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, 2005 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at July 31, 2005
------------------- ----------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets--Assets as of
June 30, 2005 (unaudited) and December 31, 2004.............. 3
Consolidating Condensed Balance Sheets--Liabilities and
Stockholders' Equity as of June 30, 2005 (unaudited)
and December 31, 2004........................................ 4
Consolidating Condensed Statements of Operations for the
three months ended June 30, 2005 and 2004 (unaudited)........ 5
Consolidating Condensed Statements of Operations for the
six months ended June 30, 2005 and 2004 (unaudited).......... 6
Consolidating Condensed Statements of Cash Flows for the
six months ended June 30, 2005 and 2004 (unaudited).......... 7
Notes to Unaudited Consolidating Condensed Financial
Statements .................................................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................29
Item 3. Quantitative and Qualitative Disclosures About Market Risk...53
Item 4. Controls and Procedures......................................55
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................55
Item 3. Defaults Upon Senior Securities..............................56
Item 4. Submission of Matters to a Vote of Security Holders..........56
Item 6. Exhibits.....................................................57
Signature ...........................................................61
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
2005 2004 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 24,846 $ 34,691 $21,397 $ 29,710 $ 3,449 $ 4,981
Restricted cash 11,083 15,682 11,083 15,682
Accounts receivable, net 46,388 43,591 $(604) $(1,036) 20,823 17,621 26,169 27,006
Inventories 86,332 76,036 (185) (268) 44,867 39,623 41,650 36,681
Assets of discontinued
operation 3,048 2,952 3,048 2,952
Deferred income taxes 12,636 12,636 10,678 10,678 1,958 1,958
Prepaid expense & other
current assets 4,976 6,826 2,366 5,124 2,610 1,702
---------------------------------------------------------------------------------------------------
Total current assets 189,309 192,414 (789) (1,304) 111,214 118,438 78,884 75,280
Property, plant &
equipment, net 118,196 124,070 76,271 79,550 41,925 44,520
Other assets:
Insurance for
asbestos-related
liabilities 7,500 7,500 7,500 7,500
Goodwill, net 11,300 11,300 11,300 11,300
Other assets 19,885 20,001 (186) (186) 14,726 14,894 5,345 5,293
---------------------------------------------------------------------------------------------------
38,685 38,801 (186) (186) 14,726 14,894 24,145 24,093
---------------------------------------------------------------------------------------------------
Total assets $346,190 $355,285 $(975) $(1,490) $202,211 $212,882 $144,954 $143,893
===================================================================================================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
2005 2004 2005 2004 2005 2004 2005 2004
---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 24,627 $ 18,700 $ (604) $ (57) $ 14,346 $ 10,295 $ 10,885 $ 8,462
Accrued expenses 41,088 48,605 (979) 21,939 28,066 19,149 21,518
Asbestos-related liabilities 22,430 21,079 22,430 21,079
Liabilities of
discontinued operation 284 165 284 165
Notes payable 19,250 17,036 10,137 9,500 9,113 7,536
Current portion of
long-term debt 20,154 21,411 20,154 21,411
Liabilities subject to
compromise 18,883 14,225 18,883 14,225
---------------------------------------------------------------------------------------------------
Total current liabilities 146,716 141,221 (604) (1,036) 87,735 83,165 59,585 59,092
Long-term debt, less current
portion 1,414 2,790 1,414 2,790
Asbestos-related liabilities 10,238 10,238 2,738 2,738 7,500 7,500
Other liabilities 25,472 25,237 10,678 10,678 14,794 14,559
Noncontrolling interests 1,266 623 1,266 623
Liabilities subject to
compromise 136,813 137,104 (186) (186) 136,999 137,290
---------------------------------------------------------------------------------------------------
321,919 317,213 (790) (1,222) 238,150 233,871 84,559 84,564
Stockholders' equity
Common stock 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,548 19,548 (49,106) (49,106) 49,106 49,106 19,548 19,548
Retained earnings 35,447 49,526 35,090 35,007 (58,780) (43,830) 59,137 58,349
Accumulated other
comprehensive loss (15,638) (15,916) 6,111 6,111 (18,545) (18,545) (3,204) (3,482)
Less treasury shares (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 24,271 38,072 (185) (268) (35,939) (20,989) 60,395 59,329
---------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $346,190 $355,285 $ (975) $ (1,490) $202,211 $212,882 $144,954 $143,893
===================================================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2005 and 2004
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Net sales $109,542 $112,510 $ 72 $133 $ 58,108 $62,951 $51,362 $49,426
Cost of products sold 81,933 80,577 (39) (87) 44,338 46,065 37,634 34,599
Selling, general &
administrative expenses 38,966 26,296 26,127 13,016 12,839 13,280
-----------------------------------------------------------------------------------------
(Loss) income from operations (11,357) 5,637 111 220 (12,357) 3,870 889 1,547
Other (income) expense:
Interest income (86) (57) (84) -- (2) (57)
Interest expense 3,267 3,133 2,618 2,314 649 819
Other (income) expense 37 (175) 72 151 (293) (421) 258 95
-----------------------------------------------------------------------------------------
3,218 2,901 72 151 2,241 1,893 905 857
-----------------------------------------------------------------------------------------
(Loss) income before taxes
and other items (14,575) 2,736 39 69 (14,598) 1,977 (16) 690
(Credit) provision for
income taxes (16) 850 -- 616 (16) 234
Noncontrolling interests (87) (59) (87) (59)
-----------------------------------------------------------------------------------------
(Loss) income from
continuing operations (14,646) 1,827 39 69 (14,598) 1,361 (87) 397
Discontinued operation (57) (110) (57) (110)
-----------------------------------------------------------------------------------------
Net (loss) income $(14,703) $ 1,717 $ 39 $ 69 $(14,598) $ 1,361 $ (144) $ 287
=========================================================================================
Basic Diluted
2005 2004 2005 2004
--------------------- -------------------
(Loss) income per common share
from continuing
operations $(4.25) $ 0.53 $(4.25) $ 0.53
Discontinued operation (0.02) (0.03) (0.02) (0.03)
--------------------- -------------------
Net (loss) income per
common share $(4.27) $ 0.50 $(4.27) $ 0.50
===================== ===================
Weighted average number of
common and equivalent
shares outstanding 3,442 3,442 3,442 3,455
===================== ===================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2005 and 2004
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------------------------
Net sales $216,966 $211,925 $124 $ 90 $115,738 $114,951 $101,104 $96,884
Cost of products sold 160,789 153,471 (83) (138) 88,307 84,514 72,565 69,095
Selling, general &
administrative expenses 64,490 52,645 37,860 25,001 26,630 27,644
-----------------------------------------------------------------------------------------
(Loss) income from operations (8,313) 5,809 207 228 (10,429) 5,436 1,909 145
Other (income) expense:
Interest income (229) (63) (182) - (47) (63)
Interest expense 6,531 6,100 5,118 4,559 1,413 1,541
Other (income) expense (2,165) (268) 124 159 (415) (665) (1,874) 238
-----------------------------------------------------------------------------------------
4,137 5,769 124 159 4,521 3,894 (508) 1,716
-----------------------------------------------------------------------------------------
(Loss) income before taxes
and other items (12,450) 40 83 69 (14,950) 1,542 2,417 (1,571)
Provision (credit) for
income taxes 955 53 -- 616 955 (563)
Noncontrolling interests (561) (23) (561) (23)
-----------------------------------------------------------------------------------------
(Loss) income from
continuing operations (13,966) (36) 83 69 (14,950) 926 901 (1,031)
Discontinued operation (113) (272) (113) (272)
-----------------------------------------------------------------------------------------
Net (loss) income $(14,079) $ (308) $ 83 $ 69 $(14,950) $ 926 $ 788 $(1,303)
=========================================================================================
Basic Diluted
2005 2004 2005 2004
----------------------- ---------------------
Loss per common share from
continuing operations $ (4.06) $ (0.01) $(4.06) $ (0.01)
Discontinued operation (0.03) (0.08) (0.03) (0.08)
---------------------- ---------------------
Net loss per common share $ (4.09) $ (0.09) $(4.09) $ (0.09)
====================== =====================
Weighted average number of
common and equivalent
shares outstanding 3,442 3,442 3,442 3,442
====================== =====================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2005 and 2004
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2005 2004 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------------------
Operating activities
Net (loss) income $(14,079) $ (308) $ 83 $ 69 $(14,950) $ 926 $ 788 $(1,303)
Net loss from discontinued operation 113 272 113 272
-----------------------------------------------------------------------------------
Net (loss) income from continuing
operations (13,966) (36) 83 69 (14,950) 926 901 (1,031)
Adjustments to reconcile net (loss)
income to net cash (used) provided
by operating activities:
Depreciation and amortization 8,698 8,847 5,626 5,714 3,072 3,133
Gain on sale of property (2,280) -- (2,280) --
Asbestos related charge 15,455 -- 15,455 --
Change in operating assets and
liabilities:
Accounts and notes receivable (3,260) (13,296) (432) 58 (3,202) (10,644) 374 (2,710)
Inventories (10,964) (3,486) (83) (69) (5,244) 1,804 (5,637) (5,221)
Prepaid expenses and other assets 403 4,462 1,400 2,692 (997) 1,770
Accounts payable and accrued expenses 3,478 22,568 432 (58) 2,785 20,570 261 2,056
Asbestos-related expenses (12,927) (1,385) (12,927) (1,385)
Asbestos-related expense
reimbursements from insurance
settlement 6,091 -- 6,091 --
Noncontrolling interests 643 (192) 643 (192)
Other (319) (370) (518) 215 199 (585)
-----------------------------------------------------------------------------------
Net cash (used) provided by
operating activities (8,948) 17,112 -- -- (5,484) 19,892 (3,464) (2,780)
Investing activities
Investments in property, plant
and equipment (3,027) (2,539) (2,155) (1,355) (872) (1,184)
Proceeds from sale of property 2,327 30 -- 30 2,327 --
-----------------------------------------------------------------------------------
Net cash (used) provided by investing
activities (700) (2,509) -- -- (2,155) (1,325) 1,455 (1,184)
Financing activities
Net short-term borrowings 2,353 8,067 637 5,030 1,716 3,037
Payments on long-term debt (2,542) (647) (2,542) (647)
Net change in restricted cash (1,311) (2,091) (1,311) (2,091)
-----------------------------------------------------------------------------------
Net cash provided (used) by financing
activities (1,500) 5,329 -- -- (674) 2,939 (826) 2,390
Effect of foreign exchange rate
changes on cash 1,393 234 1,393 234
-----------------------------------------------------------------------------------
Net cash (used) provided by continuing
operations (9,755) 20,166 -- -- (8,313) 21,506 (1,442) (1,340)
Net cash used by discontinued operations (90) (293) (90) (293)
Cash and cash equivalents at beginning of
period 34,691 3,959 29,710 2,169 4,981 1,790
-----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 24,846 $23,832 $ -- $ -- $ 21,397 $ 23,675 $ 3,449 $ 157
===================================================================================
See accompanying notes to consolidating condensed financial statements.
