SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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, MA 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the voting stock of the registrant held by
non-affiliates as of June 30, 2003 was $10.7 million.
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of March 15, 2004 was 3,441,551.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 10, 2004, which will be filed by the registrant within 120 days
after December 31, 2003 are incorporated by reference into Part III of Form
10-K. A copy of this document can be obtained at no cost by calling the Company
at (781) 237-6655.
Factors That May Affect Future Results
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Registrant's
expectations, as of the date of this report of future events, and the Registrant
undertakes no obligation to update any of these forward-looking statements.
Although the Registrant believes that its expectations are based on reasonable
assumptions, within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. Readers are cautioned not to place undue reliance on any
forward-looking statements. Factors that could cause or contribute to the
Registrant's actual results differing from its expectations include those
factors discussed elsewhere in this report, including in the section of this
report entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors That May Affect Future Results," and in
the Registrant's other filings with the Securities and Exchange Commission.
2
PART I
ITEM 1. BUSINESS
(a) General Development of Business. American Biltrite Inc. (together
with, unless the context otherwise indicates, its wholly-owned subsidiaries and
K&M Associates L.P., "ABI" or the "Company") was organized in 1908 and is a
Delaware corporation. ABI's major operations include its Tape Division as well
as a controlling interest in Congoleum Corporation, a Delaware corporation
("Congoleum"), a controlling interest in K&M Associates L.P., a Rhode Island
limited partnership ("K&M"), and ownership of a Canadian subsidiary, American
Biltrite (Canada) Ltd. ("AB Canada").
The Tape Division produces adhesive-coated, pressure-sensitive papers and films
used to protect material during handling or storage or to serve as a carrier for
transferring decals or die-cut lettering. The Tape Division also produces
pressure sensitive tapes and adhesive products used for applications in the
heating, ventilating and air conditioning (HVAC), footwear, automotive,
electrical and electronic industries.
In 1995, ABI acquired a controlling interest in K&M, a national supplier,
distributor and servicer of a wide variety of adult, children's and specialty
items of fashion jewelry and related accessories. ABI, through wholly-owned
subsidiaries, owns an aggregate 94.5% interest (7% as sole general partner and
87.5% in limited partner interests) in K&M. K&M wholesales its products to mass
merchandisers and other major retailers. It also services certain retail
merchandisers' in-store operations in fashion jewelry and related accessories
departments by assisting retailers in managing inventory and maintaining
displays.
Congoleum is a leading manufacturer of resilient sheet and tile flooring. In
1993, ABI acquired an ownership position in Congoleum in exchange for its U.S.
tile business (the "Tile Division"). In 1995, ABI acquired voting control when
Congoleum sold a new issue of shares of its Class A common stock to the public
which had one vote per share and used the proceeds to redeem most of the
two-vote-per-share Class B shares held by the then majority shareholder. ABI's
interest has increased further since then as a result of Congoleum's repurchases
of its common stock combined with open market purchases by ABI. As of December
31, 2003, ABI's ownership of 151,100 shares of Congoleum's Class A common stock
and 4,395,605 shares of Class B common stock represented 69.5% of the voting
control of Congoleum. Congoleum is a defendant in a large number of
asbestos-related lawsuits. On December 31, 2003, Congoleum and two of its
affiliates each filed their respective voluntary petitions commencing cases for
reorganization relief under Chapter 11 of the United States Bankruptcy Code in
order to resolve Congoleum's asbestos-related liabilities pursuant to a
prepackaged Chapter 11 plan of reorganization filed in the Congoleum Chapter 11
cases.
Outside the United States, the Tape Division operates facilities in Belgium and
Singapore, where bulk tape products are converted into various sizes, a sales
and distribution facility in Italy, to quickly respond to customer demands in
the European and Asian markets, and a sales representative office in Shanghai,
China. Other international operations include: a wholly-owned Canadian
subsidiary, AB Canada, which produces resilient floor tile, rubber tiles and
rolled rubber flooring and industrial products (including conveyor belting,
truck and trailer splash guards and sheet rubber material). ABI owns 50% of
Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran corporation,
which produces soles, heels, sandals and other footwear products under license
from ABI. Hulera Sula owns 100% of Hulera Sacatepequez, S.A., a Guatemalan
corporation which manufactures products in Guatemala similar to those of
3
Hulera Sula. Fomtex, S.A., a Guatemalan corporation 60% owned by Hulera Sula,
manufactures foam mattresses, beds and other foam products. In October 2003, the
Janus flooring operation, which manufactured pre-finished hardwood flooring, was
closed. Results from Janus Flooring, including charges resulting from the
shutdown, are being reported as a discontinued operation.
For financial reporting purposes, ABI operates in four industry segments:
flooring products, tape products, jewelry and the Canadian division, which
produces flooring and rubber products. See Note 15 of Notes to the Consolidated
Financial Statements, set forth in Item 8 below.
(b) Financial Information about Industry Segments. Business segment
information is in Note 15 of Notes to the Consolidated Financial Statements, set
forth in Item 8 below.
(c) Narrative Description of Business.
Marketing, Distribution and Sales. The Tape Division's protective papers and
films are sold domestically and throughout the world, principally through
distributors, but also directly to certain manufacturers. Other tape products
are marketed through the Tape Division's own sales force and by sales
representatives and distributors throughout the world. ABI's Belgian, Italian
and Singapore facilities sell these products throughout Europe and the Far East.
The products of K&M are sold domestically through its own direct sales force
and, indirectly, through a wholly-owned subsidiary and through third-party sales
representatives. K&M's business and operations experience seasonal variations.
In general, fashion jewelry supply, distribution and service businesses respond
to the seasonal demands of mass merchandisers and other major retailers, which
typically peak in preparation for end-of-year holiday shopping. Accordingly,
K&M's working capital needs tend to be greatest in the second and third fiscal
quarters, while its revenues tend to be greater toward the end of each fiscal
year, especially in the latter part of the third quarter and the first half of
the fourth quarter.
AB Canada's floor tile, rubber products and industrial products are marketed
principally through distributors. Seasonal variations in the sales and working
capital requirements of this division are not significant.
Congoleum currently sells its products through approximately 17 distributors
providing approximately 53 distribution points in the United States and Canada,
as well as directly to a limited number of mass market retailers. Congoleum
considers its distribution network to be very important to maintaining a
competitive position. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
customers, the loss of a major customer could have a materially adverse impact
on Congoleum's business, results of operations and financial condition. The
sales pattern for Congoleum's products is seasonal, with peaks in retail sales
typically occurring during March/April/May and September/October. Orders are
generally shipped as soon as a truckload quantity has been accumulated, and
backorders can be canceled without penalty.
Hulera Sula's footwear and foam products are marketed and distributed in certain
Central American countries.
Financial information about products that contributed more than 10% of the
Company's consolidated revenue during the last three fiscal years is included in
Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8
below.
4
Working Capital and Cash Flow. In general, ABI's working capital requirements
are not affected by accelerated delivery requirements of major customers or by
obtaining a continuous allotment of raw material from suppliers. ABI does not
provide special rights for customers to return merchandise and does not provide
special seasonal or extended terms to its customers. K&M does provide certain
pre-approved allowances in the form of markdowns and return authorizations for
end of season merchandise.
Congoleum produces goods for inventory and sells on credit to customers.
Generally, Congoleum's distributors carry inventory as needed to meet local or
rapid delivery requirements. Congoleum's typical credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
Congoleum anticipates spending at least $9.8 million in 2004 in connection with
its planned reorganization under Chapter 11 of the United States Bankruptcy
Code, which will have a material impact on its liquidity and cash flow, although
Congoleum anticipates that its existing cash and credit arrangements should be
sufficient to fund these expenditures. ABI does not expect its contributions in
connection with Congoleum's plan of reorganization would have a material adverse
effect on ABI's working capital or cash flow. ABI is not otherwise liable for
the separate obligations of Congoleum.
Raw Materials. ABI generally designs and engineers its own products. Most of the
raw materials required by ABI for its manufacturing operations are available
from multiple sources; however, ABI 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 ABI's cost of materials,
require product reformulation or require qualification of new suppliers, any one
or more of which could materially adversely affect the business, operations or
financial condition of ABI. ABI's 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 no loss of this source of supply is anticipated,
replacement could take a considerable period of time and interrupt production of
certain products. Congoleum maintains a raw material inventory and has an
ongoing program to develop new sources, which is designed to provide continuity
of supply for its raw material requirements. Although the Company and Congoleum
have generally not had difficulty in obtaining their requirement for these
materials, they have occasionally experienced significant price increases for
some of these materials.
Competition. All businesses in which ABI is engaged are highly competitive,
principally based upon pricing of the product, the quality of the product and
service to the customer. ABI's tape products compete with products of some of
the largest fully integrated rubber and plastic companies, as well as those of
smaller producers. Included among its competitors are 3M, Nitto Permacel,
Venture Tape, Ivex and R-Tape. AB Canada's flooring products compete with those
of other manufacturers of rubber and resilient floor tiles and with all other
types of floor covering. AB Canada also competes with Armstrong World
Industries, Inc., V.P.I. and Nora and with other manufacturers of alternate
floor covering products. In the rubber products category, AB Canada has several
competitors, principally among them being GRT Division of Enpro, The Biltrite
Corporation and West America Rubber Company.
The market for Congoleum's products is highly competitive. Resilient sheet and
tile compete for both residential and commercial customers primarily with
carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms
5
and basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. Congoleum believes, based upon its market research, that purchase
decisions are influenced primarily by fashion elements such as design, color and
style, durability, ease of maintenance, price and ease of installation. Both
tile and sheet resilient flooring are easy to replace for repair and
redecoration and, in Congoleum's view, have advantages over other floor covering
products in terms of both price and ease of installation and maintenance.
Congoleum encounters competition from three other manufacturers in North America
and, to a much lesser extent, foreign manufacturers. Certain of Congoleum's
competitors, including Armstrong World Industries, Inc. in the resilient
category, have substantially greater financial and other resources than
Congoleum.
K&M competes with other companies making similar products on the basis of
product pricing and the effectiveness of merchandising services offered. In
assessing the effectiveness of K&M products and services, customers tend to
focus on margin dollars realized from the sales of product and return on
inventory investment needed to generate sales. In its business of supplying and
servicing fashion jewelry and accessory products, K&M competes with a variety of
competitors, among them are Liz Claiborne Inc., Jones Apparel Group and a number
of other companies offering similar products and/or services. K&M also competes
with numerous importers and overseas suppliers of similar items.
Patents and Trademarks. ABI and its subsidiaries own many trademarks, including
the Congoleum brand name, the AB(R) logo, TransferRite(R) at the Tape Division
and Amtico(R), which is used solely in the Canadian market. K&M also licenses
the AK Anne Klein(R), Panama Jack(R), and Guess?(R) trademarks as well as
certain others. These trademarks are important for the Company in maintaining
its competitive position. The Company also believes that patents and know-how
play an important role in maintaining competitive position. For example,
Congoleum utilizes a proprietary transfer printing process for certain tile
products that it believes produces visual effects that only one other competitor
is presently able to duplicate.
Research and Development. Research and development efforts at the Company
concentrate on new product development, increasing efficiencies of the various
manufacturing processes, and improving the features and performance of existing
products. Expenditures for research and development were $4.8 million, $5.1
million, and $4.9 million, on a consolidated basis for the years ended December
31, 2003, 2002 and 2001, respectively.
Key Customers. For the year ended December 31, 2003, two customers of Congoleum
and one customer of K&M each accounted for over 10% of ABI's consolidated net
sales. The two Congoleum customers together accounted for 65% of Congoleum's net
sales and the K&M customer accounted for 56% of K&M's net sales. The Congoleum
customers are its distributor to the manufactured housing market,
LaSalle-Bristol, and its largest retail distributor, Mohawk Industries, Inc. The
K&M customer is Wal*Mart. No other customer accounted for more than 10% of ABI's
consolidated sales. K&M's top three customers in terms of net sales in 2003
together accounted for 70% of K&M's net sales. The loss of the largest customer
would have a material adverse effect on K&M.
Sales to five unaffiliated customers of the Tape Division together constitute
approximately 22%
6
of the net sales for the Division. The loss of the largest unaffiliated customer
and/or two or more of the other unaffiliated customers could have a significant,
adverse effect on the Tape Division's revenue. AB Canada's sales to Congoleum
and to two unaffiliated companies accounted for approximately 34% of AB Canada's
net sales. The loss of Congoleum and/or the two unaffiliated customers would
have a significant, adverse affect on AB Canada's revenue. See Note 15 of Notes
to Consolidated Financial Statements set forth in Item 8 below.
Backlog. The dollar amount of backlog of orders believed to be firm as of
December 31, 2003 and 2002 was $12.9 million and $12.7 million, respectively. It
is anticipated that all of the backlog as of December 31, 2003 will be filled
within the current fiscal year. There are no seasonal or other significant
aspects of the backlog. In the opinion of management, backlog is not significant
to the business of ABI.
Environmental Compliance. Because of the nature of the operations conducted by
ABI, ABI's 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 ABI facilities
and off-site disposal locations. ABI believes that compliance with existing
federal, state, local and foreign provisions will not have a material adverse
effect upon its capital expenditures, earnings and competitive position.
Congoleum, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
Congoleum does not anticipate that the additional costs of these measures will
be material. In connection with the acquisition of the Tile Division, ABI signed
a similar consent order with respect to the Trenton tile facility, and Congoleum
agreed to be financially responsible for any cleanup measures required.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), as amended, and similar state laws. In four
instances, although not named as a PRP, Congoleum has received a request for
information. These pending proceedings currently relate to four disposal sites
in New Jersey, Pennsylvania, Maryland and Connecticut 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 exposure in
connection with those sites depends on many factors, including the volume of
material contributed to the site, the number of other PRPs and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, Congoleum can be held jointly and severally liable
for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation, based on engineering and consultant studies conducted, would be
approximately
7
$26 million. Congoleum's proportionate share, based on waste disposed at the
site, is estimated to be approximately 5.8%.
ABI and its subsidiaries, including Congoleum, have historically expended
substantial amounts for compliance with existing environmental laws and
regulations, including those matters described above. ABI will continue to be
required to expend amounts in the future, due to the nature of past activities
at its facilities, to comply with existing environmental laws, and those amounts
may be substantial. Because environmental requirements have grown increasingly
strict, however, ABI is unable to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
See Item 3 below for certain additional information regarding environmental
matters.
Employees. As of December 31, 2003, ABI and its subsidiaries employed
approximately 2,700 people.
(d) Financial information about foreign and domestic operations and export
sales. Financial information concerning foreign and domestic operations is in
Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8
below. Export sales from the United States were $23.7 million in 2003, $24.4
million in 2002 and $24.1 million in 2001.
8
ITEM 2. PROPERTIES
At December 31, 2003, ABI and its subsidiaries owned ten manufacturing plants
and a jewelry distribution center and leased additional office and warehousing
space as follows:
Owned Industry Segment
Or For Which
Location Square Feet Leased Properties Used
---------------------------------------------------------------------------------------------------------
Trenton, NJ 1,050,000 Owned Flooring products
Marcus Hook, PA 1,000,000 Owned Flooring products
Trenton, NJ 282,000 Owned Flooring products
Finksburg, MD 107,000 Owned Flooring products
Trenton, NJ 111,000 Leased Flooring products
Mercerville, NJ 55,000 Leased Flooring products
Sherbrooke, Quebec 379,000 Owned Canadian division
Moorestown, NJ 226,000 Owned Tape products
Lowell, MA 57,000 Owned Tape products
Tyngsboro, MA 36,000 Leased Tape products
Renaix, Belgium 84,000 Owned Tape products
Singapore 32,000 Owned Tape products
Providence, RI 103,000 Owned Jewelry products
New York, Qingdoa, China and
Bentonville, Arkansas 10,800 Leased Jewelry products
Toronto, Ontario 152,000 Owned Discontinued operation
ABI knows of no material defect in the titles to any such properties or material
encumbrances thereon other than the owned properties in Renaix, Belgium, and
Singapore which have mortgages securing outstanding debt in amounts equal to
approximately 45% and 60% of the original cost of the property, respectively,
and under the terms of the Company's principal credit agreements and facilities,
pursuant to which the Company has granted a security interest in the properties
in Moorestown, NJ, Lowell, MA and Providence, RI. ABI considers and understands
that all of its and its subsidiaries' properties are in good condition and have
been well maintained.
9
It is estimated that during 2003, ABI's and its subsidiaries' plants for the
manufacture of floor covering products operated at approximately 95% of
aggregate capacity, its plants for the manufacture of tape products operated at
approximately 75% of aggregate capacity and the Canadian division operated at
approximately 80% of aggregate capacity. All estimates of aggregate capacity
have been made on the basis of a five-day, three-shift operation.
ITEM 3. LEGAL PROCEEDINGS
ABI has been named by the Environmental Protection Agency (the "EPA") as a
Potentially Responsible Party ("PRP") within the meaning of the federal
Comprehensive Environmental Response, Compensation and Liability Act, as amended
("CERCLA"), as to four sites in three separate states. See Note 9 of Notes to
the Consolidated Financial Statements included in Item 8 for detailed
information about these matters.
In addition, ABI has entered into a settlement agreement that resolved one
environmental lawsuit. The details are set forth in Note 9 of Notes to the
Consolidated Financial Statements included in Item 8.
The present owner of a site in Maine formerly owned by ABI has notified ABI that
it believes ABI is potentially responsible for response and remediation costs.
ABI also is potentially responsible for response and remediation costs as to
three state supervised sites, two sites in Massachusetts, and one in New York.
See Note 9 of Notes to the Consolidated Financial Statements included in Item 8
for information about ABI's potential liability at these four sites.
As of December 31, 2003, ABI has accrued $3.6 million representing the estimable
and probable amounts for contingencies described above, net of expected
recoveries.
As of December 31, 2003, ABI's subsidiary Congoleum was named as a defendant,
together in most cases with numerous other defendants, in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals alleging personal injury or death from
exposure to asbestos or asbestos-containing products. On December 31, 2003
Congoleum and two of its subsidiaries each filed their respective voluntary
petitions commencing cases for reorganization relief under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court for the
District of New Jersey. These Chapter 11 cases are being jointly administered as
Case No. 03-51524 (KCF), styled In re Congoleum Corporation, et al., and were
commenced in order to resolve Congoleum's asbestos-related liabilities and any
future asbestos-related liability that might be asserted against Congoleum.
