furthermore, at September 30, 2006 Congoleum
had incurred but not paid approximately $9 million in additional fees and
expenses for services through that date.
52
Under previous plans, Congoleum's assignment of insurance recoveries to the Plan
Trust was net of costs incurred by Congoleum in connection with insurance
coverage litigation, and Congoleum was entitled to withhold from recoveries, or
seek reimbursement from the Plan Trust, for coverage litigation costs incurred
after January 1, 2003 and for $1.3 million in claims processing fees paid in
connection with claims settled under the Claimant Agreement. A receivable was
recorded for these costs as they were paid. Under the Eleventh Plan, Congoleum
would be entitled to reimbursement of only the $1.3 million in claims processing
fees and would not collect the balance of these receivables ($18.8 million at
September 30, 2006). The write-off, as well as forgiveness of indebtedness
income pursuant to the Eleventh Plan and any other applicable charges or credits
are expected to be recorded at a future date, the net effect of which cannot be
determined.
Congoleum expects to spend a further $19.2 million at a minimum in fees,
expenses, and trust contributions in connection with obtaining confirmation of
its plan of reorganization (in addition to the $6.0 million insurance settlement
being held as restricted cash). It also expects to spend a further $4.4 million
at a minimum in connection with insurance coverage litigation costs, for which
it will not be reimbursed as discussed above. Required expenditures could be
materially higher than these estimates.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
at September 30, 2006 is approximately $30.5 million, including interest on the
unpaid interest due, of which $3.6 million was owed at the time of the Chapter
11 filing. In February 2006, the Bankruptcy Court ordered GHR to disgorge all
fees and certain expenses it was paid by Congoleum. The amount of the
disgorgement is approximately $9.6 million. In October 2006, Congoleum and GHR
entered into a settlement agreement (the "GHR Settlement") under which GHR would
pay Congoleum approximately $9.2 million in full satisfaction of the
disgorgement order. The payment would be made over time according to a formula
based on GHR's earnings. Congoleum has filed a motion seeking Bankruptcy Court
approval of the GHR Settlement which is pending. Pursuant to the terms of the
Eleventh Plan, the net proceeds of the GHR disgorgement would be used to reduce
the obligations of Congoleum to the Plan Trust by first being applied to reduce
or satisfy principal and accrued interest under the Plan Trust Note and
thereafter to reduce or satisfy principal and accrued interest under the New
Convertible Security.
Under the terms of the Eleventh Plan, on the Effective Date, the Plan Trust will
provide a loan to Congoleum, which loan is intended, when combined with cash on
hand and available drawings under the revolving credit facility, to provide
Congoleum with $18 million of total liquidity, on a pro forma basis as of
December 31, 2006. If the Effective Date occurs after December 31, 2006, the
total liquidity required by Congoleum, and thus the amount of the Plan Trust
Note, will be as mutually agreed among the ACC, the FCR, the Claimants'
Representative and Congoleum. The proceeds of the Plan Trust Note will only be
used for working capital and general corporate purposes. The Plan Trust Note
will be due and payable on December 31, 2011, will bear interest at 10% per
annum payable semi-annually until the maturity date, and will contain such
covenants, warranties, and representations as agreed among Congoleum, the ACC,
the FCR and the Claimants' Representative. The principal amount of the Plan
Trust Note, which is subject to review and approval by the FCR and the ACC, may
not exceed $14 million unless both the FCR and ACC agree. There can be no
assurance either or both would agree to any such request from Congoleum, or that
Congoleum would obtain any other consents that might be necessary to increase
the amount of the Plan Trust Note.