7
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the plan of Congoleum
Corporation, a majority-owned subsidiary of the Company, to settle asbestos
liability) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
The consolidated balance sheet at December 31, 2004 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidating condensed
financial statements have been reclassified to conform to the current period's
presentations.
During 2003, the Company decided to discontinue the operations of Janus Flooring
Corporation ("Janus"), a manufacturer of pre-finished hardwood flooring, and
sell the related assets. Historical financial results have been restated to
reflect the classification of Janus as a discontinued operation in accordance
with the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-lived Assets. Results of Janus, including charges resulting from the
shutdown, are being reported as a discontinued operation.
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") and two of its
subsidiaries filed voluntary petitions commencing cases for reorganization
relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") on December 31, 2003. The accompanying consolidating condensed financial
8
Note A - Basis of Presentation (continued)
statements include the results for Congoleum for all periods presented. ABI
continues to own a majority of the voting stock of Congoleum. As a result, the
Company expects to continue to control Congoleum while it is in reorganization
proceedings. In January 2004, Congoleum filed a pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. On November
8, 2004, Congoleum filed a modified plan of reorganization, disclosure statement
and related documents with the Bankruptcy Court reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures on December 9, 2004, and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of that modified
plan.
On April 22, 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its plan of
reorganization and related documents governing the settlement and payment of
asbestos-related claims against Congoleum. Under the agreed-upon modifications,
asbestos claimants with claims settled under Congoleum's pre-petition settlement
agreement would agree to forebear from exercising the security interest they
were granted and share on a pari passu basis with all other present and future
asbestos claimants in insurance proceeds and other assets of the trust to be
formed upon confirmation of the plan under Section 524(g) of the Bankruptcy Code
(the "Plan Trust") to pay asbestos claims against Congoleum. On July 22, 2005,
Congoleum filed an amended plan of reorganization and related documents with the
Bankruptcy Court, which reflected the results of these negotiations as well as
certain other technical modifications. The Bankruptcy Court approved the
disclosure statement and voting procedures on July 28, 2005, and Congoleum
expects to commence solicitation of acceptances of the plan by the end of August
2005. A hearing to consider confirmation of the plan of reorganization has been
scheduled to begin December 13, 2005. There can be no assurance that Congoleum
will receive the acceptances necessary for confirmation of the amended plan of
reorganization, that the amended plan will not be modified further, that the
amended 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 the amended plan will be confirmed, or that the amended plan, if
confirmed, will become effective.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the current plan. Congoleum expects that a number of the insurance
carriers will continue to vigorously oppose Congoleum's plan. Certain other
parties have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the amended plan.
9
Note A - Basis of Presentation (continued)
In May 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), one of its excess insurance carriers, over
coverage for asbestos-related claims. Under the terms of the settlement, certain
AIG companies will pay approximately $103 million over ten years to the Plan
Trust. The settlement resolves coverage obligations of policies with a total of
$114 million in liability limits for asbestos bodily injury claims and is
subject to final Bankruptcy Court approval and effectiveness of Congoleum's
amended plan of reorganization.
In June 2005, Congoleum entered into a settlement agreement with certain
underwriters at Lloyd's, London, which has been approved by the Bankruptcy
Court, pursuant to which the certain underwriters will pay 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 the
plan becomes effective and the Bankruptcy Court approves the payment.
In August 2005, the Company entered into a settlement agreement with Federal
Insurance Company ("Federal") pursuant to which Federal will pay $4 million to
the Plan Trust once the plan goes effective and the Bankruptcy Court approves
the payment. This agreement is subject to Bankruptcy Court approval. Court
approval of these settlement agreements has been or may be appealed by other
insurance carriers who are not party to the agreements.
Unless the context otherwise provides, references in these Notes to Unaudited
Consolidating Condensed Financial Statements to the amended plan or similar
language refers to the version of the Congoleum plan of reorganization that
Congoleum filed with the Bankruptcy Court on July 22, 2005.
The amended plan of reorganization, if confirmed, would leave non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against Congoleum. The amended plan of reorganization would, among other things,
provide for an assignment of certain rights in, and proceeds of, Congoleum's
applicable insurance to the Plan Trust, which would fund the settlement of all
pending and future asbestos claims and protect Congoleum from future
asbestos-related litigation by channeling all asbestos claims to the Plan Trust
under Section 524(g) of the Bankruptcy Code. Other creditors would be unimpaired
under the plan. The Bankruptcy Court has authorized Congoleum to pay trade
creditors in the ordinary course of business. Congoleum expects that it will
take until the first quarter of 2006 at the earliest to obtain confirmation of
its amended plan of reorganization. There can be no assurance that the plan will
be confirmed, or that if it is confirmed, that the date of the confirmation
would not occur on a date significantly later than in the first quarter of 2006.
Based on its amended plan of reorganization, Congoleum has made provision in its
financial statements for the minimum amount of the range of estimates for its
contribution and costs to effect its plan to settle asbestos liabilities through
the Plan Trust. Through the end of 2004, Congoleum had recorded charges
aggregating $26.0 million to provide for the estimated minimum costs of
completing its reorganization. In the second quarter of 2005, Congoleum recorded
an additional charge of $15.5 million to increase the amount of the estimated
10
Note A - Basis of Presentation (continued)
costs of completing its reorganization in light of the revised timeline for
anticipated confirmation. Actual amounts that will be contributed to the Plan
Trust and costs for pursuing and implementing the plan of reorganization could
be materially higher.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J of the Notes to Unaudited
Consolidating Condensed Financial Statements. There can be no assurance that
Congoleum will be successful in realizing its goals in this regard or in
obtaining confirmation of its amended plan of reorganization or that any
confirmed plan will become effective. As a result, any alternative plan of
reorganization pursued by Congoleum or confirmed by a bankruptcy court could
vary significantly from the description in this Quarterly Report on Form 10-Q,
and the estimated costs and contributions to effect the contemplated amended
plan of reorganization could be significantly greater than currently estimated.
Any plan of reorganization pursued by Congoleum will be subject to numerous
conditions, approvals and other requirements, including Bankruptcy Court and
Federal District Court approvals, and there can be no assurance that such
conditions, approvals and other requirements will be satisfied or obtained.
Delays in getting Congoleum's amended plan of reorganization approved by the
Bankruptcy Court could result in a proceeding that takes longer and is more
costly to Congoleum and the Company than Congoleum and the Company have
estimated.
Although there can be no assurances that the plan will not be further modified
or that Congoleum will obtain the necessary acceptances and approvals required
for confirmation of the plan, the terms of the plan anticipate no changes in
equity ownership of Congoleum upon emergence from reorganization. Accordingly,
the Company has elected to continue to consolidate the financial statements of
Congoleum in its consolidated results because it believes that is the
appropriate presentation given its anticipated continuing control of Congoleum.
However, the accompanying financial statements also present the details of
consolidation to separately show the financial condition, operating results and
cash flows of ABI (excluding Congoleum and its wholly owned subsidiaries) and
Congoleum and its wholly owned subsidiaries, which may be more meaningful for
certain analyses.
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
11
Note A - Basis of Presentation (continued)
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.
Note B - Stock Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) replaces SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. Pro forma disclosure is no
longer an alternative to financial statement recognition. SFAS No. 123(R) was
originally effective for public companies at the beginning of the first interim
or annual period beginning after June 15, 2005. In April 2005, the Securities
and Exchange Commission ("SEC") provided for a phased-in implementation process
for public companies. Based on the Company's year end of December 31, the
Company must adopt SFAS No. 123(R) on January 1, 2006.
SFAS No. 123(R) allows for either prospective recognition of compensation
expense or retrospective recognition, which may be back to the original issuance
of SFAS No. 123 or only to interim periods in the year of adoption. The Company
is currently evaluating these transition methods and determining the effect on
the Company's consolidated results of operations and whether the adoption will
result in amounts that are similar to the current pro-forma disclosures under
SFAS No. 123. For 2005, the Company will continue to disclose stock-based
compensation information in accordance with FASB Statement No. 148 ("SFAS 148"),
Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment
of FASB Statement No. 123, and SFAS No. 123.
12
Note B - Stock Based Compensation (continued)
A reconciliation of consolidated net income (loss), as reported, to pro forma
consolidated net income (loss) including compensation expense for the Company's
and Congoleum's stock-based plans as calculated based on the fair value at the
grant dates for awards made under these plans in accordance with the provisions
of SFAS 123 as amended by SFAS 148, as well as a comparison of as reported and
pro forma basic and diluted EPS follows (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
--------- -------- --------- -------
Net (loss) income:
As reported $(14,703) $1,717 $(14,079) $ (308)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (95) (70) (194) (124)
--------- -------- --------- -------
As adjusted $(14,798) $1,647 $(14,273) $ (432)
========= ======== ========= =======
Net (loss) income per share:
As reported $ (4.27) $ 0.50 $ (4.09) $(0.09)
Pro forma compensation expense (0.03) (0.02) (0.06) (0.04)
--------- -------- --------- -------
$ (4.30) $ 0.48 $ (4.15) $(0.13)
========= ======== ========= =======
Note C - Inventories
Inventories at June 30, 2005 and December 31, 2004 consisted of the following
(in thousands):
June 30, December 31,
2005 2004
---------- ------------
Finished goods $61,017 $54,597
Work-in-process 11,543 9,207
Raw materials and supplies 13,772 12,232
---------- ---------
$86,332 $76,036
========== =========
13
Note D - Sale of Property
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2003, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million was recognized and included in other income in the
first quarter 2005. After taxes and non-controlling interest, the increase in
first quarter 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, 2005 and December 31, 2004 consisted of the
following (in thousands):
June 30, December 31,
2005 2004
----------- ------------
Accrued advertising and
sales promotions $20,738 $24,260
Employee compensation and
related benefits 8,332 9,138
Interest 155 191
Environmental matters 1,000 1,000
Royalties 638 1,118
Taxes payable 2,572 3,709
Other 7,653 9,189
---------- ---------
$41,088 $48,605
========== =========
See Note G for Liabilities Subject to Compromise.
