FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2006 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 9, 2006
---------------------------- -----------------------------
Common Stock 3,441,551 shares
FORWARD LOOKING STATEMENTS
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and
other words of similar meaning. In particular, these include statements relating
to intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies such as
bankruptcy and other legal proceedings, and financial conditions. These
statements do not relate strictly to historical or current facts. These
forward-looking statements are based on American Biltrite Inc.'s expectations
and American Biltrite Inc.'s understanding of Congoleum's expectations, as of
the date of this report, of future events, and American Biltrite Inc. undertakes
no obligation to update any of these forward-looking statements, except as
required by federal securities laws. Although American Biltrite Inc. believes
that these expectations are based on reasonable assumptions, within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements. Any or
all of these statements may turn out to be incorrect. By their nature,
forward-looking statements involve risks and uncertainties because they relate
to events and depend on circumstances that may or may not occur in the future.
Any forward-looking statements made in this report speak only as of the date of
such statement. It is not possible to predict or identify all factors that could
potentially cause actual results to differ materially from expected and
historical results. Factors that could cause or contribute to American Biltrite
Inc.'s actual results differing from its expectations include those factors
discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q and in
American Biltrite Inc.'s other filings with the Securities and Exchange
Commission.
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets - Assets as of
June 30, 2006 (unaudited) and December 31, 2005..............1
Consolidating Condensed Balance Sheets - Liabilities and
Stockholders' Equity as of June 30, 2006 (unaudited) and
December 31, 2005............................................2
Consolidating Condensed Statements of Operations
(unaudited) for the three months ended June 30, 2006
and 2005.....................................................3
Consolidating Condensed Statements of Operations
(unaudited) for the six months ended June 30, 2006
and 2005.....................................................4
Consolidating Condensed Statements of Cash Flows -
Operating Activities (unaudited) for the six months ended
June 30, 2006 and 2005.......................................5
Consolidating Condensed Statements of Cash Flows -
Investing & Financing Activities (unaudited) for the
six months ended June, 2006 and 2005.........................6
Notes to Unaudited Consolidating Condensed Financial
Statements...................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................38
Item 3. Quantitative and Qualitative Disclosures About Market Risk..57
Item 4. Controls and Procedures.....................................57
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................58
Item 1A. Risk Factors................................................58
Item 3. Defaults Upon Senior Securities.............................67
Item 4. Submission of Matters to a Vote of Security Holders.........68
Item 5. Other Information...........................................68
Item 6. Exhibits....................................................69
Signature ..........................................................71
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations
June 30, December 31, June 30, December 31,
2006 2005 2006 2005
----------------------------------------------------------------
(Unaudited) (Unaudited)
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 18,150 $ 29,184
Restricted cash 11,967 11,644
Accounts receivable, net 51,952 41,742 $( 524) $(455)
Inventories 84,836 77,127 (103) (166)
Assets of discontinued
operation - 3,142
Deferred income taxes 18,036 18,036
Prepaid expense & other
current assets 27,133 24,062
----------------------------------------------------------------
Total current assets 212,074 204,937 (627) (621)
Property, plant & equipment, net 110,291 115,336
Other assets:
Insurance for asbestos-related
liabilities 8,950 8,950
Goodwill, net 11,475 11,726
Other assets 19,835 15,895 (135) (147)
----------------------------------------------------------------
40,260 36,571 (135) (147)
----------------------------------------------------------------
Total assets $362,625 $356,844 $(762) $(768)
================================================================
Congoleum American Biltrite
June 30, December 31, June 30, December 31,
2006 2005 2006 2005
-------------------------------------------------------------
(Unaudited)
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 15,444 $ 24,511 $ 2,706 $ 4,673
Restricted cash 11,967 11,644
Accounts receivable, net 24,235 17,092 28,241 25,105
Inventories 39,481 34,607 45,458 42,686
Assets of discontinued
operation - 3,142
Deferred income taxes 16,735 16,735 1,301 1,301
Prepaid expense & other
current assets 23,286 20,139 3,847 3,923
-------------------------------------------------------------
Total current assets 131,148 124,728 81,553 80,830
Property, plant & equipment, net 69,051 73,207 41,240 42,129
Other assets:
Insurance for asbestos-related
liabilities 8,950 8,950
Goodwill, net 11,475 11,726
Other assets 9,954 9,412 10,016 6,630
-------------------------------------------------------------
9,954 9,412 30,441 27,306
-------------------------------------------------------------
Total assets $210,153 $207,347 $153,234 $150,265
=============================================================
See accompanying notes to consolidating condensed financial statements.
1
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations
June 30, December 31, June 30, December 31,
2006 2005 2006 2005
------------------------------------------------------------
(Unaudited) (Unaudited)
(Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 21,478 $ 22,144 $ (524) $ (455)
Accrued expenses 43,052 42,976
Asbestos-related liabilities 23,439 28,369
Liabilities of discontinued operation - 200
Notes payable 23,775 19,062
Current portion of long-term debt 20,377 20,451
Liabilities subject to compromise 29,281 23,990
------------------------------------------------------------
Total current liabilities 161,402 157,192 (524) (455)
Long-term debt, less current portion 1,663 1,963
Asbestos-related liabilities 9,740 9,500
Other liabilities 30,681 29,625
Noncontrolling interests 1,086 1,365
Liabilities subject to compromise 137,800 138,714 (135) (147)
------------------------------------------------------------
Total liabilities 342,372 338,359 (659) (602)
Stockholders' equity
Common stock 46 46 (93) (93)
Additional paid-in capital 19,570 19,570 (49,236) (49,126)
Retained earnings 33,525 31,913 35,302 35,129
Accumulated other comprehensive loss (17,756) (17,912) 6,111 6,111
Less treasury shares (15,132) (15,132) 7,813 7,813
------------------------------------------------------------
Total stockholders' equity 20,253 18,485 (103) (166)
------------------------------------------------------------
Total liabilities and stockholders'
equity $362,625 $356,844 $ (762) $ (768)
============================================================
Congoleum American Biltrite
June 30, December 31, June 30, December 31,
2006 2005 2006 2005
------------------------------------------------------------
(Unaudited)
(Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 11,078 $ 12,245 $ 10,924 $ 10,354
Accrued expenses 22,410 22,703 20,642 20,273
Asbestos-related liabilities 23,439 28,369
Liabilities of discontinued operation - 200
Notes payable 13,288 9,404 10,487 9,658
Current portion of long-term debt 20,377 20,451
Liabilities subject to compromise 29,281 23,990
------------------------------------------------------------
Total current liabilities 99,496 96,711 62,430 60,936
Long-term debt, less current portion 1,663 1,963
Asbestos-related liabilities 9,740 9,500
Other liabilities 16,735 16,735 13,946 12,890
Noncontrolling interests 1,086 1,365
Liabilities subject to compromise 137,935 138,861
------------------------------------------------------------
Total liabilities 254,166 252,307 88,865 86,654
Stockholders' equity
Common stock 93 93 46 46
Additional paid-in capital 49,236 49,126 19,570 19,570
Retained earnings (64,568) (65,405) 62,791 62,189
Accumulated other comprehensive loss (20,961) (20,961) (2,906) (3,062)
Less treasury shares (7,813) (7,813) (15,132) (15,132)
------------------------------------------------------------
Total stockholders' equity (44,013) (44,960) 64,369 63,611
------------------------------------------------------------
Total liabilities and stockholders'
equity $210,153 $207,347 $153,234 $150,265
============================================================
See accompanying notes to consolidating condensed financial statements.
2
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2006 and 2005
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations
2006 2005 2006 2005
----------------------------------------------------------
Net sales $117,465 $109,542 $ - $ 72
Cost of products sold 88,279 81,435 (224) (39)
Selling, general & administrative expenses 25,177 39,464
----------------------------------------------------------
Income (loss) from operations 4,009 (11,357) 224 111
Other income (expense)
Interest income 237 86
Interest expense (3,548) (3,267)
Other income (expense) 511 (37) (184) (72)
----------------------------------------------------------
(2,800) (3,218) (184) (72)
----------------------------------------------------------
Income (loss) before taxes and other items 1,209 (14,575) 40 39
Provision for income taxes 232 (16)
Noncontrolling interests 3 (87)
----------------------------------------------------------
Income (loss) from continuing operations 980 (14,646) 40 39
Discontinued operation 36 (57)
----------------------------------------------------------
Net income (loss) $ 1,016 $(14,703) $ 40 $ 39
==========================================================
Congoleum American Biltrite
2006 2005 2006 2005
------------------------------------------------------
Net sales $58,743 $ 58,108 $58,722 $51,362
Cost of products sold 45,139 44,338 43,364 37,136
Selling, general & administrative expenses 10,261 26,127 14,916 13,337
------------------------------------------------------
Income (loss) from operations 3,343 (12,357) 442 889
Other income (expense)
Interest income 126 84 111 2
Interest expense (2,867) (2,618) (681) (649)
Other income (expense) 89 293 606 (258)
------------------------------------------------------
(2,652) (2,241) 36 (905)
------------------------------------------------------
Income (loss) before taxes and other items 691 (14,598) 478 (16)
Provision for income taxes 65 - 167 (16)
Noncontrolling interests 3 (87)
------------------------------------------------------
Income (loss) from continuing operations 626 (14,598) 314 (87)
Discontinued operation 36 (57)
------------------------------------------------------
Net income (loss) $ 626 $(14,598) $ 350 $ (144)
======================================================
Basic Diluted
2006 2005 2006 2005
---------------------------- --------------------------
Income (loss) per common share from continuing
operations $ 0.28 $(4.25) $ 0.28 $(4.25)
Discontinued operation 0.01 (0.02) 0.01 (0.02)
---------------------------- --------------------------
Net income (loss) per common share $ 0.29 $(4.27) $ 0.29 $(4.27)
============================ ==========================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,471,200 3,441,551
============================ ==========================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations
2006 2005 2006 2005
-----------------------------------------------------------
Net sales $229,186 $216,966 $ - $ 124
Cost of products sold 171,643 160,789 (351) (83)
Selling, general & administrative expenses 49,567 64,490
-----------------------------------------------------------
Income (loss) from operations 7,976 (8,313) 351 207
Other income (expense)
Interest income 481 229
Interest expense (6,962) (6,531)
Other income (expense) 525 2,165 (288) (124)
-----------------------------------------------------------
(5,956) (4,137) (288) (124)
-----------------------------------------------------------
Income (loss) before taxes and other items 2,020 (12,450) 63 83
Provision for income taxes 479 955
Noncontrolling interests (13) (561)
-----------------------------------------------------------
Income (loss) from continuing operations 1,528 (13,966) 63 83
Discontinued operation (26) (113)
-----------------------------------------------------------
Net income (loss) $ 1,502 $(14,079) $ 63 $ 83
===========================================================
Congoleum American Biltrite
2006 2005 2006 2005
---------------------------------------------------------
Net sales $115,980 $115,738 $113,206 $101,104
Cost of products sold 89,099 88,307 82,895 72,565
Selling, general & administrative expenses 20,657 37,860 28,910 26,630
---------------------------------------------------------
Income (loss) from operations 6,224 (10,429) 1,401 1,909
Other income (expense)
Interest income 283 182 198 47
Interest expense (5,601) (5,118) (1,361) (1,413)
Other income (expense) 47 415 766 1,874
---------------------------------------------------------
(5,271) (4,521) (397) 508
---------------------------------------------------------
Income (loss) before taxes and other items 953 (14,950) 1,004 2,417
Provision for income taxes 116 - 363 955
Noncontrolling interests (13) (561)
---------------------------------------------------------
Income (loss) from continuing operations 837 (14,950) 628 901
Discontinued operation (26) (113)
---------------------------------------------------------
Net income (loss) $ 837 $(14,950) $ 602 $ 788
=========================================================
Basic Diluted
2006 2005 2006 2005
------------------------------ ---------------------------
Income (loss) per common share from continuing
operations $ 0.44 $ (4.06) $ 0.44 $(4.06)
Discontinued operation (0.01) (0.03) (0.01) (0.03)
------------------------------ ---------------------------
Net income (loss) per common share $ 0.43 $ (4.09) $ 0.43 $(4.09)
============================== ===========================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,469,869 3,441,551
============================== ===========================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
OPERATING ACTIVITIES (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations
2006 2005 2006 2005
------------------------------------------------------
Operating activities
Net income (loss) $ 1,502 $(14,079) $ 63 $ 83
Net loss from discontinued operation 26 113
------------------------------------------------------
Income (loss) from continuing operations 1,528 (13,966) 63 83
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 8,232 8,698
Stock compensation expense 110 -
Gain on sale of property - (2,280)
Asbestos-related charge - 15,455
Change in operating assets and liabilities:
Accounts and notes receivable (9,744) (3,260) 57 (432)
Inventories (6,754) (10,964) (63) (83)
Prepaid expenses and other assets 2,069 403
Accounts payable and accrued expenses 4,786 3,478 (57) 432
Asbestos-related expenses (11,321) (12,927)
Asbestos-related reimbursement from insurance
settlement - 6,091
Noncontrolling interests (279) 643
Other (297) (319)
------------------------------------------------------
Net cash used by operating activities of
continuing operations (11,670) (8,948) - -
Net cash used by operating activities of
discontinued operations (85) (90)
------------------------------------------------------
Net cash used by operating activities $(11,755) $ (9,038) $ - $ -
======================================================
Congoleum American Biltrite
2006 2005 2006 2005
---------------------------------------------------------
Operating activities
Net income (loss) $ 837 $(14,950) $ 602 $ 788
Net loss from discontinued operation 26 113
---------------------------------------------------------
Income (loss) from continuing operations 837 (14,950) 628 901
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 5,345 5,626 2,887 3,072
Stock compensation expense 110 -
Gain on sale of property - (2,280)
Asbestos-related charge - 15,455
Change in operating assets and liabilities:
Accounts and notes receivable (7,143) (3,202) (2,658) 374
Inventories (4,874) (5,244) (1,817) (5,637)
Prepaid expenses and other assets 1,888 1,400 181 (997)
Accounts payable and accrued expenses 4,326 2,785 517 261
Asbestos-related expenses (11,321) (12,927)
Asbestos-related reimbursement from insurance
settlement - 6,091
Noncontrolling interests (279) 643
Other (800) (518) 503 199
---------------------------------------------------------
Net cash used by operating activities of
continuing operations (11,632) (5,484) (38) (3,464)
Net cash used by operating activities of
discontinued operations (85) (90)
---------------------------------------------------------
Net cash used by operating activities $(11,632) $ (5,484) $ (123) $(3,554)
=========================================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
INVESTING & FINANCING ACTIVITIES (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations
2006 2005 2006 2005
------------------------------------------------------
Investing activities
Investments in property, plant and equipment $ (2,261) $ (3,027) $ - $ -
Proceeds from sale of property - 2,327
------------------------------------------------------
Net cash (used) provided by investing
activities of continuing operations (2,261) (700) - -
Net cash provided by investing activities of
discontinued operations 680 -
------------------------------------------------------
Net cash (used) provided by investing activities (1,581) (700)
Financing activities
Net short-term borrowings 4,242 2,353
Payments on long-term debt (383) (2,542)
Net change in restricted cash (323) (1,311)
------------------------------------------------------
Net cash provided (used) by financing
activities of continuing operations 3,536 (1,500) - -
Effect of foreign exchange rate changes
on cash (1,234) 1,393
------------------------------------------------------
Net decrease in cash (11,034) (9,845) - -
Cash and cash equivalents at beginning
of period 29,184 34,691
------------------------------------------------------
Cash and cash equivalents at end of period $ 18,150 $ 24,846 $ - $ -
======================================================
Congoleum American Biltrite
2006 2005 2006 2005
---------------------------------------------------------
Investing activities
Investments in property, plant and equipment $ (996) $(2,155) $(1,265) $ (872)
Proceeds from sale of property - - - 2,327
---------------------------------------------------------
Net cash (used) provided by investing
activities of continuing operations (996) (2,155) (1,265) 1,455
Net cash provided by investing activities of
discontinued operations 680 -
---------------------------------------------------------
Net cash (used) provided by investing activities (996) (2,155) (585) 1,455
Financing activities
Net short-term borrowings 3,884 637 358 1,716
Payments on long-term debt (383) (2,542)
Net change in restricted cash (323) (1,311)
---------------------------------------------------------
Net cash provided (used) by financing
activities of continuing operations 3,561 (674) (25) (826)
Effect of foreign exchange rate changes
on cash (1,234) 1,393
---------------------------------------------------------
Net decrease in cash (9,067) (8,313) (1,967) (1,532)
Cash and cash equivalents at beginning
of period 24,511 29,710 4,673 4,981
---------------------------------------------------------
Cash and cash equivalents at end of period $15,444 $21,397 $ 2,706 $ 3,449
=========================================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
June 30, 2006
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the proposed amended plan of
reorganization of Congoleum Corporation, a majority-owned subsidiary of the
Company, to settle asbestos liabilities) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2006 are not necessarily indicative of the results that may be
expected for future periods, including the year ending December 31, 2006. For
further information, refer to the consolidating financial statements and
footnotes thereto included in American Biltrite Inc.'s Annual Report on Form
10-K for the year ended December 31, 2005.