53
On the Effective Date, if the holders of the Senior Note Claims (as a class)
vote to accept the Eleventh Plan, Congoleum will issue and contribute the New
Convertible Security to the Plan Trust in satisfaction of section 524(g) of the
Bankruptcy Code. The New Convertible Security will have the following terms: (i)
an initial aggregate principal amount of $2,738,234.75, such principal amount
being subject to increase in the amount, if any, by which 36% of Congoleum's
market capitalization based on average trading prices for Congoleum's Class A
Common Stock at the close of trading for the 90 consecutive trading days
beginning on the one or two-year anniversary of the Effective Date (depending on
the reset date selected by the Plan Trust), exceeds such initial principal
amount; (ii) an initial interest rate per annum equal to 9% of the principal
amount, payable semi-annually in arrears, with such interest rate per annum to
reset to the rate of 5% of the principal amount on the tenth anniversary of the
Effective Date and payable at such reset interest rate per annum until maturity;
(iii) redeemable for the principal amount at the option of the Plan Trust or
Congoleum on or anytime after the tenth anniversary of the Effective Date; (iv)
a maturity date on the fifteenth anniversary of the Effective Date if not
redeemed or otherwise paid earlier; (v) convertible into the number of shares of
Class A Common Stock (on a fully diluted basis with all Class B Common Stock
converted to Class A Common Stock) which, when combined with the number of
shares of Class A Common Stock held by the Plan Trust immediately prior to the
conversion date, will result in the Plan Trust owning 51% of the voting common
shares outstanding on a fully diluted basis immediately after the conversion on
the conversion date and 51% of the total economic equity value of Congoleum
outstanding on a fully diluted basis immediately after the conversion on the
conversion date, such conversion to take place at the option of the Plan Trust
upon the occurrence and at any time during the continuance of an event of
default of the obligation to pay interest; (vi) secured only by a first priority
lien and security interest, pari passu only with the security for the Plan Trust
Note, on distributions of recoveries from a law firm that are to be pledged to
the Plan Trust; (vii) no voting rights except upon conversion; and (viii)
contractually subordinated in priority and payment to the New Senior Notes;
provided, however, that in the absence of a default under the New Indenture,
payments due under the New Convertible Security will be made in the ordinary
course in accordance with its terms. The principal adjustment feature could
result in the principal amount of the New Convertible Security increasing
materially.
Under the terms of the Eleventh Plan, if holders of the Senior Notes vote to
accept the Plan by the requisite number and amount required by the Bankruptcy
Code, the Senior Notes would be cancelled and Congoleum would issue the New
Senior Notes in the aggregate principal amount of $100 million which shall be
payable semi-annually at the rate of 10% per annum until a maturity date of
August 1, 2011. The New Senior Notes would be secured by a lien on or security
interest in all of Congoleum's assets (subject to certain limitations), which
security interest will be subordinate in priority only to Congoleum's working
capital credit facility. The New Senior Notes would be contractually senior in
priority and right of payment to the Plan Trust Note and the New Convertible
Security, with the exception of certain litigation recoveries from a law firm
that are to be pledged to the Plan Trust. In addition to the New Senior Notes,
holders of the Senior Notes may receive an additional $5 million from Congoleum,
to be paid from insurance recoveries, contingent upon Congoleum consummating
certain insurance recoveries, which $5 million will be held in escrow and paid
to the Bondholders if certain contingencies occur and conditions are met.