14
Note F - Other Liabilities
Other Liabilities at June 30, 2005 and December 31, 2004 consisted of the
following (in thousands):
June 30, December 31,
2005 2004
----------- ------------
Pension benefits $ 2,672 $ 2,615
Environmental remediation
and product related
liabilities 4,867 4,680
Deferred income taxes 16,531 16,531
Other 1,402 1,411
---------- ---------
$25,472 $25,237
========== =========
See Note G for Liabilities Subject to Compromise.
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J to the Unaudited
Consolidating Condensed Financial Statements), pursuant to SOP 90-7, Congoleum
is required to segregate pre-petition liabilities that are subject to compromise
and report them separately on the consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of Congoleum's pre-petition debt is recorded at face value and
is classified within liabilities subject to compromise. In addition, Congoleum's
accrued but unpaid interest expense on its 8 5/8% Senior Notes Due 2008 is also
recorded in liabilities subject to compromise. See Notes A and J to the
Unaudited Consolidating Condensed Financial Statements for further discussion of
Congoleum's asbestos liability. Liabilities subject to compromise were as
follows (in thousands):
June 30, December 31,
2005 2004
----------- ------------
Current
Other pre-petition payables and
accrued interest $ 18,883 $ 14,225
Non-current
Debt (at face value) 100,000 100,000
Pension liability 16,487 16,936
Other post-retirement benefit obligation 8,145 8,303
Other pre-petition liabilities 12,367 12,051
----------- ----------
136,999 137,290
Elimination - Payable to American Biltrite (186) (186)
----------- ----------
136,813 137,104
----------- ----------
Total liabilities subject to compromise $155,696 $151,329
=========== ==========
15
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 relating to pre-petition matters.
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, 2005 and 2004 (in thousands):
Three Months Ended Three Months Ended
June 30, 2005 June 30, 2004
----------------------- -----------------------
Other Other
Pension Benefits Pension Benefits
---------- ----------- ---------- -----------
Components of Net Periodic
Benefit Cost:
Service cost $ 584 $ 46 $ 503 $ 46
Interest cost 1,443 130 1,372 121
Expected return on plan
assets (1,267) -- (1,204) --
Recognized net actuarial
loss (60) 15 (62) 12
Amortization of
transition obligation (18) -- (34) --
Amortization of prior
service cost 361 (47) 349 (116)
---------- ----------- ---------- -----------
Net periodic benefit cost $ 1,043 $144 $ 924 $ 63
========== =========== ========== ===========
16
Note H - Pension Plans (continued)
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
----------------------- -----------------------
Other Other
Pension Benefits Pension Benefits
---------- ----------- ---------- -----------
Components of Net Periodic
Benefit Cost:
Service cost $ 1,171 $ 92 $ 1,057 $ 85
Interest cost 2,888 260 2,804 242
Expected return on plan
assets (2,537) -- (2,425) --
Recognized net actuarial
loss (121) 30 (123) 24
Amortization of
transition obligation (36) -- (69) --
Amortization of prior
service cost 721 (94) 749 (231)
---------- ----------- ---------- -----------
Net periodic benefit cost $ 2,086 $288 $ 1,993 $ 120
========== =========== ========== ===========
The weighted average assumptions used to determine net periodic benefit cost for
the three and six months ended June 30, 2005 and 2004 were as follows:
2005 2004
------------------------ ------------------------
Other Other
Pension Benefits Pension Benefits
------------- -------- ------------- --------
Discount rate 6.10% - 6.25% 6.25% 6.25% - 6.75% 6.25%
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% - 5.50% --
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of Congoleum's owned and previously owned
facilities. The contingencies also include claims for personal injury and/or
property damage. The exact amount of such future cost and timing of payments are
indeterminable due to such unknown factors as the magnitude of cleanup costs,
the timing and extent of the remedial actions that may be required, the
determination of the Company's and Congoleum's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance. The Company and Congoleum have recorded provisions
17
Note I - Commitments and Contingencies (continued)
in the financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company and Congoleum
believe their estimate of the future amount of these liabilities is reasonable,
and that they will be paid over a period of five to ten years, the timing and
amount of such payments may differ significantly from the Company's and
Congoleum's assumptions. Although the effect of future government regulation
could have a significant effect on the Company's and Congoleum's costs, the
Company and Congoleum are not aware of any pending legislation which would
reasonably have such an effect. There can be no assurances that the costs of any
future government regulations could be passed along to their customers.
Estimated insurance recoveries related to these liabilities are reflected in
other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted to
reflect such revisions and progress.
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 1,847 pending claims involving
approximately 2,516 individuals as of June 30, 2005. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Six Months Year Ended
Ended December 31,
June 30, 2005 2004
-------------- -------------
Beginning claims 1,838 1,954
New claims 421 678
Settlements (17) (20)
Dismissals (395) (774)
---------- ---------
Ending claims 1,847 1,838
========== =========
18
Note I - Commitments and Contingencies (continued)
The total indemnity costs incurred to settle claims during the six months ended
June 30, 2005 and twelve months ended December 31, 2004 were $1,023,000 and
$1,320,000, respectively, all of which were paid by ABI's insurance carriers
pursuant to ABI's relevant insurance policies, as were the related defense
costs. The average indemnity cost per resolved claim was approximately $2,480
for the six months ended June 30, 2005 and $2,000 for the year ended December
31, 2004.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable.
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum), based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2004, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At June 30, 2005 and
December 31, 2004, the estimated range of liability for settlement of current
claims pending and claims anticipated to be filed through 2010 was $7.5 million
to $19.4 million. The Company believes no amount within this range is more
likely than any other, and accordingly has recorded the minimum liability
estimate of $7.5 million in its consolidated financial statements. The Company
also believes that, based on this minimum liability estimate, the corresponding
amount of insurance probable of recovery is $7.5 million at June 30, 2005 and
December 31, 2004, which has been included in other assets. Receivables for
expected insurance recoveries are recorded if the related carriers are solvent
and paying claims under a reservation of rights or under an obligation pursuant
to coverage in place or a settlement agreement. Two insurance carriers account
for 70% and 25%, respectively, of the $7.5 million deemed probable of recovery.
The estimated liabilities and insurance recovery amounts were based on currently
known facts and a number of assumptions. However, projecting future events, such
as the number of new claims to be filed each year, the average cost of disposing
of each such claim, and the continuing solvency of various insurance companies,
as well as numerous uncertainties surrounding asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be significantly higher or lower than those projected or recorded.
19
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 five year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's anticipated plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2004 Annual Report on Form 10-K that it has
been named as a Potentially Responsible Party ("PRP") within the meaning of the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended ("CERCLA"), with respect to four sites located in three separate states.
ABI also reported that it is potentially responsible for response and
remediation costs with respect to three state-supervised sites. There have been
no material developments relating to these sites during the three month period
ended June 30, 2005.
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
amounts due under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2005 will be approximately $6.4 million. For costs
beyond 2005, ABI has estimated the range to be between $20.0 million and $59.0
million. As of June 30, 2005, ABI has estimated its potential liability to Olin
to be in the range of $4.4 million to $13.8 million after allocation for Olin's
internal costs but before any recoveries from insurance and TBC.
20
Note I - Commitments and Contingencies (continued)
The State of Maine Department of Environmental Protection ("MEDEP") has put the
present owner of a former ABI plant on notice to clean up a dumpsite (the "Maine
Site") where there is exposed asbestos from sheet vinyl waste along with other
hazardous substances. ABI is reviewing the condition of the site and its
potential liability for its share of any clean-up costs. ABI believes, at this
time, that the cost of site investigation, remediation, maintenance and
monitoring at the site will be between approximately $1.2 million and $2.9
million. ABI has not yet entered a final cost sharing agreement with the current
owner. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
costs incurred by ABI at this site.
The Environmental Protection Agency ("EPA") has put the same former owner of the
Maine Site on notice to clean up a parcel of land (the "Maine Parcel") in the
same town of the Maine Site. The parcel of land is alleged to contain
polychlorinated biphenyls ("PCB's") in the soil. In May 2005, after discussions
with the MEDEP, the EPA concluded that the site should be returned to the MEDEP
for oversight of the remediation work. ABI is reviewing the condition of the
site and its potential liability for its share of any clean-up costs, as well as
the potential availability of insurance coverage for such costs. ABI cannot
determine at this time the cost of site investigation, remediation, maintenance
and monitoring at the site. ABI has not yet entered a cost sharing agreement
with the former owner. Under an agreement between ABI and TBC, TBC is liable for
37.5% of costs incurred by ABI at this site.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the three state supervised
sites, the Olin Site, the Maine Site and the Maine Parcel. An agreement was
executed by ABI and its carriers regarding the payment of the defense costs for
the Olin Site. ABI has reached agreements with three of its insurance carriers
whereby the carriers have reimbursed the Company $1.9 million for past and
current environmental claims. One carrier has also agreed to reimburse the
Company for 2.5% of the Company's liabilities regarding future environmental
expenses related to the Olin Site, $46,300 of which was reimbursed through June
30, 2005 and which reimbursement was shared 37.5% with TBC pursuant to the
Company's agreement with TBC. ABI and its insurance carriers continue to discuss
ABI's remaining demands for insurance coverage for these sites. As of June 30,
2005, the Company has accrued $5.9 million for ABI's estimable and probable
amounts for environmental-related contingencies described above. The Company has
also recorded a receivable of $2.2 million for ABI's estimable and probable
recoveries for the contingencies described above.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100 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.
21
Note I - Commitments and Contingencies (continued)
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations and cash flows of the
Company.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary case under Chapter 11
of the Bankruptcy Code. See Note J - "Congoleum Asbestos Liabilities and
Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability 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 to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large, financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater treatment system was installed thereafter.
The EPA recently selected a remedy for the soil and shallow groundwater;
however, the remedial investigation/feasibility study related to the deep
groundwater has not been completed. The PRP group estimated that future costs of
the remedy recently selected by the EPA based on engineering estimates would be
approximately $11 million. Congoleum's proportionate share, based on waste
disposed at the site, is estimated to be approximately 5.7%, or $0.7 million.
The majority of Congoleum's share of costs is presently being paid by one of its
insurance carriers, whose remaining policy limits for this claim will cover
approximately half this amount. Congoleum expects the balance to be funded by
other insurance carriers and Congoleum.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.7 million, including capital outlays and future maintenance
22
Note I - Commitments and Contingencies (continued)
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 $1.4 million was included in non-current liabilities
subject to compromise as of June 30, 2005 and December 31, 2004.