The consolidating balance sheet at December 31, 2005 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts in 2005 have been reclassified to conform to 2006
classifications. The Company has separately disclosed the operating, investing
and financing portions of the cash flows attributed to its discontinued
operations, which in prior periods were reported on a combined basis as a single
amount.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Historical financial results
have been restated to reflect the classification of Janus as a discontinued
operation in accordance with the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. Results of Janus, including charges
resulting from the shutdown, are being reported as a discontinued operation. In
April 2006, the Company completed the sale of Janus' remaining building and land
(see Note D). Subsequent to the sale of the property, the resulting note
receivable and deferred gain have been classified as a non-current asset and
non-current liability, respectively.
7
Note A - Basis of Presentation (continued)
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") and two of
Congoleum's subsidiaries filed in the United States Bankruptcy Court for the
District of New Jersey (the "Bankruptcy Court") voluntary petitions commencing
cases for reorganization relief under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") on December 31, 2003. The accompanying
consolidating condensed financial statements include the results for Congoleum
for all periods presented. ABI continues to own a majority of the voting stock
of Congoleum and expects to continue to control Congoleum while it is in
reorganization proceedings.
In January 2004, Congoleum filed its initial proposed plan of reorganization and
disclosure statement with the Bankruptcy Court. In November 2004, Congoleum
filed a modified plan of reorganization and related documents with the
Bankruptcy Court (the "Fourth Plan") reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee (the
"ACC"), the Future Claimants' Representative (the "FCR") and other asbestos
claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures in December 2004 and Congoleum obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of the
Fourth Plan. In April 2005, Congoleum announced that it had reached an agreement
in principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code (the "Plan Trust") to
pay asbestos claims against Congoleum. In July 2005, Congoleum filed an amended
plan of reorganization (the "Sixth Plan") and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn. In November 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. In March 2006, Congoleum filed a
new amended plan of reorganization (the "Eighth Plan"). In addition, an
insurance company has filed a plan of reorganization (the "CNA Plan") and the
Official Committee of Bondholders (the "Bondholders' Committee") (representing
holders of Congoleum's 8 5/8% Senior Notes due August 1, 2008 (the "Senior
Notes")) has also filed a plan of reorganization (the "Bondholder Plan"). In May
2006, the presiding judge of the Bankruptcy Court ordered all parties in
interest in Congoleum's reorganization proceedings to participate in global
mediation discussions. Several mediation sessions took place during June and
July 2006. During the mediation negotiations, Congoleum reached an agreement in
principle, subject to mutually agreeable definitive documentation, with the ACC,
the FCR and ABI on certain terms of a new amended plan (the "Ninth Plan"), which
8
Note A - Basis of Presentation (continued)
Congoleum filed and proposed jointly with the ACC on August 11, 2006 with the
Bankruptcy Court. The proponents of the CNA Plan and the Bondholder Plan have
indicated they may jointly file a new plan by August 18, 2006. The Bankruptcy
Court has scheduled a hearing to consider the adequacy of the disclosure
statements with respect to these plans for September 21, 2006.
There can be no assurance that Congoleum will not amend the Ninth Plan, that the
Bankruptcy Court will approve the disclosure statement with respect to the Ninth
Plan, that Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued protracted litigation in connection with its plan of
reorganization. It is uncertain whether the Bankruptcy Court will approve a
disclosure statement with respect to any plan filed by CNA and the Bondholders'
Committee or whether any such plan will be voted upon by creditors and, if
confirmed, will become effective. Moreover, it is uncertain whether any other
person will attempt to propose a plan and what any such plan would provide or
propose, and whether the Bankruptcy Court would confirm such a plan or any plan
other than Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Ninth Plan. Certain other parties, including the Bondholders'
Committee, have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the Ninth Plan. While
Congoleum is seeking to obtain the required acceptances of the Ninth Plan from
all necessary classes of creditors, the Ninth Plan provides alternative
treatments for holders of the Senior Notes and Congoleum stockholders. The Ninth
Plan's alternative treatment of Congoleum noteholders and stockholders depends
on whether the noteholders vote as a class to accept the Ninth Plan, and such
vote will materially affect the recoveries of such noteholders and stockholders,
including ABI. In the event that the holders of the Senior Notes vote as a class
to accept the Ninth Plan by the requisite numbers and amounts required by the
Bankruptcy Code and the plan is approved, the Senior Notes would be cancelled on
the effective date of the plan, holders of Senior Notes would receive their pro
rata share of the New Senior Notes (which are described elsewhere in this
report, including in Note J of the Notes to Unaudited Consolidating Financial
Statements), and Congoleum stockholders, including ABI, would retain their
equity interests in Congoleum, subject to the Congoleum equity dilution
contemplated by the Ninth Plan and discussed elsewhere in this report. In the
event that the holders of the Senior Notes do not vote as a class to accept the
Ninth Plan by the requisite numbers and amounts required by the Bankruptcy Code,
confirmation of the Ninth Plan would be sought in accordance with the cram down
provisions of the Bankruptcy Code (the "Cramdown Treatment"). Pursuant to the
Cramdown Treatment, the Senior Notes and existing Congoleum Class A and Class B
9
Note A - Basis of Presentation (continued)
common stock would be cancelled (including all shares of Congoleum Class A and
Class B common stock owned by ABI) and the Senior Notes holders would receive
their pro rata share, with the Plan Trust, of newly issued common stock of
reorganized Congoleum, in an amount determined by a final order of the
Bankruptcy Court. However, under the Ninth Plan, in no event may the amount of
such newly issued common stock of Congoleum to be allocated to the holders of
the Senior Notes exceed 49% of the voting common shares and total economic
equity value of reorganized Congoleum on a fully diluted basis. If the Cramdown
Treatment is implemented, the holders of existing Congoleum Class A and Class B
common stock (including ABI) would receive no distributions under the Ninth Plan
with respect to such stock, which would be cancelled.
Congoleum expects that the terms of the Ninth Plan may be amended or modified as
a result of further negotiations with various parties. Congoleum expects that
the terms of any new plan filed by CNA and the Bondholders' Committee will be
materially different from the terms of the Ninth Plan, and any such plan may
also be amended or modified or may be withdrawn. There can be no assurance that
the terms of the reorganization plan that is ultimately confirmed, if any, will
not materially differ from the terms of the Ninth Plan. Congoleum expects that
it will take until some time in the first quarter of 2007 at the earliest to
obtain confirmation of any plan of reorganization, which may be amended or
modified as a result of further negotiations with various parties.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing a
pre-petition trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and granting the Collateral Trust a
security interest in Congoleum's rights under its applicable insurance coverage
and payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced an omnibus avoidance action and a sealed avoidance action
(collectively, the "Avoidance Actions") seeking to void the security interest
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006. The Avoidance Actions remain pending.
Under the terms of the Ninth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent to, or would be deemed to have
irrevocably consented to, the forbearance of any claim and lien rights they
might have under the Claimant Agreement and related agreements. Under the terms
of the Ninth Plan, after the establishment of the Plan Trust, the assets in the
Collateral Trust would be transferred to the Plan Trust and any asbestos claims
would be paid in accordance with the terms of the Ninth Plan. Settlement values
under the Ninth Plan differ from values under previous plans and the Claimant
Agreement. As a result of such differences and the potential results of the
Avoidance Actions, the liability associated with the asbestos personal injury
claims against Congoleum may be materially different than the present estimates
of such items. As a result of tabulating ballots on the Fourth Plan, Congoleum
10
Note A - Basis of Presentation (continued)
is also aware of claims by claimants whose claims were not determined under the
Claimant Agreement but who have submitted claims with a value of approximately
$512 million based on the settlement values applicable in the Sixth Plan.
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Ninth Plan.
Actual amounts that will be contributed to the Plan Trust and costs for pursuing
and implementing the Ninth Plan or any other plan of reorganization could be
materially higher than currently recorded. Congoleum may record significant
additional charges should the minimum estimated cost increase. Delays in
proposing, filing or obtaining approval of the Ninth Plan or any other new or
amended plan of reorganization, or any plan proposed or filed by CNA or the
Bondholders' Committee, or the proposal of additional or different plans by
other parties could result in proceedings that take longer and are more costly
than Congoleum has estimated.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J of the Notes to Unaudited
Consolidating Condensed Financial Statements.
Although there can be no assurances with respect to the terms of any new amended
plan, the Company believes, that there is reasonable basis to expect it will
maintain control of Congoleum under the terms of a new amended plan, subject to
Congoleum obtaining the necessary acceptances and approvals required for
confirmation of the plan, including not seeking confirmation of the plan by
means of the Cramdown Treatment. Accordingly, the Company has elected to
continue to consolidate the financial statements of Congoleum in its
consolidated results because it believes that is the appropriate presentation
given its anticipated continuing control of Congoleum. However, the accompanying
financial statements also present the details of consolidation to separately
show the financial condition, operating results and cash flows of ABI (excluding
Congoleum and its wholly owned subsidiaries) and Congoleum and its wholly owned
subsidiaries, which may be more meaningful for certain analyses.
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
11
Note A - Basis of Presentation (continued)
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy
Code are required to segregate pre-petition liabilities that are subject to
compromise and report them separately on the balance sheet. Liabilities that may
be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Liabilities for asbestos claims are recorded based upon the minimum amount
Congoleum expects to spend for its contribution to, and costs to settle asbestos
liabilities through, the Plan Trust. Obligations arising post-petition and
pre-petition obligations that are secured or that the Bankruptcy Court has
authorized Congoleum to pay, are not classified as liabilities subject to
compromise. Other pre-petition claims (which would be classified as liabilities
subject to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases pursuant to the Bankruptcy Code or as a result of
the allowance by the Bankruptcy Court of contingent or disputed claims related
to pre-petition matters.
Recently Issued Accounting Principles
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An interpretation of FASB Statement No. 109 ("FIN 48"). This
Interpretation provides for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The Company will adopt this Interpretation in the
first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will
be recorded as an adjustment to retained earnings. The Company is currently
assessing the impact of this Interpretation on its financial position and
results of operations.
Note B - Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), Share-Based Payment, and related interpretations ("SFAS No. 123(R)")
using the modified prospective method and, accordingly, has not restated prior
period results. SFAS No. 123(R) establishes the accounting for equity
instruments exchanged for employee services. Under SFAS No. 123(R), share-based
compensation cost is measured at the grant date based on the calculated fair
value of the award. The expense is recognized over the employees' requisite
service period, generally the vesting period of the award. SFAS No. 123(R) also
requires the related excess tax benefit received upon exercise of stock options
or vesting of restricted stock, if any, to be reflected in the statement of cash
flows as a financing activity rather than an operating activity.
12
Note B - Stock Based Compensation (continued)
The Company has elected to continue to use the Black-Scholes option pricing
model to estimate the fair value of stock-based awards. The use of a
Black-Scholes option pricing model requires the input of assumptions determined
by management of the Company at the measurement date. These assumptions include
the risk-free interest rate, expected dividend yield, volatility factor of the
expected market price of the Company's common stock and the expected life of
stock option grants.
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock
options to employees in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company also provided the disclosures required under SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosures. As a result, no expense was reflected in the Company's operating
results for the six months ended June 30, 2005 for stock options, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant.
The table below reflects the pro forma net income and earnings per share for the
three and six months ended June 30, 2005 had compensation for stock options been
determined based on the fair value of the stock options at the grant date,
consistent with the methodology prescribed under SFAS No. 123.
Three
Months Six Months
Ended Ended
June 30, June 30,
2005 2005
---------------- -----------------
(In thousands,
except per share amounts)
Net loss:
As reported $(14,703) $(14,079)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (95) (194)
---------------- -----------------
As adjusted $(14,798) $(14,273)
================ =================
Net loss per share:
As reported $ (4.27) $ (4.09)
Pro forma compensation expense (0.03) (0.06)
---------------- -----------------
As adjusted $ (4.30) $ (4.15)
================ =================
13
Note B - Stock Based Compensation (continued)
No stock options were granted by American Biltrite or Congoleum during the six
months ended June 30, 2006 and 2005. The pro forma expense for the three and six
months ended June 30, 2005 represent the vesting of options previously granted
by American Biltrite and Congoleum.
On November 10, 2005, the Board of Directors of American Biltrite approved the
vesting of all outstanding and unvested options held by directors, officers and
employees under the Company's 1993 Stock Award and Incentive Plan, as amended
and restated as of March 4, 1997, and 1999 Stock Option Plan for Non-Employee
Directors (together, the "ABI Stock Plans"). As a result of the acceleration of
vesting, options to acquire 195,600 shares of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable in full. This action was taken to eliminate, to the
extent permitted, the transition expense that the Company otherwise would incur
in connection with the adoption of SFAS No. 123(R). The exercise prices of all
of the unvested options were lower than the closing trading price of the
Company's common stock on the modification date. Under the accounting guidance
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the accelerated vesting resulted in a charge for stock-based
compensation of approximately $22 thousand in 2005.
As a result of the acceleration of vesting of stock options granted under the
ABI Stock Plans and since ABI did not grant any stock options during the first
six months of 2006, the Company did not have stock compensation expense related
to the ABI Stock Plans during the six months ended June 30, 2006. Congoleum
recorded stock compensation expense of $55 thousand and $110 thousand for the
three and six months ended June 30, 2006, respectively, for the vesting of
previously granted options under its plans. This expense is included in the
Company's consolidated net income. The impact of the adoption of SFAS No. 123(R)
on the Company's consolidated net income per share was approximately $0.01 and
$0.02 per share for the three and six months ended June 30, 2006, respectively.
At June 30, 2006, the unrecognized compensation expense related to unvested
options previously granted by Congoleum was approximately $245 thousand. This
compensation expense will be recognized as the options vest over a
weighted-average period of 1.3 years.
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of up
to 50,000 shares of ABI common stock upon exercise of options granted under the
plan to ABI's non-employee directors. Under the terms of the plan, options
granted are nonqualified and have an exercise price per share equal to 100% of
the fair market value per share of the Company's common stock at the date of
grant. Options granted under the plan are exercisable six months after the date
of grant.
14
Note B - Stock Based Compensation (continued)
ABI maintains a stock award and incentive plan which permits the issuance of
options, stock appreciation rights (SARs), limited SARs, restricted stock,
restricted stock units and other stock-based awards to selected employees and
independent contractors of the Company. Upon adoption of the plan, 400,000
shares of common stock were reserved for issuance upon exercise of options
granted under the plan. The plan provides that the term of each award be
determined by the compensation committee of the Board of Directors (the
"Committee") charged with administering the plan. During 1997, the Board of
Directors approved an amendment to the plan to increase from 400,000 to 550,000
the number of shares reserved for issuance upon exercise of options granted
under the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price per share, determined by the
Committee, may not be less than the fair market value of a share on the date of
grant. SARs and limited SARs granted in tandem with an option shall be
exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. In
addition, the Committee may grant restricted stock to participants under the
plan at no cost to them. No SARs or restricted stock have been granted under the
plan since its adoption. Other than the restrictions that limit the sale and
transfer of these SARs and restricted stock, participants are entitled to all
shareholder rights with respect to SARs and restricted stock granted to them.
Congoleum Stock Option Plans
Congoleum maintains a stock option plan for its officers and key employees and a
stock option plan for its non-employee directors (together, the "Congoleum Stock
Option Plans"). Under these plans, options to purchase up to 850,000 shares of
Congoleum's Class A common stock may be issued to directors, officers and key
employees. These options may be either incentive stock options or nonqualified
stock options, and the options' exercise price must be at least equal to the
fair market value of Congoleum's Class A common stock on the date of grant.
Treasury shares of the applicable company may be issued in consideration of
stock option exercises under the ABI Stock Plans or the Congoleum Stock Option
Plans.
15
Note B - Stock Based Compensation (continued)
Stock Option Information
Stock option information for the ABI Stock Plans and the Congoleum Stock Option
Plans as of and for the six months ended June 30, 2006 was as follows:
Congoleum Stock
ABI Stock Plans Option Plans
----------------------------- ------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------- ------------------------------
Outstanding at December 31, 2005 483,000 $15.42 693,500 $2.04
Granted - - - -
Exercised - - (600) 0.36
Forfeited (1,000) 9.65 (9,900) 1.98
-------------- --------------
Outstanding at June 30, 2006 482,000 15.44 683,000 2.04
============== ==============
Exercisable at June 30, 2006 482,000 $15.44 419,900 $2.04
============== ==============
Available for grant at:
December 31, 2005 100,020 142,900
June 30, 2006 101,020 152,800
Weighted-Average Remaining Contractual
Life at June 30, 2006 (Years)
Outstanding options 4.89 6.18
Exercisable options 4.89 6.18
The intrinsic value of outstanding and exercisable stock options issued under
the ABI Stock Plans and the Congoleum Stock Option Plans as of June 30, 2006
were as follows (in thousands):
ABI Congoleum
--------- ------------
Outstanding options $352 $47
Exercisable options 352 29
16
Note B - Stock Based Compensation (continued)
Stock option information related to nonvested shares for the Congoleum Stock
Option Plans for the six months ended June 30, 2006 was as follows:
Weighted-
Average
Grant Date
Shares Fair Value
-----------------------------
Nonvested at December 31, 2005 292,900 $1.67
Granted -
Vested (26,400) 2.19
Forfeited (3,400) 1.85
--------------
Nonvested at June 30, 2006 263,100 $2.04
==============
The intrinsic value of Congoleum's options that vested during the six months
ended June 30, 2006 was $3 thousand.