54
While Congoleum is seeking to obtain the required acceptances of the Eleventh
Plan from all necessary classes of creditors, the Eleventh Plan provides an
alternative treatment for holders of the Senior Notes and stockholders in the
event sufficient note holders do not consent to the Eleventh Plan. This
alternative treatment will materially affect the recoveries of these classes. In
the event that the holders of the Senior Notes do not vote to accept the
Eleventh Plan by the requisite number and amount required by the Bankruptcy
Code, then Plan confirmation will be sought in accordance with the Cramdown
Treatment. Pursuant to the Cramdown Treatment, the Senior Notes and existing
Class A and Class B Common Stock would be cancelled and the Senior Note holders
would receive their pro rata share of Common Stock with the Plan Trust, as
determined by the Bankruptcy Court in the Confirmation Order
Unrestricted cash and cash equivalents, including short-term investments at
September 30, 2006, were $19.7 million, a decrease of $4.8 million from December
31, 2005. 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 $4.2 million and $2.0 million at
September 30, 2006 and December 31, 2005, respectively, are recorded as
restricted cash. Additionally, $6.0 million remaining from a $14.5 million
settlement received in August 2004 from an insurance carrier, which is subject
to the lien of the Collateral Trust, is included as restricted cash at September
30, 2006. Congoleum expects to contribute these funds to the Plan Trust. Working
capital was $30.1 million at September 30, 2006, up from $28.0 million at
December 31, 2005. The ratio of current assets to current liabilities at
September 30, 2006 was 1.3 to 1.0, which is unchanged from December 31, 2005.
The ratio of debt to total capital at September 30, 2006 was 0.48 to 1.0 which
is slightly lower since December 31, 2005. Net cash used by operations during
the first nine months of 2006 was $8.6 million, as compared to net cash used by
operations of $10.1 million in the first nine months of 2005. The reduction in
cash used by operations in the first nine months of 2006 versus the first nine
months of 2005 was primarily due to lower working capital requirements for
inventory, prepaid expenses, and settlement of payables and accrued expenses in
2006.
Capital expenditures for the nine months ended September 30, 2006 totaled $2.5
million. Congoleum is currently planning capital expenditures of approximately
$5 million in 2006 and between $5 million and $7 million in 2007, 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
December 31, 2006 with borrowings up to $30 million. Interest is based on 0.75%
above the prime rate. This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization ("EBITDA"). It also includes restrictions on the incurrence of
55
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
September 30, 2006. Borrowings under this facility are collateralized by
inventory and receivables. At September 30, 2006, based on the level of
receivables and inventory, $25.1 million was available under the facility, of
which $5.1 million was utilized for outstanding letters of credit and $14.2
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 and effectiveness of
its plan of reorganization. While Congoleum expects the facilities discussed
above will provide it with sufficient liquidity, there can be no assurances that
it will continue to be in compliance with the required covenants, that Congoleum
will be able to obtain a similar or sufficient facility upon exit from
bankruptcy, or that the debtor-in-possession facility (as extended) will be
renewed prior to its expiration if Congoleum's plan of reorganization is not
confirmed before that time.
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 5 to the Unaudited
Condensed Consolidated Financial Statements contained in Item 1 of this
Quarterly Report on Form 10-Q). These actions include possible obligations to
remove or mitigate the effects on the environment of wastes deposited at various
sites, including Superfund sites and certain of Congoleum's owned and previously
owned facilities. The contingencies also include claims for personal injury
and/or property damage. The exact amount of such future cost and timing of
payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of Congoleum's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although 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.
56
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum has used $8.6
million in cash from operations in the first nine months of 2006 (as more fully
discussed above), which includes the benefit of $10.1 million of accrued but
unpaid interest on long-term debt. Congoleum believes these sources will be
adequate to fund working capital requirements, debt service payments, and
planned capital expenditures for the remainder of 2006. Based on expected costs
to complete its reorganization proceedings, Congoleum anticipates it will need
to obtain the contemplated approximately $14 million from the Plan Trust Note to
provide it with sufficient liquidity when the Eleventh Plan becomes effective.
Actual sources and uses of funds to consummate the effectiveness of the Eleventh
Plan or any other plan may differ significantly from this description, but
confirmation of any plan is dependent on such plan demonstrating it leaves
Congoleum with sufficient liquidity that further reorganization will not be
needed. Congoleum's inability to obtain confirmation of the Eleventh Plan in a
timely manner would have a material adverse effect on Congoleum's ability to
fund its operating, investing and financing requirements.