At June 30, 2005 and December 31, 2004, Congoleum had recorded a total of $4.6
million for estimated environmental liabilities and $2.1 million for related
insurance recoveries. Receivables for expected insurance recoveries are recorded
if the related carriers are solvent and paying claims under a reservation of
rights or under an obligation pursuant to coverage in place or a settlement
agreement. Substantially all of Congoleum's recorded insurance asset for
environmental matters is collectible from a single carrier.
Congoleum anticipates that these matters will be resolved over a period of years
and that after application of expected insurance recoveries, funding the costs
will not have a material adverse impact on Congoleum's liquidity or financial
position. However, unfavorable developments in these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of Congoleum.
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.
Note J - Congoleum Asbestos Liabilities and Reorganization
On December 31, 2003, Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the District of New Jersey. These Chapter 11 cases are being jointly
administered as Case No. 03-51524 (KCF), styled In re Congoleum Corporation, et
al., and were commenced in order to resolve Congoleum's asbestos-related
liabilities and any future asbestos-related liability that might be asserted
against Congoleum. During 2003, Congoleum obtained the asbestos personal injury
claimant votes necessary for approval of a proposed pre-packaged Chapter 11 plan
of reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court.
In November 2004, Congoleum announced that it had filed a modified plan of
reorganization and related documents with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee, the Future Claimants' Representative and other asbestos claimant
representatives. Congoleum had solicited and received the acceptances necessary
for confirmation of its plan as constituted at that time.
23
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the Asbestos Claimants' Committee and the Future
Claimants' Representative to make certain modifications to its proposed plan of
reorganization and related documents governing the settlement and payment of
asbestos related claims against Congoleum. On July 22, 2005, Congoleum filed an
amended plan of reorganization and related documents with the Bankruptcy Court
reflecting the results of these negotiations as well as certain other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures on July 28, 2005, and Congoleum expects to commence solicitation of
acceptances of the plan by the end of August 2005. A hearing to consider
confirmation of the plan of reorganization has been scheduled to begin December
13, 2005. There can be no assurance that Congoleum will receive the acceptances
necessary for confirmation of the amended plan of reorganization, that the
amended plan will not be modified further, that the amended 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 the
amended plan will be confirmed, or that the amended plan, if confirmed, will
become effective.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the current plan. Congoleum expects that a number of insurance
carriers will continue to vigorously oppose Congoleum's plan. Certain other
parties have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the amended plan.
In May 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), one of its excess insurance carriers, over
coverage for asbestos-related claims. Under the terms of the settlement, certain
AIG companies will pay $103 million over ten years to the Plan Trust. The
settlement resolves coverage obligations of policies with a total of $114
million in liability limits for asbestos bodily injury claims and is subject to
final Bankruptcy Court approval and effectiveness of Congoleum's amended plan of
reorganization.
In June 2005, Congoleum entered into a settlement agreement with certain
underwriters at Lloyd's, London, which has been approved by the Bankruptcy
Court, pursuant to which the certain underwriters will pay 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 the
plan becomes effective and the Bankruptcy Court approves the payment.
In August 2005, the Company entered into a settlement agreement with Federal
Insurance Company ("Federal") pursuant to which Federal will pay $4 million to
the Plan Trust once the plan goes effective and the Bankruptcy Court approves
the payment. This agreement is subject to Bankruptcy Court approval. Court
approval of these settlement agreements has been or may be appealed by other
insurance carriers who are not party to the agreements.
24
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
The amended plan, if confirmed, would leave most of Congoleum's non-asbestos
creditors unimpaired and would resolve all pending and future asbestos claims
against Congoleum. The amended plan of reorganization would provide for, among
other things, an assignment of, or grant a security interest in, certain rights
in, and proceeds of, Congoleum's applicable insurance to the Plan Trust, which
would fund distributions to pending and future asbestos claimants and provide
for the issuance of an injunction that would protect Congoleum from all future
asbestos-related litigation and liabilities by channeling all current and future
asbestos claims to the Plan Trust. Congoleum's general unsecured creditors would
be unimpaired under the plan.
ABI and Congoleum expect to contribute, among other things, to the Plan Trust
$250 thousand in cash from ABI and a note from Congoleum (the "Congoleum Note")
in an initial aggregate principal amount of approximately $2.7 million with
payment of such note secured by a pledge by ABI of both the common stock of
Congoleum that it owns as well as certain of its rights to receive certain
indemnity payments from Congoleum. The Congoleum Note is expected to be subject
to future increase as of the last trading day of the 90 consecutive trading day
period commencing on the first anniversary of the effective date of Congoleum's
confirmed Chapter 11 plan of reorganization (the "Principal Adjustment Date") in
an amount equal to the excess, if any, of the amount by which 51% of Congoleum's
market capitalization, based on the average closing prices of Congoleum's Class
A common stock over that 90 trading day period, exceeds approximately $2.7
million. This adjustment amount could result in the principal amount of the note
increasing materially. The adjusted principal amount of the note would be
effective as of the measurement date of the adjustment. ABI does not expect that
the Congoleum Note would have a material adverse effect on ABI's (excluding
Congoleum) liquidity or capital resources.
The plan also provides for a possible additional contribution by ABI to the Plan
Trust in the event ABI sells its interest in Congoleum before the third
anniversary of the Principal Adjustment Date. The expected amount of any
additional contribution by ABI would be equal to 50% of any amount by which 51%
of the equity value of Congoleum implied by ABI's sale of its interest in
Congoleum exceeds the aggregate principal amount of the Principal Adjustment
Date, after taking into account any increase in the principal amount of the
Congoleum Note as a result of the remeasurement of the principal amount as of
the Principal Adjustment Date.
As part of Congoleum's amended plan of reorganization, ABI would receive certain
relief as may be afforded under Section 524(g)(4) of the Bankruptcy Code from
asbestos claims that derive from claims made against Congoleum, which claims are
expected to be channeled to the Plan Trust. However, the amended plan of
reorganization does not provide that any other asbestos claims that may be
asserted against ABI would be channeled to the Plan Trust. Under the amended
plan of reorganization, any rights of indemnity ABI may have (under the Joint
Venture Agreement, entered into in 1992, as to which both Congoleum and ABI are
parties) against Congoleum are prohibited until after any amounts due and
payable to the Plan Trust under the Congoleum Note have been paid in full to the
Plan Trust. Until such time, any such indemnity payments that would otherwise
have been payable by the Plan Trust to ABI would be set aside by
25
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
the Plan Trust and held in escrow by the Plan Trust for ABI's benefit and
pledged by ABI as additional collateral securing Congoleum's obligations under
the Congoleum Note until released from such escrow and paid to ABI.
While Congoleum believes its amended plan is feasible and should be confirmed by
the Bankruptcy Court and is in the best interest of all Congoleum's
constituents, there are sufficient risks and uncertainties such that no
assurances of the outcome of Congoleum's Chapter 11 case can be given. Congoleum
expects that its remaining costs to confirm and effect its plan, consisting
principally of legal and advisory fees and contributions to the plan trust to be
established upon confirmation of the plan will be approximately $16.5 million at
a minimum and could be materially higher.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three and
six months ended June 30, 2005 and 2004 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- --------
Net (loss) income $(14,703) $1,717 $(14,079) $ (308)
Foreign currency translation
adjustments 470 (155) 278 (408)
Minimum pension liability
adjustment -- 551 -- 551
--------- --------- --------- --------
Total comprehensive (loss) income $(14,233) $2,113 $(13,801) $ (165)
========= ========= ========= ========
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.
26
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, 2005 and 2004
were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales to external customers:
Flooring products $ 58,108 $ 62,951 $115,738 $114,951
Tape products 25,231 23,335 47,830 44,353
Jewelry 13,788 15,119 29,676 30,873
Canadian division 12,415 11,105 23,722 21,748
--------- --------- --------- ---------
Total net sales to
external customers 109,542 112,510 216,966 211,925
Intersegment net sales:
Flooring products -- 18 -- 69
Tape products 38 29 58 46
Jewelry -- -- -- -
Canadian division 1,621 1,713 2,805 2,900
--------- --------- --------- ---------
Total intersegment
net sales 1,659 1,760 2,863 3,015
Reconciling items
Intersegment net sales (1,659) (1,760) (2,863) (3,015)
--------- --------- --------- ---------
Total consolidated net sales $109,542 $112,510 $216,966 $211,925
========= ========= ========= =========
27
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, 2005 and 2004 was as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Segment profit (loss)
Flooring products $(14,598) $1,977 $(14,950) $ 1,542
Tape products 891 111 922 (87)
Jewelry (297) 1,518 328 804
Canadian division (348) (692) (597) (1,143)
--------- --------- --------- ---------
Total segment profit
(loss) (14,352) 2,914 (14,297) 1,116
Reconciling items
Corporate expenses (274) (164) 1,752 (1,168)
Intercompany profit
(loss) 51 (14) 95 92
--------- --------- --------- ---------
Total consolidated
income (loss) before
income taxes and
other items $(14,575) $2,736 $(12,450) $ 40
========= ========= ========= =========
Corporate expenses for the six months ended June 30, 2005 include a gain of $2.3
million from the sale of a warehouse during the first quarter (see Note D). The
flooring products segment's loss for the three and six months ended June 30,
2005 includes a $15.5 million charge by Congoleum to increase its reserves for
asbestos related reorganization costs (see Note J).
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,
2005 2004
----------- ------------
Segment assets
Flooring products $202,211 $212,882
Tape products 62,596 51,788
Jewelry 33,689 37,158
Canadian division 41,897 39,953
----------- -----------
Total segment assets 340,393 341,781
Reconciling items
Assets of discontinued operation 3,048 2,952
Corporate items 26,313 22,577
Intersegment accounts receivable (23,192) (11,558)
Intersegment profit in inventory (186) (281)
Intersegment other asset (186) (186)
----------- -----------
Total consolidated assets $346,190 $355,285
=========== ===========
28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's (and
its majority-owned subsidiary Congoleum's) expectations, as of the date of this
report, of future events and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on any forward-looking statements. Factors that
could cause or contribute to the Company's actual results differing from its
expectations include those factors discussed elsewhere in this report, including
in the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 and in the Company's other filings with the Securities and
Exchange Commission.