During 2003, Congoleum obtained the asbestos personal injury claimant votes
necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the bankruptcy court. The
bankruptcy court has not yet scheduled a hearing to consider approval of the
proposed plan. See Notes 1, 9 and 10 of Notes to the Consolidated Financial
Statements included in Item 8 for information about Congoleum's potential
liabilities in connection with these lawsuits.
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately 1,954 pending claims involving
approximately 3,462 individuals as of December 31, 2003. The claimants allege
personal injury from exposure to asbestos or asbestos-containing products. See
Notes 1, 9 and 10 of Notes to the Consolidated Financial Statements included in
Item 8 for detailed information about these claims. These claims relate to
products of the Tile Division, which was acquired by Congoleum.
10
Together with a large number (in most cases, hundreds) of other companies,
Congoleum is named as a PRP in pending proceedings under CERCLA and similar
state laws. See Note 9 of Notes to the Consolidated Financial Statements
included in Item 8 for detailed information about these matters.
Congoleum also accrues remediation costs for certain of its owned facilities on
an undiscounted basis. Estimated total cleanup costs, including capital outlays
and future maintenance costs for soil and groundwater remediation are primarily
based on engineering studies. In the ordinary course of its business, ABI and
its consolidated entities become involved in lawsuits, administrative
proceedings, product liability and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The registrant's Common Stock, par value $.01 per share, is traded on the
American Stock Exchange (ticker symbol: ABL). At the close of business on March
15, 2004, the closing price of ABI's Common Stock was $10.85 per share and the
approximate number of record holders was 340.
High and low stock prices and dividends for the last two years were:
Sale Prices of Common Shares
2003 2002
------------------------------------------------------
Quarter Ended High Low High Low
--------------------------------------------------------------------------------
March 31 $9.85 $7.00 $14.37 $11.20
June 30 7.55 6.35 15.10 12.20
September 30 9.16 6.60 13.95 11.65
December 31 7.70 6.32 11.87 7.00
Cash Dividends Per
Common Share
------------------------
Quarter Ended 2003 2002
---------------------------------------------------
March 31 $.1250 $ .125
June 30 .0625 .125
September 30 -- .125
December 31 -- .125
------------------------
$.1875 $ .500
========================
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EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2003.
Number of
Securities
Remaining
Available for
Number of Future
Securities to Weighted- Issuance
be Issued Average Under Equity
Upon Exercise Compensation
Exercise of Price of Plans
Outstanding Outstanding (excluding
Options, Options, Securities
Warrants Warrants reflected in
Plan Category and Rights. and Rights. Column (a))
------------- ----------- ----------- -----------
(a) (b) (c)
Equity Compensation Plans Approved
By Security Holders ............................. 210,000 $22.74 323,020
Equity Compensation Plans Not
Submitted To Security Holders For
Approval ........................................ 19,000 $14.25 31,000
Total ........................................... 229,000 $22.04 354,020(1)
(1) Includes 323,020 shares of Common Stock available for issuance under the
Company's 1993 Stock Award and Incentive Plan, as amended. In addition to
stock options, awards under the Company's 1993 Stock Award and Incentive
Plan, as amended, may take the form of stock appreciation rights (SARs),
limited SARs, restricted stock units and other stock awards specified in
the Plan. If such awards are granted, they will reduce the number of
shares of Common Stock available for issuance pursuant to future stock
option awards.
On July 1, 1999 the Company established its 1999 Stock Option Plan for
Non-Employee Directors, (the "1999 Plan"), under which non-employee directors
may be granted non-qualified options (the "Options") to purchase up to 50,000
shares of the Company's common stock. The 1999 Plan was not submitted to
stockholders for approval. The options granted under the 1999 Plan have ten-year
terms and vest 6 months from the grant date. The exercise price for each Option
is 100% of the fair market value on the date of the grant. As of December 31,
2003 an aggregate of 19,000 shares of common stock were issuable upon the
exercise of outstanding Options.
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ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31,
2003 2002 2001 2000 1999
---------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Financial Position
Total assets $ 319,396 $ 361,870 $ 423,918 $ 400,887 $ 344,060
Long-term debt 124,915 125,271 126,161 111,107 114,105
Total stockholders' equity 32,979 47,538 77,248 79,547 78,381
Summary of Operations
Net sales $ 416,569 $ 434,495 $ 403,509 $ 414,096 $ 419,646
(Loss) income before
income taxes other items (9,946) (11,813) 5,961 2,921 20,116
Provision (credit) for
income taxes (3,323) 1,248 2,345 770 7,391
Noncontrolling interests (174) 6,221 435 3,235 (2,992)
Net (loss) income from
continuing operations (6,797) (6,840) 4,051 5,386 9,733
Discontinued operation (1) (7,361) (2,073) (1,235) (53)
Cumulative effect of
accounting change (2) (7,742)
Net (loss) income (14,158) (16,655) 2,816 5,333 9,733
Basic (loss) income per share $ (4.11) $ (4.84) $ 0.82 $ 1.52 $ 2.71
Diluted (loss) income per share (4.11) (4.84) 0.82 1.51 2.66
Cash dividends per common share 0.1875 0.50 0.50 0.50 0.50
Number of shares used in computing:
Basic income per share 3,441,551 3,441,562 3,455,134 3,518,107 3,591,895
Diluted income per share 3,441,572 3,441,648 3,455,148 3,537,256 3,661,946
(1) 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 Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
(2) Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" (SFAS No. 142). In accordance with the provisions
of SFAS No. 142, the Company recorded a transitional goodwill impairment
charge of $7.7 million.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On December 31, 2003 the Company's subsidiary Congoleum and two of its
subsidiaries each filed their respective voluntary petitions commencing cases
for reorganization relief under Chapter 11 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of New Jersey. These
Chapter 11 cases are being jointly administered as Case No. 03-51524 (KCF),
styled In re Congoleum Corporation, et al., to resolve claims that have been or
might in the future be asserted against Congoleum related to the use of asbestos
in its products decades ago. During 2003, Congoleum obtained the asbestos
personal injury claimant votes necessary for approval of a proposed pre-packaged
Chapter 11 plan of reorganization and in January 2004, filed its pre-packaged
plan of reorganization and disclosure statement with the Bankruptcy Court. Based
on its pre-packaged bankruptcy strategy, which included Congoleum settling
certain asbestos claims prior to commencing its Chapter 11 case, Congoleum has
made provision in its financial statements for the minimum amount of the range
of estimates for its contribution and costs to effect its plan to settle
asbestos liabilities through a plan trust established under Section 524(g) of
the Bankruptcy Code. Congoleum recorded charges of $17.3 million in the fourth
quarter of 2002, and an additional charge of $3.7 million in the fourth quarter
of 2003, to increase its recorded liability to the estimated minimum cost to
complete its reorganization. Actual amounts that will be contributed to the plan
trust and costs for obtaining confirmation of and implementing the plan of
reorganization could be materially higher, which could have a material effect on
ABI's consolidated results of operations.
In addition, the Company is also a defendant in a number of asbestos-related
lawsuits. See Note 10 of the Notes to Consolidated Financial Statements, which
is incorporated herein by reference. These matters may have a material adverse
impact on the Company's or Congoleum's financial position and results of
operations.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary, a manufacturer of pre-finished hardwood
flooring, and sell the related assets. Results of Janus Flooring, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's bankruptcy 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.
Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
ABI and non-debtor subsidiaries
Net sales for the year ended December 31, 2003 were $195.9 million, a decrease
of $1.6 million or 0.8% from sales of $197.5 million in 2002. Jewelry segment
sales decreased $2.8 million or 3.6% from 2002 due to lower sales to a major
mass merchandiser, partly offset by increases in sales to other customers. Tape
and Canadian segment sales increased slightly as a result of foreign currency
translation; absent the weaker dollar, these segments would have reported
decreases due to the continued weak economic environment in several of their end
use markets.
14
Cost of products sold was 67.5% of net sales in 2003 compared with 66.2% in
2002. Gross margins in the Tape segment, as a percentage of its sales, improved
0.7 percentage points due to a more profitable product mix, the weaker dollar,
and manufacturing cost improvements. Canadian margins declined 2.6 percentage
points principally due to lower volume. Margins in the jewelry business were the
same in 2003 as in 2002.
Selling, general and administrative expenses for the year ended December 31,
2003 were $62.6 million, or 31.9% of net sales, up from $58.6 million or 29.6%
of net sales in 2002. Selling, general and administrative expenses increased due
to higher costs for insurance, employee medical benefits and professional fees
as well as the impact of the weaker dollar on expenses of foreign operations.
Interest expense increased from $2.4 million in 2002 to $2.7 million in 2003 due
to slightly higher average borrowings and higher interest rates under certain of
the Company's debt agreements.
The effective tax rate in 2003 was 79.9%. The high effective tax rate in 2003
(relative to statutory rates) was primarily the result of the fact that the
Canadian division recorded a valuation allowance against deferred tax assets
arising from its losses. Future effective tax rates are expected to be closer to
statutory rates, but could fluctuate depending on the results of the Canadian
division and the magnitude of those results relative to those of other segments.
The net loss from continuing operations was $ 35 thousand in 2003, compared with
income from continuing operations of $5.9 million in 2002, as a result of the
lower profitability of the jewelry business and the loss at the Canadian
division. The net loss was $7.4 million in 2003 compared with a net income of
$1.9 million in 2002, or net income of $3.8 million before a required accounting
change. The lower net income before the required accounting change versus income
the previous year was due to the increased loss from discontinued operations in
2003 when the charges related to closure of Janus were incurred.
Congoleum
Congoleum's net sales for the year ended December 31, 2003 were $220.7 million
as compared to $237.2 million for the year ended December 31, 2002, a decrease
of $16.5 million or 7%. The decrease resulted primarily from lower sales in the
do-it-yourself tile category coupled with continued weakness in the Manufactured
Housing market. Improved resilient sheet volume, particularly in base-grade and
trade-up builder products, coupled with a price increase and lower sales
allowances, helped to partially mitigate the sales decline.
Congoleum's gross profit for the year ended December 31, 2003 totaled $53.8
million, or 24.4% of sales, compared to $57.5 million, or 24.2% of sales, for
the year ended December 31, 2002. Gross margins improved slightly as improved
pricing, manufacturing efficiencies and cost reduction programs helped offset
raw material cost increases.
Congoleum's selling, general and administrative expenses were $56.9 million for
the year ended December 31, 2003 as compared to $70.1 million for the year ended
December 31, 2002, a decrease of $13.2 million. Selling, general and
administrative expenses for 2003 and 2002 included $3.7 million and $17.3
million of cost associated with asbestos-related claims, respectively. As a
percent of net sales, selling, general and administrative expenses were 25.8%
and 29.6% for the years ended December 31, 2003 and 2002 respectively. During
2003, cost savings initiatives were implemented that helped offset increases in
pension, medical and other related costs.
15
Congoleum recorded a charge of $3.7 million during the fourth quarter of 2003,
included in selling, general, and administrative expenses, to increase its
recorded liability for resolving asbestos-related claims. The recorded liability
at December 31, 2003 represents the minimum estimated cost that Congoleum will
incur to resolve its asbestos-related liability through the execution of
Congoleum's proposed plan of reorganization. If Congoleum is not successful in
obtaining confirmation of its proposed plan of reorganization in a timely
manner, actual costs could be significantly higher. The proposed plan also would
require Congoleum to make an additional contribution to the plan trust one year
after confirmation of the plan equal to 51% of any increase in the market value
of Congoleum's shares at that time over their value on June 6, 2003. No
provision has been made for the cost of this possible additional contribution,
which could be material. Congoleum will adjust its recorded liability should its
estimates change.
The loss from continuing operations was $6.8 million for the year ended December
31, 2003 compared to a loss of $19.3 million for the year ended December 31,
2002, an improvement of $12.5 million. This smaller loss from operations was
primarily due to the lower asbestos-related charge, offset by lower gross margin
dollars.
Interest income declined from $0.3 million in 2002 to $0.1 million in 2003 due
to lower average cash equivalent and short-term investment balances. Interest
expense increased from $8.4 million in 2002 to $8.9 million in 2003, reflecting
increased borrowings under the revolver. Congoleum recorded a tax benefit of
$3.9 million on a loss before income taxes of $10.6 million in 2003 as a result
of utilizing certain loss carry forwards that had previously been fully
reserved.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
ABI and Non-Debtor Subsidiaries
Net sales for the year ended December 31, 2002 were $197.5 million, an increase
of $12.5 million or 6.8% from sales of $185.0 million in 2001. The increase in
sales was due to higher jewelry segment sales. Jewelry sales increased as a
result of sales of a line of licensed products acquired in July 2001, as well as
continued growth with a major mass merchandiser. Tape and Canadian segment sales
declined due to the poor economic environment in several of their end use
markets.
Cost of products sold was 66.2% of net sales in 2002, down slightly from 66.6%
in 2001. Within segments, gross margins improved at Tape, were level in Canada,
and declined in jewelry (due to costs for the acquired line of licensed
products).
Selling, general and administrative expenses for the year ended December 31,
2002 were $58.6 million, or 29.6% of net sales, up from $52.5 million or 28.4%
of net sales in 2001. The increase was primarily due higher selling expenses at
K&M related to increased sales. In addition, all operations experienced cost
increases for insurance and employee benefits.
Other income increased from $0.8 million in 2001 to $1.5 million in 2002
primarily as a result of gains on foreign exchange.
Income from continuing operations was $5.9 million in 2002 compared with $4.9
million in 2001. Results in the jewelry segment improved from 2001 to 2002,
while income declined at the Tape and Canadian businesses. Net income after a
$2.0 million charge for a required accounting change in 2002 was $1.9 million,
compared to $3.6 million in 2001. The Company recorded a non-cash transitional
charge of $2.0 million in the first quarter of 2002 for impairment of goodwill
that resulted from the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets.
16
Congoleum
Congoleum's net sales for the year ended December 31, 2002 were $237.2 million
as compared to $218.8 million for the year ended December 31, 2001, an increase
of $18.4 million or 8.4%. The increase resulted primarily from strong sales of
the DuraStone product line, which was introduced in August 2001, and improved
resilient sheet sales in both the base grade and trade up builder segment,
partially offset by lower luxury and contract tile sales.
Congoleum's gross profit for the year ended December 31, 2002 was $57.5 million,
or 24.2% of sales, compared to $53.1 million in 2001, or 24.3% of sales, an
increase of $4.4 million over the year ended December 31, 2001. Gross profit
margins declined slightly as costs of expanding sales and the product mix impact
of increased base grade builder product sales offset improved manufacturing
efficiencies and cost reduction programs.
Congoleum's selling, general and administrative expenses were $70.1 million for
the year ended December 31, 2002, which includes asbestos-related costs of $17.3
million, as compared to $49.0 million for the year ended December 31, 2001, an
increase of $21.2 million or 43.2%. As a percent of net sales, selling, general
and administrative expenses were 29.6% and 22.4% for the years ended December
31, 2002 and 2001, respectively. In addition to the asbestos-related charge,
significant investments in additional displays and samples to support the
DuraStone product line and higher promotional support contributed to the
increase.
Congoleum recorded a charge of $17.3 million, in the fourth quarter of 2002,
included in selling, general and administrative expenses, to adjust its recorded
liability for resolving asbestos-related claims against it. The recorded
liability at December 31, 2002 represented the then-minimum estimated cost that
Congoleum would incur to resolve its asbestos-related liability through a plan
of reorganization.
Loss from operations was $12.6 million for the year ended December 31, 2002,
compared to income of $4.1 million for the year ended December 31, 2001, a
decrease of $16.7 million. This change was primarily due to the asbestos charge.
Interest income declined from $0.7 million in 2001 to $0.3 million in 2002 due
to a combination of lower average cash equivalent and short-term investment
balances and lower interest rates. Interest expense increased from $8.3 million
in 2001 to $8.4 million in 2002, due to lower capitalized interest in 2002
compared to 2001.
Congoleum recorded a tax provision of $92 thousand on a loss before income taxes
and the cumulative effect of accounting change of $19.2 million in 2002. The tax
provision included a benefit from the reduction of $529 thousand for a tax
valuation allowance as a result of utilizing certain loss carry forwards that
had previously been fully reserved. This benefit was offset by an additional
provision for valuation allowance. For 2001, the effective tax rate was 23.6%
resulting in a tax benefit of $506 thousand which included a reduction for a tax
valuation allowance of $273 thousand.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 provides that goodwill and intangible
assets with indefinite lives will not
17
be amortized, but rather will be tested for impairment on an annual basis. SFAS
No. 142 was effective for Congoleum as of January 1, 2002. During the first
quarter of 2002, Congoleum performed a transitional impairment test of goodwill
in accordance with SFAS No. 142 and concluded that there was impairment.
Congoleum compared the implied fair value of goodwill to the carrying value of
goodwill and it was determined that based on the fair value of Congoleum's
assets and liabilities, there should be no goodwill recorded. Accordingly,
Congoleum recorded an impairment loss of $10.5 million during the first quarter
of 2002, which has been recorded as the cumulative effect of a change in
accounting principle as of January 1, 2002.
During the fourth quarter of 2002, Congoleum recorded other comprehensive
expense of $11.3 million relating to the recognition of a minimum pension
liability. Congoleum reduced its assumed long-term rate of return on pension
plan assets from 9% to 7% and its discount rate from 7.25% to 6.75%.
Liquidity and Capital Resources - ABI and non-debtor subsidiaries
At December 31, 2003, consolidated working capital was $13.4 million, the ratio
of current assets to current liabilities was 1.2 to 1, and the debt to equity
ratio was 1.45 to 1. Net cash provided by operations during 2003 was $11.0
million. As discussed below, because the majority of the Company's debt
agreements must be amended or extended prior to December 31, 2004, the related
liabilities are classified as current. The Company anticipates that it will
obtain the necessary amendments or extensions, or otherwise refinance the
related debt. If the Company were unable to do so, it would have a material
adverse effect on liquidity.
Although the Company currently has no material commitments for capital
expenditures, it plans to make expenditures during 2004 of approximately $3
million to $4 million. Capital expenditures generally cover normal replacement
of machinery and equipment and process improvements.
In 2001, ABI entered into a Note Purchase and Private Shelf Agreement with
Prudential Insurance Company (the "Prudential Agreement"). Under the terms of
this agreement, ABI borrowed $20 million and used the proceeds to retire
existing long-term and revolving debt.