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 its investments. The Company and Congoleum invest
primarily in highly liquid debt instruments with strong credit ratings and
short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. If market
interest rates were to increase by 10% from levels at September 30, 2006, the
fair value of our investments would decline by an immaterial amount. In
addition, substantially all of the Company's outstanding consolidated long-term
debt as of September 30, 2006 consisted of indebtedness with a fixed rate of
interest, which is not subject to change based upon changes in prevailing market
interest rates, or has been hedged with an interest rate swap agreement. The
Company's interest rate swap agreements have been designated cash flow hedges.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as in other countries in Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
the applicable foreign currency sales decreases. When the U.S. dollar weakens
against those currencies, the U.S. dollar value of the applicable foreign
currency sales increases.
Under their current policies, other than interest rate swap agreements, neither
the Company nor Congoleum use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in foreign currency exchange rates, commodity prices or equity prices
and does not hold any instruments for trading purposes.
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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 J "Commitments and Contingencies" and Note K
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Part I, Item 2 of
this Quarterly Report on Form 10-Q, and in "Risk Factors - 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," included in Part II, Item 1A of this
Quarterly Report on Form 10-Q, are incorporated herein by reference.
58
Item 1A. Risk Factors
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.
The Company and Congoleum have significant liability and funding exposure for
asbestos claims. Congoleum has entered into settlement agreements with various
asbestos claimants totaling in excess of $491 million. The Eleventh Plan
incorporates a compromise and settlement of the asbestos personal injury claims
that were settled prior to the petition date under the Claimant Agreement and
other pre-petition settlement agreements. Under the terms of the Eleventh Plan,
settlement values differ from values under previous plans, the Claimant
Agreement and other pre-petition settlement agreements.
There can be no assurance that Congoleum will not amend the Eleventh Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan, that its plan will not be modified further, that its
plan will receive necessary court approvals from the Bankruptcy Court and the
Federal District Court, or that such approvals will be received in a timely
fashion, that its plan will be confirmed, that its plan, if confirmed, will
become effective, or that there will be sufficient funds to pay for continued
protracted litigation over its plan of reorganization. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof, and a competing plan
has been filed by an insurance company. It is unclear whether any other person
will attempt to propose a plan or what any such plan would provide or propose,
and whether the Bankruptcy Court would approve a plan other than Congoleum's
proposed plan.
The Eleventh Plan and any alternative plan of reorganization pursued by
Congoleum or another plan proponent or confirmed by the Bankruptcy Court and the
Federal District Court could materially differ from the description of the
Eleventh Plan contained in this Quarterly Report on Form 10-Q. Furthermore, the
estimated costs and contributions to effect the Eleventh Plan 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 and Federal
District Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained.
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective. If Congoleum's cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of Congoleum's plan of reorganization or in connection with
Congoleum's New Jersey state court insurance coverage litigation discussed
elsewhere in this report are materially more than anticipated, or if sufficient
funds from insurance proceeds or other sources are not available at
confirmation, Congoleum may be unable to obtain exit financing, when combined
with net cash provided from operating activities, that would provide it with
sufficient funds, which would likely result in Congoleum not being able to
confirm an amended plan of reorganization or have such plan become effective.