On December 31, 2003, the Company's subsidiary Congoleum and two of Congoleum's
subsidiaries each filed their respective voluntary petitions commencing cases
for reorganization relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of New Jersey. These Chapter 11 cases
are being jointly administered as Case No. 03-51524 (KCF), styled In re
Congoleum Corporation, et al., to resolve claims that have been or might in the
future be asserted against Congoleum related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization, and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court.
On November 8, 2004, Congoleum filed a modified plan of reorganization,
disclosure statement and related documents with the Bankruptcy Court reflecting
the result of further negotiations with representatives of the Asbestos
Claimants' Committee, the Future Claimants' Representative and other asbestos
claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures on December 9, 2004, and Congoleum obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of the modified plan.
On April 22, 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreement would agree to forebear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
29
assets of the trust to be formed upon confirmation of Congoleum's plan of
reorganization (the "Plan Trust") to pay asbestos claims against Congoleum. As a
result of these changes, Congoleum advised the Bankruptcy Court that Congoleum
would withdraw its existing plan and prepare an amended plan and disclosure
statement and solicit acceptances from certain claimant creditors affected by
these modifications. On July 22, 2005, Congoleum filed an amended plan of
reorganization and related documents with the Bankruptcy Court reflecting the
results of these negotiations as well as certain other technical modifications.
The Bankruptcy Court approved the disclosure statement and voting procedures on
July 28, 2005, and Congoleum expects to commence solicitation of acceptances of
the plan by the end of August 2005. A hearing to consider confirmation of the
plan of reorganization has been scheduled to begin December 13, 2005. There can
be no assurance that Congoleum will receive the acceptances necessary for
confirmation of the amended plan of reorganization, that the amended plan will
not be modified further, that the amended 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 the amended plan will be
confirmed, or that the amended plan, if confirmed, will become effective.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the current plan. Congoleum expects that a number of the insurance
carriers will continue to vigorously oppose Congoleum's plan. Certain other
parties have also filed various objections to Congoleum's previously proposed
plans of reorganization and may file objections to the amended plan.
In May 2005, Congoleum entered into a settlement agreement with American
International Group, Inc. ("AIG"), one of its excess insurance carriers, over
coverage for asbestos-related claims. Under the terms of the settlement, certain
AIG companies will pay $103 million over ten years to the Plan Trust. The
settlement resolves coverage obligations of policies with a total of $114
million in liability limits for asbestos bodily injury claims and is subject to
final Bankruptcy Court approval and effectiveness of Congoleum's amended plan of
reorganization.
In June 2005, Congoleum entered into a settlement agreement with certain
underwriters at Lloyd's, London pursuant to which the certain underwriters will
pay $19,950,000 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 the plan becomes effective and the Bankruptcy Court approves the payment.
The agreement is subject to Bankruptcy Court approval.
In August 2005, the Company entered into a settlement agreement with Federal
Insurance Company ("Federal") pursuant to which Federal will pay $4 million to
the Plan Trust once the plan goes effective and the Bankruptcy Court approves
the payment. This agreement is subject to Bankruptcy Court approval. Court
approval of these settlement agreements has been or may be appealed by other
insurance carriers who are not party to the agreements.
30
Unless the context otherwise provides, references in this report to the amended
plan or similar language refers to the version of the Congoleum plan of
reorganization that Congoleum filed with the Bankruptcy Court on July 28, 2005.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $491 million. As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing a pre-petition trust (the
"Collateral Trust") to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in its
rights under applicable insurance coverage and payments from insurers for
asbestos claims. Under Congoleum's amended plan of reorganization, after the
establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust. The Company expects that any claims subject to
the Claimant Agreement that are unsatisfied as of the confirmation of the plan
of reorganization by the Bankruptcy Court would be channeled to the Plan Trust.
As a result of tabulating ballots on its fourth amended plan, the Company is
also aware of claims by claimants whose claims were not determined under the
Claimant Agreement but who have submitted claims with a value of $512 million
based on the settlement values applicable in the current amended plan.
The amended plan and Collateral Trust Agreement, as modified, will obligate
Congoleum, together with the Plan Trust, to indemnify certain asbestos claimant
representatives for all costs and liabilities (including attorneys' fees)
relating to the negotiation of the amendment of the plan and the Collateral
Trust. Congoleum's indemnification obligations in this regard are capped under
the amended plan and plan trust agreement at $3 million. In addition, the plan
amendments further obligate Congoleum to fund any actual costs in excess of $2
million incurred by such asbestos claimant representatives in connection with
the confirmation of the plan, subject to Bankruptcy Court approval of those
costs.
Based on its reorganization strategy, which included Congoleum settling certain
asbestos claims prior to commencing its Chapter 11 case, Congoleum has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust. Through the end of 2004, Congoleum had
recorded charges aggregating $26.0 million to provide for the estimated minimum
costs of completing its reorganization. In the second quarter of 2005, Congoleum
recorded an additional charge of $15.5 million to increase the amount of the
estimated costs of completing its reorganization plan in light of the revised
timeline for anticipated confirmation. Congoleum expects that its remaining
costs to confirm and effect its plan, consisting principally of legal and
advisory fees and contributions to the plan trust to be established upon
confirmation of the plan will be approximately $16.5 million at a minimum.
Actual amounts that will be contributed to the plan trust and costs for
obtaining confirmation of and implementing the plan of reorganization could be
materially higher, which could have a material adverse effect on ABI's and
Congoleum's consolidated results of operations as well as Congoleum's financial
position.
31
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 (K&M) 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, 2004, 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.
32
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
2005 2004 2005 2004
-------------------------------------- -------------------------------------
Net sales $51,362 $49,426 $101,104 $ 96,884
Cost of sales 37,634 34,599 72,565 69,095
----------- ----------- ----------- ----------
Gross profit 13,728 26.7% 14,827 30.0% 28,539 28.2% 27,789 28.7%
Selling, general &
administrative expenses 12,839 25.0% 13,280 26.9% 26,630 26.3% 27,644 28.5%
----------- ----------- ----------- ----------
Operating income (loss) 889 1,547 1,909 145
Interest expense, net 647 762 1,366 1,478
Other expense (income), net 258 95 (1,874) 238
----------- ----------- ----------- ----------
(Loss) income before taxes and
other items (16) 690 2,417 (1,571)
(Benefit from) provision for
income taxes (16) 234 955 (563)
Noncontrolling interests (87) (59) (561) (23)
----------- ----------- ----------- ----------
(Loss) income from continuing
operations $ (87) $ 397 $ 901 $ (1,031)
=========== =========== =========== ==========
Net sales in the second quarter of 2005 were $51.4 million compared to $49.4
million in the second quarter of 2004, an increase of $2.0 million or 3.9%. This
increase was due to higher net sales at the Tape and Canadian divisions, partly
offset by lower net sales at K&M. Tape and the Canadian divisions had increases
in net sales of $1.9 million (8.1%) and $1.4 million (12.5%), respectively,
while K&M's net sales declined by $1.3 million (8.8%). The increase in net sales
at the Tape division was driven by a combination of higher pricing ($1.3 million
across all product lines) and volume ($0.7 million, primarily in automotive
products). The increase in Canadian division net sales was mostly due to the
foreign exchange impact of a stronger Canadian dollar, and improved flooring
product sales (up 13%) offset by lower industrial sales (down 5%). Net sales at
K&M declined due to higher returns, markdowns, and other allowances and lower
second quarter sales to two customers (down 49%). Net sales for the first six
months of 2005 increased $4.2 million (4.4%) to $101.1 million from $96.9
million for the first half of 2004. Tape and Canadian division net sales were
higher by 7.8% and 9.0%, respectively, while K&M's net sales were 3.9% lower for
the first half of this year versus last year for the same reasons affecting the
second quarter.
Gross profit declined from 30.0% for the second quarter of 2004 to 26.7% for the
second quarter of 2005. Gross profit at the Tape division improved by 3.0 points
as a result of additional sales volume, better manufacturing performance, and
sales price increases, which helped offset increases in raw material costs.
Gross profit at the Canadian division improved by 0.7 points because of improved
product mix. Gross profit at K&M decreased by 15.6 points as a result of higher
costs for returns, markdowns and allowances (13.6 points) as well as price
increases by suppliers in China (2.0 points). Gross profit for the six months
ended June 30, 2005 was 28.2% compared to 28.7% for the first six months of
2004, 0.5 points lower despite the increase in net sales. Tape division gross
profit was higher (1.9 points) for the six months compared to the prior year as
33
a result of the same factors that affected the division's second quarter gross
profit. Gross profit for K&M decreased by 3.9 points for the six month period as
a result of the significant decline in gross profit for the second quarter of
2005. The gross profit percentage for the Canadian division for the first six
months of 2005 was approximately the same as the gross profit percentage for the
first half of 2004.
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, 2005 and 2004 would have been
26.3% and 29.5%, respectively. The gross profit margins for the six months ended
June 30, 2005 and 2004 would have been 27.8% and 28.2%, respectively.
Selling, general and administrative ("SG&A") expenses in the second quarter of
2005 decreased by $441 thousand compared to the second quarter of 2004. The
decrease in expense was primarily due to lower SG&A costs at K&M as a result of
lower compensation costs and professional fees. As a percentage of net sales,
SG&A decreased from 26.9% to 25.0%, reflecting the decrease in expense as well
as the increase in sales volume at the Tape and Canadian divisions. SG&A
expenses for the six months ended June 30, 2005 were $26.6 million (26.3% of net
sales) versus $27.6 million (28.5% of net sales) for the first half of 2004. The
decrease in expense is attributed to lower compensation expense at K&M and lower
professional fees at the Corporate level.
Interest expense for the second quarter and first half of 2005 was lower,
reflecting a lower interest rate during the second quarter on the Company's
outstanding note issued to The Prudential Insurance Company of America. Higher
borrowings under the Canadian line of credit were offset by lower borrowings at
the Corporate level.
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.
The effective tax rate was 40% for the first half of 2005 compared to 36% for
the first half of 2004. During the first half of 2004, the Canadian division
recorded a higher loss and a higher tax benefit (effective rate of 36%). For
2005, the Canadian division lowered its effective tax rate to 30% consistent
with its overall effective rate for 2004.
The loss from continuing operations in the second quarter of 2005 was $87
thousand compared to income from continuing operations of $397 thousand in the
corresponding prior year period, reflecting the decline in gross profit margin.
For the six months ended June 30, 2005, income from continuing operations was
$901 thousand compared to a loss of $1 million for the same period last year.
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.