The Prudential Agreement was amended in October 2003 and January 2004 to revise
certain financial covenants to afford the Company with greater flexibility to
comply with those covenants and requires the Company to comply with additional
covenants consistent with those included in the Fleet Agreement (as discussed
below). In connection with the amendment, the Company and certain of its
domestic subsidiaries granted Prudential a security interest in most of the
Company's and its domestic subsidiaries' assets. The security interest granted
to Prudential does not include the assets or shares of capital stock of
Congoleum. Certain domestic subsidiaries of the Company have agreed to guaranty
the Company's obligations under the amended Prudential Agreement. The security
interests granted under the Prudential Agreement are on parity with security
interests granted under the Fleet Agreement. The notes issued under the
Prudential Agreement bear interest at 7.91% plus an additional fee on each
interest payment date if the Company's and certain of its subsidiaries' ratio of
debt to EBITDA, as defined under the amended Fleet Agreement, exceeds certain
levels. The amount of those fees that may be payable by the Company varies
depending on the extent the Company's and certain of its subsidiaries' debt
exceeds EBITDA and is capped at 2% of the outstanding principal amount of the
Series A Notes. Principal is repayable in five annual $4.0 million installments
beginning August 28, 2006. Because the Prudential Agreement, as amended,
requires the Fleet Agreement to be replaced or refinanced effective no later
than December 31, 2004
18
(and the related commitment to be in place no later than November 14, 2004),
amounts outstanding under the Prudential Agreement are classified as current
liabilities.
In October 2003, the Company and K&M entered into a new credit agreement (the
"Fleet Agreement") which was further amended on January 29, 2004. The January
amendment eliminated a participating lender under the agreement and reduced the
maximum borrowings under the agreement from $25 million to $20 million. The
Company expects to further amend the agreement to permit the Company's Canadian
subsidiary to grant a security interest under that subsidiary's credit agreement
(the "CIBC Agreement"). The Fleet Agreement, as amended, replaces a previous
revolving credit agreement. In connection with the Fleet Agreement, the Company
and certain of its domestic subsidiaries granted the lender a security interest
in most of the Company's and its domestic subsidiaries' assets. The security
interests granted are on parity with security interests granted under the
Prudential Agreement. The security interest granted to the Lenders does not
include the assets or shares of capital stock of Congoleum. Under the Fleet
Agreement as amended, the Company and K&M are subject to various financial and
other covenants. The amount of borrowings that may be outstanding at any time
under the Fleet Agreement are determined by a borrowing base formula applied to
inventory, receivables and fixed assets of the Company and certain of its
subsidiaries, reduced by amounts outstanding under the Prudential Agreement,
subject to a maximum of $20 million. Interest is payable on amounts borrowed
under the Fleet Agreement at rates which generally range from 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 Fleet Agreement. Certain domestic subsidiaries of
the Company have agreed to guaranty the Company's obligations under the Fleet
Agreement. The Fleet Agreement expires on December 31, 2004.
The Company's Canadian subsidiary is financed under the CIBC Agreement that
provided a $7.5 million Canadian dollar (US $5.8 million) capital loan and
provides an operating loan facility of $11 million Canadian dollars (US $8.5
million). Proceeds of the capital loan were used to fund acquisitions of
property and equipment in Canada. The capital loan is payable in 20 equal
quarterly installments which began on February 28, 2002 and bears interest at
6.03%. The operating loan is payable on demand and bears interest at a floating
rate which was 4.5% at December 31, 2003. The Company has agreed, subject to
consent of lenders under the Fleet and Prudential Agreement, to permit
borrowings under the CIBC Agreement to be secured by the Canadian division's
inventory, receivables, and equipment.
Certain borrowing agreements of the Company or its subsidiaries restrict the
ability of the Company or the borrowing subsidiary to incur additional
indebtedness, pay dividends, or make capital expenditures in excess of a
specified aggregate, and require the maintenance of certain financial ratios and
minimum net worth levels. The covenants and conditions under those borrowing
agreements must be met in order for the Company to borrow under those
agreements. In addition, borrowings under the Fleet agreement are based upon the
amount of domestic inventory, accounts receivable and fixed assets available as
collateral. These considerations could limit the Company's ability to fully
utilize the $28.5 million available under its existing lines of credit. At
December 31, 2003, $7.9 million was outstanding under these lines and $0.5
million secured outstanding letters of credit, and $14.9 million was available
for borrowing based on collateral levels.
Cash requirements for capital expenditures, working capital, debt service, and
any dividends or share repurchases are expected to be financed from operating
activities and borrowings under existing lines of credit. Existing resources,
together with the cash generated from operations, is
19
expected to be sufficient to meet the capital requirements of the current
operations for the foreseeable future.
The following table summarizes the Company's obligations at December 31, 2003
for future principal payments on its long-term debt (assuming any necessary
amendments or waivers are obtained from its lenders) and future minimum rental
payments on its non-cancelable operating leases.
Payments due by Period
(amounts in thousands)
Less than 1 1-2 2-3 3-4 4-5 After
Total Year Years Years Years Years 5 Years
------------------------------------------------------------------------------------------------
Long-term
debt $25,142 $21,289 $1,293 $1,297 $144 $ 111 $1,008
Operating
leases 4,703 1,555 1,045 831 703 569 --
------------------------------------------------------------------------------------------------
$29,845 $22,844 $2,338 $2,128 $847 $ 680 $1,008
================================================================================================
On December 31, 2003 the Company's subsidiary Congoleum and two of its
subsidiaries each filed voluntary petitions with the United States Bankruptcy
Court for the District of New Jersey (Case No. 03-51524) seeking relief under
Chapter 11 of the United States Bankruptcy Code. As part of Congoleum's plan of
reorganization, ABI expects that Congoleum's indemnification obligations to ABI
with respect to current and future asbestos claims related to its former Tile
Division operations not covered by ABI insurance will be channeled to the trust
established in connection with Congoleum's Chapter 11 plan of reorganization.
ABI expects to contribute $250 thousand in cash and a pledge of its Congoleum
shares as collateral for Congoleum's obligations to the trust that would be
established in connection with Congoleum's Chapter 11 reorganization. ABI does
not expect its cash contribution or pledge would have a material adverse effect
on its liquidity or capital resources. In addition, the Company is a defendant
in a number of asbestos-related lawsuits as well, and is a party to Congoleum's
litigation with its insurance carriers. See Note 10 of the Notes to the
Consolidated Financial Statements, which is included at Item 8. These matters
may have a material adverse impact on the Company's liquidity and capital
resources.
Liquidity and Capital Resources - Congoleum
Congoleum's financial statements 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, and 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 Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-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.
20
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003 filed a pre-packaged plan of reorganization under Chapter 11
of the United States Bankruptcy Code as part of its strategy to resolve this
liability. See Notes to Consolidated Financial Statements, which are contained
in Item 8 of this Annual Report on Form 10-K. These matters will have a material
adverse impact on Congoleum's liquidity and capital resources. During 2003,
Congoleum paid $5.3 million in defense and indemnity costs related to
asbestos-related claims and $13.5 million in fees and expenses related to
implementation of its planned reorganization under Chapter 11 and litigation
with certain insurance companies. Congoleum expects to spend a further $9.8
million at a minimum in fees, expenses, and trust contributions in connection
with obtaining confirmation of its plan. Congoleum also expects to recover $3.6
million from the Collateral Trust or its successor pursuant to terms of the
Claimant Agreement and related documents which provide for the trust to
reimburse certain expenses of Congoleum. Timing of such recovery will depend on
when the trust receives funds from insurance settlements or other sources.
Unrestricted cash and cash equivalents, including short-term investments at
December 31, 2003, were $2.2 million, a decrease of $16.1 million from December
31, 2002. 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. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. Working capital was
$27.1 million at December 31, 2003, down from $28.8 million one year earlier.
The ratio of current assets to current liabilities at December 31, 2003 was 1.5
to one, compared to 1.4 to one a year earlier. The ratio of debt to total
capital at December 31, 2003 was .57 compared to .49 in 2002. Net cash used by
operations during the year ended December 31, 2003 was $20.0 million, as
compared to cash provided by operations of $10.0 million in 2002. Cash from
operations decreased from 2002 to 2003 as funds were used to reduce accounts
payable and accrued expenses offset by lower inventories and accounts
receivables. Expenditures related to asbestos liabilities and Congoleum's
reorganization plan were $18.8 million, in 2003, compared to $3.4 million in
2002, accounting for slightly more than half the decrease. The remainder of the
decrease was primarily due to a low level of manufacturing and shipment activity
at the end of 2003, combined with creditors managing their pre-petition credit
exposure, and Congoleum prepaying certain expenses, prior to its December 31,
2003 Chapter 11 filing. These accounts are not expected to remain at the
unusually low levels experienced at the end of 2003. Capital expenditures in
2003 totaled $4.6 million. Congoleum is currently planning capital expenditures
of approximately $6 million in 2004 and between $5 and $8 million in 2005.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing provides a one year revolving credit facility
with borrowings up to $30.0 million. Interest is based on .75% above the prime
rate. This financing agreement contains certain covenants which include the
maintenance of a minimum tangible net worth and EBITDA. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financial agreement must
be met in order for Congoleum to borrow from the facility. Congoleum was in
compliance with these covenants at December 31, 2003. Borrowings under this
facility are collateralized by inventory and receivables. At December 31, 2003,
based on the level of receivables and inventory, Congoleum had base borrowing
availability of $22.4 million, of which $4.1 million was utilized for
outstanding letters of credit and $10.2 million was utilized by the revolving
loan. Congoleum anticipates that its debtor-in-possession financing facility
will be
21
replaced with a revolving credit facility on substantially similar terms upon
confirmation of its plan of reorganization. While Congoleum expects the
facilities discussed above will provide it with sufficient liquidity, there can
be no assurances that it will continue to be in compliance with the required
covenants, that Congoleum will be able to obtain a similar or sufficient
facility upon exit from bankruptcy, or that the debtor-in-possession facility
would be renewed if Congoleum's plan of reorganization is not confirmed by that
facility's expiration on December 31, 2004.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in "Legal Proceedings" in Part
I, Item 3 and "Environmental Regulation" in Part I, Item 1). These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites and
certain of 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.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate cash from operations in 2003 (as more fully discussed above),
Congoleum anticipates that it will generate cash from operations in 2004.
Congoleum believes these sources will be adequate to fund working capital
requirements, debt service payments, planned capital expenditures for the
foreseeable future, and its current estimates for costs to settle and resolve
its asbestos liabilities through its pre-packaged Chapter 11 plan of
reorganization. Congoleum's inability to obtain confirmation of the proposed
plan in a timely manner would have a material adverse effect on Congoleum's
ability to fund its operating, investing and financing requirements.
22
The following table summarizes Congoleum's contractual obligations for future
principal payments on its debt and future minimum rental payments on its
non-cancelable operating leases at December 31, 2003. Congoleum does not have
payment obligations under capital leases or long term purchase contracts.
Payments Due by Period
(amounts in thousands)
-----------------------------------------------------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
-----------------------------------------------------------------------------------------------------------------------
Long-term debt $100,000 $100,000
Operating leases 11,644 $2,762 $4,091 3,158 $1,633
-----------------------------------------------------------------------------------------------------------------------
Total $111,644 $2,762 $4,091 $103,158 $1,633
=======================================================================================================================
Contingencies
The Company's subsidiary Congoleum is seeking confirmation of a pre-packaged
plan of reorganization under Chapter 11 of the United States Bankruptcy Code as
part of its strategy to resolve liabilities related to the use of asbestos in
its products decades ago.
ABI has recorded what it believes are adequate provisions for environmental
remediation and product-related liabilities, including provisions for testing
for potential remediation of conditions at its own facilities. While ABI
believes its estimate of the future amount of these liabilities is reasonable
and that they will be paid for the most part over a period of one to seven
years, the timing and amount of such payments may differ significantly from
ABI's assumptions. Although the effect of future government regulation could
have a significant effect on ABI's costs, ABI is not aware of any pending
legislation which could significantly affect the liabilities ABI has established
for these matters. There can be no assurances that the costs of any future
government regulations could be passed along by ABI to its customers.
Certain legal and administrative claims are pending or have been asserted
against ABI. Among these claims, ABI is a named party in several actions
associated with waste disposal sites and asbestos-related claims. These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites. The
exact amount of such future costs to ABI is 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 ABI's liability in proportion
to other potentially responsible parties and the extent to which costs may be
recoverable from insurance. ABI has recorded provisions in its consolidated
financial statements for the estimated probable loss associated with all known
environmental and asbestos-related contingencies. The contingencies also include
claims for personal injury and/or property damage. (See Notes 1, 9 and 10 of
Notes to Consolidated Financial Statements.)
23
During 2003 the Company decided to cease operations at its Janus division and
recorded a charge of $8.5 million in the second quarter 2003 consisting
primarily of $3.0 million to reduce inventories to net realizable value, $0.5
million in accounts receivable allowances, a $2.5 million asset impairment
charge related to machinery and equipment and a $1.9 million income tax
provision to write off deferred tax assets deemed not probable of recovery. The
Company disposed of substantially all of the assets of Janus, other than the
real estate, during 2003. Future expenditures related to this discontinued
operation are not expected to be material, and the Company expects to realize
approximately $4 million in net future cash proceeds from the sale of the real
estate. Pursuant to a debt agreement the Company has with one of its lenders,
the net sales proceeds from any sale or disposition of Janus' building must be
first applied to repay amounts owed by the Company's wholly owned subsidiary AB
Canada under its credit agreement with any remaining net sales proceeds to be
applied to repaying amounts outstanding under the Company's credit facilities.
If the Company is unable to timely sell or otherwise dispose of the assets of
Janus on terms acceptable to ABI and in accordance with applicable regulatory or
other legal requirements, including Canadian regulations and laws, such
inability could have a material adverse effect on the Company's business,
results of operations and financial condition.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that entail 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 below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements.
Asbestos Liabilities - As discussed previously, the Company and its subsidiary
Congoleum are parties to a significant number of lawsuits stemming from their
previous manufacture of asbestos-containing products. ABI has recorded in its
consolidated balance sheet a liability and corresponding insurance receivable
based on its estimates of the future costs and related insurance recoveries to
settle asbestos litigation and pay for related legal and loss handling costs.
These estimates are based on a number of subjective assumptions, including the
anticipated costs to settle claims, the cost to litigate claims, the number of
claims expected to be received, and the applicability and allocation of
insurance coverage to these costs. Due to the numerous uncertainties related to
future asbestos litigation trends and costs, the Company does not believe
reasonable estimates can be developed beyond a five year horizon. Accordingly,
the Company's estimated liability is based on claims currently filed as well as
claims anticipated to be filed over the next five years. Due to the highly
subjective nature of these assumptions, the Company has estimated a wide range
of potential future costs and insurance recoveries and, because management
believes that no amount within the range is more likely than any other, has
recorded a liability and insurance receivable based on the low end of the range
in accordance with accounting principles generally accepted in the United
States. As such, the selection of a different amount within the
24
range could have a material effect on the Company's consolidated financial
statements, as could future developments, which may differ from the assumptions
used in developing the Company's estimates.
The Company's subsidiary Congoleum is a party to a significant number of
lawsuits stemming from its manufacture of asbestos-containing products and is
seeking confirmation of a pre-packaged plan of reorganization under Chapter 11
of the United States Bankruptcy Code as part of its strategy to resolve this
liability. Congoleum's liability for settlements of asbestos claims is at least
$491 million, not including the cost to defend and litigate unsettled or future
cases, which is substantially in excess of both the total assets of Congoleum as
well as Congoleum's previous estimates made in prior periods of the maximum
liability for both known and unasserted claims. While Congoleum purchased
insurance coverage it believes applies to these claims, some of the insurance
carriers are presently insolvent and the remaining solvent insurance carriers
have disputed their coverage obligations. Congoleum believes the ultimate amount
of its liability, and the amount of recoverable insurance, will be determined
through some combination of negotiation, litigation, and bankruptcy court order,
but that these amounts can no longer be reasonably estimated given all the
uncertainties that presently exist.
Congoleum expects that insurance will provide the vast majority of the recovery
available to claimants, due to the amount of insurance coverage it purchased and
the comparatively limited resources and value of Congoleum itself. Congoleum
believes that it does not have the necessary financial resources to litigate
and/or settle asbestos claims in the ordinary course of business, and filed for
bankruptcy protection on December 31, 2003.
In light of its bankruptcy filing and pre-packaged plan of reorganization,
Congoleum believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the plan trust
plus the costs to effect the reorganization. Congoleum estimates the minimum
remaining costs to complete this plan to be $9.8 million, which it has recorded
as a current liability. The maximum amount of asbestos losses is limited to the
going concern or liquidation value of Congoleum, an amount which Congoleum
believes is substantially less than the minimum estimated liability for the
known claims against it. The Company also expects to recover $3.6 million from
the Collateral Trust or its successor pursuant to terms of the Claimant
Agreement and related documents which provide for the trust to reimburse certain
expenses of the Company. Timing of such recovery will depend on when the trust
receives funds from insurance settlements or other sources.
Congoleum will update its estimates as additional information becomes available
during the reorganization process, resulting in potentially material adjustments
to Congoleum's earnings in future periods.
Environmental Contingencies - As discussed previously, the Company has incurred
liabilities related to environmental remediation costs at both third party sites
and Company owned sites. Management has recorded both liabilities and insurance
receivables in its consolidated financial statements for its estimate of future
remediation activities. These estimates are based on certain assumptions such as
the extent of clean-up activities to be performed, the methods employed in the
clean-up activities, the Company's relative share in costs at sites where other
parties are involved, and the ultimate insurance coverage available. These
projects tend to be long-term in nature, and these assumptions are subject to
refinement as facts change. As such, it is possible that the Company may need to
revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods.
Valuation of Deferred Tax Assets - The Company will provide for valuation
reserves against its deferred tax assets in accordance with the requirements of
SFAS 109. In evaluating the recovery of deferred tax assets, management makes
certain assumptions as to future events such as the ability to
25
generate future taxable income. It is possible that the facts underlying these
assumptions may not materialize in future periods, which may require the Company
to record additional deferred tax valuation allowances, or to reduce previously
recorded valuation allowances. Pension Plans and Postretirement Benefits - The
Company accounts for its defined benefit pension plans in accordance with SFAS
No. 87, Employers' Accounting for Pensions, which requires that amounts
recognized in financial statements be determined on an actuarial basis. As
permitted by SFAS No. 87, the Company uses a calculated value of plan assets
(which is further described below). SFAS No. 87 requires that the effects of the
performance of the pension plans' assets and changes in pension liability
discount rates on the Company's computation of pension income (expense) be
amortized over future periods.
The most significant element in determining the Company's pension expense in
accordance with SFAS No. 87 is the expected return on plan assets. In 2003, the
Company has assumed that the expected long-term rate of return on plan assets
will be 7.0%-7.5%. The assumed long-term rate of return on assets is applied to
a calculated value of plan assets, which recognizes changes in the fair value of
plan assets in a systematic manner over four years. This produces the expected
return on plan assets that is included in pension expense. The difference
between this expected return and the actual return on plan assets is deferred.