Note C - Inventories
Inventories at June 30, 2006 and December 31, 2005 consisted of the following
(in thousands):
June 30, December 31,
2006 2005
--------- ------------
Finished goods $60,192 $50,515
Work-in-process 12,474 10,370
Raw materials and supplies 12,170 16,242
--------- ------------
$84,836 $77,127
========= ============
17
Note D - Sale of Property
In April 2006, the Company completed the sale of a building and land owned by
Janus, a discontinued operation (see Note A). The building and land were sold
for $5.0 million Canadian dollars ("C$"). The Company received C$1.0 million in
cash and a C$4.0 million note. Commissions and other expenses incurred in
connection with the sale totaled C$200 thousand, resulting in net cash proceeds
of C$800 thousand. Payment of the note is contingent upon obtaining an
environmental certification on the land sold. The Company estimates the cost to
remediate the property at C$200 thousand, and remediation is expected to be
completed during the first half of 2007. At June 30, 2006, the Company recorded
a deferred gain of approximately C$1.1 million. The Company expects to recognize
a final gain of approximately C$850 thousand after the completion of the
remediation in 2007 and the incurrence of related expenses.
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2003, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million was recognized and included in other income in the
first quarter of 2005. After taxes and non-controlling interest, the increase in
first quarter 2005 net income as a result of the sale was $887 thousand or $0.26
per share.
Note E - Accrued Expenses
Accrued Expenses at June 30, 2006 and December 31, 2005 consisted of the
following (in thousands):
June 30, December 31,
2006 2005
---------- --------------
Accrued advertising and sales promotions $21,411 $24,089
Employee compensation and related benefits 9,669 9,499
Interest 145 265
Environmental matters 1,124 1,124
Royalties 521 806
Taxes payable 173 1,330
Other 10,009 5,863
---------- -----------
$43,052 $42,976
========== ===========
See Note G for Liabilities Subject to Compromise.
18
Note F - Other Liabilities
Other Liabilities at June 30, 2006 and December 31, 2005 consisted of the
following (in thousands):
June 30, December 31,
2006 2005
--------- --------------
Pension benefits (less current portion) $ 2,404 $ 2,557
Environmental remediation and product related
liabilities 4,259 4,259
Deferred income taxes 21,390 21,343
Deferred gain on sale of Janus property 1,135 -
Other 1,493 1,466
--------- ------------
$30,681 $29,625
========= ============
See Note G for Liabilities Subject to Compromise.
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J of the Notes to
the Unaudited Consolidating Condensed Financial Statements), pursuant to SOP
90-7, Congoleum is required to segregate pre-petition liabilities that are
subject to compromise and report them separately on the consolidated balance
sheet. Liabilities that may be affected by a plan of reorganization are recorded
at the amount of the expected allowed claims, even if they may be settled for
lesser amounts. Substantially all of Congoleum's pre-petition debt is recorded
at face value and is classified within liabilities subject to compromise. In
addition, Congoleum's accrued but unpaid interest expense on its 8 5/8% Senior
Notes Due 2008 is also recorded in liabilities subject to compromise. See Notes
A and J of the Notes to the Unaudited Consolidating Condensed Financial
Statements for further discussion of Congoleum's asbestos liability. Liabilities
subject to compromise were as follows (in thousands):
June 30, December 31,
2006 2005
----------- ------------
Current
Pre-petition other payables and accrued interest $ 29,281 $ 23,990
Non-current
Debt (at face value) 100,000 100,000
Pension liability 15,914 16,871
Other post-retirement benefit obligation 8,419 8,407
Pre-petition other liabilities 13,602 13,583
----------- ------------
137,935 138,861
Elimination - Payable to American Biltrite (135) (147)
----------- ------------
137,800 138,714
----------- ------------
Total liabilities subject to compromise $167,081 $162,704
=========== ============
19
Note G - Liabilities Subject to Compromise (continued)
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three and
six months ended June 30, 2006 and 2005 (in thousands):
Three Months Ended June 30,
2006 2005
--------------------------------- ----------------------------------
Other Other
Pension Benefits Pension Benefits
--------------- --------------- --------------- ---------------
Components of Net Periodic Benefit Cost:
Service cost $ 607 $ 48 $ 584 $ 46
Interest cost 1,498 132 1,443 130
Expected return on plan assets (1,435) - (1,267) -
Recognized net actuarial loss (40) 16 (60) 15
Amortization of transition obligation - - (18) -
Amortization of prior service cost 359 9 361 (47)
--------------- --------------- --------------- ---------------
Net periodic benefit cost $ 989 $205 $ 1,043 $144
=============== =============== =============== ===============
20
Note H - Pension Plans (continued)
Six Months Ended June 30,
2006 2005
--------------------------------- ----------------------------------
Other Other
Pension Benefits Pension Benefits
--------------- --------------- --------------- ---------------
Components of Net Periodic Benefit Cost:
Service cost $ 1,210 $ 96 $ 1,171 $ 92
Interest cost 2,991 264 2,888 260
Expected return on plan assets (2,863) - (2,537) -
Recognized net actuarial loss (80) 32 (121) 30
Amortization of transition obligation - - (36) -
Amortization of prior service cost 718 18 721 (94)
--------------- --------------- --------------- ---------------
Net periodic benefit cost $ 1,976 $410 $ 2,086 $288
=============== =============== =============== ===============
The weighted average assumptions used to determine net periodic benefit cost for
the three and six months ended June 30, 2006 and 2005 were as follows:
2006 2005
-------------------------------------- -------------------------------------
Other Other
Pension Benefits Pension Benefits
---------------------- ------------ ---------------------- -----------
Discount rate 6.00% 6.00% 6.10% - 6.25% 6.25%
Expected long-term return on plan
assets 7.00% - 7.50% - 7.00% - 7.50% -
Rate of compensation increase 4.00% - 5.50% - 4.00% - 5.00% -
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company's and Congoleum's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future cost and timing
of payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's and Congoleum's liability in
proportion to other potentially responsible parties, and the extent to
21
Note I - Commitments and Contingencies (continued)
which costs may be recoverable from insurance. The Company and Congoleum have
recorded provisions in the financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company and Congoleum believe their estimate of the future amount of these
liabilities is reasonable, and that they will be paid over a period of five to
ten years, the timing and amount of such payments may differ significantly from
the Company's and Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's and
Congoleum's costs, the Company and Congoleum are not aware of any pending
legislation that would have such an effect. There can be no assurances that the
costs of any future government regulations could be passed along to their
customers. Estimated insurance recoveries related to these liabilities are
reflected in other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments, and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted to
reflect such revisions and progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidated balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability. However, since ABI includes Congoleum in
ABI's consolidating financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidating financial
statements.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,794 pending claims involving
approximately 2,141 individuals as of June 30, 2006. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Six Months Year Ended
Ended December 31,
June 30, 2006 2005
------------- ------------
Beginning claims 1,703 1,838
New claims 304 621
Settlements (15) (24)
Dismissals (198) (732)
----------- -------------
Ending claims 1,794 1,703
=========== =============
22
Note I - Commitments and Contingencies (continued)
The total indemnity costs incurred to settle claims during the six months ended
June 30, 2006 and twelve months ended December 31, 2005 were $1.1 million and
$1.3 million, respectively, all of which were paid by ABI's insurance carriers
pursuant to ABI's applicable insurance policies, as were the related defense
costs. The average indemnity cost per resolved claim was approximately $5.0
thousand for the six months ended June 30, 2006 and $1.7 thousand for the year
ended December 31, 2005.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable.
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum), based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2005, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At December 31, 2005, the
estimated range of liability for settlement of current claims pending and claims
anticipated to be filed through 2011 was $9.5 million to $18.8 million. The
Company believes no amount within this range is more likely than any other, and
accordingly, recorded the minimum liability estimate of $9.5 million in its
consolidated financial statements at December 31, 2005. At June 30, 2006, the
Company has recorded $9.7 million for the estimated minimum liability. The
Company also believes that, based on this minimum liability estimate, the
corresponding amount of insurance probable of recovery is $9.0 million at June
30, 2006 and December 31, 2005, which has been included in other assets. The
same factors that affect developing forecasts of potential indemnity costs for
asbestos-related liabilities also affect estimates of the total amount of
insurance that is probable of recovery, as do a number of additional factors.
These additional factors include the financial viability of some of the
insurance companies, the method in which losses will be allocated to the various
insurance policies and the years covered by those policies, how legal and other
loss handling costs will be covered by the insurance policies, and
interpretation of the effect on coverage of various policy terms and limits and
their interrelationships. These amounts were based on currently known facts and
a number of assumptions. However, projecting future events, such as the number
of new claims to be filed each year, the average cost of disposing of each such
claim, and the continuing solvency of various insurance companies, as well as
numerous uncertainties surrounding asbestos legislation in the United States,
could cause the actual liability and insurance recoveries for the Company to be
higher or lower than those projected or recorded.
23
Note I - Commitments and Contingencies (continued)
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a six year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's reorganization plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2005 Annual Report on Form 10-K that it has
been named as a Potentially Responsible Party ("PRP") within the meaning of the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), with respect to five sites located in four separate states
(the "CERCLA Sites"). There has been no material developments relating to these
sites during the six month period ended June 30, 2006.
In 1993, a lawsuit was brought by Olin Corporation ("Olin"), the present owner
of a former chemical plant site in Wilmington, Massachusetts (the "Olin Site"),
which alleged that ABI and three other named defendants were liable for a
portion of the site's soil and groundwater response and remediation costs at the
site. A wholly-owned subsidiary of ABI owned and operated the Wilmington plant
from 1959 to 1964, and for approximately one month during 1964, American
Biltrite Inc. held title to the property directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus pay an annual reimbursement of $100 thousand for
Olin's internal costs as long as Olin is actively working on remediating the
site. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
aggregate amounts due from ABI and TBC under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2006 will be approximately $7.2 million. For costs
beyond 2006, ABI has estimated the range of total response costs for the site to
be between $15.7 million and $45.3 million. As of June 30, 2006 ABI has
estimated its potential liability to Olin to be in the range of $3.5 million to
$10.8 million after allocation for the annual reimbursement of $100 thousand for
Olin's internal costs but before any recoveries from insurance and TBC. Costs
are expected to be incurred over the next 10 years. In January 2006, the EPA
assumed the responsibility for the oversight of the Olin Site from the
Massachusetts Department of Environmental Protection.
24
Note I - Commitments and Contingencies (continued)
The State of Maine Department of Environmental Protection (the "Maine DEP") has
put Miller Industries, Inc. ("Miller"), the present owner of a former ABI sheet
vinyl plant in Lisbon Falls, Maine, on notice to clean up a dumpsite where there
is exposed asbestos from sheet vinyl waste along with other hazardous
substances. In September 2005, a lawsuit was brought by Miller against ABI,
which alleged that ABI and one other named defendant are liable for costs to
clean up the dumpsite ("Parcel A") and a second parcel of land ("Parcel B"),
which is alleged to contain polychlorinated biphenyls ("PCB's") in the soil. The
lawsuit, captioned Miller Industries, Inc. v. American Biltrite Inc. et al, was
filed on September 22, 2005 in the Androscoggin Superior Court of Maine. Miller
is seeking indemnification or contribution from ABI for the clean-up of both
parcels of land (together, the "Maine Sites"). The lawsuit was dismissed by the
Superior Court of Maine on February 3, 2006 for lack of subject matter
jurisdiction and failure to state a claim upon which relief can be granted. In
January 2006, ABI was notified by the Maine DEP that the Maine DEP believes ABI
is a potential responsible party with respect to the clean up of Parcel B.
Prior to the commencement of the lawsuit by Miller, the Company had been
investigating and reviewing the condition of Parcel A and its potential
liability for its share of any clean-up costs. The Company believes, at this
time, that the total cost of site investigation, remediation, maintenance and
monitoring for Parcel A will be between approximately $1.2 million and $1.5
million. Prior to the filing of the lawsuit, the Company was also in the process
of reviewing the condition of Parcel B and its potential liability for its share
of any clean-up costs. The Company cannot determine at this time the cost of
site investigation, remediation, maintenance and monitoring for Parcel B.
Furthermore, at this time, the Company is not able to determine what its
potential liability will be with regard to the Maine Sites. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of costs incurred by ABI for the
Maine Sites.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at all of the CERCLA and state supervised sites.
An agreement was executed by ABI and its carriers regarding the payment of the
defense costs for the Olin Site. ABI has reached agreements with four of its
insurance carriers whereby the carriers have reimbursed the Company $6.5 million
for past and current environmental claims. One carrier has also agreed to
reimburse the Company for 2.5% of the Company's liabilities regarding future
environmental expenses related to the Olin Site, $63 thousand of which was
reimbursed through June 30, 2006 and 37.5% of the amount of that reimbursement
was shared with TBC pursuant to the Company's agreement with TBC. ABI and one of
its insurance carriers continue to discuss ABI's remaining demands for insurance
coverage for these sites.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
25
Note I - Commitments and Contingencies (continued)
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100 thousand as financial assurance for certain remediation funding
obligations. The Company remains contingently liable in the event that Congoleum
fails to perform or fund any required remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary reorganization case
under Chapter 11 of the Bankruptcy Code. See Note J - "Congoleum Asbestos
Liabilities and Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable by Congoleum from relevant insurance
policies. However, under CERCLA, and certain other laws, as a PRP, Congoleum can
be held jointly and severally liable for all environmental costs associated with
a site.
The most significant exposure for which Congoleum has been named a PRP relates
to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund
Site"). The PRP group at this site is made up of 81 companies, substantially all
of which are large financially solvent entities. Two removal actions were
substantially complete as of December 31, 1998 and a groundwater treatment
system was installed thereafter. The United States Environmental Protection
Agency ("EPA") has selected a remedy for the soil and shallow groundwater
("Operable Unit 1" or OU-1); however, the remedial investigation/feasibility
study related to the deep groundwater (OU-2) has not been completed. The PRP
group, of which Congoleum is a part, has entered into a Consent Decree to
perform the remedy for OU-1 and resolve natural resource damage claims. The
Decree also requires the PRPs to perform the OU-2 remedy, assuming that the
estimated cost of the remedy is not more than $10.0 million. If the estimated
cost of the OU-2 remedy is more than $10.0 million, the PRPs may decline to
perform it or they may elect to perform anyway. Cost estimates for the OU-1 and
OU-2 work combined (including natural resource damages) range between $22
million and $34 million, with Congoleum's share ranging between approximately
$1.0 million and $1.6 million. This assumes that all parties participate and
26
Note I - Commitments and Contingencies (continued)
that none cash-out and pay a premium; those two factors may account for some
fluctuation in Congoleum's share. Fifty percent (50%) of Congoleum's share of
the costs is presently being paid by one of its insurance carriers, Liberty
Mutual Insurance Company, whose remaining policy limits for this claim will
cover approximately $0.3 million in additional costs. Congoleum expects to fund
the balance to the extent further insurance coverage is not available.
Congoleum filed a motion before the Bankruptcy Court seeking authorization and
approval of the Consent Decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual
Insurance Company and Congoleum to make certain payments that have been invoiced
to Congoleum with respect to the Consent Decree and related settlement
agreements. A hearing on the motion is scheduled for August 21, 2006.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.6 million for Congoleum's expected portion of those
remediation funding obligations, including capital outlays and future
maintenance costs for soil and groundwater remediation, are primarily based on
engineering studies. Of this amount, $300 thousand was included in current
liabilities subject to compromise and $1.3 million was included in non-current
liabilities subject to compromise as of June 30, 2006 and December 31, 2005.
At June 30, 2006 and December 31, 2005, Congoleum had recorded a total of $4.5
million and $4.3 million, respectively for estimated environmental liabilities
that are not reduced by the amount of insurance recoveries. At June 30, 2006 and
December 31, 2005, such estimated insurance recoveries are approximately $2.1
million and $1.9 million, respectively. Receivables for expected insurance
recoveries are recorded if the related carriers are solvent and paying claims
under a reservation of rights or under an obligation pursuant to coverage in
place or a settlement agreement. Substantially all of Congoleum's recorded
insurance asset for environmental matters is collectible from a single carrier.
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, funding of
the costs by Congoleum will not have a material adverse impact on Congoleum's
liquidity or financial position. However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on the business, operations and financial position of
Congoleum.