34
Congoleum
Three Months Ended June 30 Six Months Ended June 30
2005 2004 2005 2004
-------------------------------------- --------------------------------------
Net sales $ 58,108 $62,951 $115,738 $114,951
Cost of sales 44,338 46,065 88,307 84,514
----------- ----------- ----------- -----------
Gross profit 13,770 23.7% 16,886 26.8% 27,431 23.7% 30,437 26.5%
Selling, general &
administrative expenses 26,127 45.0% 13,016 20.7% 37,860 32.7% 25,001 21.7%
----------- ----------- ----------- -----------
Operating (loss) income (12,357) 3,870 (10,429) 5,436
Interest expense, net 2,534 2,314 4,926 4,559
Other income (expense), net (293) (421) (415) (665)
----------- ----------- ----------- -----------
(Loss) income before taxes (14,598) 1,977 (14,950) 1,542
Provision for income taxes -- 616 -- 616
----------- ----------- ----------- -----------
Net (loss) income $(14,598) $ 1,361 $(14,950) $ 926
=========== =========== =========== ===========
Net sales for the quarter ended June 30, 2005 were $58.1 million as compared to
$63.0 million for the quarter ended June 30, 2004, a decrease of $4.9 million or
7.7%. The decrease resulted primarily from the impact of a $4.4 million
reduction by a major distributor of its inventory of Congoleum's products as
compared to a $3.8 million increase in the second quarter of 2004. Additional
factors contributing to the decline were lower sales of do-it-yourself tile due
to the loss of a major home center customer (down 67%), partially offset by
higher sales in the manufactured housing category (up 0.9%) and the impact of
selling price increases instituted in late 2004 and 2005 (10%).
Net sales for the six months ended June 30, 2005 totaled $115.7 million as
compared to $115.0 million for the same period in the prior year, an increase of
$0.7 million or 0.7%. The increase reflects higher sales to the manufactured
housing category (up 3.7%) and the impact of selling price increases instituted
in late 2004 and 2005 (up 10%) substantially offset by a $3.5 million inventory
decrease by a major customer in the first half of 2005 versus a $1.7 million
increase in the first half of 2004, lower sales of do-it-yourself tile to the
mass merchandiser category (down 59.4%) and lower sales of residential products
(down 5.7%).
Gross profit for the quarter ended June 30, 2005 totaled $13.8 million, or 23.7%
of net sales, compared to $16.9 million, or 26.8% of net sales, for the same
period last year. The major factor leading to the reduction in gross margin
percent was the sharp rise in raw material costs experienced during the fourth
quarter of 2004 and continuing into the second quarter of 2005, which reduced
margins by 11.5 percentage points of net sales, coupled with a less profitable
sales mix (1.1 percentage points of net sales). This was partially mitigated by
the 10.0 percentage point increase in selling prices, as well as improved plant
efficiencies and cost reduction programs which benefited gross margins by an
additional 0.1 percentage point. Gross profit for the six months ended June 30,
2005 was $27.4 million or 23.7% of net sales, compared to $30.4 million, or
26.5% of net sales for the same period in the prior year. The lower gross profit
dollars and margin percent reflect the same factors impacting the second quarter
2005.
35
Selling, general and administrative expenses were $ 26.1 million for the quarter
ended June 30, 2005 as compared to $13.0 million for the quarter ended June 30,
2004, an increase of $13.1 million. The increase in expenses reflects a charge
of $15.5 million taken during the second quarter of 2005 in connection with the
revised time and cost estimate for completion of Congoleum's Chapter 11
reorganization. Operating expenses excluding this charge declined by $2.3
million reflecting lower incentive related expenses of $1.0 million and a
reduction of $0.9 million in merchandising and sales support related costs. As a
percent of net sales, selling, general and administrative costs were 44.9%
(18.3% before the asbestos related charge) for the quarter ended June 30, 2005
compared to 20.7% for the same period last year. Selling, general and
administrative expenses for the six months ended June 30, 2005 totaled $37.9 or
32.7% of sales as compared to $25.0 million or 21.7% for the same period last
year, with the increase due to the asbestos related charge.
The loss from operations was $12.4 million for the quarter ended June 30, 2005
compared to income of $3.9 million for the quarter ended June 30, 2004. The
reduction in operating income was primarily due to the asbestos related charge,
together with lower sales and related gross margin dollars. For the six months
ended June 30, 2005, loss from operations totaled $10.4 million as compared to
income from operations of $5.4 million for the same period in the prior year due
to the asbestos related charge and the impact of higher raw material costs.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased $1.6
million in the first six months of 2005 to $3.4 million. Cash used by operating
activities, principally for seasonal working capital increases, were financed by
income earned year-to-date and with short term borrowings. Working capital at
June 30, 2005 was $19.3 million, up from $16.2 million at December 31, 2004. The
ratio of current assets to current liabilities at June 30, 2005 was 1.32
compared to 1.27 at December 31, 2004, consistent with the increased amount of
working capital at June 30, 2005.
Capital expenditures in the first half of 2005 were $0.9 million compared to
$1.2 million for the first half of 2004. It is anticipated that capital spending
for the full year 2005 will be between $3 million and $4 million.
During the first quarter, the Company sold a warehouse for $2.5 million,
resulting in net cash proceeds of $2.3 million. The warehouse was owned by
Tullahoma Properties L.L.C., a subsidiary in which the Company owns a 62.5%
interest.
The Company has recorded provisions which it believes are adequate for
environmental remediation, 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 three to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
36
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that such costs could be passed along to its customers.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Fleet National Bank, a Bank of America company ("Fleet"), 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 AB Canada. The amount of
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 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 issue 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 revolving loans borrowed by American Biltrite
Inc. and K&M Associates L.P. under the Credit Facility periodically 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 Fleet'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 revolving loans will be calculated
based on a LIBOR based rate, and if Fleet 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 a
percentage of AB Canada's accounts receivable, inventory and fixed assets, and
(c) $20 million less the amount of 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 issue letters of credit in an aggregate amount
at any time 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.
37
Interest is payable quarterly on revolving loans under the Canadian sublimit
facility periodically 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,
ABI Canada may generally determine whether interest on revolving loans will be
calculated based on a LIBOR based rate.
Pursuant to the Credit Facility, and in connection with the Canadian sublimit
facility, AB Canada granted a security interest in all of its personal property
to the Canadian Lender. AB Canada repaid all amounts outstanding under its
previous credit agreement with another lender from the proceeds of borrowings
under the Credit Facility.
The Credit Facility expires on September 30, 2006.
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%.
Principal on the Notes is repayable in five annual installments of $4.0 million
beginning on August 28, 2006.
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 12-month period beginning
38
immediately after June 30, 2006, as determined under the Credit Facility (the
"Pro Forma Financial Covenant"). 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.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its subsidiaries granted BofA 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, the Company
and certain of its 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
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. AB Canada repaid all amounts outstanding under its previous credit
agreement with another lender from the proceeds of borrowings under the Credit
Facility.
39
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.
Fees and expenses incurred for the amendments to the Credit Facility and Note
Agreement in May 2005 were approximately $425 thousand.
There can be no assurance that the Company will not need to obtain additional
amendments or waivers of covenants under its debt agreements in 2005 or
subsequent years. If it fails to satisfy those covenants it will be in default
under the respective debt agreements.
Certain defaults under the Note Agreement, such as defaults resulting from
certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum), automatically cause all
amounts owing with respect to the 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.
Certain events of default under the Credit Facility, such as defaults resulting
from certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum) automatically terminates
Fleet'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, Fleet 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, Fleet 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
40
likely be unable to repay those outstanding amounts, in which case, Fleet as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise Fleet'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 proceeds from the sale of the Janus Flooring assets and borrowings
available under its existing credit facilities will be adequate for its expected
capital expenditure, working capital and debt service needs, subject to
compliance with the covenants contained in its debt agreements and the ability
of the Company to replace or refinance its existing credit facility that is
scheduled to expire on 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 Congoleum's amended plan of reorganization, it is expected that certain
rights that the Company may have to receive indemnification for claims under the
plan of reorganization or the joint venture agreement relating to the
contribution by ABI to Congoleum in 1993 of the Company's tile division, subject
to certain exceptions, will not be paid to the Company for so long as any
obligations owed to the Plan Trust under the promissory note expected to be
contributed by Congoleum to the Plan Trust remain outstanding. Instead, those
amounts will be held in escrow by the Plan Trust and be pledged by the Company
as collateral securing Congoleum's obligations under that promissory note until
released from such escrow and paid to the Company pursuant to the terms of
Congoleum's plan of reorganization, the promissory note and the pledge agreement
expected to be entered into by the Company with regard to the collateral
expected to be pledged by the Company to secure Congoleum's obligations under
the promissory note. To the extent the amounts that are subject to that escrow
are material, that could have a material adverse effect on the Company's
liquidity and capital resources since those escrowed amounts represent amounts
that would have already been paid by the Company but not yet reimbursed to the
Company to the extent they remain in escrow.
Pursuant to the terms of Congoleum's amended plan of reorganization, ABI will
also pledge the shares of Congoleum stock it owns as collateral securing
Congoleum's obligations under that promissory note expected to be contributed by
Congoleum to the Plan Trust. The original principal amount of that note is
expected to be approximately $2.7 million and will be subject to increase as of
the last trading day of the 90 consecutive trading day period commencing on the
first anniversary of the effective date of Congoleum's plan of reorganization
(the "Principal Adjustment Date") in an amount equal to the excess, if any, of
the amount by which 51% of Congoleum's market capitalization, based on the
average closing prices of Congoleum's Class A common stock over that 90 trading
41
day period, exceeds approximately $2.7 million. This adjustment amount could
result in the principal amount of the note increasing materially. For example,
if the adjustment amount were calculated based on the excess of 51% of the
equity value of Congoleum over $2.7 million during the 90 consecutive trading
day period ended June 30, 2005, the resulting adjustment amount would be
approximately $16.6 million. Although the scheduled repayment date for this note
does not occur until its tenth anniversary of issuance, it is expected that the
terms of the note will require Congoleum to make interest payments prior to the
note's maturity date. Any default by Congoleum under that note could have a
material adverse effect on the Company's liquidity and capital resources.
Congoleum's plan of reorganization also provides for a possible additional
contribution by ABI to the Plan Trust in the event ABI sells its interest in
Congoleum during the three-year period beginning on the Principal Adjustment
Date. The expected amount of any additional contribution by ABI would be equal
to 50% of any amount by which 51% of the equity value of Congoleum implied by
ABI's sale of its interest in Congoleum exceeds the aggregate principal amount
of the note contributed by Congoleum to the Plan Trust outstanding as of the
Principal Adjustment date, after taking into account any increase in the
principal amount of that note as of the Principal Adjustment Date.