59
Some additional factors that could cause actual results to differ from
Congoleum's goals for resolving its asbestos liability through an amended plan
of reorganization include: (i) the future cost and timing of estimated asbestos
liabilities and payments, (ii) the availability of insurance coverage and
reimbursement from insurance companies that underwrote the applicable insurance
policies for Congoleum for asbestos-related claims, (iii) the costs relating to
the execution and implementation of any plan of reorganization pursued by
Congoleum, (iv) timely reaching agreement with other creditors, or classes of
creditors, that exist or may emerge, (v) satisfaction of the conditions and
obligations under Congoleum's outstanding debt instruments, (vi) the response
from time to time of the lenders, customers, suppliers and other constituencies
of Congoleum and ABI, the majority stockholder of Congoleum, to the ongoing
process arising from Congoleum's strategy to settle its asbestos liability,
(vii) 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, (viii) timely obtaining sufficient creditor and
court approval (including the results of any relevant appeals) of any
reorganization plan pursued by it and the court overruling any objections to
Congoleum's reorganization plan that may be filed, (ix) costs of, developments
in and the outcome of insurance coverage litigation pending in New Jersey state
court involving Congoleum and certain insurers, (x) compliance with the
Bankruptcy Code, including Section 524(g) and (xi) the possible adoption of
another party's plan of reorganization which may prove to be unfeasible. In any
event, if Congoleum is not successful in obtaining sufficient creditor and court
approval of its amended plan of reorganization, such failure would have a
material adverse effect upon its business, results of operations and financial
condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, Congoleum does not know what effects any such legislation,
if adopted, may have upon its business, results of operations or financial
condition, or upon any plan of reorganization it may decide to pursue. To date,
Congoleum has expended significant amounts pursuant to resolving its asbestos
liability relating to its proposed amended 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 Congoleum
to pay significant amounts to any national trust or otherwise, such legislation
could have a material adverse effect on Congoleum's business, results of
operations and financial condition. As a result of Congoleum's significant
liability and funding exposure for asbestos claims, there can be no assurance
that if it were to incur any unforecasted or unexpected liability or disruption
to its business or operations it would be able to withstand that liability or
disruption and continue as an operating company.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
60
liabilities and expenses, that would likely have a material adverse effect on
the Company's financial position. In addition, certain of the excess liability
insurance policies that the Company purchased were underwritten by companies
that are now insolvent, which may limit the amount of funds available to pay for
any future claims covered by these policies.
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; (ii) the availability of insurance coverage and reimbursement from
insurance companies that underwrote the applicable insurance policies for
asbestos-related claims, including insurance coverage and reimbursement for
asbestos claimants under Congoleum's proposed modified plan, which certain
insurers have objected to in Bankruptcy Court and are litigating in New Jersey
State Court, or any other plan of reorganization; (iii) costs relating to the
execution and implementation of any plan of reorganization pursued by Congoleum
or relating to any other plan of reorganization proposed by any other party in
interest; (iv) timely reaching an agreement with other creditors, or classes of
creditors, that exist or may emerge; (v) satisfaction of the conditions and
obligations under the Company's and Congoleum's respective outstanding debt
instruments, and amendment of those outstanding debt instruments, as necessary,
to permit Congoleum and the Company to satisfy their obligations under any plan
of reorganization and to make certain covenants under those debt instruments
less restrictive; (vi) the response from time-to-time of the Company's and
Congoleum's lenders, customers, suppliers, holders of the Senior Notes and their
representatives, and other creditors and constituencies to the Chapter 11
process and related developments arising from the strategy to settle asbestos
liability; (vii) 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; (viii) timely obtaining sufficient
creditor and court approval of a reorganization plan and the court overruling
any objections to such plan that may be filed; (ix) developments in costs,
associated with and the outcome of insurance coverage litigation pending in New
Jersey State Court involving Congoleum and certain insurers; (x) the extent to
which Congoleum is able to obtain reimbursement for costs it incurs in
connection with the insurance coverage litigation; (xi) compliance with the
Bankruptcy Code, including section 524(g); and (xii) the possible adoption of
another party in interest's proposed plan of reorganization which may prove to
be unfeasible. In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations
regarding its pursuit of a plan of reorganization, 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 a 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 of this
legislation, the Company does not know what effects any such legislation, if
61
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 to resolve its
asbestos liability pursuant to a 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 strategy 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 or financial
conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A and K of the Notes to Unaudited Consolidating Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included in Part I, Item 1 and Part I, Item 2,
respectively, in this report.
Any plan of reorganization for Congoleum will likely result in substantial
dilution of Congoleum's equity holders, including the Company.