The net deferral of past asset gains or losses affects the calculated value of
plan assets and, ultimately, future pension expense.
At the end of each year, the Company determines the discount rate to be used to
calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2003, the Company determined this rate to be 6.25%.
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes 1, 9 and 10 of Notes to Consolidated Financial
Statements, which is included in this report, the Company and its majority-owned
subsidiary Congoleum have significant liability and funding exposure for
asbestos personal injury claims. Congoleum has entered into settlement
agreements with various asbestos claimants totaling $491 million. Settlement of
this obligation pursuant to the terms of Congoleum's proposed pre-packaged plan
is dependent on Bankruptcy Court confirmation of the plan, including
determinations by the Bankruptcy Court that the plan has satisfied certain
criteria under the Bankruptcy Code, among other things.
There can be no assurance that Congoleum will be successful in obtaining
confirmation of Congoleum's pre-packaged plan in a timely manner or at all. Any
alternative plan of reorganization pursued by Congoleum or confirmed by the
Bankruptcy Court could vary significantly from the description in this report
(including descriptions incorporated by reference in this report). Furthermore,
the estimated costs and contributions required to confirm and to effect the
proposed pre-packaged plan of reorganization or an alternative plan could be
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court approvals, and
26
there can be no assurance that such conditions, approvals and other requirements
will be satisfied or obtained.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives for resolving asbestos liability
include: (i) the future cost and timing of estimated asbestos liabilities and
payments and availability of insurance coverage and reimbursement from insurance
companies, which underwrote the applicable insurance policies for Congoleum and
the Company, for asbestos-related claims, (ii) costs relating to the execution
and implementation of any plan of reorganization pursued by Congoleum, (iii)
timely reaching an agreement with other creditors, or classes of creditors, that
exist or may emerge, (iv) the Company's and Congoleum's satisfaction of the
conditions and obligations under their respective outstanding debt instruments
and the proposed pre-packaged plan, (v) the response from time-to-time of the
Company's and Congoleum's lenders, customers, suppliers and other constituencies
to the pre-packaged Chapter 11 process and related developments arising from the
strategy to settle asbestos liability, (vi) Congoleum's ability to maintain
debtor-in-possession financing sufficient to provide it with funding that may be
needed during the pendency of its Chapter 11 case and to obtain exit financing
sufficient to provide it with funding that may be needed for its operations
after emerging from the bankruptcy process, in each case, on reasonable terms,
(vii) timely obtaining sufficient creditor and court approval of any
reorganization plan, (viii) developments in and the outcome of insurance
coverage litigation pending in New Jersey State Court involving Congoleum, ABI,
and certain insurers, and (ix) compliance with the Bankruptcy Code, including
section 524(g). In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations, and
there can be no assurance as to what that impact, positive or negative, might
be. In any event, the failure of Congoleum to obtain confirmation of its
anticipated pre-packaged plan of reorganization would have a material adverse
effect on Congoleum's business, results of operations or financial condition and
could have a material adverse effect on American Biltrite's business, results of
operations or financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed
prepackaged Chapter 11 plan of reorganization. To the extent any federal
legislation is enacted which does not credit Congoleum for amounts paid by
Congoleum pursuant to its plan of reorganization or requires the Company or
Congoleum to pay significant amounts to any national trust or otherwise, such
legislation could have a material adverse effect on the Company or Congoleum's
businesses, results of operations and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
27
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes 1, 9 and 10 of Notes to the Consolidated Financial Statements,
which are included in this report.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their facilities, 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 position, there is no certainty
that these amounts will not have a material adverse effect on their respective
financial positions because, as a result of environmental requirements becoming
increasingly strict, neither the Company nor Congoleum is able to determine the
ultimate cost of compliance with environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of
28
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 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 a continuing operating company that has 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.
29
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 22% of the
Company's tape division's net sales for the year ended December 31, 2003 and 25%
of its net sales for the year ended December 31, 2002. The loss of the largest
unaffiliated customer and/or two or more of the other unaffiliated customers
could have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 65% of
Congoleum's net sales for the year ended December 31, 2003 and 59% of
Congoleum's net sales for the year ended December 31, 2002.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 70% of its net sales for the year ended
December 31, 2003 and 75% of its net sales for the year ended December 31, 2002.
The loss of K&M Associates L.P.'s largest customer would likely have a material
adverse effect on the Company's business, results of operations or financial
condition.
30
A portion of the Company's debt must be amended or refinanced prior to December
31, 2004
The Company's revolving credit agreement expires on December 31, 2004. In
addition, terms of the Company's Prudential Agreement require the Company to
have a commitment to extend or replace the Fleet agreement no later than
November 14, 2004, with such financing effective no later than December 31,
2004. Although the Company expects to extend the Fleet agreement, there can be
no assurances that it will be able to do so, and such failure could have a
material adverse effect on liquidity.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments but does not consider this interest rate market
risk exposure to be material to its consolidated financial condition or results
of operations. The Company invests primarily in highly liquid debt instruments
with strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities. Substantially all of the Company's outstanding long-term
debt as of December 31, 2003 consisted of indebtedness with a fixed rate of
interest, which is not subject to change based upon changes in prevailing market
interest rates.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. To a certain extent, foreign currency exchange rate movements also affect
the Company's competitive position, as exchange rate changes may affect business
practices and/or pricing strategies of non-U.S. based competitors. For foreign
currency exposures existing at December 31, 2003, a 10% unfavorable movement in
currency exchange rates in the near term would not materially affect ABI's
consolidated operating results, financial position or cash flows.
Under its current policies, the Company does not use derivative financial
instruments, derivative commodity instruments or other financial instruments to
manage its exposure to changes in interest rates, foreign currency exchange
rates, commodity prices or equity prices and does not hold any instruments for
trading purposes.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details
(In thousands of dollars)
December 31
2003 2002
---------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,959 $ 20,160
Restricted cash 1,757 --
Accounts and notes receivable, less allowances of
$2,615 in 2003 and $2,764 in 2002 for doubtful
accounts and discounts 36,010 41,148
Inventories 81,480 89,428
Assets of discontinued operation 2,902 13,942
Deferred income taxes 11,033 9,459
Prepaid expenses and other current assets 12,530 11,139
---------------------------------
Total current assets 149,671 185,276
Property, plant and equipment, net 134,285 141,517
Other assets:
Insurance receivable - asbestos-related liabilities 10,700 8,500
Goodwill, net 11,300 11,300
Other assets 13,440 15,277
---------------------------------
35,440 35,077
---------------------------------
Total assets $319,396 $361,870
=================================
See accompanying notes.
32
American
Eliminations Congoleum Biltrite
2003 2002 2003 2002 2003 2002
-----------------------------------------------------------------------------------------
$ 2,169 $ 18,277 $ 1,790 $ 1,883
1,757
$ (280) $ (94) 13,560 17,034 22,730 24,208
44,995 50,725 36,485 38,703
2,902 13,942
8,752 7,901 2,281 1,558
(186) (1,068) 9,672 7,868 3,044 4,339
-----------------------------------------------------------------------------------------
(466) (1,162) 80,905 101,805 69,232 84,633
87,035 93,556 47,250 47,961
10,700 8,500
11,300 11,300
7,959 8,630 5,481 6,647
-----------------------------------------------------------------------------------------
7,959 8,630 27,481 26,447
-----------------------------------------------------------------------------------------
$ (466) $ (1,162) $175,899 $203,991 $143,963 $159,041
=========================================================================================
33
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details (continued)
(In thousands of dollars)
December 31
2003 2002
------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 13,327 $ 24,657
Accrued expenses 55,873 77,401
Liabilities of discontinued operation 688 1,298
Notes payable 18,125 15,276
Current portion of long-term debt 21,289 21,061
------------------------
Total current liabilities 109,302 139,693
Long-term debt, less current portion 103,626 104,210
Asbestos-related liabilities 10,700 8,500
Other liabilities 62,126 61,121
Noncontrolling interests 663 808
Stockholders' equity:
Common stock, par value $.01, authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,548 19,548
Retained earnings 47,573 62,376
Accumulated other comprehensive loss (19,056) (19,300)
------------------------
48,111 62,670
Less cost of 1,166,351 shares of common stock in
treasury 15,132 15,132
------------------------
Total stockholders' equity 32,979 47,538
------------------------
Total liabilities and stockholders' equity $ 319,396 $ 361,870
========================
See accompanying notes.
34
American
Eliminations Congoleum Biltrite
2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------
$ (280) $ (1,163) $ 4,544 $ 14,647 $ 9,063 $ 11,173
38,980 58,329 16,893 19,072
688 1,298
10,232 7,893 15,276
21,289 21,061
-------------------------------------------------------------------------------------------------------------
(280) (1,163) 53,756 72,976 55,826 67,880
99,773 99,724 3,853 4,486
10,700 8,500
(186) 48,147 47,369 14,165 13,752
663 808
(93) (93) 93 93 46 46
(49,105) (49,105) 49,105 49,105 19,548 19,548
35,275 35,275 (46,778) (40,016) 59,076 67,117
6,110 6,111 (20,384) (17,447) (4,782) (7,964)
-------------------------------------------------------------------------------------------------------------
(7,813) (7,812) (17,964) (8,265) 73,888 78,747
(7,813) (7,813) 7,813 7,813 15,132 15,132
-------------------------------------------------------------------------------------------------------------
-- 1 (25,777) (16,078) 58,756 63,615
-------------------------------------------------------------------------------------------------------------
$ (466) $ (1,162) $ 175,899 $ 203,991 $ 143,963 $ 159,041
=============================================================================================================
35
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Operations with Consolidating Details
(In thousands of dollars, except per share amounts)
Years ended December 31
2003 2002 2001
-------------------------------------------------------
Revenues:
Net sales $ 416,569 $ 434,495 $ 403,509
Interest 191 330 909
Other 3,359 3,058 2,162
-------------------------------------------------------
420,119 437,883 406,580
Costs and expenses:
Cost of products sold 299,017 310,260 288,740
Selling, general and administrative
expenses 119,472 128,673 101,440
Interest 11,576 10,763 10,439
-------------------------------------------------------
430,065 449,696 400,619
Income (loss) before income taxes and other
items (9,946) (11,813) 5,961
Provision (credit) for income taxes (3,323) 1,248 2,345
Noncontrolling interests (174) 6,221 435
-------------------------------------------------------
Net (loss) income from continuing (6,797) (6,840) 4,051
operations
Discontinued operation (2003 includes loss
on disposal of $6,466 and tax benefit of
$2,178; 2002 and 2001 include tax
benefits of $888 and $531, respectively) (7,361) (2,073) (1,235)
Cumulative effect of accounting change (7,742)
-------------------------------------------------------
Net (loss) income $ (14,158) $ (16,655) $ 2,816
========================================================
Income (loss) per common share from
continuing operations, basic and diluted $ (1.97) $ (1.99) $ 1.17
Discontinued operation (2.14) (0.60) (0.35)
Cumulative effect of accounting change (2.25)
-------------------------------------------------------
Net (loss) income per common share, basic
and diluted $ (4.11) $ (4.84) $ 0.82
=======================================================
See accompanying notes.
36
Eliminations Congoleum American Biltrite
2003 2002 2001 2003 2002 2001 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
$ (56) $ (198) $(214) $ 220,706 $ 237,206 $ 218,760 $ 195,919 $ 197,487 $ 184,963
63 263 708 128 67 201
1,276 1,543 1,320 2,083 1,515 842
-------------------------------------------------------------------------------------------------------------------
(56) (198) (214) 222,045 239,012 220,788 198,130 199,069 186,006
(56) (198) (214) 166,864 179,699 165,683 132,209 130,759 123,271
56,911 70,119 48,952 62,561 58,554 52,488
8,906 8,375 8,299 2,670 2,388 2,140
-------------------------------------------------------------------------------------------------------------------
(56) (198) (214) 232,681 258,193 222,934 197,440 191,701 177,899
(10,636) (19,181) (2,146) 690 7,368 8,107
(90) (3,874) 92 (506) 551 1,156 2,941
6,534 737 (174) (313) (302)
-------------------------------------------------------------------------------------------------------------------
-- 6,534 827 (6,762) (19,273) (1,640) (35) 5,899 4,864
(7,361) (2,073) (1,235)
4,731 (10,523) (1,950)
-------------------------------------------------------------------------------------------------------------------
$ -- $ 11,265 $ 827 $ (6,762) $ (29,796) $ (1,640) $ (7,396) $ 1,876 $ 3,629
===================================================================================================================
37
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows with Consolidating Details
(In thousands of dollars)
Years ended December 31
2003 2002 2001
-----------------------------------------------
Operating activities
Net (loss) income $(14,158) $(16,655) $ 2,816
Net loss from discontinued operation 7,361 2,073 1,235
-----------------------------------------------
Net (loss) income from continuing operations (6,797) (14,582) 4,051
Adjustments to reconcile net (loss) income to net cash provided
(used) by operating activities:
Depreciation and amortization 18,026 17,067 18,421
Provision for doubtful accounts and discounts 2,691 2,863 2,761
Deferred income taxes (2,243) 2,635 401
Cumulative effect of accounting change 7,742
Gain on sale of property, plant and equipment (809)
Changes in certain operating assets and liabilities,
exclusive of those arising from acquisitions:
Accounts and notes receivable 3,471 (4,603) 4,416
Inventories 10,722 2,453 (4,342)
Prepaid expenses and other current assets 3,908 1,680 (7,261)
Accounts payable and accrued expenses (37,849) 15,836 (8,332)
Noncontrolling interests 174 (6,221) (435)
Other (1,050) (4,182) 1,271
-----------------------------------------------
Net cash provided (used) by operating activities (8,947) 20,688 10,142
Investing activities
Investments in property, plant and equipment (7,445) (12,127) (22,211)
Purchases of short-term investments (4,175)
Proceeds from sales of short-term investments 1,416 14,856
Proceeds from sale of property, plant and equipment 1,092
Acquisition of certain Swank assets (4,646)
Purchase of additional partnership interests in K&M (2,066)
-----------------------------------------------
Net cash used in investing activities (7,445) (10,711) (17,150)
Financing activities
Net short-term borrowings (payments) 2,586 3,630 (33)
Long-term borrowings 24,882
Payments on long-term debt (1,203) (1,032) (9,684)
Net change in restricted cash (1,757)
Purchase of treasury shares (1,066)
Dividends paid (645) (1,721) (1,727)
Proceeds from exercise of stock options 103
-----------------------------------------------
Net cash provided (used) by financing activities (1,019) 877 12,475
Effect of foreign exchange rate changes on cash (1,859) (1,170) 393
-----------------------------------------------
Net cash (used in) provided by continuing operations (19,270) 9,684 5,860
Net cash provided (used) by discontinued operation 3,069 (6,327) (5,914)
Cash and cash equivalents at beginning of year 20,160 16,803 16,857
-----------------------------------------------
Cash and cash equivalents at end of year $ 3,959 $ 20,160 $ 16,803
===============================================
See accompanying notes
38
Eliminations Congoleum American Biltrite
2003 2002 2001 2003 2002 2001 2003 2002 2001
-----------------------------------------------------------------------------------------------------
$ -- $ 11,265 $ 827 $ (6,762) $(29,796) $ (1,640) $ (7,396) $ 1,876 $ 3,629
7,361 2,073 1,235
-----------------------------------------------------------------------------------------------------
11,265 827 (6,762) (29,796) (1,640) (35) 3,949 4,864
11,761 11,273 12,181 6,265 5,794 6,240
2,691 2,863 2,761
(882) 4,112 (652) (1,361) (1,477) 1,053
(4,731) 10,523 1,950
(809)
3,474 898 7,595 (3) (5,501) (3,179)
5,730 5,057 (2,875) 4,992 (2,604) (1,467)
(1,667) 602 (4,870) 5,575 1,078 (2,391)
(29,945) 11,326 (10,508) (7,904) 4,510 2,176
(6,534) (827) 174 313 392
(1,664) (4,025) 566 614 (157) 705
-----------------------------------------------------------------------------------------------------
(19,955) 9,970 (203) 11,008 10,718 10,345
(4,628) (8,366) (7,858) (2,817) (3,761) (14,353)
(4,175)
1,416 14,856
1,092
(4,646)
(2,066)
-----------------------------------------------------------------------------------------------------
(4,628) (6,950) 2,823 (2,817) (3,761) (19,973)
10,232 (7,646) 3,630 (33)
24,882
(1,203) (1,032) (9,684)
(1,757)
(1,066)
(645) (1,721) (1,727)
103
-----------------------------------------------------------------------------------------------------
8,475 (9,494) 877 12,475
(1,859) (1,170) 393
-----------------------------------------------------------------------------------------------------
(16,108) 3,020 2,620 (3,162) 6,664 3,240
3,069 (6,327) (5,914)
18,277 15,257 12,637 1,883 1,546 4,220
-----------------------------------------------------------------------------------------------------
$ -- $ -- $ -- $ 2,169 $ 18,277 $ 15,257 $ 1,790 $ 1,883 $ 1,546
=====================================================================================================
39
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands of dollars)
Accumulated
Additional Other Total
Paid-in Retained Comprehensive Treasury Stockholders'
Common Stock Capital Earnings Loss Stock Equity
---------------------------------------------------------------------------------------
Balance at December 31, 2000 $ 46 $ 19,521 $ 79,663 $ (5,514) $(14,169) $ 79,547
Comprehensive income:
Net income for 2001 2,816 2,816
Other comprehensive loss (2,452) (2,452)
--------------
Total comprehensive income 364
Tax benefit on exercise of options 27 27
Dividends declared ($.50 per share) (1,727) (1,727)
Exercise of stock options 103 103
Purchase of treasury stock (1,066) (1,066)
---------------------------------------------------------------------------------------
Balance at December 31, 2001 46 19,548 80,752 (7,966) (15,132) 77,248
Comprehensive loss:
Net loss for 2002 (16,655) (16,655)
Other comprehensive loss (11,334) (11,334)
--------------
Total comprehensive loss (27,989)
Dividends declared ($.50 per share) (1,721) (1,721)
---------------------------------------------------------------------------------------
Balance at December 31, 2002 46 19,548 62,376 (19,300) (15,132) 47,538
Comprehensive loss:
Net loss for 2003 (14,158) (14,158)
Other comprehensive income 244 244
--------------
Total comprehensive loss (13,914)
Dividends declared ($.1875 per share) (645)
---------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 46 $ 19,548 $ 47,573 $(19,056) $(15,132) $ 32,979
=======================================================================================
See accompanying notes.