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings in connection with product liability claims
and other matters. In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts, and the matters may remain unresolved
for several years.
27
Note J - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into the Claimant Agreement, a settlement agreement with various
asbestos personal injury claimants. As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing the Collateral Trust to
distribute funds in accordance with the terms of the Claimant Agreement and
granting the Collateral Trust a security interest in Congoleum's rights under
its applicable insurance coverage and payments from Congoleum's insurers for
asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories, which motion
was denied in June 2006. Settlement values under the Ninth Plan differ from
values under previous plans and the Claimant Agreement. As a result of such
differences and the potential results of the Avoidance Actions, the liability
associated with the asbestos personal injury claims against Congoleum may be
materially different than the present estimates of such items.
In October 2003, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, Congoleum filed its initial proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
28
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the ACC,
the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed the Eighth Plan. In addition, an
insurance company has filed the CNA Plan and the Bondholders' Committee has
filed the Bondholder Plan. In May 2006, the presiding judge of the Bankruptcy
Court ordered all parties in interest in Congoleum's reorganization proceedings
to participate in global mediation discussions. Several mediation sessions took
place during June and July 2006. During the mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with the ACC, the FCR and ABI on certain terms of the Ninth Plan,
which Congoleum filed and proposed jointly with the ACC on August 11, 2006 with
the Bankruptcy Court. The proponents of the CNA Plan and the Bondholder Plan
have indicated they may jointly file a new plan by August 18, 2006. The
Bankruptcy Court has scheduled a hearing to consider the adequacy of the
disclosure statements with respect to these plans for September 21, 2006.
Under the terms of the Ninth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related agreements.
Under the terms of the Ninth Plan, after the establishment of the Plan Trust,
the assets in the Collateral Trust would be transferred to the Plan Trust and
any asbestos claims would be channeled to the Plan Trust and paid in accordance
with the terms of the Ninth Plan.
29
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
There can be no assurance that Congoleum will not amend the Ninth Plan, that the
Bankruptcy Court will approve the disclosure statement with respect to the Ninth
Plan, that Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued protracted litigation in connection with its plan of
reorganization. It is uncertain whether the Bankruptcy Court will approve a
disclosure statement with respect to any plan filed by CNA and the Bondholders'
Committee or whether any such plan will be voted upon by creditors and, if
confirmed, will become effective. Moreover, it is uncertain whether any other
person will attempt to propose a plan and what any such plan would provide or
propose, and whether the Bankruptcy Court would confirm such a plan or any plan
other than Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Ninth Plan. Certain other parties, including the Bondholders'
Committee, have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the Ninth Plan. While
Congoleum is seeking to obtain the required acceptances of the Ninth Plan from
all necessary classes of creditors, the Ninth Plan provides alternative
treatments for holders of the Senior Notes and Congoleum stockholders. The Ninth
Plan's alternative treatment of Congoleum noteholders and stockholders depends
on whether the noteholders vote as a class to accept the Ninth Plan, and such
vote will materially affect the recoveries of such noteholders and stockholders,
including ABI. In the event that the holders of the Senior Notes vote as a class
to accept the Ninth Plan by the requisite numbers and amounts required by the
Bankruptcy Code and the plan is approved, the Senior Notes would be cancelled on
the effective date of the plan, holders of Senior Notes would receive their pro
rata share of the New Senior Notes (which are described elsewhere in this
report, including in Note J of the Notes to Unaudited Consolidating Financial
Statements), and Congoleum stockholders, including ABI, would retain their
equity interests in Congoleum, subject to the Congoleum equity dilution
contemplated by the Ninth Plan and discussed elsewhere in this report. In the
event that the holders of the Senior Notes do not vote as a class to accept the
Ninth Plan by the requisite numbers and amounts required by the Bankruptcy Code,
confirmation of the Ninth Plan would be sought in accordance with the cram down
provisions of the Bankruptcy Code (the "Cramdown Treatment"). Pursuant to the
Cramdown Treatment, the Senior Notes and existing Congoleum Class A and Class B
common stock would be cancelled (including all shares of Congoleum Class A and
Class B common stock owned by ABI) and the Senior Notes holders would receive
their pro rata share, with the Plan Trust, of newly issued common stock of
reorganized Congoleum, in an amount determined by a final order of the
Bankruptcy Court. However, under the Ninth Plan, in no event may the amount of
30
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
such newly issued common stock of Congoleum to be allocated to the holders of
the Senior Notes exceed 49% of the voting common shares and total economic
equity value of reorganized Congoleum on a fully diluted basis. If the Cramdown
Treatment is implemented, the holders of existing Congoleum Class A and Class B
common stock (including ABI) would receive no distributions under the Ninth Plan
with respect to such stock, which would be cancelled.
During 2005 and 2006 Congoleum has entered into a number of settlement
agreements with excess insurance carriers over coverage for asbestos-related
claims. In May 2005, certain AIG companies agreed to pay approximately $103
million over ten years to the Plan Trust. This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code. An insurer has appealed the
approval order granted by the Bankruptcy Court to the U.S. District Court, where
it is pending. In June 2005, Congoleum entered into a settlement agreement with
certain underwriters at Lloyd's, London, pursuant to which the certain
underwriters paid approximately $20 million into an escrow account in exchange
for a release of insurance coverage obligations. The escrow agent will transfer
the funds to the Plan Trust once a plan of reorganization with the Section
524(g) protection specified in the settlement agreement goes effective and the
Bankruptcy Court approves the transfer of the funds. In August 2005, Congoleum
entered into a settlement agreement with Federal Insurance Company pursuant to
which Federal will pay $4 million to the Plan Trust, subject to certain
adjustments, once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The FCR has appealed the approval order
granted by the Bankruptcy Court to the U.S. District Court, where it is pending.
In October 2005, Congoleum entered into a settlement agreement with Mt. McKinley
Insurance Company and Everest Reinsurance Company pursuant to which Mt. McKinley
and Everest have paid $21.5 million into an escrow account. The escrow agent
will transfer the funds to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds. An insurer and the
FCR have appealed the approval order granted by the Bankruptcy Court to the U.S.
District Court, where it is pending. In March 2006, Congoleum entered into a
settlement agreement with Harper Insurance Limited. Under the terms of this
settlement, Harper will pay $1.4 million to Congoleum or the Plan Trust once
certain conditions are satisfied, including the effectiveness of a plan of
reorganization containing the Section 524(g) protection specified in the
settlement agreement. The Bankruptcy Court approved this settlement in April
2006. In April 2006, Congoleum entered into a settlement agreement with
Travelers Casualty and Surety Company and St. Paul Fire and Marine Insurance
Company (collectively, "Travelers"). Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. A motion for Bankruptcy Court approval of
this settlement is pending. In April 2006, Congoleum also entered into a
settlement agreement with Fireman's Fund Insurance Company.
31
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Under the terms of this settlement, Fireman's Fund will pay $1 million to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. A motion for Bankruptcy Court approval of
this settlement is pending. It is possible that any of the settling insurers may
argue that the Ninth Plan is not substantially similar to relevant provisions of
earlier plans referenced in its respective settlement agreement and therefore is
relieved of its settlement obligation.
Congoleum expects that it will take until some time in the first quarter of 2007
at the earliest to obtain confirmation of the Ninth Plan, which may be amended
or modified as a result of further negotiations with various parties.
Under previous plans, Congoleum's assignment of insurance recoveries to the Plan
Trust was net of costs incurred by Congoleum in connection with insurance
coverage litigation, and Congoleum was entitled to withhold from recoveries, or
seek reimbursement from the Plan Trust, for coverage litigation costs incurred
after January 1, 2003 and for $1.3 million in claims processing fees paid in
connection with claims settled under the Claimant Agreement. A receivable was
recorded for these costs as they were paid. Under the Ninth Plan, Congoleum
would be entitled to reimbursement of only approximately $3.7 million in cash
for such coverage litigation costs and of the $1.3 million in claims processing
costs and would not collect the balance of these receivables ($16.8 million at
June 30, 2006). The write-off and any applicable forgiveness of indebtedness
income pursuant to the Ninth Plan are expected to be recorded at a future date,
the net effect of which cannot be presently determined.
The Ninth Plan provides for the channeling of asbestos property damage claims in
addition to asbestos personal injury claims to the Plan Trust. There were no
asbestos related property damage claims asserted against Congoleum at the time
of its bankruptcy filing. The Bankruptcy Court approved an order establishing a
bar date of May 3, 2004 for the filing of asbestos property damage claims. The
claims agent appointed in Congoleum's bankruptcy proceeding advised Congoleum
that, as of the bar date, it received 35 timely filed asbestos property damage
claims asserting liquidated damages in the amount of approximately $0.8 million
plus additional unspecified amounts. Congoleum objected to certain claims on
various grounds, and the Bankruptcy Court ultimately allowed 19 claims valued at
$133 thousand. The Ninth Plan will provide for payment of those claims in full
from certain insurance proceeds.
Under the terms of the Ninth Plan, on the effective date of the Ninth Plan (the
"Effective Date"), the Plan Trust will provide a loan to Congoleum, which loan
is intended, when combined with cash on hand and available drawings under the
revolving credit facility, to provide Congoleum with $18 million of total
liquidity, on a pro forma basis as of December 31, 2006 (the "Plan Trust Note").
If the effective date of the plan occurs after December 31, 2006, the total
liquidity required by Congoleum, and thus the amount of the Plan Trust Note,
will be as mutually agreed among the ACC, the FCR and Congoleum. The proceeds of
32
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
the Plan Trust Note will only be used for working capital and general corporate
purposes. The Plan Trust Note will be due and payable on December 31, 2011,
shall bear interest at 10% per annum payable semi-annually until the maturity
date, and will contain appropriate covenants, warranties, and representations as
agreed among Congoleum, the ACC, the FCR and the Claimants' Representative. The
principal amount of the Plan Trust Note, which is subject to review and approval
by the FCR and the ACC, may not exceed $14 million unless both the FCR and ACC
agree. There can be no assurance either or both would agree to any such request
from Congoleum, or that Congoleum would obtain any other consents that might be
necessary to increase the amount of the Plan Trust Note.
On the Effective Date, if the holders of the Senior Notes (as a creditor class)
vote to accept the Ninth Plan, Congoleum will issue and contribute a convertible
promissory note (the "New Convertible Security") to the Plan Trust in
satisfaction of section 524(g) of the Bankruptcy Code. The New Convertible
Security will have the following terms: (i) an initial aggregate principal
amount of $2,738,234.75, such principal amount being subject to increase in the
amount, if any, by which 36% of Congoleum's market capitalization based on
average trading prices for Congoleum's Class A common stock at the close of
trading for the 90 consecutive trading days beginning on the one year
anniversary of the Effective Date, exceeds such initial principal amount; (ii)
an initial interest rate equal to 9% of the principal amount per annum, payable
semi-annually in arrears, with such interest rate to reset at the rate of 5% of
the principal amount per annum on the tenth anniversary of the Effective Date
and payable at such reset interest rate per annum until maturity; (iii)
redeemable for the principal amount at the option of the Plan Trust or Congoleum
on or anytime after the tenth anniversary of the Effective Date; (iv) a maturity
date on the fifteenth anniversary of the Effective Date if not redeemed or
otherwise paid earlier; (v) convertible into 5,700,000 shares of Congoleum Class
A common stock (on a fully diluted basis with all Congoleum Class B common stock
converted to Class A common stock) upon a specified default of the obligation to
pay interest and a failure to cure such default within any cure period, which,
when combined with the newly issued Congoleum Class A common stock, will result
in the Plan Trust owning 51% of the voting common shares and 51% of the total
economic equity value of Congoleum on a fully diluted basis; and (vi) no voting
rights except upon conversion. The principal adjustment feature could result in
the principal amount of the New Convertible Security increasing materially.
Under the terms of the Ninth Plan, if holders of the Senior Notes vote to accept
the Plan by the requisite number and amount required by the Bankruptcy Code, the
Senior Notes would be cancelled and Congoleum would issue new notes (the "New
Senior Notes") in the aggregate principal amount of $100 million with interest
which shall be payable semi-annually on the outstanding principal at the rate of
10% per annum until a maturity date of August 1, 2011 at which time all
principal would be repaid; provided, however, that Congoleum shall receive a
credit against all interest payable under the New Senior Notes for all fees and
expenses of the Bondholders' Committee incurred and paid after the date that the
Ninth Plan is filed with the Bankruptcy Court. The New Senior Notes will be
subordinate in priority and payment to the New Convertible Security and the Plan
Trust Note.
33
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
While Congoleum is seeking to obtain the required acceptances of the Ninth Plan
from all necessary classes of creditors, the Ninth Plan provides an alternative
treatment for holders of the Senior Notes and stockholders in the event
sufficient note holders do not consent to the Ninth Plan. This alternative
treatment will materially affect the recoveries of these classes. In the event
that the holders of the Senior Notes do not vote to accept the Ninth Plan by the
requisite number and amount required by the Bankruptcy Code, then Plan
confirmation will be sought in accordance with the Cramdown Treatment. Pursuant
to the Cramdown Treatment, the Senior Notes and existing Congoleum Class A and
Class B common stock would be cancelled (including all shares of Congoleum Class
A and Class B common stock owned by ABI) and the Senior Notes holders would
receive their pro rata share of newly issued common stock of reorganized
Congoleum with the Plan Trust, as determined by a final order of the Bankruptcy
Court. However, under the Ninth Plan, in no event may the amount of such newly
issued common stock of reorganized Congoleum to be allocated to the holders of
the Senior Notes exceed 49% of the voting common shares and total economic
equity value of reorganized Congoleum on a fully diluted basis.
As part of the Ninth Plan, Congoleum agreed to indemnify representatives of
holders of pre-petition secured asbestos claims (the "Claimants'
Representative") and the trustee of the Collateral Trust in connection with
arranging and supporting the Ninth Plan and for effecting the forbearance of
claimants from exercising any lien rights under the Claimant Agreement and
related documents, for claims and costs, including attorneys' fees, up to a
maximum of $3 million.
Under the Ninth Plan and related documents, ABI has agreed to make a cash
contribution in the amount of $250 thousand to the Plan Trust upon the formation
of the Plan Trust and to forego certain indemnification rights it has from
Congoleum for asbestos claims. Under the Ninth Plan, ABI would receive certain
relief as may be afforded under Section 524(g)(4) of the Bankruptcy Code from
asbestos claims that derive from claims made against Congoleum, which claims are
expected to be channeled to the Plan Trust. However, the Ninth Plan does not
provide that any other asbestos claims that may be asserted against ABI would be
channeled to the Plan Trust.
There are sufficient risks and uncertainties related to Congoleum's efforts to
confirm a plan of reorganization such that no assurances of the outcome can be
given. In addition, the remaining costs to effect the reorganization process,
consisting principally of legal and advisory fees and contributions to the Plan
Trust, are expected to be approximately $13.9 million at a minimum, not
including any Additional Principal Amount arising from revaluation of the New
Convertible Security or the principal amount of the Plan Trust Note, and could
be materially higher.
34
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Ninth Plan.
Congoleum is not yet able to determine the additional costs that may be required
to effect the Ninth Plan or any other plan, and actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing any plan
of reorganization could be materially higher than currently recorded. Delays in
proposing, filing or obtaining approval of the Ninth Plan or any other new or
amended plan of reorganization, or any plan proposed or filed by CNA or the
Bondholders' Committee, or the proposal of additional or different plans by
other parties could result in proceedings that take longer and are more costly
than Congoleum has estimated. Congoleum may record significant additional
charges should the minimum estimated cost increase.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income for the three and six
months ended June 30, 2006 and 2005 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------------ ------------- ----------- ------------
Net income (loss) $1,016 $(14,703) $1,502 $(14,079)
Foreign currency translation adjustments 127 470 156 278
Minimum pension liability adjustment - - - -
------------ ------------- ----------- ------------
Total comprehensive income (loss) $1,143 $(14,233) $1,658 $(13,801)
============ ============= =========== ============
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 requires both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common equivalent shares outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
35
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings, which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber and
other industrial products.
Net sales by segment for the three and six months ended June 30, 2006 and 2005
were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales to external customers:
Flooring products $ 58,743 $ 58,108 $ 115,980 $ 115,738
Tape products 28,587 25,231 54,710 47,830
Jewelry 14,924 13,788 30,008 29,676
Canadian division 15,211 12,415 28,488 23,722
--------- --------- --------- ---------
Total net sales to external
customers 117,465 109,542 229,186 216,966
Intersegment net sales:
Flooring products -- -- -- --
Tape products 6 38 6 58
Jewelry -- -- -- --
Canadian division 1,414 1,621 2,862 2,805
--------- --------- --------- ---------
Total intersegment net sales 1,420 1,659 2,868 2,863
Reconciling items -- -- -- --
Intersegment net sales (1,420) (1,659) (2,868) (2,863)
--------- --------- --------- ---------
Total consolidated net sales $ 117,465 $ 109,542 $ 229,186 $ 216,966
========= ========= ========= =========
36
Note M - Industry Segments (continued)
Segment profit or loss is before income tax expense or benefit. Profit (loss) by
segment for the three and six months ended June 30, 2006 and 2005 was as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
------- -------- ------- --------
Segment profit (loss)
Flooring products $ 691 $(14,598) $ 953 $(14,950)
Tape products 1,116 891 1,267 922
Jewelry (289) (297) (118) 328
Canadian division 415 (348) 675 (597)
------- -------- ------- --------
Total segment profit (loss) 1,933 (14,352) 2,777 (14,297)
Reconciling items
Corporate expenses (763) (274) (820) 1,752
Intercompany profit (loss) 39 51 63 95
------- -------- ------- --------
Total consolidated income (loss)
before income taxes and other items $ 1,209 $(14,575) $ 2,020 $(12,450)
======= ======== ======= ========
Corporate items for the six months ended June 30, 2005 include a gain of $2.3
million from the sale of the Tullahoma property (see Note D).