Under the terms of the Eleventh Plan, if confirmation of the plan is not sought
by means of the Cramdown Treatment, on the effective date of that plan,
Congoleum would issue 3.8 million shares of its Class A common stock, which
based on the number of shares of Congoleum Class A and Class B common stock
outstanding as of November 9, 2006, would represent 31.5% of Congoleum's
outstanding common stock and 22.8% of the aggregate general voting power of
Congoleum's outstanding common stock, and would reduce the Company's equity
ownership in Congoleum to 37.7% and its general equity voting interest in
Congoleum to 53.6%, in each case, after giving effect to the stock issuance. On
a fully diluted basis, the Company's equity ownership would be reduced to 35.2%
with a general equity voting interest of 51.0%, giving effect to such stock
issuance as if it occurred on such date.
In addition, under the Eleventh Plan, if confirmation of the plan is not sought
by means of the Cramdown Treatment, Congoleum would issue the New Convertible
Security to the Plan Trust on the effective date of the plan. The principal
amount of that convertible security is expected to be approximately $2.7 million
and subject to possible future increase. Under the terms of the Eleventh Plan,
the convertible security would be convertible into a number of shares of
Congoleum Class A common stock that, when combined with the 3.8 million shares
of Congoleum Class A common stock to be issued by Congoleum to the Plan Trust on
the effective date of the plan, would result in the Plan Trust owning 51% of the
voting common shares outstanding on a fully diluted basis immediately after the
conversion on the conversion date, such conversion to take place at the option
62
of the Plan Trust upon the occurrence and at any time during the continuance of
an event of default of the obligation to pay [interest? principal?] under the
New Convertible Security when due. If this further additional issuance were to
occur, based on the number of shares of Congoleum Class A and Class B common
stock outstanding as of November 9, 2006, the Company's equity ownership and
voting equity interest in Congoleum would be reduced to 24.4%, resulting in a
loss of voting control of Congoleum by ABI.
As discussed elsewhere in this report, if confirmation of the plan is sought by
means of the Cramdown Treatment, all the existing Congoleum Class A and Class B
common stock on the effective date of the plan would be cancelled (including all
shares of Congoleum Class A and Class B common stock owned by ABI). An ad hoc
committee of holders of Congoleum's Senior Notes has threatened to vote against
the Eleventh Plan. In the event sufficient holders of the Senior Notes do not
vote (as a class) to accept the Eleventh Plan, its terms provide that Congoleum
may seek confirmation of the plan by means of the Cramdown Treatment. In
addition, any proposed plans of reorganization proposed for Congoleum by other
parties in interest may provide for cancellation of Congoleum's existing Class A
and Class B common stock or even greater dilution of the Congoleum equity
interests than that contemplated by the Eleventh Plan, and the Eleventh Plan
could be confirmed in accordance with the cram down provisions of the Bankruptcy
Code, in which case ABI would completely lose its ownership interest in
Congoleum. There can be no assurance as to how the equity interests in
Congoleum, including ABI's Congoleum equity interests, will be treated under any
plan of reorganization for Congoleum that may ultimately be confirmed by the
Bankruptcy Court and consummated.
Congoleum's Eleventh Plan of reorganization could be confirmed in accordance
with the cram down provisions of the Bankruptcy Code which would eliminate ABI's
controlling equity interest in Congoleum.
The Eleventh Plan provides that confirmation of the plan would be sought by
means of the Cramdown Treatment if the holders of the Senior Notes do not vote
as a class to accept the Eleventh Plan by the requisite numbers and amount
required by the Bankruptcy Code. An ad hoc committee of holders of Congoleum's
Senior Notes has threatened to vote against the Eleventh Plan which could result
in Congoleum seeking confirmation of the plan by means of the Cramdown
Treatment. Under the Cramdown Treatment, all existing common stock of Congoleum
would be cancelled and ABI would no longer control or own any equity interest in
Congoleum. Elimination of ABI's controlling equity interest in Congoleum could
have a material adverse impact on Congoleum's business, operations and financial
condition, the business relationships between ABI and Congoleum, and ABI's
business, operations and financial condition.