40
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands of dollars)
December 31, 2003
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American Biltrite
Inc. and its wholly-owned subsidiaries (referred to as "ABI" or the "Company"),
as well as entities over which it has voting control. In 1995, ABI gained voting
control over Congoleum Corporation ("Congoleum") and K&M Associates L.P.
("K&M"). Upon consolidation intercompany accounts and transactions, including
transactions with associated companies that result in intercompany profit, are
eliminated.
As discussed more fully below and elsewhere in these footnotes, the Company's
Congoleum subsidiary filed for bankruptcy protection on December 31, 2003. The
accompanying consolidated financial statements include the results for Congoleum
for all periods presented. ABI continues to own a majority of the voting stock
of Congoleum. As a result, the Company expects to continue to control Congoleum
while it is in bankruptcy. Additionally, Congoleum's proposed reorganization
plan, which remains subject to Bankruptcy Court approval, anticipates no changes
in the equity ownership upon emergence from bankruptcy. Congoleum believes that
its pre-packaged bankruptcy proceeding could be concluded in a relatively short
period of time, possibly by December 31, 2004. 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 (including
its non-debtor subsidiaries) and Congoleum, which may be more meaningful for
certain analyses.
As more fully discussed in Notes 9 and 10 of Notes to Consolidated Financial
Statements, the Company's subsidiary Congoleum is a party to a significant
number of lawsuits stemming from its manufacture of asbestos-containing products
and is seeking confirmation of a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. The plan contemplated by Congoleum would permit
shareholders, including ABI, to retain their existing equity interests in
Congoleum. As part of Congoleum's plan of reorganization, ABI expects that
Congoleum's indemnification obligations to ABI with respect to current and
future asbestos personal injury claims related to ABI's former Tile Division
operations not covered by ABI insurance will be channeled to the plan trust
established under section 524(g) of the Bankrupty Code pursuant to Congoleum's
Chapter 11 plan of reorganization. ABI and Congoleum expect to contribute, among
other things, to the plan trust that would be established pursuant to
Congoleum's Chapter 11 reorganization $250 thousand in cash from ABI and a note
from Congoleum in an aggregate principal amount equal to at least 51% of the
equity value of Congoleum, with payment of such contribution secured by a pledge
by ABI of both the common stock of Congoleum that it owns as well as certain of
its rights to receive certain indemnity payments from Congoleum. ABI does not
expect that Congoleum's note contribution to the plan trust would have a
material adverse effect on ABI's liquidity or capital resources. The value of
41
1. Significant Accounting Policies (continued)
the note that Congoleum will contribute to the trust under the proposed plan is
$2.7 million but is subject to increase based upon the equity value of Congoleum
as of the last trading day of the 90 consecutive trading day period commencing
on the first anniversary of the effective date of Congoleum's confirmed Chapter
11 plan of reorganization, which could be materially higher. The proposed
pre-packaged plan calls for a possible additional contribution by ABI to the
plan trust in the event ABI sells its interest in Congoleum before the fifth
anniversary of confirmation of Congoleum's plan.
Because it maintains a controlling interest, ABI has continued to consolidate
Congoleum's results, which included losses of (including other comprehensive
losses) of $25.8 million in excess of the value of its investment in Congoleum
at December 31, 2003. For more information regarding Congoleum's and ABI's
asbestos liabilities and plans for resolving those liabilities, please refer to
Notes 9 and 10 of Notes to Consolidated Financial Statements. In addition,
please refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors that May Affect Future Results - The
Company and its majority-owned subsidiary have significant asbestos liability
and funding exposure, and the Company's and Congoleum's strategies for resolving
this exposure may not be successful" for factors that could cause actual results
to differ from Congoleum's and ABI's goals for resolving their asbestos
liabilities.
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
The Company will implement this guidance in consolidated financial statements
for periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of the Company's liabilities at
December 31, 2003 will be reclassified as liabilities subject to compromise.
Obligations arising post petition, and pre-petition obligations that are secured
or that the Bankruptcy Court authorizes the Company to pay, will not be
classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Included in other assets on the accompanying balance sheets is ABI's investment
in Compania Hulera Sula, S.A., a 50%-owned venture. The investment is accounted
for on the cost method due to the uncertainty of the political climate and
currency restrictions in Honduras.
Use of Estimates and Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent liabilities, at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.
42
1. Significant Accounting Policies (continued)
Critical accounting policies are defined as those that entail significant
judgments and estimates, and could potentially result in materially different
results under different assumptions and conditions. The Company believes that
the most critical accounting policies upon which its financial condition
depends, and which involve the most complex or subjective decisions or
assessments, concern asbestos liabilities, environmental contingencies,
valuation of deferred tax assets, and pension plan and post-retirement benefits.
A discussion on the application of these and other accounting policies is
detailed throughout Note 1.
Although the Company makes every effort to ensure the accuracy of the estimates
and assumptions used in the preparation of its financial statements or in the
application of accounting policies, if business conditions were different, or if
the Company used different estimates and assumptions, it is possible that
materially different amounts could be reported in the Company's financial
statements.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses in previous
years have generally been within management's expectations. For the years ended
December 31, 2003, 2002 and 2001, the Company had two customers that accounted
for 35%, 32%, and 26% of net sales, respectively. At December 31, 2003, 2002 and
2001, one customer accounted for 16%, 19% and 14% of trade receivables
outstanding, respectively.
Cash
Cash equivalents represent highly liquid debt instruments with maturities of
three months or less at the date of purchase. The carrying value of cash
equivalents approximates fair value.
Under the terms of Congoleum's revolving credit agreement, payments on their
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. Restricted cash represents funds deposited in this account but not
immediately applied to the loan balance.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for most of the Company's domestic inventories
and the first-in, first-out (FIFO) method for the Company's foreign inventories.
The Company records as a charge to cost of products sold any amounts required to
reduce the carrying value of inventories to net realizable value.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for maintenance,
repairs and renewals are charged to expense as incurred; major improvements are
capitalized. Depreciation, which is determined using the straight-line method,
is provided over the estimated useful lives (thirty to forty years for buildings
and building improvements, ten to fifteen years for production equipment and
heavy-duty vehicles, and three to ten years for light-duty vehicles and office
furnishings and equipment).
43
1. Significant Accounting Policies (continued)
Debt Issue Costs
Costs incurred in connection with the issuance of debt have been capitalized and
are being amortized over the life of the related debt agreements. Debt issue
costs at December 31, 2003 and 2002 amounted to $1,649 and $2,159, respectively,
net of accumulated amortization of $2,167 and $1,657, respectively, and are
included in other noncurrent assets.
Goodwill
Goodwill represents the excess of acquisition costs over the estimated fair
value of the net assets acquired and was amortized through year-end 2001 using
the straight-line method principally over 40 years. The Company evaluates the
recoverability of goodwill and other intangible assets annually in the fourth
quarter, or more frequently if events or changes in circumstances, such as a
decline in sales, earnings, or cash flows, or material adverse changes in the
business climate, indicate that the carrying value of an asset might be
impaired. The Company completed its annual impairment test in the fourth quarter
of 2003 and concluded that no adjustment was required to the carrying value of
our goodwill based on the analysis performed.
Goodwill is considered to be impaired when the net book value of a reporting
unit exceeds its estimated fair value. During the first quarter of 2002, the
Company performed a transitional impairment test and concluded that the goodwill
related to both Congoleum and Janus was impaired and recorded a goodwill
impairment charge for the cumulative effect of change in accounting principle of
$7.7 million. Congoleum recorded an impairment loss of $10.5 million. ABI's
share, 55%, in this impairment loss resulted in a charge of $5.8 million plus a
charge of $1.9 million for an impairment loss related to Janus goodwill for a
total charge of $7.7 million.
The following table reflects consolidated results adjusted as though the
Company's adoption of SFAS 142 occurred as of January 1, 2001:
Years Ended December 31
2003 2002 2001
--------- --------- ---------
(In thousands, except per share amounts)
Net (loss) income from continuing
operations:
As reported $ (6,797) $ (6,840) $ 4,051
Goodwill amortization 1,402
--------- --------- ---------
As adjusted $ (6,797) $ (6,840) $ 5,453
========= ========= =========
Basic (loss) income per share from
continuing operations:
As reported $ (1.97) $ (1.99) $ 1.17
Goodwill amortization .41
--------- --------- ---------
As adjusted $ (1.97) $ (1.99) $ 1.58
========= ========= =========
Impairment of Long-Lived Assets
The Company assesses its long-lived assets other than goodwill for impairment
whenever facts and circumstances indicate that the carrying amount may not be
fully recoverable. To analyze
44
1. Significant Accounting Policies (continued)
recoverability, it projects undiscounted net future cash flows over the
remaining life of such assets. If these projected cash flows are less than the
carrying amount, an impairment would be recognized, resulting in a write-down of
the assets with a corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount and the fair
value of the assets.
Environmental Remediation and Product Liabilities
The Company is subject to federal, state, and local environmental laws and
regulations. The Company records a liability for environmental remediation
claims when a clean-up program or claim payment becomes probable and the costs
can be reasonably estimated. The Company also records an insurance receivable
based on its estimate of insurance recoveries for these costs. The recorded
liabilities, and related assets, are not discounted for delays in future
payments (see Notes 5, 7 and 9.).
Asbestos Liabilities and Congoleum Plan of Reorganization
The Company is a party to a number of lawsuits stemming from its manufacture of
asbestos-containing products. The Company records a liability for these cases
based on its estimate of costs to resolve both open and incurred but not
reported claims. The Company also records an insurance receivable based on its
estimate of insurance recoveries for these costs. In estimating the Company's
asbestos-related exposures, the Company analyzes and considers the possibility
of any uncertainties regarding the legal sufficiency of insurance claims or
solvency of insurance carriers.
The Company's subsidiary Congoleum is a defendant in a large number of
asbestos-related lawsuits and is seeking confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the United States Bankruptcy Code as part of
its strategy to resolve this liability (See Notes 9 and 10). The recorded
liability for Congoleum's asbestos-related exposures is based on the minimum
estimated cost to resolve these liabilities through the proposed plan of
reorganization.
Accounting for asbestos-related costs includes significant assumptions and
estimates, and actual results could differ materially from the estimates
recorded.
Revenue Recognition
Revenue is recognized when products are shipped and title has passed to the
customer. Net sales are comprised of the total sales billed during the period
less the sales value of estimated returns, trade discounts and customers'
allowances. The Company defers recognition of revenue for its estimate of
potential sales returns under right-of-return agreements with its customers
until the right-of-return period lapses.
Shipping and Handling Costs
Shipping and handling costs for the years ended December 31, 2003, 2002 and 2001
were $6,525, $6,448 and $8,301, respectively, and are included in selling,
general and administrative expenses.
45
1. Significant Accounting Policies (continued)
Income Taxes
The Company provides for income taxes based upon earnings reported for financial
statement purposes. Deferred tax assets and liabilities are determined based
upon temporary differences between the financial reporting and tax bases of
assets and liabilities. A valuation allowance is recorded, when necessary, to
reduce the Company's deferred tax assets to amounts deemed realizable.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, requires the recognition
of, or disclosure of, compensation expense for grants of stock options or other
equity instruments issued to employees based on their fair value at the date of
grant. As permitted by SFAS No. 123, the Company follows the disclosure
requirements instead of recognition of compensation expense and therefore
continues to apply existing accounting rules under APB Opinion No. 25 (APB 25)
and related interpretations for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The fair value for the ABI options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2003 and 2002, respectively: risk-free interest rate of 4.31%
and 4.37%, expected dividend yield of 3.00% and 4.00%, volatility factor of the
expected market price of the Company's common stock of .286 and .285, and a
weighted-average expected life of the options of seven and one-half years.
The weighted-average fair value of options granted under ABI's 1999 Stock Award
and Incentive Plan for Directors during 2003 and 2002 was $1.90 and $2.68,
respectively. The weighted-average fair value of options granted under ABI's
1993 Stock Award and Incentive Plan during 2001 was $3.95.
For purposes of pro forma disclosures, the estimated fair value of the ABI
options is amortized to expense over the options' vesting period. The impact on
pro forma net income may not be representative of compensation expense in future
years, when the effect of the amortization of multiple awards would be reflected
in the pro forma disclosures.
The Company's pro forma information follows:
Years ended December 31
2003 2002 2001
---------------------------------
(In thousands, except per share amounts)
Net (loss) income $(14,158) $(16,655) $ 2,816
Estimated pro forma compensation
expense from stock options (14) (20) (21)
---------------------------------
Pro forma net (loss) income $(14,172) $(16,675) $ 2,795
=================================
Pro forma (loss) income per share:
Basic $ (4.12) $ (4.85) $ .81
Diluted (4.12) (4.85) .81
46
1. Significant Accounting Policies (continued)
Research and Development Costs
Expenditures relating to the development of new products are charged to
operations as incurred and amounted to $4,765, $5,105 and $4,940 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the applicable
local currency. Balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate, and income statement items are translated at the
average exchange rate for the period; resulting translation adjustments are made
directly to accumulated other comprehensive income (loss) in stockholders'
equity. Realized exchange gains and losses (immaterial in amount) are included
in current operations.
Issuances of Stock by Subsidiaries
The Company accounts for issuances of stock by its subsidiaries as capital
transactions.
Earnings Per Share
Basic earnings per share have been computed based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share have
been computed based upon the weighted-average number of common shares
outstanding during the year, adjusted for the dilutive effect of shares issuable
upon the exercise of stock options (common stock equivalent) unless their
inclusion would be antidilutive. In calculating diluted earnings per share, the
dilutive effect of a stock option is computed using the average market price for
the period.
Recently Issued Accounting Principles
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002.
Adoption of this standard did not have an effect on the Company's consolidated
financial statements.
In January 2003, the FASB released Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 requires that all primary
beneficiaries of Variable Interest Entities (VIE) consolidate such entities. FIN
46 is effective immediately for VIEs created after January 31, 2003 and for VIEs
in which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to VIEs in
which an enterprise holds a variable interest it acquired before February 1,
2003. In December 2003, the FASB published a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of the interpretation and to defer the effective
date of implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly referred to
as special purpose entities are required to apply the provisions of the
interpretation in financial statements
47
1. Significant Accounting Policies (continued)
for periods ending after March 14, 2004. The Company does not have interests in
special purpose entities and will apply the provisions of FIN 46R with its first
quarter 2004 financial statements.
In November 2001, Emerging Issues Task Force (EITF) issue 01-9, Accounting for
Consideration Given by Vendor to Customer or Reseller of the Vendor's Products,
was issued. The Company adopted EITF 01-9 effective January 1, 2002 as required.
This issue addresses the manner in which companies account for sales incentives
to their customers. The Company's current accounting policies for the
recognition of costs related to these programs, which is to accrue for costs as
benefits are earned by the Company's customers, are in accordance with the
consensus reached in this issue. The Company has reclassified amounts previously
recorded in selling, general and administrative expense as a reduction in net
sales. The impact for the twelve month's ending December 31, 2002 and 2001 was a
reduction of net sales and of selling, general and administrative expenses $4.1
million and $4.5 million respectively.
Reclassifications
Certain amounts in prior years have been reclassified to permit comparison with
2003 classifications.
2. Inventories
Inventories at December 31 consisted of the following:
2003 2002
--------------------
Finished goods $62,072 $64,741
Work-in-process 7,953 9,857
Raw materials and supplies 11,455 14,830
--------------------
$81,480 $89,428
====================
At December 31, 2003, domestic inventories determined by the LIFO inventory
method amounted to $54,874 ($61,000 at December 31, 2002). If the FIFO inventory
method, which approximates replacement cost, had been used for these
inventories, they would have been $2,080 and $1,158 lower at December 31, 2003
and 2002, respectively.
48
3. Property, Plant and Equipment
A summary of the major components of property, plant and equipment at December
31 is as follows:
2003 2002
------------------------
Land and improvements $ 5,526 $ 5,536
Buildings 73,535 70,381
Machinery and equipment 258,367 246,593
Construction-in-progress 6,350 6,032
------------------------
343,778 328,542
Less accumulated depreciation 209,493 187,025
------------------------
$134,285 $141,517
========================
Interest is capitalized in connection with the construction of major facilities.
Capitalized interest is recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. Capitalized interest cost was
$311 and $250 for 2003 and 2002, respectively.
Depreciation expense amounted to $17,414, $16,508 and $16,634 in 2003, 2002 and
2001, respectively.
4. Acquisitions and Purchase of Additional Partnership Interests
K&M Transactions
During 1995, ABI acquired additional partnership interests in K&M, giving ABI
majority ownership and control. In conjunction with the acquisition, ABI also
entered into agreements with the remaining limited partners of K&M, providing
ABI the option to buy, and providing the limited partners of K&M the option to
require ABI to purchase, the remaining partnership interests in K&M. During
2001, ABI acquired an additional 10% interest from the limited partners for
total consideration of $2,066. ABI owns a 94.5% partnership interest in K&M at
December 31, 2003.
Acquisition of Certain Swank Assets
In July 2001, K&M acquired certain inventories and receivables of Swank's Ladies
Jewelry division in exchange for $4,646, and entered into related licensing
agreements with Anne Klein(R) and Guess?(R). The acquisition was accounted for
using purchase accounting, with the purchase price allocated to the assets
acquired based on their fair market value at the date of acquisition. The
purchase price was allocated to accounts receivable ($1,532) and inventories
($3,114). The acquisition's operating results are included in the Company's
consolidated statement of income from the date of acquisition.
49
5. Accrued Expenses
Accrued expenses at December 31 consisted of the following:
2003 2002
---------------------
Accrued advertising and sales promotions $21,771 $31,289
Asbestos-related matters 9,819 21,295
Employee compensation and related benefits 7,018 7,329
Interest 3,879 3,803
Environmental liabilities 1,559 1,434
Royalties 1,205 1,292
Deferred income taxes 4,376 3,954
Income taxes 1,632
Other 6,246 5,373
---------------------
$55,873 $77,401
=====================
6. Financing Arrangements
Long-term debt at December 31 consisted of the following:
2003 2002
---------------------
8 5/8% Senior Notes, due 2008 $ 99,773 $ 99,724
Note Purchase Agreement 20,000 20,000
Other notes 5,142 5,547
---------------------
124,915 125,271
Less current portion 21,289 21,061
---------------------
$103,626 $104,210
=====================
8 5/8% Senior Notes due 2008
In August 1998, Congoleum issued $100,000 of 8 5/8% Senior Notes, maturing
August 1, 2008, priced at 99.505 to yield 8.70%. The Senior Notes are redeemable
at the option of Congoleum, in whole or in part, at any time on or after August
1, 2003, at predetermined redemption prices (ranging from 104% to 100%), plus
accrued and unpaid interest to date of redemption. During 2003, the indenture
governing the Senior Notes was amended to permit transactions contemplated under
Congoleum's proposed plan of reorganization and related agreements. The holders
of the Senior Notes have no recourse to the assets of ABI or its other
subsidiaries.