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
June 30, December 31,
2006 2005
--------- ---------
Segment assets
Flooring products $ 210,153 $ 207,347
Tape products 65,292 51,679
Jewelry 37,182 39,421
Canadian division 45,043 43,139
--------- ---------
Total segment assets 357,670 341,586
Reconciling items
Assets of discontinued operation -- 3,142
Janus note receivable from property sale 3,601 --
Corporate items 28,784 33,080
Intersegment accounts receivable (27,191) (20,650)
Intersegment profit in inventory (104) (167)
Intersegment other asset (135) (147)
--------- ---------
Consolidated assets $ 362,625 $ 356,844
========= =========
37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization as a means to resolve claims
asserted against it related to the use of asbestos in its products decades ago.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code. In January 2004,
Congoleum filed its initial proposed plan of reorganization and disclosure
statement with the Bankruptcy Court. In November 2004, Congoleum filed the
Fourth Plan with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the ACC, the FCR and other asbestos
claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures in December 2004 and Congoleum obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of the
Fourth Plan. In April 2005, Congoleum announced that it had reached an agreement
in principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust. In July 2005, Congoleum
filed the Sixth Plan and related documents with the Bankruptcy Court which
reflected the result of these negotiations as well as other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures and Congoleum commenced solicitation of acceptances of the Sixth Plan
in August 2005. In September 2005, Congoleum learned that certain asbestos
claimants were unwilling to agree to forbear from exercising their security
interest as contemplated by the Sixth Plan and the Sixth Plan was subsequently
withdrawn. In November 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In
addition, an insurance company has filed the CNA Plan and the Bondholders'
Committee (representing holders of the Senior Notes) has filed the Bondholder
Plan. In May 2006, the presiding judge of the Bankruptcy Court ordered all
parties in interest in Congoleum's reorganization proceedings to participate in
global mediation discussions. Several mediation sessions took place during June
and July 2006. During the mediation negotiations, Congoleum reached an agreement
in principle, subject to mutually agreeable definitive documentation, with the
ACC, the FCR and ABI on certain terms of the Ninth Plan, which Congoleum filed
and proposed jointly with the ACC on August 11, 2006 with the Bankruptcy Court.
The proponents of the CNA Plan and the Bondholder Plan have indicated they may
jointly file a new plan by August 18, 2006. The Bankruptcy Court has scheduled a
hearing to consider the adequacy of the disclosure statements with respect to
these plans for September 21, 2006.
There can be no assurance that Congoleum will not amend the Ninth Plan, that the
Bankruptcy Court will approve the disclosure statement with respect to the Ninth
Plan, that Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
38
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued protracted litigation in connection with its plan of
reorganization. It is uncertain whether the Bankruptcy Court will approve a
disclosure statement with respect to any plan filed by CNA and the Bondholders'
Committee or whether any such plan will be voted upon by creditors and, if
confirmed, will become effective. Moreover, it is uncertain whether any other
person will attempt to propose a plan and what any such plan would provide or
propose, and whether the Bankruptcy Court would confirm such a plan or any plan
other than Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Ninth Plan. Certain other parties, including the Bondholders'
Committee, have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the Ninth Plan. While
Congoleum is seeking to obtain the required acceptances of the Ninth Plan from
all necessary classes of creditors, the Ninth Plan provides alternative
treatments for holders of the Senior Notes and Congoleum stockholders. The Ninth
Plan's alternative treatment of Congoleum noteholders and stockholders depends
on whether the noteholders vote as a class to accept the Ninth Plan, and such
vote will materially affect the recoveries of such noteholders and stockholders,
including ABI. In the event that the holders of the Senior Notes vote as a class
to accept the Ninth Plan by the requisite numbers and amounts required by the
Bankruptcy Code and the plan is approved, the Senior Notes would be cancelled on
the effective date of the plan, holders of Senior Notes would receive their pro
rata share of the New Senior Notes (which are described elsewhere in this
report, including in Note J of the Notes to Unaudited Consolidating Financial
Statements), and Congoleum stockholders, including ABI, would retain their
equity interests in Congoleum, subject to the Congoleum equity dilution
contemplated by the Ninth Plan and discussed elsewhere in this report. In the
event that the holders of the Senior Notes do not vote as a class to accept the
Ninth Plan by the requisite numbers and amounts required by the Bankruptcy Code,
confirmation of the Ninth Plan would be sought in accordance with the cram down
provisions of the Bankruptcy Code (the "Cramdown Treatment"). Pursuant to the
Cramdown Treatment, the Senior Notes and existing Congoleum Class A and Class B
common stock would be cancelled (including all shares of Congoleum Class A and
Class B common stock owned by ABI) and the Senior Notes holders would receive
their pro rata share, with the Plan Trust, of newly issued common stock of
reorganized Congoleum, in an amount determined by a final order of the
Bankruptcy Court. However, under the Ninth Plan, in no event may the amount of
such newly issued common stock of Congoleum to be allocated to the holders of
the Senior Notes exceed 49% of the voting common shares and total economic
equity value of reorganized Congoleum on a fully diluted basis. If the Cramdown
Treatment is implemented, the holders of existing Congoleum Class A and Class B
common stock (including ABI) would receive no distributions under the Ninth Plan
with respect to such stock, which would be cancelled.
39
Congoleum expects that the terms of the Ninth Plan may be amended or modified as
a result of further negotiations with various parties. Congoleum expects that
the terms of any new plan filed by CNA and the Bondholders' Committee will be
materially different from the terms of the Ninth Plan, and these plans may also
be amended or modified or may be withdrawn. There can be no assurance that the
terms of the reorganization plan that is ultimately confirmed, if any, will not
materially differ from the terms of the Ninth Plan. Congoleum expects that it
will take until some time in the first quarter of 2007 at the earliest to obtain
confirmation of any plan of reorganization, which may be amended or modified as
a result of further negotiations with various parties.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing the
Collateral Trust to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories, which motion
was denied in June 2006. The Avoidance Actions remain pending. Under the terms
of the Ninth Plan, asbestos personal injury claimants voting to accept the plan
would irrevocably consent to, or would be deemed to have irrevocably consented
to, the forbearance of any claim and lien rights they might have under the
Claimant Agreement and related agreements. Under the terms of the Ninth Plan,
after the establishment of the Plan Trust, the assets in the Collateral Trust
would be transferred to the Plan Trust and any claims subject to the Claimant
Agreement would be channeled to the Plan Trust and paid in accordance with the
terms of the Ninth Plan. Settlement values under the Ninth Plan differ from
values under previous plans and the Claimant Agreement. As a result of such
differences and the potential results of the Avoidance Actions, the liability
associated with the asbestos personal injury claims against Congoleum may be
materially different than the present estimates of such items. As a result of
tabulating ballots on the Fourth Plan, Congoleum is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Ninth Plan.
Actual amounts that will be contributed to the Plan Trust and costs for pursuing
and implementing the Ninth Plan or any other plan of reorganization could be
materially higher than currently recorded. Congoleum may record significant
additional charges should the minimum estimated cost increase. Delays in
proposing, filing or obtaining approval of the Ninth Plan or any other new or
amended plan of reorganization, or any plan proposed or filed by CNA or the
Bondholders' Committee, or the proposal of additional or different plans by
other parties could result in proceedings that take longer and are more costly
than Congoleum has estimated.
40
Please refer to "Risk Factors - The Company and its majority-owned subsidiary
Congoleum have significant asbestos liability and funding exposure, and the
Company's and Congoleum's strategies for resolving this exposure may not be
successful" included in Part II, Item 1A of this Quarterly Report on Form 10-Q
for a discussion of certain factors that could cause actual results to differ
from the Congoleum's goals for resolving its asbestos liability through a plan
of reorganization.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M Associates L.P.) and Canadian division segments as well as
Corporate items and Janus. Congoleum is the flooring products segment.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidating financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the Company's financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies, upon which its financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005, filed with the Securities and Exchange
Commission. There have been no material changes in what the Company considers to
be its critical accounting policies or the applicability of the disclosure the
Company provided regarding those policies in that Form 10-K.
41
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
2006 2005 2006 2005
--------------------------------------- -----------------------------------------
(In thousands)
Net sales $ 58,722 $ 51,362 $ 113,206 $ 101,104
Cost of sales 43,364 37,136 82,895 72,565
-------- -------- --------- ---------
Gross profit 15,358 26.2% 14,226 27.7% 30,311 26.8% 28,539 28.2%
Selling, general &
administrative expenses 14,916 25.4% 13,337 26.0% 28,910 25.5% 26,630 26.3%
-------- -------- --------- ---------
Operating income 442 889 1,401 1,909
Interest expense, net (570) (647) (1,163) (1,366)
Other income (expense), net 606 (258) 766 1,874
-------- -------- --------- ---------
Income (loss) before taxes and
other items 478 (16) 1,004 2,417
Provision for (benefit from)
income taxes 167 (16) 363 955
Noncontrolling interests 3 (87) (13) (561)
-------- -------- --------- ---------
Income (loss) from continuing
operations $ 314 $ (87) $ 628 $ 901
======== ======== ========= =========
Net sales in the second quarter of 2006 were $58.7 million compared to $51.4
million in the second quarter of 2005, an increase of $7.3 million or 14.3%.
Tape division sales increased $3.3 million or 13.3% over year earlier levels as
a result of increased sales volumes of protective paper, HVAC tapes and
protective films, coupled with price increases averaging approximately 6%.
Canadian division sales increased $2.8 million or 22.5% over the second quarter
of 2005 due to growth in sales of flooring products, the effect of a stronger
Canadian dollar relative to the U.S. dollar, and increased selling prices.
Jewelry sales increased $1.1 million or 8.2% primarily as a result of higher
sell-through rates, as sales declines resulting from department store
consolidations were offset by growth into mid-tier retailers.
Net sales for the first six months of 2006 increased $12.1 million (12.0%) to
$113.2 million from $101.1 million for the first half of 2005. Tape division
sales increased $6.9 million or 14.4% on growth of paper, HVAC and film as well
as price increases. Canadian division sales in the first half of 2006 were up
$4.8 million or 20.1% over year earlier levels due to increased flooring and
industrial sales and the effect of a stronger Canadian dollar relative to the
U.S. dollar. Jewelry sales for the first six months of 2006 were essentially
flat as the loss of sales from department store consolidation offset the higher
retail sell-through rates and growth in sales to the mid-tier category.
Gross profit decreased from 27.7% of net sales for the second quarter of 2005 to
26.2% for the second quarter of 2006. All operations have experienced
significant cost increases for freight, energy and raw materials used in
manufacturing, although the Canadian division has seen offsetting benefit from
the greater purchasing power of the Canadian dollar relative to the U.S. dollar.
42
Only a portion of these cost increases have been passed through to the Company's
sales pricing to date. Tape division margins in the second quarter of 2006 were
below the same period in 2005 due to the raw material and energy cost inflation.
Canadian division margins improved through higher manufacturing volumes and cost
reductions, and Jewelry margins were essentially flat as the margin benefit of
higher sell through rates was offset by the unfavorable sales mix of a lower
proportion of department store business.
Gross profit for the six months ended June 30, 2006 was 26.8% compared to 28.2%
for the first six months of 2005, a decrease of 1.4 points. This was due to
lower margins at the Tape Division coupled with a less favorable sales mix for
the Jewelry division, partly offset by improved margins at the Canadian
division. Jewelry sales have higher average gross margins than the Tape or
Canadian division sales.
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended June 30, 2006 and 2005 would have been
25.7% and 26.3%, respectively. The gross profit margins for the six months ended
June 30, 2006 and 2005 would have been 26.3% and 27.8%, respectively.
Selling, general and administrative ("SG&A") expenses in the second quarter of
2006 increased by $1.6 million or 11.8% compared to the second quarter of 2005.
The increase was due to higher commissions and selling related expenses,
increased freight costs, inflation on wages and benefits, and increased
professional fees. As a percentage of net sales, SG&A decreased from 26.0% to
25.4%.
SG&A expenses for the six months ended June 30, 2006 were $28.9 million (25.5%
of net sales) versus $26.6 million (26.3% of net sales) for the first half of
2005, with the dollar increase attributable to the same factors affecting the
second quarter comparison.
Net interest expense for the second quarter and first half of 2006 was lower
compared to the same periods in 2005 due to lower average borrowings.
Other income for the six months ended June 30, 2005 includes a gain of $2.3
million recognized on the sale of a warehouse. The impact of this sale on the
Company's net income after taxes and non-controlling interest was $887 thousand,
or $0.26 per share.
Income from continuing operations in the second quarter of 2006 was $314
thousand compared to a loss of $87 thousand in the corresponding prior year
period, reflecting the increased sales largely offset by cost increases for
freight, energy and raw materials and in manufacturing. For the six months ended
June 30, 2006, income from continuing operations was $628 thousand compared to
income of $901 thousand for the same period last year, with the decrease
resulting from the warehouse sale gain in the prior year income. Excluding the
net impact of the sale of the warehouse, the income from continuing operations
for the first half of 2005 was approximately $100 thousand.
43
Congoleum
Three Months Ended June 30 Six Months Ended June 30
2006 2005 2006 2005
------------------------------------------ --------------------------------------------
(In thousands)
Net sales $ 58,743 $ 58,108 $ 115,980 $ 115,738
-------- -------- --------- ---------
Cost of sales 45,139 44,338 89,099 88,307
-------- -------- --------- ---------
Gross profit 13,604 23.2% 13,770 23.7% 26,881 23.2% 27,431 23.7%
Selling, general &
administrative expenses 10,261 17.5% 26,127 45.0% 20,657 17.8% 37,860 32.7%
-------- -------- --------- ---------
Operating income (loss) 3,343 (12,357) 6,224 (10,429)
Interest expense, net (2,741) (2,534) (5,318) (4,936)
Other income (expense), net 89 293 47 415
-------- -------- --------- ---------
Income (loss) before taxes 691 (14,598) 953 (14,950)
Provision for income taxes 65 -- 116 --
-------- -------- --------- ---------
Net income (loss) $ 626 $(14,598) $ 837 $ (14,950)
======== ======== ========= =========
Net sales for the three months ended June 30, 2006 totaled $58.7 million as
compared to $58.1 million for the same period in the prior year, an increase of
$0.6 million or 1.1%. The increase primarily reflected the impact of price
increases taken in the second half of 2005 and the replenishment of inventories
by Congoleum's largest distributor. These increases were partially offset by
weak retail demand for residential sheet products and softer sales in the
commercial tile category. Net sales for the six months ended June 30, 2006 were
$116.0 million as compared to $115.7 million for the six months ended June 30,
2005, an increase of $0.3 million. The increase reflected the impact of price
increases instituted in the second half of 2005 and stronger sales of mid-priced
resilient sheet products and higher manufactured housing products. Offsetting
these increases were weaker sales in high-end resilient sheet products and less
demand for promotional product.
Gross profit for the three months ended June 30, 2006 totaled $13.6 million or
23.2% of net sales, compared to $13.8 million, or 23.7% of net sales, for the
same period last year. The deterioration in gross margins reflect the impact of
higher raw material and utility costs which reduced margins by approximately 4%
of net sales, partially offset by selling price increases totaling 3.6%. Gross
profit for the six months ended June 30, 2006 totaled $26.9 million, or 23.2% of
net sales, compared to $27.4 million, or 23.7% of net sales, for the same period
last year. The major factors leading to the deterioration in gross margin were
the increase in raw material costs and utility costs experienced during the
second half of 2005, which reduced margins by approximately 3.2% of net sales.
This was partially mitigated by the 2.6% increase in selling prices.
Selling, general and administrative expenses were $10.3 million for the three
months ended June 30, 2006, as compared to $26.1 million for the same period
last year. The reduction in expense reflects a $15.5 million charge for
reorganization expense taken in the second quarter of 2005, lower merchandising
expenses (down $0.2 million) and lower freight expense ($0.2 million). As a
percent of net sales, selling, general and administrative expenses totaled 17.5%
of net sales for the second quarter of 2006 versus 45.0% for the same period
44
last year. Selling, general and administrative expenses were $20.7 million for
the six months ended June 30, 2006 as compared to $37.9 million for the six
months ended June 30, 2005, a decrease of $17.2 million. The reduction in
expenses primarily reflects a reorganization related charge of $15.5 million
taken in 2005. Additionally, 2006 expenses were lower as a result of reduced
merchandising related expenses ($0.7 million), lower compensation costs related
to workforce reduction ($0.5 million) and lower freight costs ($0.3 million). As
a percent of net sales, selling, general and administrative costs were 17.8% for
the six months ended June 30, 2006 compared to 32.7% for the same period last
year.