The Company has had to amend its debt agreements in the past in order to avoid
being in default of those agreements and may have to do so again in the future,
and the Company's ability to obtain additional financing may be limited.
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. Most recently, on September
25, 2006, the Company entered into an amendment and restatement to the credit
63
agreement it has with Bank of America, National Association and Bank of America,
National Association acting through its Canada branch, which is the agreement
that governs the Company's primary source of borrowings. In connection with that
amendment and restatement, certain financial covenants were amended under the
credit agreement to enable the Company to comply with those covenants. Although
the Company does not anticipate that it will need to further amend the credit
agreement to avoid being in default at some future date, there can be no
assurances in that regard. If the Company were to violate one of those covenants
and not amend the agreement to address or obtain a waiver of the violation, it
could breach the agreement, resulting in a default of the agreement. If such a
default were to occur, the lenders could require the Company to repay all
amounts outstanding under the credit agreement. If the Company were unable to
repay those amounts due, the lenders could have its rights over the collateral
(most of the Company's and its domestic subsidiaries' (excluding Congoleum)
assets) exercised, which would likely have a material adverse effect on the
Company's business, results of operations or financial condition.
In addition, under the terms of the credit agreement, 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 their current and previously owned
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 is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
64
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 or
financial condition.
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 or
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 its raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and have
remained high in 2006 and until additional capacity becomes available.
65
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.
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
66
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.
On August 18, 2006, an explosion and fire caused extensive damage to components
of a major production line at the Congoleum's Marcus Hook facility. By
implementing a seven day operation on its other production line and purchasing
base material from a competitor, Congoleum has been able to meet all production
requirements. Congoleum expects its insurance carrier will pay substantially all
excess costs (beyond a deductible) for replacing the damaged equipment and lost
production capacity. Fabrication of replacement equipment is underway, and
Congoleum anticipates that the line will be operational by the end of 2006. The
financial impact in the third quarter of 2006 as a result of lost overhead
absorption, lost sales and deductibles and uninsured expenses is estimated to be
approximately $0.8 million. Congoleum does not anticipate any impact to
operating results as a result of this incident in the fourth quarter of 2006.
However, if Congoleum experiences any significant unforeseen delays or
difficulties with its alternative production arrangements, the procurement and
installation of replacement equipment, or obtaining insurance reimbursements for
the excess costs associated with the loss, it could have a material adverse
impact on its business, results of operations, and 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 23% of the
Company's Tape division's net sales for the year ended December 31, 2005 and 21%
of its net sales for the year ended December 31, 2004. The loss of the largest
unaffiliated customer and/or two or more of the other three unaffiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
67
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 67% of Congoleum's net sales for the
year ended December 31, 2005 and 70% of Congoleum's net sales for the year ended
December 31, 2004.
The Company's majority-owned subsidiary K&M Associates L.P. ("K&M") 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's
customers accounted for approximately 58% of its net sales for the year ended
December 31, 2005 and 59% of its net sales for the year ended December 31, 2004.
The loss of the largest of these customers would have a material adverse effect
on K&M's business, results of operations and financial condition and would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
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 perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
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 on the Senior Notes on the following
dates: February 1, 2004, 2005 and 2006 and August 1, 2004, 2005 and 2006. 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 $30.5 million.
As of November 13, 2006, the aggregate outstanding principal amount of the
Senior Notes was $100.0 million. These amounts, which include $3.2 million of
aggregate accrued interest on the unpaid interest that was due on February 1,
2004, 2005 and 2006 and August 1, 2004, 2005 and 2006 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.