In addition, the terms of Congoleum's plan of reorganization are expected to
provide that the Company will no longer have certain other rights to receive
indemnification under the joint venture agreement or Congoleum's plan of
reorganization for asbestos-related property damage claims. To the extent that
the Company pays material amounts for asbestos-related property damage claims
that the Company would have been entitled to be reimbursed for by Congoleum
absent the provisions of Congoleum's plan of reorganization, that could have a
material adverse effect on the Company's liquidity and capital resources.
Furthermore, to the extent that the amount of any of the Company's indemnity
claims against the Plan Trust are reduced pursuant to the distribution
procedures under Congoleum's plan of reorganization to an amount less than the
corresponding amount paid by the Company, that could have a material adverse
effect on the Company's liquidity and capital resources.
In addition, under the terms of Congoleum's plan of reorganization, ABI expects
to contribute $250 thousand in cash to the Plan Trust.
Cash requirements for capital expenditures, working capital, and debt service
are expected to be financed from operating activities and borrowings under
existing bank lines of credit. As of June 30, 2005, $20.0 million in the
aggregate was available for borrowing by the Company under the Credit Facility.
At June 30, 2005, $9.1 million was outstanding under revolving credit lines and
$0.8 million was outstanding under letters of credit. An additional $10.1
million was available for borrowing by the Company under its amended bank lines
of credit. The Company believes that its cash flow from operations, expected
proceeds from the sale of the Janus Flooring assets and borrowings available
under the Credit Facility will be adequate for its expected capital expenditure,
working capital, and debt service needs, subject to compliance with the
covenants contained in its debt agreements referred to above and the ability of
the Company to replace or refinance its existing credit facility that is
scheduled to expire on September 30, 2006 on satisfactory terms.
42
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.
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the unaudited
condensed consolidated financial statements do not include any adjustments that
might be necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to Unaudited Consolidating Condensed Financial
Statements contained in Item 1 of this Quarterly Report on Form 10-Q, there is
substantial doubt about Congoleum's ability to continue as a going concern
unless it obtains relief from its substantial asbestos liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003 filed a pre-packaged plan of reorganization under Chapter 11
of the United States Bankruptcy Code as part of its strategy to resolve this
liability. See Notes A and J of the Notes to the Unaudited Consolidating
Condensed Financial Statements, which are contained in Item 1 of this Quarterly
Report on Form 10-Q. These matters will have a material adverse impact on
liquidity and capital resources. During the second quarter of 2005, Congoleum
paid $8.5 million in fees (bringing the total year to date spending to $12.9
million) and expenses related to implementation of its planned reorganization
under Chapter 11 and litigation with certain insurance companies. Pursuant to
terms of the Claimant Agreement and related documents, Congoleum is entitled to
reimbursement for certain expenses it incurs for claims processing costs and
expenses in connection with pursuit of insurance coverage. At June 30, 2005,
Congoleum had $7.5 million recorded as a receivable for such reimbursements. The
amount and timing of reimbursements that will be received will depend on when
the trust receives funds from insurance settlements or other sources and whether
the insurance proceeds exceed $375 million, which is the required threshold for
reimbursement of the first $7.3 million spent by Congoleum. Congoleum believes
this threshold will eventually be met, although there can be no assurances to
that effect. Congoleum expects to spend a further $16.5 million at a minimum in
fees, expenses, and trust contributions in connection with obtaining
confirmation of its plan, which amount is recorded in its reserve for
asbestos-related liabilities (in addition to the $8.6 million insurance
settlement being held as restricted cash). It also expects to spend a further
$7.5 million at a minimum in connection with pursuit of insurance coverage, for
which it expects to be reimbursed as discussed above. Congoleum currently holds
$3.7 million in restricted cash that can be used to offset future coverage cost
spending, subject to approval by the Bankruptcy Court. Required expenditures
could be materially higher than these estimates.
43
As part of Congoleum's proposed amended plan of reorganization, Congoleum
expects that it will also issue a promissory note to the Plan Trust. Under the
terms of the proposed amended plan, the original principal amount of Congoleum's
Note will be approximately $2.7 million and will be subject to increase as of
the last trading day of the 90 consecutive trading day period commencing on the
first anniversary of the effective date of Congoleum's plan of reorganization in
an amount approximately equal to the excess, if any, of the amount by which 51%
of Congoleum's market capitalization as of that date exceeds $2.7 million. This
adjustment amount could result in the principal amount of the note increasing
materially. For example, if the adjustment amount were calculated for the period
ended June 30, 2005, the resulting adjustment amount would be $16.6 million.
Although the scheduled repayment date for this note does not occur until its
tenth anniversary of issuance, this debt may affect Congoleum's ability to
obtain other sources of financing or refinance existing obligations. In
addition, it is expected that the terms of the Note will require Congoleum to
make interest payments prior to such note's maturity date.
The proposed amended plan and Plan Trust agreement, as modified, would obligate
Congoleum, together with the Plan Trust, to indemnify certain asbestos claimant
representatives for all costs and liabilities (including attorneys' fees)
relating to the negotiation of the modification of the plan and the collateral
trust. Congoleum's indemnification obligations in this regard are capped under
the modified plan and Plan Trust agreement at $3.0 million. In addition, the
plan would further obligate Congoleum to fund any actual costs in excess of $2.0
million incurred by such asbestos claimant representatives in connection with
the confirmation of the plan, subject to Bankruptcy Court approval of those
costs.
Unrestricted cash and cash equivalents, including short-term investments at June
30, 2005, were $21.4 million, a decrease of $8.3 million from December 31, 2004.
Net cash used by operations during the first six months of 2005 was $5.5
million, as compared to $19.9 million of cash provided by operations in the
first half of 2004. The increase in cash used by operations in the first six
months of 2005 versus the first six months of 2004 was primarily due to higher
inventories, higher asbestos related payments and higher payments of accrued
liabilities. 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 $2.5 million and $1.2 million at June 30,
2005 and December 31, 2004, respectively, are recorded as restricted cash.
Additionally, $8.6 million of 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, 2005. Congoleum expects to contribute
these funds, less any amounts withheld pursuant to reimbursement arrangements,
to the Plan Trust formed upon confirmation of its proposed amended plan of
reorganization. Working capital was $23.5 million at June 30, 2005, down from
$35.3 million at December 31, 2004. The ratio of current assets to current
liabilities at June 30, 2005 was 1.3 versus 1.4 at December 31, 2004.
44
Capital expenditures for the six months ended June 30, 2005 totaled $2.2
million. Congoleum is currently planning capital expenditures of approximately
$6.0 million in 2005 and between $6 million and $7 million in 2006, primarily
for maintenance and improvement of plants and equipment, which it expects to
fund with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on
December 31, 2005 with borrowings up to $30.0 million. Interest is based on
0.75% above the prime rate. This financing agreement contains certain covenants,
which include the maintenance of 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, 2005. Borrowings under this facility are collateralized by
inventory and receivables. At June 30, 2005, based on the level of receivables
and inventory, $27.4 million was available under the facility, of which $6.0
million was utilized for outstanding letters of credit and $10.1 million was
utilized by the revolving loan. Congoleum anticipates that its
debtor-in-possession financing facility will be replaced with a revolving credit
facility on substantially similar terms upon confirmation of its proposed
amended plan of reorganization. While Congoleum expects the facilities discussed
above will provide it with sufficient liquidity, there can be no assurances that
it will continue to be in compliance with the required covenants, that Congoleum
will be able to obtain a similar or sufficient facility upon exit from
bankruptcy, or that the debtor-in-possession facility (as extended) will be
renewed prior to that facility's expiration.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate cash from operations in the first six months of 2005, Congoleum
anticipates that it will generate cash from operations during the balance of
2005. Congoleum believes that net cash provided by operating activities and
borrowings under its financing agreement will be adequate to fund working
capital requirements, debt service payments, and planned capital expenditures
for the foreseeable future, plus its current estimates for costs to settle and
resolve its asbestos liabilities through its proposed amended plan of
reorganization. Congoleum's inability to obtain confirmation of its proposed
amended plan in a timely manner would have a material adverse effect on
Congoleum's ability to fund its operating, investing and financing requirements.
Congoleum also anticipates it will be able to obtain exit financing upon
confirmation of its proposed amended plan although there can be no assurance
that such financing will be obtained. Such financing will be required to replace
its debtor-in-possession credit facility and permit Congoleum to pay accrued
interest on its Senior Notes and other obligations needed to be satisfied in
connection with the confirmation of the proposed amended plan of reorganization.
If Congoleum's cash flow from operations is materially less than anticipated,
and/or if the costs in connection with seeking confirmation of the proposed
amended plan of reorganization or in connection with the insurance coverage
litigation are materially more than anticipated, or if sufficient funds from
insurance proceeds are not available at confirmation to reimburse coverage
litigation costs as expected, the contemplated exit financing, when combined
with net cash provided from operating activities, may not provide sufficient
funds and Congoleum may not be able to obtain confirmation of and go effective
with the proposed amended plan of reorganization.
45
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 5 to the Unaudited
Condensed Consolidated Financial Statements). 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.
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, I and J of the Notes to Unaudited
Consolidating Condensed Financial Statements, included in Part I, Item 1 of the
Quarterly Report on Form 10-Q, the Company and its majority-owned subsidiary
Congoleum have significant liability and funding exposure for asbestos personal
injury claims. In connection with Congoleum's strategy for resolving its
asbestos liability, in 2003, Congoleum entered into settlement agreements with
various asbestos claimants, which provides for an aggregate settlement value of
at least $491 million. As a result of tabulating ballots on its fourth amended
plan, the Company is also aware of claims by claimants whose claims were not
46
determined under the Claimant Agreement but who have submitted claims with a
value of $512 million based on the settlement values applicable in the fourth
amended plan. Settlement of these obligations pursuant to the terms of
Congoleum's amended plan is dependent on Bankruptcy Court confirmation of the
plan of reorganization, including determinations by the Bankruptcy Court that
the plan has satisfied certain criteria under the Bankruptcy Code, among other
things.
There can be no assurance that Congoleum will be successful in obtaining
confirmation of Congoleum's amended plan in a timely manner or at all. Any
alternative plan of reorganization pursued by Congoleum or confirmed by the
Bankruptcy Court could vary significantly from the description in this report.