Income from operations totaled $3.3 million for the quarter ended June 30, 2006,
compared to a loss from operations of $12.4 million for the same period last
year. The 2005 numbers include a charge for reorganization expenses of $15.5
million which was the primary reason for the improvement in 2006. Income from
operations was $6.2 million for the six months ended June 30, 2006 compared to a
loss of $10.4 million for the six months ended June 30, 2005. The improvement in
operating income in 2006 reflects the reorganization related charge taken in
2005, coupled with lower selling, general and administrative expenses
experienced in 2006.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased $2.0
million in the first six months of 2006 to $2.7 million. Cash used by operating
activities, principally for seasonal working capital increases, was funded from
existing balances. Working capital at June 30, 2006 was $19.1 million, down from
$19.9 million at December 31, 2005. The ratio of current assets to current
liabilities at June 30, 2006 was 1.31 compared to 1.33 at December 31, 2005.
This change in working capital and current ratio is attributed to the sale of
the Janus property (see below and Note D of Notes to Unaudited Consolidating
Condensed Financial Statements). The assets and liabilities of the discontinued
operations were classified as current assets and liabilities. Subsequent to the
sale of the property, the resulting note receivable and deferred gain have been
classified as a non-current asset and non-current liability, respectively.
Capital expenditures in the first six months of 2006 were $1.3 million compared
to $872 thousand for the first six months of 2005. It is anticipated that
capital spending for the full year 2006 will be approximately $4 million.
During the second quarter of 2006, the Company completed the sale of a building
and land owned by Janus, a discontinued operation for $5.0 million Canadian
dollars. The Company received net cash proceeds of $800 thousand (Canadian),
which was used to reduce borrowings, and a note for $4.0 million (Canadian).
Payment of the note is contingent upon obtaining an environmental certification
on the land sold, which is expected to be completed during the first half of
2007 at a cost of $200 thousand (Canadian) or less.
45
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of one to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that any such costs could be passed along to its customers.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Bank of America ("BofA"), and Bank of America National
Association acting through its Canada branch (the "Canadian Lender"). The Credit
Facility provides American Biltrite Inc. and its subsidiary K&M Associates L.P.
with a revolving credit facility of up to $20 million and a $12 million
borrowing sublimit for American Biltrite Inc.'s subsidiary American Biltrite
(Canada) Ltd. ("AB Canada"). The amount of domestic borrowings available from
time to time under the Credit Facility for the Company may not exceed the lesser
of (a) $20 million less the then outstanding amount of borrowings by AB Canada
under the Canadian sublimit facility and (b) the applicable borrowing base. The
formula used for determining the borrowing base is based upon inventory,
receivables and fixed assets of the Company and certain of its subsidiaries (not
including, among others, AB Canada and Congoleum), reduced by amounts
outstanding under the Note Agreement (as defined below). American Biltrite Inc.
and K&M Associates L.P. may also obtain letters of credit in an aggregate amount
at any time outstanding of up to $4 million, subject to the Credit Facility's
maximum borrowing availability limit discussed above.
Interest is payable quarterly on domestic revolving loans borrowed by American
Biltrite Inc. and K&M Associates L.P. under the Credit Facility at rates which
vary depending on the applicable interest rate in effect and are generally
determined based upon: (a) if a LIBOR based rate is in effect, at a rate between
a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Facility, (b) if a
fixed rate is in effect, at a rate between the fixed rate plus 1.0% to a fixed
rate plus 2.75%, depending on the Company's leverage ratio, as determined under
the Credit Facility, and (c) for loans not based on a LIBOR or fixed rate, the
higher of BofA's applicable prime rate and 0.50% plus the federal funds rate, as
determined under the Credit Facility. Under the Credit Facility, the Company may
generally determine whether interest on domestic revolving loans will be
calculated based on a LIBOR based rate, and if BofA elects to make a fixed rate
option available, whether interest on revolving loans will be calculated based
on a fixed rate.
The amount of borrowings available from time to time for AB Canada under the
Canadian sublimit facility under the Credit Facility is limited to the lesser of
(a) $12 million, (b) AB Canada's borrowing base amount, which is based upon AB
Canada's accounts receivable, inventory and fixed assets, and (c) $20 million
less the amount of domestic borrowings outstanding under the Credit Facility on
behalf the Company and K&M Associates L.P. The Canadian sublimit facility also
allows AB Canada to obtain letters of credit in an aggregate amount at any time
46
outstanding of up to $1 million, subject to the Canadian sublimit facility's
maximum borrowing availability limit discussed above. AB Canada may borrow
amounts under the Canadian sublimit facility in United States or Canadian dollar
denominations; however, solely for purposes of determining amounts outstanding
and borrowing availability under the Credit Facility, all Canadian dollar
denominated amounts will be converted into United States dollars in the manner
provided in the Credit Facility.
Interest is payable quarterly on revolving loans under the Canadian sublimit
facility at rates which vary depending on the applicable interest rate in effect
and are generally determined based upon: (a) if a LIBOR based rate is in effect,
at a rate between a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%,
depending on the Company's leverage ratio, as determined under the Credit
Agreement, and (b) if a LIBOR based rate is not in effect, for outstanding
revolving loans denominated in Canadian dollars, the higher of 0.50% plus the
applicable 30-day average bankers' acceptance rate as quoted on Reuters CDOR
page and the Canadian Lender's applicable prime rate for loans made in Canadian
dollars to Canadian customers, and for outstanding revolving loans denominated
in United States dollars, the higher of 0.50% plus the federal funds rate as
calculated under the Credit Agreement and the applicable rate announced by the
Canadian Lender as its reference rate for commercial loans denominated in United
States dollars made to a person in Canada. Under the Credit Agreement, AB Canada
may generally determine whether interest on revolving loans will be calculated
based on a LIBOR based rate.
The Credit Facility expires on September 30, 2006. In June 2006, the Company
received a commitment from BofA to renew the facility through September 30, 2009
on substantially similar terms (the "Renewal Facility") and expects to complete
documentation of the Renewal Facility during the third quarter of 2006, although
there can be no assurances in this regard. A fee of $50 thousand will be owed in
connection with the Renewal Facility.
The second principal debt agreement that American Biltrite Inc. is a party to
(the "Note Agreement") is with The Prudential Insurance Company of America
("Prudential"). Under the Note Agreement, the Company previously issued notes in
an aggregate principal amount of $20 million (the "Notes"). The Notes generally
bear interest at a rate of 7.91% per annum, and the Company is obligated to pay
Prudential an additional fee on each interest payment date if the Company's and
certain of its subsidiaries' ratio of debt to EBITDA, as defined under the Note
Agreement, exceeds certain levels. The amount of those fees that may be payable
by the Company varies depending on the extent the Company's and certain of its
subsidiaries' debt exceeds EBITDA, as determined under the Note Agreement, and
is capped at 2% of the outstanding principal amount of the Series A Notes.
During 2004 and for the first quarter of 2005, the Company was obligated to pay
the full 2% of that fee. For the second quarter of 2005, the fee was 1%, and for
the third and fourth quarter of 2005 and the first and second quarter of 2006,
it was 0.5%. Principal on the Notes is repayable in five annual installments of
$4.0 million beginning on August 28, 2006.
47
The Credit Facility and the Note Agreement contain certain covenants that the
Company must satisfy. The covenants included in the Credit Facility and the Note
Agreement include certain financial tests, restrictions on the ability of the
Company to incur additional indebtedness or to grant liens on its assets and
restrictions on the ability of the Company to pay dividends on its capital
stock. In addition, the Credit Facility includes a financial covenant that
requires the Company's consolidated adjusted EBITDA for the four consecutive
fiscal quarters ending June 30, 2006 to exceed 150% of the Company's
consolidated pro forma fixed charges for the twelve-month period beginning
immediately after June 30, 2006, as determined under the Credit Facility (the
"Pro Forma Financial Covenant"). In June 2006, American Biltrite Inc., K&M
Associates L.P., AB Canada and BofA (in its various capacities under the Credit
Agreement) entered into a consent agreement, pursuant to which, the Company was
allowed to exclude the $4 million principal payment payable by the Company on
August 28, 2006 to Prudential pursuant to the Note Agreement for purposes of
determining the Company's compliance with the Pro Forma Financial Covenant as of
June 30, 2006. The financial tests are required to be calculated based on the
Company accounting for its majority-owned subsidiary Congoleum Corporation on
the equity method and include a maximum ratio of total liabilities to tangible
net worth, a minimum ratio of earnings before interest, taxes, depreciation and
amortization ("EBITDA") less certain cash payments for taxes, debt service, and
dividends to interest expense, a minimum level of tangible net worth, a
requirement that there be no consecutive quarterly losses from continuing
operations, and a maximum level of capital spending. In addition, beginning on
September 30, 2006, the Note Agreement requires the Company to satisfy a
different set of financial covenants, including a minimum ratio of current
assets to current liabilities, a minimum ratio of adjusted EBITDA to fixed
charges, a cap on the amount of debt as a percentage (45%) of tangible net
worth, a cap on the amount of priority debt (generally, debt of a Company
subsidiary (not including Congoleum) that is not a guarantor under the Note
Agreement plus secured debt of the Company) as a percentage (15%) of tangible
net worth, a minimum leverage ratio, and a minimum amount of tangible net worth.
The Company does not presently expect to meet all of the financial covenants
that take effect under the Note Agreement on September 30, 2006 and expects it
will need to negotiate amendments to or waivers of certain covenants, or obtain
alternative financing to repay the outstanding Notes, although there can be no
assurance it will be successful in this regard.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its subsidiaries granted BofA, the Canadian Lenders and Prudential a security
interest in most of the Company's and its subsidiaries' assets. The security
interest granted does not include the shares of capital stock of the Company's
majority-owned subsidiary Congoleum Corporation or the assets of Congoleum
Corporation. In addition, pursuant to the Credit Facility and the Note
Agreement, certain of the Company's subsidiaries have agreed to guarantee the
Company's obligations (excluding AB Canada's obligations) under the Credit
Facility and the Note Agreement.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. In January 2004, the Credit
Facility and the Note Agreement were amended to remove a former lender under the
Credit Facility, reduce the credit line to $20 million, and to modify the
tangible net worth, adjusted EBITDA to interest expense and consecutive
quarterly loss covenants. Fees of $83 thousand were paid to the lenders in
connection with those amendments. In April 2004, the Credit Facility and the
Note Agreement were amended to permit AB Canada the ability to grant a security
48
interest in certain assets under a credit agreement that AB Canada was a party
to. In November 2004, the Credit Facility was amended to extend the term of the
Credit Facility to January 1, 2006, to modify the treatment of tax refunds in
covenant calculations, and to modify the measurement levels for the adjusted
EBITDA to interest expense and current assets to current liabilities covenants
for the remainder of the extended term of the Credit Facility. A fee of $50
thousand was paid in connection with that amendment.
On May 20, 2005, the Company entered into amendments and restatements of its
Credit Facility and Note Agreement. The amendment to the Credit Facility
extended the maturity date of the Credit Facility to September 30, 2006, added
the Pro Forma Financial Covenant and added the $12 million Canadian sublimit
facility for AB Canada. Pursuant to the amended Credit Facility, AB Canada
granted a security interest in all of its personal property to the Canadian
Lender. During the second quarter of 2005, AB Canada repaid all amounts
outstanding under its previous credit agreement with another lender from the
proceeds of borrowings under the Credit Facility.
The amendment to the Note Agreement in May 2005 generally removed the
application of the financial covenants under the Note Agreement for any
measurement period prior to March 31, 2005, which effectively cured the
Company's preexisting failure to satisfy the adjusted EBITDA to interest expense
covenant (as determined under the Note Agreement) as of December 31, 2004. In
addition, the amendments modified the financial covenants for 2005 under the
Note Agreement to make them comparable to the financial covenants for 2005 under
the Credit Facility. The amendment also requires the Company to enter into a
definitive commitment to replace or refinance the $20 million borrowing limit
under the Credit Facility by June 30, 2006 and to consummate the replacement or
refinancing by September 30, 2006. As discussed above, in June 2006, the Company
received a commitment from BofA for the Renewal Facility, and the Company
expects to complete documentation of the Renewal Facility during the third
quarter of 2006, although there can be no assurances in this regard.
Fees and expenses incurred for the amendments to the Credit Facility and Note
Agreement in May 2005 were approximately $425 thousand.
In addition, the Company does not presently expect to meet all of the financial
covenants that take effect under the Note Agreement on September 30, 2006 and
expects it will need to negotiate amendments to or waivers of certain covenants,
or obtain alternative financing to repay the outstanding Notes. There can be no
assurances that the Company will be successful in this regard.
Certain defaults under the Note Agreement, such as defaults resulting from
certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum), automatically cause all
amounts owing with respect to the Notes then outstanding under the Note
Agreement to become immediately due and payable. A default in the payment of
principal or interest under the Notes would allow each individual noteholder to
cause all amounts owed with respect to the Notes held by such holder to become
immediately due and payable. In addition, with respect to all other defaults
under the Note Agreement, holders of at least 51% of the aggregate principal
amount of the Notes then outstanding could cause all amounts then owing with
respect to the Notes to become immediately due and payable. The Company
understands that Prudential is the only holder of the Notes and, as such, any
decision to cause the acceleration of amounts owed with respect to the Notes
would be made at Prudential's discretion.
49
Certain events of default under the Credit Facility, such as defaults resulting
from certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum) automatically terminate
BofA's and the Canadian Lender's obligations to make borrowings available under
the Credit Facility and causes all amounts outstanding under the Credit Facility
to become immediately due and payable. With respect to all other events of
default under the Credit Facility, BofA and the Canadian Lender may terminate
their obligations to make borrowings available under the Credit Facility and
cause all amounts outstanding under the Credit Facility to become immediately
due and payable.
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If a default occurs, BofA and the Canadian Lender and
Prudential could respectively require the Company to repay all amounts
outstanding under the respective debt agreements. If a default occurs and the
Company is unable to obtain a waiver from the applicable lender and the Company
is required to repay all amounts outstanding under those agreements, the Company
would need to obtain funding from another source. Otherwise, the Company would
likely be unable to repay those outstanding amounts, in which case, BofA as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise BofA's and the
Canadian Lender's and Prudential's rights over that collateral. Any default by
the Company under the Credit Facility or the Note Agreement that results in the
Company being required to immediately repay outstanding amounts under its debt
agreements, and for which suitable replacement financing is not timely obtained,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
As noted above, the Credit Facility and the Note Agreement restrict the
Company's ability to obtain additional financing. Moreover, since the Company
and most of its subsidiaries have already granted security interests in most of
their assets, the Company's ability to obtain any additional debt financing may
be limited. The Company currently believes that its cash flow from operations,
expected payments under the note issued to ABI in connection with the sale of
the Janus Flooring assets and borrowings available under its existing credit
facilities will be adequate for its expected capital expenditures, working
capital and debt service needs, subject to compliance with the covenants
contained in its debt agreements (or obtaining alternative financing in lieu of
any such debt agreement) and the ability of the Company to replace or refinance
its existing credit facility that is scheduled to expire on September 30, 2006
on satisfactory terms. However, if circumstances change, the inability of the
Company to obtain any necessary additional debt financing would likely have a
material adverse effect on its business, operations and financial condition.
Under the terms of the Ninth Plan, ABI expects to contribute $250 thousand in
cash to the Plan Trust on the effective date of the plan. In addition, ABI will
forego certain rights it has to receive indemnification payments from Congoleum
pursuant to a joint venture agreement that ABI and Congoleum are party to.
50
Under the Ninth Plan, ABI would receive certain relief as may be afforded under
Section 524(g)(4) of the Bankruptcy Code from asbestos personal injury claims
that derive from claims made against Congoleum, which claims are expected to be
channeled to the Plan Trust. However, the Ninth Plan does not provide that any
other asbestos claims that may be asserted against ABI would be channeled to the
Plan Trust. Under the Ninth Plan, the Company will release and forgive, as part
of ABI's contribution to the Plan Trust, the rights ABI has to receive
indemnification from Congoleum under the joint venture agreement that both ABI
and Congoleum are party to, and which they entered into in connection with the
contribution by ABI to Congoleum in 1993 of the Company's tile division, for
asbestos-related claims. To the extent that the Company pays material amounts
for asbestos-related claims that the Company would have been entitled to be
reimbursed for by Congoleum absent the provisions of Congoleum's plan of
reorganization, that could have a material adverse effect on the Company's
liquidity and capital resources.