68
Item 6. Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
4.1 III Amended and Restated Credit Agreement dated as of September
25, 2006, among American Biltrite Inc., K&M Associates L.P.,
and American Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender and as
a domestic administrative agent, Bank of America, National
Association, acting through its Canada branch, both in its
capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
4.2 Amendment No. 1 to Amended and Restated Credit Agreement, dated
as of November 7, 2006, among American Biltrite Inc, K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a domestic
lender and as a domestic administrative agent, Bank of America,
National Association, acting through its Canada branch, both in
its capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
10.1 III Amended and Restated Credit Agreement dated as of September 25,
2006, among American Biltrite Inc, K&M Associates L.P., and
American Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender and as a
domestic administrative agent, Bank of America, National
Association, acting through its Canada branch, both in its
capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
10.2 IV Amendment No. 1 to Amended and Restated Credit Agreement, dated
as of November 7, 2006, among American Biltrite Inc, K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a domestic
lender and as a domestic administrative agent, Bank of America,
National Association, acting through its Canada branch, both in
its capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
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
69
Exhibit No. Description
--------------------------------------------------------------------------------
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
99.1 Eleventh Modified Joint Plan of Reorganization Under Chapter 11
of the Bankruptcy Code of Congoleum Corporation, et al., and
the Asbestos Claimants' Committee, dated as of October 23,
2006, including the exhibits thereto
99.2 Proposed Disclosure Statement with respect to Eleventh Modified
Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code of Congoleum Corporation, et al., and Asbestos Claimants'
Committee, dated as of October 23, 2006, including the exhibits
thereto (except Exhibit A thereto, which is included at Exhibit
99.1 to this report)
99.3 Settlement and Policy Buyback Agreement and Release, made as of
August 17, 2006, by and between Congoleum Corporation and
Century Indemnity Company and its affiliates
___________________________
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on September 27, 2006
IV Incorporated by reference to exhibit 4.2 to this Quarterly Report on
Form 10-Q
70
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: November 13, 2006 BY: /s/ Howard N. Feist III
------------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
71
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
4.1 III Amended and Restated Credit Agreement dated as of September
25, 2006, among American Biltrite Inc., K&M Associates L.P.,
and American Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender and as
a domestic administrative agent, Bank of America, National
Association, acting through its Canada branch, both in its
capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
4.2 Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of November 7, 2006, among American Biltrite Inc, K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a
domestic lender and as a domestic administrative agent, Bank
of America, National Association, acting through its Canada
branch, both in its capacity as a Canadian lender and as
Canadian administrative agent, and the other lenders from time
to time party thereto
10.1 III Amended and Restated Credit Agreement dated as of September
25, 2006, among American Biltrite Inc, K&M Associates L.P.,
and American Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender and as
a domestic administrative agent, Bank of America, National
Association, acting through its Canada branch, both in its
capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
10.2 IV Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of November 7, 2006, among American Biltrite Inc, K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a
domestic lender and as a domestic administrative agent, Bank
of America, National Association, acting through its Canada
branch, both in its capacity as a Canadian lender and as
Canadian administrative agent, and the other lenders from time
to time party thereto
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
Exhibit No. Description
--------------------------------------------------------------------------------
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
99.1 Eleventh Modified Joint Plan of Reorganization Under Chapter
11 of the Bankruptcy Code of Congoleum Corporation, et al.,
and the Asbestos Claimants' Committee, dated as of October 23,
2006, including the exhibits thereto
99.2 Proposed Disclosure Statement with respect to Eleventh
Modified Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al., and Asbestos
Claimants' Committee, dated as of October 23, 2006, including
the exhibits thereto (except Exhibit A thereto, which is
included at Exhibit 99.1 to this report)
99.3 Settlement and Policy Buyback Agreement and Release, made as
of August 17, 2006, by and between Congoleum Corporation and
Century Indemnity Company and its affiliates
___________________________
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K filed with the Securities and Exchange Commission
on September 27, 2006
IV Incorporated by reference to exhibit 4.2 to this Quarterly Report on
Form 10-Q