The fair value of Congoleum's long-term debt is based on the quoted market
prices for publicly traded issues. The estimated fair value of the 8 5/8% Senior
Notes was approximately $65,000 and $45,000 at December 31, 2003 and 2002,
respectively.
50
6. Financing Arrangements (continued)
Note Purchase Agreement
During the third quarter of 2001, ABI entered into a Note Purchase and Private
Shelf Agreement with Prudential Insurance Company (the "Prudential Agreement").
Under the terms of this agreement, ABI borrowed $20,000 and used the proceeds to
retire existing long-term and revolving debt. The terms of the Prudential
Agreement were modified during 2003 and in January 2004 to revise covenants and
certain other terms to conform with revisions to the Company's revolving credit
agreement, and to require, among other things, that the Company obtain a
commitment to extend or replace its revolving credit agreement no later than
November 15, 2004. These amendments also granted the lender a security interest,
shared with the revolving credit lender, in certain domestic receivables,
inventory, and fixed assets. The notes under the Prudential Agreement bear
interest at 9.91% (reducing to 7.91% if a lower ratio of debt to EBITDA, as
defined in the Prudential Agreement, is attained). Principal is repayable in
five annual $4,000 installments beginning August 28, 2006.
Other Notes
In 1998, the Company obtained loans from local banks in connection with the
acquisition of buildings in Belgium and Singapore. The loans were for 25,000
Belgian francs (US $681) and 2,700 Singapore dollars (US $1,534). The loans are
payable in equal installments through 2008 and 2018, respectively. The interest
rates on the loans are 5.6% for the Belgian loan and 1.5% above the local bank's
prime rate (5.0% at December 31, 2003) for the Singapore loan. The loans are
secured by the property acquired.
The Company, through a Canadian subsidiary, is party to a credit agreement
providing a $7,500 Canadian dollar (US $4,770) capital loan and increasing an
existing operating loan facility to $12,000 Canadian dollars (US $7,632).
Proceeds of the capital loan were used to fund acquisitions of property and
equipment in Canada. The capital loan is payable in 20 equal quarterly
installments beginning February 28, 2002 and bears interest at 6.03%. The
operating loan is payable on demand and bears interest at a floating rate which
averaged 4.5% at December 31, 2003.
Revolving Credit Agreements
ABI is party to a revolving credit agreement that provides for borrowings of up
to $20,000 (depending on levels of domestic inventory, receivables, and fixed
assets) through December 31, 2004, with interest varying based upon the
Company's leverage ratio (as defined in that agreement). This agreement was
amended during 2003 and in January 2004 to modify certain terms, including
making financial covenants less restrictive. This agreement as amended provides
for a commitment fee based on the average daily unused portion of the
commitment, which varies depending on the leverage ratio. Borrowings under the
revolving credit agreement and the note purchase agreement are secured by
certain of the assets of certain of the Company's domestic subsidiaries. At
December 31, 2003, the Company had $3,950 outstanding under this agreement with
an interest rate of 3.75%. Unused borrowing availability under this agreement at
December 31, 2003 was $10,333.
Congoleum has a revolving credit facility, which expires December 31, 2004 that
provides for borrowings up to $30,000 depending on levels of inventory and
receivables. This agreement, which converted to a debtor-in-possession facility
upon Congoleum's bankruptcy filing, provides for a commitment fee based on the
average daily unused portion of the commitment equal to three-eighths of one
percent and a monthly servicing fee of $3. Borrowings under this
51
facility are collateralized by inventory and receivables. There was $10,232 in
borrowings outstanding under this facility at December 31, 2003 and no
borrowings outstanding at December 31, 2002. The facility provides for standby
letters of credit, the outstanding amount of which was $4,100 at December 31,
2003. Unused borrowing availability under this agreement at December 31, 2003
was $8,100.
The terms of certain of the Company's loan agreements include restrictions on
incurring additional indebtedness, restrictions on some types of payments
including dividends, and limitations on capital expenditures. Certain agreements
also have covenants requiring maintenance of minimum net worth levels, current
ratios, and fixed charge coverage ratios and maximum debt levels and debt to
EBITDA ratios. Retained earnings, which were unrestricted as to such
distributions, amounted to $1,937 at December 31, 2003.
Interest paid on all outstanding debt amounted to $11,500 in 2003, $10,796 in
2002 and $10,645 in 2001.
Principal payments on the Company's long-term obligations due in each of the
next five years are as follows:
2004 $21,289
2005 1,293
2006 1,297
2007 144
2008 99,884
7. Other Liabilities
Other liabilities at December 31 consisted of the following:
2003 2002
-------------------
Pension benefit obligations $26,278 $24,808
Environmental remediation and product
related liabilities 9,301 8,745
Other postretirement benefits 8,517 8,708
Deferred income taxes 10,355 10,703
Accrued workers' compensation 5,130 5,499
Accrued compensation 370 318
Other 2,175 2,340
-------------------
$62,126 $61,121
===================
8. Pension Plans
The Company sponsors several noncontributory defined benefit pension plans
covering most of the Company's employees. Benefits under the plan are based on
years of service and employee compensation. Amounts funded annually by the
Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below in "Other Benefits").
52
8. Pension Plans (continued)
The following summarizes the change in the benefit obligation; the change in
plan assets; the funded status; and reconciliation to the amounts recognized in
the balance sheets for the pension benefits and other benefits plans. The
measurement date for all items set forth below is the last day of the fiscal
year presented.
Pension Benefits Other Benefits
--------------------- -------------------
(In thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 81,106 $ 75,390 $ 8,341 $ 7,033
Service cost 1,854 1,587 189 157
Interest cost 5,440 5,314 546 522
Plan participants contributions 162 153
Amendments 305 14
Actuarial (gain) loss 9,351 4,101 610 1,115
Foreign currency exchange rate changes 1,427 88
Benefits paid (5,608) (5,541) (509) (486)
---------------------------------------------
Benefit obligation at end of year $ 94,037 $ 81,106 $ 9,177 $ 8,341
=============================================
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 56,577 $ 63,102
Actual return on plan assets 10,504 (5,950)
Employer contribution 4,752 4,689
Plan participants contribution 162 153
Foreign currency exchange rate changes 1,788 124
Benefits paid (5,608) (5,541)
---------------------
Fair value of plan assets at end of year $ 68,175 $ 56,577
=====================
Funded (unfunded) status $(25,862) $(24,529) $(9,177) $(8,341)
Unrecognized net actuarial loss 22,504 22,090 848 272
Unrecognized transition obligations (301) (377) (603) (1,065)
Unamortized prior service cost 401 (335)
---------------------------------------------
Accrued benefit cost $ (3,258) $ (3,151) $(8,932) $(9,134)
=============================================
Amounts recognized in the balance sheets consist of:
Accrued benefit liability $(26,278) $(24,808) $(8,517) $(8,708)
Accrued expenses (415) (426)
Prepaid benefit obligation 111 259
Intangible asset 328 436
Deferred tax asset 2,197 3,515
Accumulated other comprehensive income 20,384 17,447
---------------------------------------------
Net amount recognized $ (3,258) $ (3,151) $(8,932) $(9,134)
=============================================
Accumulated Benefit Obligation as of year-end $ 87,766 $ 76,010
=====================
53
8. Pension Plans (continued)
Pension Benefits Other Benefits
-------------------------------- -------------------------
(In thousands) 2003 2002 2001 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $ 1,854 $ 1,587 $ 1,514 $ 189 $ 157 $ 142
Interest cost 5,440 5,314 5,183 546 522 474
Expected return on plan assets (4,052) (5,513) (5,739)
Recognized net actuarial loss (gain) 1,499 442 (19) 34 14 (9)
Amortization of transition obligation (111) 71 275
Amortization of prior service cost (206) (195) (195) (462) (462) (462)
-------------------------------------------------------------
Net periodic benefit cost $ 4,424 $ 1,706 $ 1,019 $ 307 $ 231 $ 145
=============================================================
The weighted-average assumptions used to determine benefit obligation for the
Pension Benefits as of year-end were as follows:
2003 2002
---- ----
Discount rate 6.25% 6.75%
Rate of compensation increase 4.00%-5.00% 4.25%-5.00%
The weighted-average assumptions used to determine benefit obligation for the
Other Benefits as of year-end were as follows:
2003 2002
---- ----
Discount rate 6.75% 6.75%
The weighted-average assumptions used to determine net periodic benefit cost
related to the Pension Benefits were as follows:
2003 2002 2001
---- ---- ----
Discount rate 6.25%-6.75% 6.75% 6.75%-7.25%
Expected long-term return on plan assets 7.00%-7.50% 7.00%-9.00% 7.50%-9.00%
Rate of compensation increase 4.00%-5.50% 4.25%-5.00% 4.25%-5.00%
The weighted-average assumptions used to determine net periodic benefit cost
related to the Other Benefits were as follows:
2003 2002 2001
---- ---- ----
Discount Rate 6.75% 6.75% 7.25%
In developing the overall expected long-term return on plan assets assumption, a
building block approach was used in which rates of return in excess of inflation
were considered separately for equity securities, debt securities, and other
assets. The excess returns were weighted by the representative target allocation
and added along with an appropriate rate of inflation to develop the overall
expected long-term return on plan assets assumption. The Company believes this
determination is consistent with SFAS 87.
54
8. Pension Plans (continued)
Assumed healthcare cost trend rates as of year-end were as follows:
2003 2002
---- ----
Healthcare cost trend rate assumed for next year 9.0% 9.0%
Ultimate healthcare cost trend rate 5.0% 5.0%
Year that the assumed rate reaches ultimate rate 2009 2008
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare benefits. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 64 $ 55
Effect on post-retirement benefit obligation $666 $594
For the pension plan, the weighted-average asset allocation at December 31,
2003, and December 31, 2002, by asset category, are as follows:
Pension Assets Pension Assets
at December 31, at December 31,
Asset Category 2003 2002
------------------------------------------------------------------------------
Equity securities 59% 55%
Debt securities 40% 44%
Other 1% 1%
--------------------------------------
Total 100% 100%
======================================
The Company has developed an investment strategy for the pension plan. The
investment strategy is to emphasize total return; that is, the aggregate return
from capital appreciation and dividend and interest income. The primary
objective of the investment management for the plan's assets is the emphasis on
consistent growth; specifically, growth in a manner that protects the Plan's
assets from excessive volatility in market value from year to year. The
investment policy takes into consideration the benefit obligations, including
timing of distributions.
The primary objective for the plan is to provide long-term capital appreciation
primarily through investment in equity and debt securities. The Company's target
asset allocation is consistent with the weighted-average allocation at December
31, 2003.
The Company selects professional money managers whose investment policies are
consistent with the Company's investment strategy and monitors their performance
against appropriate benchmarks.
55
8. Pension Plans (continued)
Contributions
The Company expects to contribute between $9.0 million and $10.0 million to its
pension plans, substantially all of which relates to Congoleum.
Estimated Future Benefit Payments
The following benefit payments, which reflect future service as appropriate, are
expected to be paid. The benefit payments are based on the same assumptions used
to measure the Company's benefit obligation at the end of fiscal 2003.
Pension Other
Benefits Benefits
-------- --------
2004 $ 5,960 $ 529
2005 5,998 562
2006 6,063 594
2007 6,133 648
2008 6,194 699
2009-2013 33,086 3,938
The Company also has three 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
of compensation with the Company partially matching contributions. Defined
contribution pension expense for the Company was $984, $1,788, and $1,793 for
the years ended December 31, 2003, 2002, and 2001, respectively.
9. Commitments and Contingencies
Leases
The Company occupies certain warehouse and office space and uses certain
equipment and motor vehicles under lease agreements expiring at various dates
through 2010. The leases generally require the Company to pay for utilities,
insurance, taxes and maintenance, and some contain renewal options. Total rent
expense charged to operations was $5,894 in 2003, $6,079 in 2002 and $5,475 in
2001.
Future minimum payments relating to operating leases are as follows:
2004 $ 4,317
2005 3,489
2006 2,478
2007 2,264
2008 2,166
Thereafter 1,633
---------
Total future minimum lease payments $16,347
=========
56
9. Commitments and Contingencies (continued)
Environmental and Other Liabilities
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described in the following footnote. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts, and the
matters may remain unresolved for several years.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company 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 balance sheet as shown in the
following table. Due to the relative magnitude and wide range of estimates of
these liabilities and 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 consolidated financial statements, to the extent that
Congoleum incurs a liability or expense, it will be reflected in ABI's
consolidated financial statements. Congoleum has filed a plan of reorganization
under Chapter 11 of the United States Bankruptcy Code as part of a plan to
resolve its asbestos-related liabilities. See Notes 1 and 10 for a discussion of
this subject.
57
9. Commitments and Contingencies (continued)
2003 2002
Liability Receivable Liability Receivable
-------------------------------------------------
Congoleum
Environmental liabilities $ 5,285 $ 2,689 $ 5,177 $ 1,995
Asbestos product liability 9,819 3,587 21,295
Other 996 130 1,281 225
----------------------------------------------
16,100 6,406 27,753 2,220
----------------------------------------------
American Biltrite Inc.
Environmental liabilities 4,479 875 3,621 875
Asbestos product liability 10,700 10,700 8,500 8,500
Other 100 100
----------------------------------------------
15,279 11,575 12,221 9,375
----------------------------------------------
Consolidated
Environmental liabilities 9,764 3,564 8,798 2,870
Asbestos product liability 20,519 14,287 29,795 8,500
Other 1,096 130 1,381 225
----------------------------------------------
$31,379 $17,981 $39,974 $11,595
==============================================
Reporting Classification of above amounts
Accrued expenses $11,378 $22,729
Asbestos-related liabilities 10,700 8,500
Other liabilities 9,301 8,745
Other current assets $ 3,587 $ 2,220
Insurance for asbestos-related liabilities 10,700 8,500
Other assets 3,694 875
----------------------------------------------
$31,379 $17,981 $39,974 $11,595
==============================================
58
9. Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,954 pending claims involving
approximately 3,462 individuals as of December 31, 2003. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to asbestos claims during the years ended December
31, was as follows:
2003 2002
------------------
Claims at January 1 884 464
New claims 1,367 528
Settlements (14) (11)
Dismissals (283) (97)
------------------
Claims at December 31 1,954 884
==================
The total indemnity costs incurred to settle claims during 2003 and 2002 were
$270 and $409, respectively, all of which were paid by ABI's insurance carriers,
as were the related defense costs. The average indemnity cost per resolved claim
was approximately $0.9 in 2003 and $3.8 in 2002. In general, governmental
authorities have determined that asbestos-containing sheet and tile products are
nonfriable (i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable. The Company estimates its liability to defend and
resolve current and reasonably anticipated future asbestos-related claims (not
including claims asserted against Congoleum), based upon a strategy to actively
defend or seek settlement for those claims in the normal course of business.
Factors such as recent and historical settlement and trial results, the
incidence of past and recent claims, the number of cases pending against it and
asbestos litigation developments that may impact the exposure of the Company
were considered in performing these estimates. In 2003, the Company engaged an
outside actuary to assist it in developing estimates of the Company's liability
for resolving asbestos claims at December 31, 2003. The actuary estimated the
range of liability for settlement of current claims pending and claims
anticipated to be filed through 2009 was $10,700 to $16,000. The Company
believes no amount within this range is more likely than any other, and
accordingly has recorded the minimum liability estimate of $10,700 in its
financial statements. The Company also believes that based on this minimum
liability estimate, the corresponding amount of insurance probable of recovery
is $10,700 at December 31, 2003, which has been included in other assets.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's pre-packaged Chapter 11 case and proposed plan of reorganization on
the Company's liabilities, the Company does not believe that reasonable
estimates can be developed of liabilities for claims beyond a five year horizon.
The Company will continue to evaluate its range of future exposure, and the
related insurance coverage available, and when appropriate, record future
adjustments to those estimates, which could be material.
59
9. Commitments and Contingencies (continued)
ABI has been named as a Potentially Responsible Party ("PRP") within the meaning
of the Federal Comprehensive Environmental Response Compensation and Liability
Act, as amended ("CERCLA"), with respect to four sites located in three separate
states. At one of the four sites, which is located in Southington, Connecticut,
(the "Southington Site"), an ABI subsidiary ("Ideal") is also named as a PRP. At
the Southington Site, the currently estimated aggregate future cost of
remediation and monitoring is approximately $65,000. In addition, the
Environmental Protection Agency (the "EPA") has estimated its reimbursable costs
to be approximately $20,000. ABI's and Ideal's share of the aggregate
assessments to the PRPs to date is approximately $159. Subject to a final
allocation among the PRPs, ABI's and Ideal's aggregate share of the EPA's past
costs and the future remediation costs is currently estimated to be
approximately $953. Under an agreement, Ideal will share a percentage of this
cost with the former owner of Ideal's assets. Under an agreement between ABI and
The Biltrite Corporation ("TBC"), TBC is liable for 37.5% of the remediation
costs incurred by ABI with respect to the Southington Site.
At another site, ABI, together with a number of other PRPs, signed a consent
decree and site remediation agreement (the "Agreements"), which, without
admission of liability by the PRPs, requires remediation of the ILCO Superfund
site located in Leeds, Alabama (the "ILCO Site"). The currently estimated
aggregate future cost of remediation and associated transactional costs at the
ILCO Site ranges from $2,700 to $10,700. Pursuant to a final allocation among
consent decree participants, ABI's share of the currently estimated future
remediation costs range from approximately $22 to about $227. These estimates
consider commitments from de minimis and de maximus settlors, the City of Leeds
and its insurers, amounts currently held in an escrow fund, a RCRA Closure Fund
refund, and TBC's share, which by agreement is 37.5% of the remediation costs
incurred by ABI. A substantial share of ABI's future remediation costs with
respect to the ILCO site will be payable over the next one to five years. ABI
and the other settling PRPs also are pursuing litigation against two PRPs who
used the ILCO Site and have not settled.