The Ninth Plan provides that confirmation of the plan would be sought by means
of the Cramdown Treatment if the holders of the Senior Notes do not vote as a
class to accept the Ninth Plan by the requisite number and amount required by
the Bankruptcy Code. Under the Cramdown Treatment, all existing common stock of
Congoleum would be cancelled and ABI would longer control or own any equity
interest in Congoleum. While the Company does not believe the loss of the value
of its equity interest in Congoleum would have a direct material adverse effect
on ABI's liquidity, it could have a material adverse impact on Congoleum's
business, operations and financial condition, and directly or indirectly, a
material adverse impact on the business relationships between ABI and Congoleum,
which in turn could have a material adverse impact on ABI's business, operations
and financial condition.
Under the Ninth Plan, the Company will release and forgive, as part of ABI's
contribution to the Plan Trust, the rights ABI has to receive indemnification
from Congoleum under the joint venture agreement that both ABI and Congoleum are
party to, and which they entered into in connection with the contribution by ABI
to Congoleum in 1993 of the Company's tile division, for asbestos-related
personal injury and property damage claims. To the extent the Company pays
material amounts for asbestos-related personal injury and property damage claims
that the Company would have been otherwise entitled to be reimbursed or
indemnified for by Congoleum pursuant to the joint venture agreement, such
payments could have a material adverse effect on the Company's liquidity and
capital resources.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's Board of Directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Facility, aggregate dividend
payments (since June 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Facility, earned from June 30, 2003.
Under the Note Agreement, aggregate dividend payments (since December 31, 2000)
generally may not exceed the sum of $6 million plus 50% of cumulative
consolidated net income (accounting for Congoleum under the equity method of
accounting), as determined under the Note Agreement, earned after December 31,
2000.
51
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, Congoleum's
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, there is substantial doubt about Congoleum's ability to continue as a
going concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and J of the Notes to the Unaudited Consolidating Financial Statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q. These matters will have
a material adverse impact on Congoleum's liquidity and capital resources. During
the first six months of 2006, Congoleum paid $11.3 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 and
litigation with certain insurance companies.
Under previous plans, Congoleum's assignment of insurance recoveries to the Plan
Trust was net of costs incurred by Congoleum in connection with insurance
coverage litigation, and Congoleum was entitled to withhold from recoveries, or
seek reimbursement from the Plan Trust, for coverage litigation costs incurred
after January 1, 2003 and for $1.3 million in claims processing fees paid in
connection with claims settled under the Claimant Agreement. A receivable was
recorded for these costs as they were paid. Under the Ninth Plan, Congoleum
would be entitled to reimbursement of only approximately $3.7 million in cash
for such coverage litigation costs and of the $1.3 million in claims processing
costs and would not collect the balance of these receivables ($16.8 million at
June 30, 2006). The write-off and any applicable forgiveness of indebtedness
income pursuant to the Ninth Plan are expected to be recorded at a future date,
the net effect of which cannot be presently determined.
Congoleum expects to spend a further $13.9 million at a minimum in fees,
expenses, and trust contributions in connection with obtaining confirmation of
its plan of reorganization, which amount is recorded in its reserve for
asbestos-related liabilities in addition to the $9.5 million insurance
settlement being held as restricted cash. It also expects to spend a further
$7.9 million at a minimum in connection with insurance coverage litigation
costs, for which it expects to be reimbursed as discussed above. Required
expenditures could be materially higher than these estimates. Congoleum
currently holds $3.7 million in restricted cash that may be available to offset
future costs incurred pursuing insurance coverage, subject to approval by the
Bankruptcy Court.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
at June 30, 2006 is approximately $27.8 million, including interest on the
unpaid interest due, of which $3.6 million was owed at the time of the Chapter
11 filing. In February 2006, the Bankruptcy Court ordered Gilert Heintz &
Randolph LLP ("GHR"), a law firm formerly representing Congoleum to disgorge all
fees and certain expenses it was paid by Congoleum. The law firm has appealed
52
this ruling. The amount of the disgorgement is approximately $9.6 million.
Pursuant to the terms of the Ninth Plan, the net proceeds of the GHR
disgorgement would be used to reduce the obligations of Congoleum to the Plan
Trust by first being applied to reduce or satisfy principal and accrued interest
under the Plan Trust Note and thereafter to reduce or satisfy principal and
accrued interest under the New Convertible Security.
Under the terms of the Ninth Plan, on the Effective Date, the Plan Trust will
provide a loan to Congoleum, which loan is intended, when combined with cash on
hand and available drawings under the revolving credit facility, to provide
Congoleum with $18 million of total liquidity, on a pro forma basis as of
December 31, 2006 (the "Plan Trust Note"). If the Effective Date occurs after
December 31, 2006, the total liquidity required by Congoleum, and thus the
amount of the Plan Trust Note, will be as mutually agreed among the ACC, the FCR
and Congoleum. The proceeds of the Plan Trust Note will only be used for working
capital and general corporate purposes. The Plan Trust Note will be due and
payable on December 31, 2011, will bear interest at 10% per annum payable
semi-annually until the maturity date, and will contain appropriate covenants,
warranties, and representations as agreed among Congoleum, the ACC, the FCR and
the Claimants' Representative. The principal amount of the Plan Trust Note,
which is subject to review and approval by the FCR and the ACC, may not exceed
$14 million unless both the FCR and ACC agree. There can be no assurance either
or both would agree to any such request from Congoleum, or that Congoleum would
obtain any other consents that might be necessary to increase the amount of the
Plan Trust Note.
Under the terms of the Ninth Plan, if holders of the Senior Notes vote as a
class to accept the Plan by the requisite number and amount required by the
Bankruptcy Code and the Plan is confirmed, the Senior Notes would be cancelled
on the Effective Date, holders of the Senior Notes would receive their pro rata
share of the new notes that Congoleum would issue (the "New Senior Notes") in
the aggregate principal amount of $100 million, and Congoleum Stockholders,
including ABI, would retain their equity interests in Congoleum, subject to the
Congoleum equity dilution contemplated by the Ninth Plan and discussed elsewhere
in this report. The New Senior Notes would pay interest semi-annually at the
rate of 10% per annum until a maturity date of August 1, 2011 at which time all
principal would be repaid; provided, however, that reorganized Congoleum shall
receive a credit against all interest payable under the New Senior Notes for all
fees and expenses of the Bondholders' Committee incurred and paid after the date
that the Plan is filed with the Bankruptcy Court. The New Senior Notes will be
subordinate in priority and payment to the New Convertible Security and the Plan
Trust Note. There can be no assurance that the plan which is ultimately
confirmed will provide for such maturity extension or other terms.
While Congoleum is seeking to obtain the required acceptances of the Ninth Plan
from all necessary classes of creditors, the Ninth Plan provides an alternative
treatment for holders of the Senior Notes and Congoleum Stockholders. The Ninth
Plan's alternative treatment of Congoleum noteholders and stockholders depends
on whether the noteholders vote as a class to accept the Ninth Plan, and such
vote will materially affect the recoveries of such noteholders and stockholders,
including ABI. As discussed above, in the event that the holders of the Senior
Notes vote as a class to accept the Ninth Plan by the requisite numbers and
amounts required by the Bankruptcy Code and the plan is approved, the Senior
Notes would be cancelled on the effective date of the plan, holders of Senior
Notes would receive their pro rata share of the New Senior Notes, and Congoleum
53
stockholders, including ABI, would retain their equity interests in Congoleum,
subject to the Congoleum equity dilution contemplated by the Ninth Plan and
discussed elsewhere in this report. In the event that the holders of the Senior
Notes do not vote as a class to accept the Ninth Plan by the requisite numbers
and amounts required by the Bankruptcy Code, confirmation of the Ninth Plan
would be sought in accordance with the cram down provisions of the Bankruptcy
Code. Pursuant to the Cramdown Treatment, the Senior Notes and existing
Congoleum Class A and Class B common stock would be cancelled (including all
shares of Congoleum Class A and Class B common stock owned by ABI) and the
Senior Notes holders would receive their pro rata share, with the Plan Trust, of
newly issued common stock of reorganized Congoleum, in an amount determined by a
final order of the Bankruptcy Court. However, under the Ninth Plan, in no event
would the amount of such newly issued common stock of Congoleum to be allocated
to the holders of the Senior Notes exceed 49% of the voting common shares and
total economic equity value of reorganized Congoleum on a fully diluted basis.
If the Cramdown Treatment is implemented, the holders of existing Congoleum
Class A and Class B common stock (including ABI) would receive no distributions
under the Ninth Plan with respect to such stock, which would be cancelled.
On the Effective Date of the Ninth Plan, if the holders of the Senior Notes (as
a creditor class) vote to accept the Ninth Plan, Congoleum will issue and
contribute the New Convertible Security to the Plan Trust in satisfaction of
section 524(g) of the Bankruptcy Code. The New Convertible Security will have
the following terms: (i) an initial aggregate principal amount of $2,738,234.75,
such principal amount being subject to increase in the amount, if any, by which
36% of Congoleum's market capitalization based on average trading prices for
Congoleum's Class A common stock at the close of trading for the 90 consecutive
trading days beginning on the one year anniversary of the Effective Date,
exceeds such initial principal amount; (ii) an initial interest rate equal to 9%
of the principal amount per annum, payable semi-annually in arrears, with such
interest rate to reset at the rate of 5% of the principal amount per annum on
the tenth anniversary of the Effective Date and payable at such reset interest
rate per annum until maturity; (iii) redeemable for the principal amount at the
option of the Plan Trust or Congoleum on or anytime after the tenth anniversary
of the Effective Date; (iv) a maturity date on the fifteenth anniversary of the
Effective Date if not redeemed or otherwise paid earlier; (v) convertible into
5,700,000 shares of Class A common stock (on a fully diluted basis with all
Class B common stock converted to Class A common stock) upon a specified default
of the obligation to pay interest and a failure to cure such default within any
cure period, which, when combined with the New Class A common stock, will result
in the Plan Trust owning 51% of the voting common shares and 51% of the total
economic equity value of Congoleum on a fully diluted basis; and (vi) no voting
rights except upon conversion. The principal adjustment feature could result in
the principal amount of the New Convertible Security increasing materially.
Unrestricted cash and cash equivalents, including short-term investments at June
30, 2006, were $15.4 million, a decrease of $9.1 million from December 31, 2005.
Under the terms of its revolving credit agreement, payments on Congoleum's
accounts receivable are deposited in an account assigned by Congoleum to its
lender and the funds in that account are used by the lender to pay down any loan
balance. Funds deposited in this account but not yet applied to the loan
balance, which amounted to $2.4 million and $2.0 million at June 30, 2006 and
December 31, 2005, respectively, are recorded as restricted cash. Additionally,
54
$9.6 million remaining from a $14.5 million settlement received in August 2004
from an insurance carrier, which is subject to the lien of the Collateral Trust,
is included as restricted cash at June 30, 2006. Congoleum expects to contribute
these funds, less any amounts withheld pursuant to reimbursement arrangements,
to the Plan Trust. Working capital was $31.7 million at June 30, 2006, up from
$28.0 million at December 31, 2005. The ratio of current assets to current
liabilities at June 30, 2006 was 1.3 to 1.0, which is unchanged from December
31, 2005. The ratio of debt to total capital at June 30, 2006 was 0.48 to 1.0
which is also unchanged since December 31, 2005. Net cash used by operations
during the first six months of 2006 was $11.6 million, as compared to net cash
used by operations of $5.5 million in the first six months of 2005. The increase
in cash used by operations in the first six months of 2006 versus the first six
months of 2005 was primarily due to higher working capital requirements and
increased reorganization expenditures in 2006.
Capital expenditures for the six months ended June 30, 2006 totaled $1.0
million. Congoleum is currently planning capital expenditures of approximately
$5.0 million in 2006 and between $5.0 million and $7.0 million in 2007,
primarily for maintenance and improvement of plants and equipment, which it
expects to fund with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on
December 31, 2006 with borrowings up to $30.0 million. Interest is based on
0.75% above the prime rate. This financing agreement contains certain covenants,
which include the maintenance of minimum earnings before interest, taxes,
depreciation and amortization ("EBITDA"). It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
Congoleum to borrow from the facility. Congoleum was in compliance with these
covenants at June 30, 2006. Borrowings under this facility are collateralized by
inventory and receivables. At June 30, 2006, based on the level of receivables
and inventory, $17.6 million was available under the facility, of which $4.7
million was utilized for outstanding letters of credit and $11.5 million was
utilized by the revolving loan. Congoleum anticipates that its
debtor-in-possession financing facility will be replaced with a revolving credit
facility on substantially similar terms upon confirmation and effectiveness of
its plan of reorganization. While Congoleum expects the facilities discussed
above will provide it with sufficient liquidity, there can be no assurances that
it will continue to be in compliance with the required covenants, that Congoleum
will be able to obtain a similar or sufficient facility upon exit from
bankruptcy, or that the debtor-in-possession facility (as extended) will be
renewed prior to its expiration if Congoleum's plan of reorganization is not
confirmed before that time.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
55
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 5 to the Unaudited
Condensed Consolidated Financial Statements contained in Item 1 of this
Quarterly Report on Form 10-Q). These actions include possible obligations to
remove or mitigate the effects on the environment of wastes deposited at various
sites, including Superfund sites and certain of Congoleum's owned and previously
owned facilities. The contingencies also include claims for personal injury
and/or property damage. The exact amount of such future cost and timing of
payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of Congoleum's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on Congoleum's costs,
Congoleum is not aware of any pending legislation which would reasonably have
such an effect. There can be no assurances that the costs of any future
government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against Congoleum.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum has used
$11.6 million in cash from operations in the first six months of 2006 (as more
fully discussed above), which includes the benefit of $5.2 million of accrued
but unpaid interest on long-term debt. Congoleum believes these sources will be
adequate to fund working capital requirements, debt service payments, and
planned capital expenditures for the remainder of 2006. Based on expected costs
to complete its reorganization proceedings, Congoleum anticipates it will need
to obtain the contemplated approximately $14 million from the Plan Trust Note to
provide it with sufficient liquidity when the Ninth Plan goes effective. Actual
sources and uses of funds to consummate the effectiveness of the Ninth Plan or
any other plan may differ significantly from this description, but confirmation
of any plan is dependent on such plan demonstrating it leaves Congoleum with
sufficient liquidity that further reorganization will not be needed. Congoleum's
inability to obtain confirmation of the Ninth Plan in a timely manner would have
a material adverse effect on Congoleum's ability to fund its operating,
investing and financing requirements.
56
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on its investments. The Company and Congoleum invest
primarily in highly liquid debt instruments with strong credit ratings and
short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. If market
interest rates were to increase by 10% from levels at June 30, 2006, the fair
value of our investments would decline by an immaterial amount. In addition,
substantially all of the Company's outstanding consolidated long-term debt as of
June 30, 2006 consisted of indebtedness with a fixed rate of interest, which is
not subject to change based upon changes in prevailing market interest rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as in other countries in Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
the applicable foreign currency sales decreases. When the U.S. dollar weakens
against those currencies, the U.S. dollar value of the applicable foreign
currency sales increases.
Under their current policies, neither the Company nor Congoleum use derivative
financial instruments, derivative commodity instruments or other financial
instruments to manage its exposure to changes in interest rates, foreign
currency exchange rates, commodity prices or equity prices and does not hold any
instruments for trading purposes.
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
57
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Part I, Item 2 of
this Quarterly Report on Form 10-Q, and in "Risk Factors - The Company and its
majority-owned subsidiary Congoleum have significant asbestos liability and
funding exposure, and the Company's and Congoleum's strategies for resolving
this exposure may not be successful," included in Part II, Item 1A of this
Quarterly Report on Form 10-Q, are incorporated herein by reference.
Item 1A. Risk Factors
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
The Company and Congoleum have significant liability and funding exposure for
asbestos personal injury claims. In connection with Congoleum's strategy for
resolving its asbestos liability, in 2003, Congoleum entered into settlement
agreements with various asbestos claimants totaling in excess of $491 million.
Under the terms of the Ninth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under such settlement
agreements. The outcome of the Avoidance Actions could affect the outcome of
plan voting and therefore confirmation of the Ninth Plan.
There can be no assurance that Congoleum will not amend the Ninth Plan, that the
Bankruptcy Court will approve the disclosure statement with respect to the Ninth
Plan, that Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, that its plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
58
for continued protracted litigation in connection with its plan of
reorganization. In November 2005, the Bankruptcy Court denied a request to
extend Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof, and plans have been filed by an insurance company and the
Bondholders' Committee, who have further indicated an intent to file another
plan jointly by August 18, 2006. It is unclear whether any other person will
attempt to propose a plan and what any such plan would provide or propose, and
whether the Bankruptcy Court will confirm such a plan or any plan other than
Congoleum's proposed plan.
The Ninth Plan and any alternative plan of reorganization pursued by Congoleum
or another plan proponent or confirmed by the Bankruptcy Court and the Federal
District Court could materially differ from the description of the Ninth Plan
contained in this Quarterly Report on Form 10-Q. Furthermore, the estimated
costs and contributions to effect the Ninth Plan or an alternative plan could be
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and Federal District Court approvals,
and there can be no assurance that such conditions, approvals and other
requirements will be satisfied or obtained.