There are two EPA sites in Georgia. At one of the EPA sites, ABI has been named
along with seven other PRPs with respect to three neighborhood sites ("Sites")
in Atlanta, Georgia where properties within the boundaries of the Sites contain
lead in the surface soil in concentrations that exceed the EPA's residential
lead screening level. The EPA has requested that ABI sign an administrative
consent order. ABI has reviewed the EPA notification letter and the
administrative consent order and is assessing its responsibility with respect to
the Sites and whether it is in its interest to sign the consent order. At the
other site in Fulton County, a former smelting and refinery site, ABI has not
entered into any negotiations with other PRP's or the site owner. ABI believes,
based upon current information available, that its liability at either site will
not be material. Under an agreement between ABI and TBC, TBC is liable for 37.5%
of the remediation costs, incurred by ABI at these Georgia sites.
A lawsuit was brought by Olin Corporation, the present owner of a former
chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three 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, ABI held title to the property
directly.
60
9. Commitments and Contingencies (continued)
In 2000, ABI and 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 $4,100 in settlement of their share of
Olin's $18,000 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 site after January 1, 1999, plus an annual reimbursement
of $100 for Olin's internal costs. Under an agreement between ABI and TBC, TBC
is liable for 37.5% of the costs that may be incurred by ABI in connection with
this lawsuit and 37.5% of the amounts due under the settlement agreement with
Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the site. Olin has estimated that the total
response costs for 2004 will be approximately $6,600. For costs beyond 2004, ABI
has estimated the range to be between $14,600 to $27,300. As of December 31,
2003, ABI has estimated its potential liability for Olin to be in the range of
$2,300 to $4,000 after allocation for Olin's internal costs but before any
recoveries from insurance.
The State of Maine Department of Environmental Protection has put the present
owner of a former ABI plant on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
approximately $1,000. ABI has not yet entered a final cost sharing agreement
with the current owner. Under an agreement between ABI and TBC, TBC is liable
for 37.5% of the remediation costs, incurred by ABI at this site.
ABI also is potentially responsible for response and remediation costs with
respect to three state-supervised sites, two sites in Massachusetts, and one in
New York. At these three sites, ABI's liability will be based upon disposal of
allegedly hazardous waste material from its current and former plants. While the
exact amount of the future costs to ABI resulting from its liability is
indeterminable due to such unknown factors as the magnitude of clean-up costs,
the timing and extent of the remedial actions that may be required,
determination of ABI's liability in proportion to other responsible parties and
the extent to which costs may be recoverable from insurance, ABI believes, based
upon current information available, that its liability for these sites will not
be material. Under an agreement between ABI and TBC, TBC is liable for 37.5% of
the remediation costs, incurred by ABI at these sites.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the Southington Site, the ILCO Site, the
Georgia Sites, the Olin Site and the state supervised sites in Maine,
Massachusetts and New York. An agreement was executed by ABI and it carriers
regarding the payment of the defense costs for the Olin Site. ABI has reached
agreements with three of its insurance carriers whereby the carriers have
reimbursed the Company $1,900 for past and current environmental claims. One
carrier has agreed to reimburse the Company for 2.5% for Olin's future
environmental expenses, $20 of which was reimbursed through December 31, 2003
and which reimbursement was shared 37.5% with TBC. ABI and its other carriers
continue to discuss ABI's remaining demands for insurance coverage for these
sites. As of December 31, 2003, the Company has accrued $4,500 for ABI's
estimable and probable amounts for contingencies described above. Additionally,
the Company has recorded an asset related to insurance recoveries, net of
reimbursements to certain PRP's, for approximately $900.
61
9. Commitments and Contingencies (continued)
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and is
seeking confirmation of a pre-packaged plan of reorganization under Chapter 11
of the United States Bankruptcy Code. See Note 10.
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
currently relate to four disposal sites in New Jersey, Pennsylvania, Maryland,
and Connecticut in which recovery from generators of hazardous substances is
sought for the cost of cleaning up the contaminated waste sites. Congoleum's
ultimate liability in connection with those sites depends on many factors,
including the volume of material contributed to the site, the number of other
PRP's and their financial viability, the remediation methods and technology to
be used and the extent to which costs may be recoverable from insurance.
However, under CERCLA, and certain other laws, as a PRP, the Company can be held
jointly and severally liable for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 51 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation, based on engineering and consultant studies conducted, would be
approximately $26 million. Congoleum's proportionate share, based on waste
disposed at the site, is estimated to be approximately 5.8%.
Congoleum also accrues remediation costs for certain 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 self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total clean-up costs, including capital
outlays and future maintenance costs for soil and groundwater remediation are
primarily based on engineering studies.
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 will not have a material adverse effect on Congoleum's liquidity or
financial position.
Other
In the ordinary course of its business, ABI and Congoleum become involved in
lawsuits, administrative proceedings, product liability and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts, and the matters may remain unresolved for several years.
62
10. Congoleum Asbestos Liabilities and Planned Reorganization
On December 31, 2003 Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the District of New Jersey. These Chapter 11 cases are
being jointly administered as Case No. 03-51524 (KCF), styled In re Congoleum
Corporation, et al., and were commenced in order to resolve Congoleum's
asbestos-related liabilities and any future asbestos-related liability that
might be asserted against Congoleum. During 2003, Congoleum obtained the
asbestos personal injury claimant votes necessary for approval of a proposed
pre-packaged Chapter 11 plan of reorganization, and, in January 2004, filed its
pre-packaged plan of reorganization and disclosure statement with the Bankruptcy
Court. The Bankruptcy Court has not yet scheduled a hearing to consider approval
of the proposed plan. Congoleum is also involved in litigation with certain
insurance carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers have filed various objections to
Congoleum's pre-packaged plan of reorganization and related matters.
The pre-packaged plan, if confirmed, would leave most non-asbestos creditors
unimpaired and would resolve all pending and future asbestos claims against
Congoleum. The plan of reorganization would provide for, among other things, an
assignment of, or grant a security interest in, certain rights in, and proceeds
of, Congoleum's applicable insurance to a plan trust established under Section
524(g) of the Bankruptcy Code that would fund distributions to pending and
future asbestos claims, provide for the issuance of an injunction that would
protect Congoleum from all future asbestos-related litigation and liabilities by
channeling all current and future asbestos claims to the plan trust. General
unsecured creditors would be unimpaired under the plan.
As part of Congoleum's plan of reorganization, ABI expects that Congoleum's
indemnification obligations to ABI with respect to current and future asbestos
personal injury claims related to ABI's former Tile Division operations not
covered by ABI insurance will be channeled to the plan trust established under
Section 524(g) of the Bankruptcy Code pursuant to Congoleum's Chapter 11 plan of
reorganization. ABI and Congoleum expect to contribute, among other things, to
the plan trust that would be established pursuant to Congoleum's Chapter 11
reorganization $250 thousand in cash from ABI and a note from Congoleum in an
aggregate principal amount equal to at least 51% of the equity value of
Congoleum, with payment of such contribution secured by a pledge by ABI of both
the common stock of Congoleum that it owns as well as certain of its rights to
receive certain indemnity payments from Congoleum. ABI does not expect that
Congoleum's note contribution to the plan trust would have a material adverse
effect on ABI's liquidity or capital resources. The value of the note that
Congoleum will contribute to the trust under the proposed plan is $2.7 million
but is subject to increase based upon the equity value of Congoleum as of the
last trading day of the 90 consecutive trading day period commencing on the
first anniversary of the effective date of Congoleum's confirmed Chapter 11 plan
of reorganization, which could be materially higher. The proposed pre-packaged
plan also provides for a possible additional contribution by ABI to the plan
trust in the event ABI sells its interest in Congoleum before the fifth
anniversary of confirmation of Congoleum's plan of reorganization.
While Congoleum believes its plan is feasible and in the best interest of all
Congoleum's constituents, there are sufficient risks and uncertainties such that
no assurances of the outcome of Congoleum's pre-packaged Chapter 11 case can be
given. Congoleum expects that its remaining
63
10. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
costs to confirm and effect its proposed pre-packaged plan, consisting
principally of legal and advisory fees and contributions to the Plan Trust will
be approximately $9.8 million at a minimum.
11. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2003 and
2002 were as follows:
2003 2002
---------------------
Deferred tax assets:
Accruals and reserves $16,786 $16,528
Net operating losses and credit carryforwards 7,524 5,820
---------------------
Total deferred tax assets 24,310 22,348
Less valuation allowance 2,321 1,884
---------------------
Net deferred tax assets 21,989 20,464
Deferred tax liabilities:
Depreciation 16,523 17,053
Insurance 2,308 2,334
Inventory 4,061 3,632
Foreign taxes 1,095 1,122
Other 1,700 1,521
---------------------
Total deferred tax liabilities 25,687 25,662
---------------------
Net deferred tax liability $(3,698) $(5,198)
=====================
Credit carryforwards consisted primarily of alternative minimum tax credits and
state tax credits.
Net operating losses consisted primarily of federal net operating loss
carryforwards of $10.3 million and $7.1 million for 2003 and 2002, respectively.
Management has determined that a partial valuation allowance is necessary to
reduce the deferred tax assets to the amount expected to be realized. The
Federal loss carryforward will begin to expire in 2020.
During 2003, 2002 and 2001, Congoleum recorded a minimum pension liability
adjustment. Deferred taxes were adjusted accordingly, and the tax effect reduced
or increased Congoleum's retained earnings. The tax benefit (charge) to retained
earnings was $(2,767), $(3,512) and $1,504 for the years ended December 31,
2003, 2002 and 2001, respectively. The consolidated statement of stockholders'
equity reflects ABI's proportionate share of the net adjustment to retained
earnings.
64
11. Income Taxes (continued)
The components of income (loss) before the provision for income taxes for the
years ended December 31 are as follows:
2003 2002 2001
------------------------------------
Domestic $(12,607) $(12,758) $4,884
Foreign 2,661 945 1,077
------------------------------------
$ (9,946) $(11,813) $5,961
====================================
Significant components of the provision for income taxes for the years ended
December 31 were as follows:
2003 2002 2001
----------------------------------
Current:
Federal $(1,856) $(2,612) $1,378
Foreign 727 259 (117)
State 334 432 262
----------------------------------
Total current (795) (1,921) 1,523
Deferred:
Federal (2,052) 2,341 (103)
Foreign (27) 830 737
State (449) (2) 188
----------------------------------
Total deferred (2,528) 3,169 822
----------------------------------
$(3,323) $1,248 $2,345
==================================
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for the years ended December 31 was as follows:
2003 2002 2001
---------------------------
U.S. statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefits
and valuation allowance 1.0 (5.0) 6.9
Undistributed domestic earnings 10.0 (2.2)
Reorganization expenses (24.9)
Goodwill impairment (14.1)
Other (1.6) (10.6) 0.6
---------------------------
Effective tax rate 33.4% (10.6)% 39.3%
===========================
65
11. Income Taxes (continued)
Undistributed earnings of foreign subsidiaries aggregated approximately $22,761
at December 31, 2003, which, under existing law, will not be subject to U.S. tax
until distributed as dividends. Because the earnings have been or are intended
to be reinvested indefinitely in foreign operations, no provision has been made
for U.S. income taxes that may be applicable thereto.
Income taxes paid amounted to approximately $434 in 2003, $1,853 in 2002 and
$1,257 in 2001.
12. Other Comprehensive Income
The Company records unrealized gains or losses on foreign currency translation
adjustments and changes in certain minimum pension liabilities in other
comprehensive income.
Components of other comprehensive income (loss) for the years ended December 31
consisted of the following:
2003 2002 2001
-------------------------------
Foreign currency translation adjustments $ 3,181 $ 2 $(1,012)
Change in minimum pension liability (2,937) (11,336) (1,440)
-------------------------------
$ 244 $(11,334) $(2,452)
===============================
Accumulated balances related to each component of other comprehensive loss as of
December 31, net of related taxes, were as follows:
2003 2002 2001
--------------------------------
Foreign currency translation adjustments $ (1,420) $ (4,601) $(4,603)
Minimum pension liability (17,636) (14,699) (3,363)
--------------------------------
$(19,056) $(19,300) $(7,966)
================================
66
13. Income (loss) Per Share
The following table sets forth the computation of basic and diluted (loss)
income per share for the years ended December 31:
2003 2002 2001
-----------------------------------
(In thousands, except per share amounts)
Numerator:
Net (loss) income $(14,158) $(16,655) $2,816
===================================
Denominator:
Denominator for basic income per share:
Weighted-average shares 3,442 3,442 3,455
Dilutive employee stock options
-----------------------------------
Denominator for diluted income per share:
Adjusted weighted-average shares and
assumed conversions 3,442 3,442 3,455
===================================
Basic (loss) income per share $ (4.11) $ (4.84) $ 0.82
===================================
Diluted (loss) income per share $ (4.11) $ (4.84) $ 0.82
===================================
14. Stock Option Plans
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of
50,000 options for common stock to non-employee directors. Under the terms of
the plan, options granted are nonqualified and are issued at a price equal to
100% of fair market value at the date of grant. Options granted under the plan
are exercisable six 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. The plan reserved 400,000 shares of
common stock for grant and provides that the term of each award be determined by
the 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 the number of shares reserved for grant from
400,000 to 550,000.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price, determined by the Committee, may
not be less than the fair market value of a share on the date of 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 of the plan at no cost to them. No SARs
or restricted stock have been granted under the plan since its adoption. Other
than the restrictions, which limit the sale and transfer of these SARs and
restricted stock, participants are entitled to all the rights of a shareholder.
67
14. Stock Option Plans (continued)
The following tables summarize information about ABI's stock options:
2003 2002 2001
---------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------
Outstanding at beginning of year 469,940 $19.48 510,440 $19.57 543,740 $19.28
Granted 3,500 7.10 3,500 12.20 3,000 14.00
Exercised -- -- -- -- (14,800) 7.00
Forfeited (244,440) 16.90 (44,000) 19.94 (21,500) 20.17
---------- --------- ---------
Outstanding at end of year 229,000 $22.04 469,940 $19.48 510,440 $19.57
========== ========= =========
Options exercisable at end of year 218,100 468,457 450,357
Available for grant at end of year 354,020 113,080 72,580
Outstanding at Weighted- Exercisable at Weighted- Weighted-Average
Range of December 31 Average Exercise December 31 Average Exercise Remaining
Exercise Price 2003 Price 2003 Price Contractual Life
-------------------------------------------------------------------------------------------------------------------------
$7.10-$14.00 13,000 $11.37 9,500 $12.94 7.99
$14.06-$17.25 27,000 $16.08 19,600 $16.68 6.96
$23.625 189,000 $23.63 189,000 $23.63 4.00
Congoleum Stock Option Plan
Congoleum maintains a Stock Option Plan and a Directors' Stock Option Plan.
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 value of
Congoleum's Class A common stock on the date of grant.
15. 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.
Congoleum manufactures vinyl and vinyl composition floor coverings and sells
them primarily through floor covering distributors to retailers, and contractors
for commercial and residential use. The tape products segment consists of two
production facilities in the United States, and finishing and sales facilities
in Belgium and Singapore. The tape products segment manufactures paper, film,
HVAC, electrical, shoe, and other tape products for use in industrial and
automotive markets. The jewelry segment consists of K&M Associates L.P., a
national costume jewelry supplier to mass merchandisers and department stores.
The Company's Canadian division produces flooring, rubber products, including
materials used by footwear manufacturers, and other industrial products.
68
15. Industry Segments (continued)
Measurement of Segment Profit or Loss and Segment Assets
The Company considers all revenues and expenses to be of an operating nature
and, accordingly, allocates them to industry segments regardless of the entity
in which recorded. Costs specific to a segment, such as pension expense, are
charged to the segment. Certain Corporate office expenses are allocated to
certain segments based on resources allocated. Significant assets of the
Corporate office include cash, insurance assets related to accrued liabilities,
and deferred tax assets. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales or transfers.
Factors Used to Identify Reportable Segments
Reportable segments are business units that offer different products and are
each managed separately. The Company's Canadian division manufactures certain
products which are similar to products of the flooring segment; however, the
Canadian division is managed and reports separately from the flooring segment.
Segment Profit and Assets
Years ended December 31
2003 2002 2001
-------------------------------
Revenues
Revenues from external customers:
Flooring products $220,650 $237,008 $218,546
Tape products 81,141 80,637 82,914
Jewelry 76,157 78,972 62,125
Canadian division 38,621 37,878 39,924
-------------------------------
Total revenues from external customers 416,569 434,495 403,509
Intersegment revenues:
Flooring products 56 198 214
Tape products 126 138 143
Jewelry -- -- --
Canadian division 6,856 9,816 7,949
-------------------------------
Total intersegment revenues 7,038 10,152 8,306
-------------------------------
Total revenue 423,607 444,647 411,815
Reconciling items
Intersegment revenues (7,038) (10,152) (8,306)
-------------------------------
Total consolidated revenues $416,569 $434,495 $403,509
===============================
69
15. Industry Segments (continued)
A major portion of the increase in Jewelry segment revenue in 2002 compared to
2001 was from the acquisition of Swank's Ladies Jewelry Division. The increase
in Flooring segment revenue in 2002 resulted from strong sales of the new
DuraStone product line introduced in August 2001 and improved resilient sheet
sales, partially offset by lower luxury and contract tile sales.
Approximately 51%, 50% and 53% of the Canadian division's revenues from external
customers were for flooring products for 2003, 2002 and 2001, respectively. The
remaining revenues from the Canadian division's external customers were from
sale of rubber and other industrial products.
Years ended December 31
2003 2002 2001
------------------------------
Interest income
Flooring products $ 63 $ 263 $ 708
Tape products 16 15 105
Jewelry 7 20 34
Canadian division 9 12 3
------------------------------
Total segment interest revenue 95 310 850
Corporate office interest revenue 96 20 59
------------------------------
Total consolidated interest income $ 191 $ 330 $ 909
==============================
Interest expense
Flooring products $ 8,906 $ 8,375 $ 8,299
Tape products 111 109 114
Jewelry 416 435 741
Canadian division 66 109 38
------------------------------
Total segment interest expense 9,499 9,028 9,192
Corporate office interest expense 2,077 1,735 1,247
------------------------------
Total consolidated interest expense $11,576 $10,763 $10,439
==============================
70
15. Industry Segments (continued)
Years ended December 31
2003 2002 2001
--------------------------------
Depreciation and amortization expense
Flooring products $ 11,761 $ 11,273 $12,181
Tape products 2,939 2,861 2,529
Jewelry 900 831 1,711
Canadian division 2,412 2,078 1,978
--------------------------------
Total segment depreciation and amortization 18,012 17,043 18,399
Reconciling items
Corporate office depreciation 14 24 22
--------------------------------
Total consolidated depreciation and amortization $ 18,026 $ 17,067 $18,421
================================
Segment profit
Flooring products $(10,636) $(19,181) $(2,146)
Tape products 300 305 1,137
Jewelry 4,782 7,301 5,633
Canadian division (2,072) 507 1,717
--------------------------------
Total segment profit (7,626) (11,068) 6,341
Reconciling items
Corporate expenses (2,214) (774) (308)
Intercompany profit (loss) (106) 29 (72)
--------------------------------
Total consolidated (loss) earnings from continuing operations
before income taxes and other items $ (9,946) $(11,813) $ 5,961
================================
Segment profit or loss is before income tax expense or benefit. The flooring
products segment loss includes charges related to asbestos claims of $3.7
million in 2003 and $17.3 million in 2002.