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective. If Congoleum's cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of Congoleum's plan of reorganization or in connection with
Congoleum's New Jersey state court insurance coverage litigation discussed
elsewhere in this report are materially more than anticipated, or if sufficient
funds from insurance proceeds or other sources are not available at confirmation
to reimburse coverage litigation costs as expected, Congoleum may be unable to
obtain exit financing, when combined with net cash provided from operating
activities, that would provide it with sufficient funds, which would likely
result in Congoleum not being able to confirm an amended plan of reorganization
or have such plan become effective.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses, that would likely have a material adverse effect on
the Company's financial position. In addition, certain of the excess liability
insurance policies that the Company purchased were underwritten by companies
that are now insolvent, which may limit the amount of funds available to pay for
any future claims covered by these policies.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives for resolving asbestos liability
include: (i) the future cost and timing of estimated asbestos liabilities and
payments; (ii) the availability of insurance coverage and reimbursement from
insurance companies that underwrote the applicable insurance policies for
asbestos-related claims, including insurance coverage and reimbursement for
asbestos claimants under Congoleum's proposed modified plan, which certain
insurers have objected to in Bankruptcy Court and are litigating in New Jersey
State Court, or any other plan of reorganization; (iii) costs relating to the
execution and implementation of any plan of reorganization pursued by Congoleum
59
or relating to any other plan of reorganization proposed by any other party in
interest; (iv) timely reaching an agreement with other creditors, or classes of
creditors, that exist or may emerge; (v) satisfaction of the conditions and
obligations under the Company's and Congoleum's respective outstanding debt
instruments, and amendment of those outstanding debt instruments, as necessary,
to permit Congoleum and the Company to satisfy their obligations under any plan
of reorganization and to make certain covenants under those debt instruments
less restrictive; (vi) the response from time-to-time of the Company's and
Congoleum's lenders, customers, suppliers, holders of the Senior Notes and their
representatives, and other creditors and constituencies to the Chapter 11
process and related developments arising from the strategy to settle asbestos
liability; (vii) Congoleum's ability to maintain debtor-in-possession financing
sufficient to provide it with funding that may be needed during the pendency of
its Chapter 11 case and to obtain exit financing sufficient to provide it with
funding that may be needed for its operations after emerging from the bankruptcy
process, in each case, on reasonable terms; (viii) timely obtaining sufficient
creditor and court approval of a reorganization plan and the court overruling
any objections to such plan that may be filed; (ix) developments in costs,
associated with and the outcome of insurance coverage litigation pending in New
Jersey State Court involving Congoleum and certain insurers; (x) the extent to
which Congoleum is able to obtain reimbursement for costs it incurs in
connection with the insurance coverage litigation; (xi) compliance with the
Bankruptcy Code, including section 524(g); and (xii) the possible adoption of
another party in interest's proposed plan of reorganization which may prove to
be unfeasible. In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations
regarding its pursuit of a plan of reorganization, and there can be no assurance
as to what that impact, positive or negative, might be. In any event, the
failure of Congoleum to obtain confirmation and consummation of a Chapter 11
plan of reorganization would have a material adverse effect on Congoleum's
business, results of operations or financial condition and could have a material
adverse effect on American Biltrite's business, results of operations or
financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties of this
legislation, the Company does not know what effects any such legislation, if
adopted, may have upon its or Congoleum's businesses, results of operations or
financial conditions, or upon any plan of reorganization Congoleum may decide to
pursue. To date, Congoleum has expended significant amounts to resolve its
asbestos liability pursuant to a Chapter 11 plan of reorganization. To the
extent any federal legislation is enacted which does not credit Congoleum for
amounts paid by Congoleum pursuant to its plan of reorganization strategy or
requires the Company or Congoleum to pay significant amounts to any national
trust or otherwise, such legislation could have a material adverse effect on the
Company or Congoleum's businesses, results of operations or financial
conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
60
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A and J of the Notes to Unaudited Consolidating Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included in Part I, Item 1 and Part I, Item 2
and Part I, Item 1A, respectively, in this report.
Any plan of reorganization for Congoleum will likely result in substantial
dilution of Congoleum's equity holders, including the Company.
Under the terms of the Ninth Plan, if confirmation of the plan is not sought by
means of the Cramdown Treatment, on the effective date of that plan, reorganized
Congoleum would issue 3.8 million shares of its Class A common stock, which
based on the number of shares of Congoleum Class A and Class B common stock
outstanding as of March 17, 2006, would represent 31.5% of Congoleum's
outstanding common stock and 22.8% of the aggregate general voting power of
Congoleum's outstanding common stock, and would reduce the Company's equity
ownership in Congoleum to 37.7% and its general equity voting interest in
Congoleum to 53.6%, in each case, after giving effect to the stock issuance. On
a fully diluted basis, the Company's equity ownership would be reduced to 35.2%
with a general equity voting interest of 51.0%, giving effect to such stock
issuance as if it occurred on such date.
In addition, under the Ninth Plan, if confirmation of the plan is not sought by
means of the Cramdown Treatment, Congoleum would issue a new convertible
security to the Plan Trust on the effective date of the plan. The principal
amount of that convertible security is expected to be approximately $2.7 million
and subject to possible future increase. Under the terms of the Ninth Plan, the
convertible security would be convertible into 5.7 million shares of reorganized
Congoleum Class A common stock (or the equivalent thereof on a fully diluted
basis) upon a specified default of the obligation to pay interest, on the
convertible security and a failure to cure such default within any cure period,
which, when combined with the 3.8 million newly issued shares of reorganized
Congoleum Class A common stock to be contributed to the Plan Trust on the
effective date of the plan, would result in the Plan Trust owning 51% of the
voting common stock on a fully diluted basis. If this further additional
issuance were to occur, based on the number of shares of Congoleum Class A and
Class B common stock outstanding as of March 17, 2006, the Company's equity
ownership and voting equity interest in Congoleum would be reduced to 24.4%,
resulting in a loss of voting control of Congoleum by ABI.
As discussed elsewhere in this report, if confirmation of the plan is sought by
means of the Cramdown Treatment, all the existing Congoleum Class A and Class B
common stock on the effective date of the plan would be cancelled (including all
shares of Congoleum Class A and Class B common stock owned by the Company). In
addition, any proposed plans of reorganization proposed for Congoleum by other
parties in interest may provide for cancellation of Congoleum's existing Class A
and Class B common stock or even greater dilution of the Congoleum equity
interests than that contemplated by the Ninth Plan, and the Ninth Plan could be
confirmed in accordance with the cram down provisions of the Bankruptcy Code, in
which case ABI would completely lose its ownership interest in Congoleum. There
can be no assurance as to how the equity interests in Congoleum, including ABI's
Congoleum equity interests, will be treated under any plan of reorganization for
Congoleum that may ultimately be confirmed by the Bankruptcy Court and
consummated.
61
Congoleum's Ninth Plan of reorganization could be confirmed in accordance with
the cram down provisions of the Bankruptcy Code which would eliminate ABI's
controlling equity interest in Congoleum.
The Ninth Plan provides that confirmation of the plan would be sought by means
of the Cramdown Treatment if the holders of the Senior Notes do not vote as a
class to accept the Ninth Plan by the requisite numbers and amount required by
the Bankruptcy Code. Under the Cramdown Treatment, all existing common stock of
Congoleum would be cancelled and ABI would no longer control or own any equity
interest in Congoleum. Elimination of ABI's controlling equity interest in
Congoleum could have a material adverse impact on Congoleum's business,
operations and financial condition, the business relationships between ABI and
Congoleum, and ABI's business, operations and financial condition.
A substantial portion of the Company's debt must be amended or refinanced and
the Company's ability to obtain additional financing may be limited.
The credit agreement governing the Company's credit facility (the "Credit
Facility") with Bank of America ("BofA") expires on September 30, 2006. Although
the Company has received a commitment to renew the facility through September
30, 2009 on substantially similar terms (the "Renewal Facility"), and expects to
complete documentation of the Renewal Facility during the third quarter of 2006,
there can be no assurances in this regard.
Under the Credit Facility, a new financial covenant took effect as of June 30,
2006. In order to be in compliance with that financial covenant as of June 30,
2006, in June 2006, the Company obtained BofA's consent to exclude the $4
million principal payment payable by the Company on August 28, 2006 to The
Prudential Insurance Company of America ("Prudential") pursuant to the Company's
note agreement (the "Note Agreement") with Prudential governing the Company's
outstanding $20 million aggregate principal amount notes (the "Notes") from the
determination as to whether the Company complied with that covenant as of June
30, 2006. In connection with the Renewal Facility, the Company expects that it
may need to revise that covenant and other covenants currently included in the
Note Agreement to enable it to comply with those covenants in future periods.
The Company would be required to repay (without replenishment) all amounts
outstanding under the Credit Facility if it were to fail to extend or replace
that facility by the expiration date, which would have a material adverse effect
on the Company's financial condition and liquidity.
The Company also does not anticipate it will meet certain financial covenants
under the Note Agreement that take effect September 30, 2006. In addition, under
the Note Agreement, the Company must consummate the replacement or refinancing
of the $20 million borrowing limit under the Credit Facility by September 30,
2006. Although the Company expects that it will obtain a modification of those
financial covenants under the Note Agreement, and that it will complete the
documentation of the Renewal Facility by September 30, 2006, or that it will be
able to obtain alternative financing to repay the Notes, there can be no
assurances in this regard. If the Company is unable to timely satisfy these
requirements or obtain waivers for or amendments of these requirements, such
failure would result in a breach of the Note Agreement.
62
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If such a default occurs, the lenders under those agreements
could respectively require the Company to repay all amounts outstanding under
the respective debt agreements. If a default occurs and the Company is unable to
obtain a waiver from the lenders under those agreements and the Company is
required to repay all amounts outstanding under those agreements, the Company
would need to obtain funding from another source. Otherwise, the Company would
likely be unable to repay those outstanding amounts, in which case, the
administrative agent over the collateral securing the amounts outstanding under
those agreements might exercise the lenders' rights over that collateral. Any
default by the Company under those agreements that results in the Company being
required to immediately repay outstanding amounts under its debt agreements, and
for which suitable replacement financing is not timely obtained, would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Under the terms of the Company's debt agreements, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their current and previously owned
facilities, in order to comply with existing environmental laws, and those
amounts may be substantial. Although the Company and Congoleum believe that
those amounts should not have a material adverse effect on their respective
financial positions, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
63
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations or
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters, or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of its raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and may
remain high in 2006 and until additional capacity becomes available.
64
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the United States Bankruptcy Code and emerge from
bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum. In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
65
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 23% of the
Company's Tape division's net sales for the year ended December 31, 2005 and 21%
of its net sales for the year ended December 31, 2004. The loss of the largest
unaffiliated customer and/or two or more of the other three unaffiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
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 67% of
Congoleum's net sales for the year ended December 31, 2005 and 70% of
Congoleum's net sales for the year ended December 31, 2004.
66
The Company's majority-owned subsidiary K&M Associates L.P. ("K&M") sells its
products through its own direct sales force and, indirectly, through a wholly
owned subsidiary and through third-party sales representatives. Three of K&M's
customers accounted for approximately 58% of its net sales for the year ended
December 31, 2005 and 59% of its net sales for the year ended December 31, 2004.
The loss of the largest of these customers would have a material adverse effect
on K&M's business, results of operations and financial condition and would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due on the Senior Notes on the following
dates: February 1, 2004, 2005 and 2006 and August 1, 2004 and 2005. The
aggregate amount of the interest payments that was not paid on the Senior Notes
with respect to those interest payment due dates is approximately $24.2 million.
As of June 30, 2006, the aggregate outstanding principal amount of the Senior
Notes is approximately $100 million. These amounts, which include $2.6 million
of aggregate accrued interest on the unpaid interest that was due on February 1,
2004, 2005 and 2006 and August 1, 2004 and 2005 with respect to the Senior
Notes, are included in the line item "Liabilities Subject to Compromise" in the
Company's consolidated balance sheet included in this report. Congoleum also did
not make a scheduled interest payment of $4.3 million that was due on August 1,
2006.
67
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's stockholders held on May 9, 2006, all
director nominees were elected.
The three nominees who were elected as Class I directors will hold office until
the annual meeting of stockholders to be held in 2009 and until their successors
are duly elected and qualify. The results of the vote for the election of those
directors are set forth below.
Number of Number of
Name Votes For Votes Withheld
--------------------------- ---------------------- ---------------------
Gilbert K. Gailius 2,885,828 8,302
Richard G. Marcus 2,748,158 145,972
Frederick H. Joseph 2,886,858 7,272
Item 5. Other Information
On August 8, 2006, the general partner and the limited partners of K&M
Associates L.P. entered into, as of January 1, 2006, an Amendment No. 1 (the
"Amendment No. 1") to the Amended and Restated Agreement of Limited Partnership
of K&M Associates L.P. (the "Limited Partnership Agreement"). American Biltrite
Inc.'s wholly owned subsidiary Aimpar, Inc. is the sole general partner (the
"General Partner") of K&M Associates L.P. and Ocean State Jewelry, Inc., a
subsidiary of American Biltrite Inc., William B. Edwards and Donald J. Fulford
are the limited partners (the "Limited Partners") of K&M Associates L.P. The
Amendment No. 1, among other things, provides for an extension of the term of
the Limited Partnership Agreement to December 31, 2010 and addresses certain
other administrative matters. Mr. Edwards is President of K&M Associates L.P.,
and Mr. Fulford is Sales Executive for New Business Development of K&M
Associates L.P.
The foregoing description of the Amendment No. 1 does not purport to be complete
and is qualified in its entirety by reference to the Amendment No. 1, a copy of
which is filed as an exhibit to this report as Exhibit 10.2, and is incorporated
by reference herein.
68
Item 6. Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
10.1 III Consent, dated as of June 30, 2006, among American Biltrite
Inc., K&M Associates L.P., American Biltrite (Canada) Ltd.,
Bank of America, N.A. and Bank of America, N.A., acting
through its Canada Branch
10.2 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of K&M Associates L.P., dated as of
January 1, 2006
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.1 Ninth Modified Joint Plan of Reorganization Under Chapter
11 of the Bankruptcy Code of Congoleum Corporation, et al.,
and the Asbestos Claimants' Committee, dated as of August
11, 2006, including the exhibits thereto
99.2 Disclosure Statement with respect to Ninth Modified Joint
Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code of Congoleum Corporation, et al., and Asbestos
Claimants' Committee, dated as of August 11, 2006,
including the exhibits thereto (except Exhibit A thereto,
which is included at Exhibit 99.1 to this report)
99.3 IV Settlement and Policy Buyback Agreement and Release by and
among Congoleum Corporation, the Plan Trust, American
Biltrite Inc. and Travelers Casualty and Surety Co.,
formerly known as The Aetna Casualty and Surety Company,
and St. Paul Fire and Marine Insurance Company
99.4 IV Settlement Agreement, made as of April 27, 2006, by and
between Congoleum Corporation and Fireman's Fund Insurance
Company
69
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibit to the Company's Current
Report on Form 8-K dated June III 30, 2006 and filed with the
Securities and Exchange Commission on July 7, 2006
IV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 and filed
with the Securities and Exchange Commission on May 15, 2006
70
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: August 14, 2006 BY: /s/ Howard N. Feist III
----------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
71
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
10.1 III Consent, dated as of June 30, 2006, among American Biltrite
Inc., K&M Associates L.P., American Biltrite (Canada) Ltd.,
Bank of America, N.A. and Bank of America, N.A., acting
through its Canada Branch
10.2 Amendment No. 1 to Amended and Restated Agreement of
Limited Partnership of K&M Associates L.P., dated as of
January 1, 2006
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
99.1 Ninth Modified Joint Plan of Reorganization Under Chapter
11 of the Bankruptcy Code of Congoleum Corporation, et al.,
and the Asbestos Claimants' Committee, dated as of August
11, 2006, including the exhibits thereto
99.2 Disclosure Statement with respect to Ninth Modified Joint
Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code of Congoleum Corporation, et al., and Asbestos
Claimants' Committee, dated as of August 11, 2006,
including the exhibits thereto (except Exhibit A thereto,
which is included at Exhibit 99.1 to this report)
99.3 IV Settlement and Policy Buyback Agreement and Release by and
among Congoleum Corporation, the Plan Trust, American
Biltrite Inc. and Travelers Casualty and Surety Co.,
formerly known as The Aetna Casualty and Surety Company,
and St. Paul Fire and Marine Insurance Company
99.4 IV Settlement Agreement, made as of April 27, 2006, by and
between Congoleum Corporation and Fireman's Fund Insurance
Company
72
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibit to the Company's Current
Report on Form 8-K dated June III 30, 2006 and filed with the
Securities and Exchange Commission on July 7, 2006
IV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006 and filed
with the Securities and Exchange Commission on May 15, 2006
73