71
15. Industry Segments (continued)
December 31
2003 2002
---------------------
Segment assets
Flooring products $175,899 $203,991
Tape products 54,415 56,561
Jewelry 37,272 43,123
Canadian division 35,642 30,467
---------------------
Total segment assets 303,228 334,142
Reconciling items
Assets of discontinued operation 2,902 13,942
Corporate office assets 23,089 28,910
Intersegment accounts receivable (9,575) (14,962)
Intersegment profit in inventory (248) (162)
---------------------
Total consolidated assets $319,396 $361,870
=====================
Years ended December 31
2003 2002 2001
--------------------------------
Expenditures for additions to long-lived assets
Flooring products $4,628 $ 8,366 $ 7,858
Tape products 973 2,004 8,303
Jewelry 801 579 858
Canadian division 1,038 1,164 5,185
--------------------------------
Total expenditures for additions to long-lived assets 7,440 12,113 22,204
Reconciling items
Corporate office expenditure for additions to long-lived assets 5 14 7
--------------------------------
Total expenditures for additions to long-lived assets $7,445 $12,127 $22,211
================================
72
15. Industry Segments (continued)
Geographic Area Information
Years ended December 31
2003 2002 2001
---------------------------------
Revenues from external customers
United States $354,392 $370,034 $337,716
Canada 30,660 33,093 33,824
Mexico 4,639 5,512 6,929
Europe 17,308 16,716 16,327
Asia 7,899 7,474 6,719
Other 1,671 1,666 1,994
---------------------------------
Total revenues from external customers $416,569 $434,495 $403,509
=================================
Revenues are attributed to regions based on the location of customers.
December 31
2003 2002
---------------------
Long-Lived Assets by Area
United States $151,819 $159,938
Canada 14,508 13,361
Mexico 9
Europe 1,151 1,070
Asia 2,247 2,216
---------------------
Total long-lived assets $169,725 $176,594
=====================
73
16. Discontinued Operation
During the second quarter of 2003, the Company reassessed operations at its
Toronto, Canada subsidiary, Janus Flooring Corporation, a manufacturer of
prefinished hardwood flooring, and decided to exit and dispose of this business
before the end of 2003 due to its history of operating losses. The Company
acquired Janus in 2000 intending it to serve as a strategic addition to the
flooring product business. In connection with this decision, the Company
recorded a charge of $8.5 million in second quarter 2003 consisting primarily of
$3.0 million to reduce inventories to net realizable value, $0.5 million in
accounts receivable allowances, a $2.5 million asset impairment charge related
to machinery and equipment and a $1.9 million income tax provision to write off
deferred tax assets deemed not probable of recovery. Results of Janus Flooring,
including this charge, are being reported as a discontinued operation. Assets of
discontinued operation at December 31, 2003 consist primarily of land and
building held for sale and liabilities of discontinued operation consist
primarily of accrued expenses.
74
17. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
(In thousands, except per share amounts)
2003(1)
-------
Net sales $101,946 $103,457 $107,810 $103,356
Gross profit 28,707 27,543 30,831 30,471
Net (loss) income from
continuing operations (2,406) (1,989) 1,348 (3,750)
Discontinued operation (719) (9,897) (922) 4,177
Net (loss) income (3,125) (11,886) 426 427
Net (loss) income per share,
basic and diluted:
Net (loss) income from
continuing operations (0.70) (0.58) 0.39 (1.09)
Discontinued operation (0.21) (2.88) (0.27) 1.21
Net (loss) income (0.91) (3.46) 0.12 0.12
2002(1)
-------
Net sales $100,696 $120,026 $109,556 $104,217
Gross profit 28,065 34,086 33,389 28,695
Net (loss) income from
continuing operations (367) 1,918 1,958 (10,349)
Discontinued operation (408) (273) (516) (876)
Cumulative effect of
accounting change (7,742)
Net (loss) income (8,517) 1,645 1,442 (11,225)
Net (loss) income per share,
basic and diluted:
Net (loss) income from
continuing operations (0.10) 0.56 0.57 (3.01)
Discontinued operation (0.12) (0.08) (0.15) (0.25)
Cumulative effect of
accounting change (2.25)
Net (loss) income (2.47) 0.48 0.42 (3.26)
(1) Amounts prior to the third quarter of 2003 have been restated for Janus as
a discontinued operation.
75
18. Fair Value of Financial Instruments
The Company's cash and cash equivalents, restricted cash, accounts receivable,
accounts payable, notes payable and long-term debt are financial instruments.
Congoleum's $100 million 8 5/8% Notes due in 2008 had a book value of $99.7
million and a fair market value of $65.0 million at December 31, 2003. The
corresponding amounts at December 31, 2002 were a book value of $99.7 million
and a fair market value of $45.0 million. The carrying value of the Company's
remaining financial instruments approximates their fair value at December 31,
2003.
The fair value of the Company's publicly traded long-term debt is determined
based on quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
76
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
American Biltrite Inc.
We have audited the accompanying consolidated balance sheets of American
Biltrite Inc. and subsidiaries (the Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2003.
Our audits also include the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Biltrite
Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
/s/ Ernst & Young LLP
Boston, Massachusetts
March 5, 2004
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our management, with the
participation of our Chief Executive Officer, or CEO, and Chief Financial
Officer, or CFO, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act) as of December 31, 2003. Based on this evaluation, our CEO and CFO
concluded that, as of December 31, 2003, our disclosure controls and procedures
were (1) designed to ensure that material information relating to us, including
our consolidated subsidiaries, is made known to our CEO and CFO by others within
those entities, particularly during the period in which this Report was being
prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Securities 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 Controls. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act) occurred during the fiscal quarter ended December 31,
2003 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 10, 2004 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2003 and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 10, 2004 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2003 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in part in Item 5 hereof and
in part in ABI's Proxy Statement for its Annual Stockholders' Meeting to be held
May 10, 2004 to be filed with the Securities and Exchange Commission within 120
days after December 31, 2003 and is incorporated herein by reference.
78
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 10, 2004 to be filed with the
Securities and Exchange Commission within 120 days after December 31, 2003 and
is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 10, 2004 filed with the
Securities and Exchange Commission within 120 days after December 31, 2003 and
is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of American Biltrite
Inc. and its subsidiaries are included in Item 8:
Consolidated balance sheets - December 31, 2003 and 2002,
pages 32 through 35
Consolidated statements of operations - Years ended December
31, 2003, 2001 and 2000, pages 36 & 37
Consolidated statements of cash flows - Years ended December
31, 2003, 2001 and 2000, pages 38 & 39
Consolidated statements of stockholders' equity - Years ended
December 31, 2003, 2001 and 2000, page 40
Notes to consolidated financial statements, pages 41 through
76
(2) The following financial statement schedule is included in Item 15
(d)
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
79
(3) Listing of Exhibits
The listing of exhibits required under this item is incorporated
herein by reference to pages 83 through 89 of this Form 10-K.
(b) Reports on Form 8-K. We filed a report on Form 8-K on January 14, 2003
setting forth the press release relating to its majority-owned subsidiary
Congoleum Corporation's strategy for resolving current and future asbestos
claims liability.
(c) Exhibits: The required exhibits are filed herewith or incorporated by
reference following the required Exhibit Index.
(d) Financial Statement Schedule: The required consolidated financial
statement schedule is included on page 81 of this Form 10-K.
80
American Biltrite Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
------------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts -- Deductions -- Balance at
Description Period Expenses Describe Other Describe End of Period
------------------------------------------------------------------------------------------------------------------------------------
2003
----
Allowances for doubtful accounts
and cash discounts $2,764 $2,691 $2,840(A) $2,615
===================================================================================
2002
----
Allowances for doubtful accounts
and cash discounts $4,190 $2,863 $4,289(A) $2,764
===================================================================================
2001
----
Allowances for doubtful accounts
and cash discounts $4,071 $2,761 $2,642(A) $4,190
===================================================================================
(A) Represents accounts charged off during the year, net of recoveries.
81
Pursuant to the requirements of Section 13 or 15 (d) 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: March 30, 2004 by: /s/ Howard N. Feist III
-------------------- -----------------------------
Howard N. Feist III
Vice President Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 2004 by: /s/ Roger S. Marcus
---------------- --------------------
Roger S. Marcus, Chairman of the
Board, Chief Executive Officer
and Director
Date: March 30, 2004 by: /s/ Richard G. Marcus
---------------- ---------------------
Richard G. Marcus, President, Chief
Operating Officer and Director
Date: March 30, 2004 by: /s/ William M. Marcus
---------------- ---------------------
William M. Marcus, Executive Vice
President, Treasurer, Chairman of
the Executive Committee and Director
Date: March 30, 2004 by: /s/ John C. Garrels III
---------------- -----------------------
John C. Garrels III, Director
Date: March 30, 2004 by: /s/ Kenneth I. Watchmaker
---------------- -------------------------
Kenneth I. Watchmaker, Director
Date: March 30, 2004 by: /s/ Edward J. Lapointe
---------------- ----------------------
Edward J. Lapointe, Controller
Date: March 30, 2004 by: /s/ James S. Marcus
---------------- -------------------
James S. Marcus, Director
Date: March 30, 2004 by: /s/ Howard N. Feist III
---------------- -----------------------
Howard N. Feist III
Vice President Finance and
Chief Financial Officer
82
INDEX OF EXHIBITS
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
3 (1) VII Restated Certificate of -
Incorporation
3 (2) I By-Laws, amended and restated as of -
March 13, 1991
4 (1) Any instrument defining the rights -
of holders of unregistered
long-term debt of American
Biltrite Inc. that does not
authorize the issuance of debt
securities in excess of 10 percent
of the total assets of American
Biltrite Inc. and its subsidiaries
on a consolidated basis is not
filed as an exhibit to this
Report. American Biltrite Inc.
agrees to furnish a copy of each
such instrument to the Securities
and Exchange Commission upon
request.
4 (2) XIV Note Purchase and Private Shelf -
Agreement and Facility Guarantee,
dated as of August 28, 2001, among
American Biltrite Inc., K&M
Associates L.P. and The Prudential
Insurance Company of America
4 (3) XIV Amendment No. 1 to Note Purchase -
and Private Shelf Agreement and
Facility Guarantee, dated as of
December 31, 2002, among American
Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance
Company of America
4 (4) XIV Amendment No. 2 to Note Purchase -
and Private Shelf Agreement and
Facility Guarantee, dated as of
March 31, 2003, among American
Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance
Company of America
4 (5) XIV Amendment No. 3 to Note Purchase -
and Private Shelf Agreement and
Facility Guarantee, dated as of
June 30, 2003, among American
Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance
Company of America
83
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
4 (6) XIV Amendment No. 4 to Note Purchase -
and Private Shelf Agreement and
Facility Guarantee, dated as of
October 14, 2003, among American
Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance
Company of America
4 (7) XIV Security Agreement, dated as of -
October 14, 2003, among American
Biltrite Inc., K&M Associates
L.P., Fleet National Bank and the
subsidiaries of American Biltrite
Inc. from time to time party
thereto
4 (8) XIV Intercreditor and Collateral -
Agency Agreement, dated as of
October 14, 2003, by and among
Fleet National Bank, Citizens Bank
of Massachusetts, The Prudential
Insurance Company of America and
the other banks from time to time
party thereto and the
Acknowledgment of and Consent and
Agreement to Intercreditor and
Collateral Agency Agreement by
American Biltrite Inc., K&M
Associates L.P. and the other
American Biltrite Inc. guarantor
subsidiaries
4 (9) XIV Guarantor Joinder Agreement, dated -
as of October 14, 2003, made by
ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual
Properties, Inc., Ideal Tape Co.,
Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425
Dexter Associates, L.P. in favor
of The Prudential Insurance
Company
4 (10) XV Amendment No. 5 to Note Purchase -
and Private Shelf Agreement and
Facility Guarantee, dated as of
January 29, 2004, among American
Biltrite Inc., K&M Associates L.P.
and The Prudential Insurance
Company of America
10 (1) III Joint Venture Agreement dated as -
of December 16, 1992 by and among
American Biltrite Inc., Resilient
Holdings Incorporated, Congoleum
Corporation, Hillside Industries
Incorporated and Hillside Capital
Corporation
84
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
10 (2) IV Closing Agreement dated as of -
March 11, 1993 by and among
American Biltrite Inc., Resilient
Holdings Incorporated, Congoleum
Corporation, Hillside Industries
Incorporated and Hillside Capital
Corporation
10 (3) IX, II 1993 Stock Award and Incentive -
Plan as Amended and Restated as of
March 4, 1997
10 (4) VI K&M Associates L.P. Amended and -
Restated Agreement of Limited
Partnership
10 (5) V Purchase Agreement dated as of -
March 31, 1995 by and among Ocean
State and certain limited partners
of K&M
10 (6) V Agreement and Plan of Merger dated -
as of April 1, 1995 by and among
the Company, Jewelco Acquisition
Co., Inc., AIMPAR, Inc., Arthur I.
Maier, Bruce Maier and Edythe J.
Wagner
10 (7) V Option Agreement dated as of April -
1, 1995 by and among Ocean State
and certain limited partners of K&M
10 (8) V Agreement and Plan of Merger dated -
as of May 3, 1995 by and among the
Company, Zirconia Acquisition Co.,
Inc., Wilbur A. Cowett
Incorporated and Wilbur A. Cowett
10 (9) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and Michael
J. Glazerman, Trustee of the
Marcus Family Insurance Trust
u/t/d/ March 1, 1990
10 (10) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and the
Marcus Family 1990 Insurance Trust
85
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
10 (11) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and the
Marcus Family 1996 Irrevocable
Insurance Trust Dated October 28,
1996
10 (12) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and The
Richard G. Marcus Irrevocable
Insurance Trust of 1990 Dated June
1, 1990
10 (13) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and the
Roger S. Marcus Irrevocable
Insurance Trust Dated November 29,
1996, Richard G. Marcus, Trustee
10 (14) VII, II Split-Dollar Agreement dated as of -
December 20, 1996 by and between
American Biltrite Inc. and the
Roger S. Marcus Irrevocable
Insurance Trust Dated November 29,
1996
10 (15) VII, II Split-Dollar Agreement dated as of -
January 9, 1997 by and between
American Biltrite Inc. and Joseph
D. Burns
10 (16) VII, II Description of Supplemental -
Retirement Benefits for Gilbert K.
Gailius
10 (17) X, II American Biltrite Inc. Deferred -
Compensation Plan
10 (18) X American Biltrite 1999 Stock -
Option Plan for Non-Employee
Directors
10 (19) XI, II Description of Employment -
Arrangement for Gilbert K. Gailius.
10 (20) II, XII Split-Dollar Agreement dated as of -
November 20, 2000 by and between
American Biltrite Inc. and
Howard N. Feist III
86
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
10 (21) XIII Personal Services Agreement, dated -
as of March 11, 1993, by and
between Congoleum Corporation and
the Company; First Amendment dated
as of February 8, 1995; Second
Amendment dated as of November 15,
1996; Third Amendment dated as of
March 10, 1998; Fourth Amendment
dated as of November 7, 2002
10 (22) XIV Credit Agreement, dated as of -
October 14, 2003, among American
Biltrite Inc., K&M Associates
L.P., Fleet National Bank and the
other lenders party thereto
10 (23) XIV Security Agreement, dated as of -
October 14, 2003, among American
Biltrite Inc., K&M Associates
L.P., Fleet National Bank and the
subsidiaries of American Biltrite
Inc. from time to time party
thereto
10 (24) XIV Intercreditor and Collateral -
Agency Agreement, dated as of
October 14, 2003, by and among
Fleet National Bank, Citizens Bank
of Massachusetts, The Prudential
Insurance Company of America and
the other banks from time to time
party thereto and the
Acknowledgment of and Consent and
Agreement to Intercreditor and
Collateral Agency Agreement by
American Biltrite Inc., K&M
Associates L.P. and the other
American Biltrite Inc. guarantor
subsidiaries
10 (25) XIV Guarantee Agreement dated as of -
October 14, 2003, among Abtre,
Inc., Aimpar, Inc., American
Biltrite Intellectual Properties,
Inc., Ideal Tape Co., Inc.,
Majestic Jewelry, Inc., Ocean
State Jewelry, Inc., 425 Dexter
Associates, L.P. and Fleet
National Bank
10 (26) XV Amendment No. 1 to Credit -
Agreement, dated as of January 29,
2004, among American Biltrite
Inc., K&M Associates L.P. and
Fleet National Bank
87
Exhibit No. Description Page No.
--------------------------------------------------------------------------------
11 VIII Statement Re: Computation of Per 67
Share Earnings
21(1) Subsidiaries of the Registrant 90-91
(including each subsidiary's
jurisdiction of incorporation and
the name under which each
subsidiary does business)
23 (1) Consent of Ernst & Young LLP, 92
Independent Auditors
31.1 Certification of the Principal 93-94
Executive Officer of the
Registrant Pursuant to Rule
13a-15(e) and Rule 15d-14(a) of
the Securities Exchange Act of
1934, as amended
31.2 Certification of the Principal 95-96
Financial Officer of the
Registrant Pursuant to Rule
13a-15(e) and Rule 15d-14(a) of
the Securities Exchange Act of
1934, as amended
32 Certification of the Chief 97
Executive Officer and the Chief
Financial Officer of the
Registrant pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991. (1-4773)
II Compensatory plans required to be filed as exhibits pursuant to Item
14(c) of Form 10-K.
III Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed December 21, 1992.
(1-4773)
IV Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K filed March 25, 1993.
(1-4773)
V Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K as amended by the Form 8-K/A filed respectively on
May 17, 1995 and July 17, 1995. (1-4773)
88
VI Incorporated by reference to Item 14 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
(1-4773)
VII Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996. (1-4773)
VIII Incorporated by reference to Note 14 of the Company's consolidated
financial statements (filed herewith).
IX Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on June 28, 1997. (1-4773)
X Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on August 12, 1999
XI Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
XII Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2000.
XIII Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2002
XIV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on October 17, 2003
XV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on February 2, 2004
89