Furthermore, the estimated costs and contributions required to confirm and to
effect the amended plan of reorganization or an alternative plan could be
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and Federal District Court approvals,
and there can be no assurance that such conditions, approvals and other
requirements will be satisfied or obtained.
As part of Congoleum's plan of reorganization, Congoleum would contribute to the
Plan Trust certain of Congoleum's rights to receive insurance proceeds for
asbestos liabilities under its applicable insurance policies. Congoleum is
currently involved in litigation with certain of its insurance carriers related
to disputed insurance coverage for asbestos-related liabilities, and certain
insurance carriers have filed various objections to Congoleum's previously filed
plan of reorganization and related matters. It is expected that these insurers
will continue to vigorously contest their obligations to provide Congoleum with
insurance coverage for Congoleum's asbestos liabilities and seek to prevent any
contribution by Congoleum of its rights to receive insurance for asbestos
matters to the Plan Trust. The first phase of the insurance coverage trial began
August 2, 2005 and will address all issues and claims relating to whether the
insurers are obligated to provide coverage under the policies at issue in this
litigation for the global Claimant Agreement entered into by Congoleum,
including all issues and claims relating to both Congoleum's decision and
conduct in entering into the Claimant Agreement and filing a pre-packaged
bankruptcy and the insurance company defendants' decisions and conduct in
opposing the Claimant Agreement and Congoleum's pre-packaged bankruptcy, the
reasonableness and good faith of the Claimant Agreement, whether the Claimant
Agreement breached any insurance policies and, if so, whether the insurance
companies suffered any prejudice, and whether the insurance companies'
opposition to the Claimant Agreement and bankruptcy and various other conduct by
the insurers constituted a breach of their duties of good faith and fair dealing
such that they are precluded from asserting that Congoleum's decision to enter
into the Claimant Agreement constitutes any breach on the part of Congoleum. The
second phase of the trial will address all coverage issues, including but not
limited to trigger and allocation. The final phase of the trial will address bad
faith punitive damages, if appropriate. Congoleum believes, however, that even
if the insurers were to succeed in the first phase of the coverage action, such
result would not deprive individual claimants of the right to seek payment from
the affected insurance policies nor would such result preclude Congoleum from
amending the Claimant Agreement and seeking recovery under the Claimant
Agreement, as amended; moreover, Congoleum does not believe that it would be
deprived of coverage-in-place insurance for future obligations of or demands
upon the insurers under the applicable insurance policies. However, there can be
no assurances of the outcome of these matters or their potential effect on
Congoleum's ability to obtain approval of its plan of reorganization.
47
Confirmation of Congoleum's plan of reorganization will depend on Congoleum
obtaining exit financing to provide it with sufficient liquidity to pay accrued
interest and other obligations upon the plan going effective. If Congoleum's
cash flow from operations is materially less than anticipated, and/or if the
costs in connection with seeking confirmation of the proposed amended plan of
reorganization or in connection with the insurance coverage litigation are
materially more than anticipated, or if sufficient funds from insurance proceeds
are not available at confirmation to reimburse coverage litigation costs as
expected, Congoleum may be unable to obtain sufficient exit financing, when
combined with net cash provided from operating activities, to provide sufficient
funds, and Congoleum may not be able to obtain confirmation of and go effective
with the proposed amended plan of reorganization.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses that would likely have a material adverse effect on the
Company's financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives for resolving asbestos liability
include: (i) the future cost and timing of estimated asbestos liabilities and
payments, (ii) the availability of insurance coverage and reimbursement from
insurance companies, which underwrote the applicable insurance policies for
Congoleum and the Company, for asbestos-related claims, (iii) the costs relating
to the execution and implementation of any plan of reorganization pursued by
Congoleum, (iv) timely reaching an agreement with other creditors, or classes of
creditors, that exist or may emerge, (v) the Company's and Congoleum's
satisfaction of the conditions and obligations under their respective
outstanding debt instruments, and amendment of those outstanding debt
instruments, as necessary, to permit Congoleum and the Company to satisfy their
obligations under Congoleum's plan of reorganization, (vi) the response from
time-to-time of the Company's and Congoleum's lenders, customers, suppliers and
other constituencies to the Chapter 11 process and related developments arising
from the strategy to settle asbestos liability, (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 any reorganization plan, (ix) developments in and the outcome of insurance
coverage litigation pending in New Jersey State Court involving Congoleum and
certain insurers, and (x) compliance with the Bankruptcy Code, including section
524(g). In addition, in view of American Biltrite's relationships with
Congoleum, American Biltrite could be affected by Congoleum's negotiations, and
there can be no assurance as to what that impact, positive or negative, might
be. In any event, the failure of Congoleum to obtain confirmation and
consummation of its anticipated Chapter 11 plan of reorganization would have a
material adverse effect on Congoleum's business, results of operations or
financial condition and could have a material adverse effect on American
Biltrite's business, results of operations or financial condition.
48
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed Chapter 11
plan of reorganization. To the extent any federal legislation is enacted which
does not credit Congoleum for amounts paid by Congoleum pursuant to its plan of
reorganization or requires the Company or Congoleum to pay significant amounts
to any national trust or otherwise, such legislation could have a material
adverse effect on the Company or Congoleum's businesses, results of operations
and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, I and J of the Notes to Unaudited Consolidating Condensed
Financial Statements, included in Part I, Item 1 of this Quarterly Report on
Form 10-Q.
The Company relies on debt financing to help fund its operations and other
general corporate purposes and any default by it under its credit facilities or
inability to obtain any necessary debt financing would likely have a material
adverse effect on its business, operations and financial condition.
The Company relies on borrowings under its existing credit facilities to help
finance, among other things, its operations, working capital and capital
expenditures. The Company and most of its domestic and Canadian subsidiaries
have granted a security interest to the lenders under the Company's primary
credit facilities in most of the Company's and its domestic and Canadian
subsidiaries' assets. The collateral that is subject to this security interest
does not include the shares of capital stock of Congoleum or assets of
Congoleum.
Pursuant to the terms of the Note Agreement and the Credit Facility, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If such a default occurs, the lenders under the respective
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 respective lenders 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
49
likely be unable to repay those outstanding amounts, in which case, Fleet as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise the lenders' 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.
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. There can be no assurance
that the Company will not need to obtain additional amendments or waivers of
covenants under its debt agreements in 2005 or subsequent years. If it fails to
satisfy those covenants it will be in default under the respective debt
agreements.
The Credit Facility expires on September 30, 2006. Although the Company expects
that the Credit Facility will be extended or replaced by that date, there can be
no assurances in this regard. If the Company has outstanding borrowings under
the Credit Facility at that date and the Credit Facility's term has not been
extended beyond that date, such failure would result in a breach of the Note
Agreement, which, for the reasons discussed in the preceding paragraph, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Under the terms of the Company's debt agreements, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its subsidiaries have already granted security interests in most of
their assets, the Company's ability to obtain any additional debt financing may
be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at those facilities, in order to comply
with existing environmental laws, and those amounts may be substantial. Although
50
the Company and Congoleum believe that those amounts should not have a material
adverse effect on their respective financial positions, there can be no
assurance that these amounts will not have such an effect because, as a result
of environmental requirements becoming increasingly strict, neither the Company
nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company or Congoleum
to modify or curtail their operations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of their raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, in part due to a fire
at a large resin plant in 2004. Although the Company and Congoleum have not
experienced any significant difficulties obtaining specialty resin, there can be
no assurances that they may not have difficulty in the future, particularly if
global supply conditions deteriorate. Raw material prices in 2004 increased
significantly and are expected to remain high in 2005 and until additional
capacity becomes available.
51
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.
52
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 21% of the
Company's tape division's net sales for the year ended December 31, 2004. The
loss of the largest unaffiliated customer and/or two or more of the other
unaffiliated customers could have a material adverse effect on the Company's
business, results of operations or financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 70% of
Congoleum's net sales for the year ended December 31, 2004.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 59% of its net sales for the year ended
December 31, 2004. The loss of K&M Associates L.P.'s largest customer would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
53
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to adequately perform in his current position,
could have a material adverse effect on the Company's business, results of
operations or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on their investments. The Company and Congoleum
invest primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. If market interest rates were to
increase by 10% from levels at December 31, 2004 and June 30, 2005, the fair
value of our investments as of each such respective date would decline by an
immaterial amount. The carrying amount of these investments approximates fair
value due to the short-term maturities. The substantial majority of the
Company's outstanding consolidated long-term debt as of December 31, 2004 and
June 30, 2005 consisted of indebtedness with a fixed rate of interest, which is
not subject to change based upon changes in prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe, Asia and
Central America, giving rise to exposure to market risks from changes in foreign
exchange rates. To a certain extent, foreign currency exchange rate movements
also affect the Company's competitive position, as exchange rate changes may
affect business practices and/or pricing strategies of non-U.S. based
competitors. For foreign currency exposures existing at December 31, 2004 and
June 30, 2005, a 10% unfavorable movement in currency exchange rates in the near
term would not materially affect the Company's consolidated operating results,
financial position or cash flows as of each respective date.
Under their current policies, neither the Company nor Congoleum currently use
derivative financial instruments, derivative commodity instruments or other
financial instruments to manage their exposure to changes in interest rates,
foreign currency exchange rates, commodity prices or equity prices and do not
hold any instruments for trading purposes.
54
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, and the information included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors That May Affect Future Results - The Company and its majority-owned
subsidiary 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 I, Item 2 of this Quarterly Report on Form
10-Q, are incorporated herein by reference.
55
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due February 1, 2004, August 1, 2004 and
February 1, 2005 on the Senior Notes. As of June 30, 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 $13.0 million, and the
aggregate outstanding principal amount of the Senior Notes is approximately $100
million. These amounts, plus approximately $1 million of aggregate accrued
interest on the unpaid interest that was due on February 1, 2004, August 1, 2004
and February 1, 2005 with respect to the Senior Notes, are included in the line
item "Liabilities Subject to Compromise" in the Company's consolidated balance
sheet included in this report.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's stockholders held on May 10, 2005, all
director nominees were elected.
The four nominees who were elected as Class III directors will hold office until
the annual meeting of stockholders to be held in 2008 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
---------------------- ---------------- ----------------
Mark N. Kaplan 2,995,319 115,298
Natalie S. Marcus 3,003,519 107,098
William M. Marcus 3,003,268 107,349
Kenneth I. Watchmaker 3,095,919 14,698
56
Item 6. Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September
11, 2004
4.1 Amended and Restated Note Purchase Agreement and
Facility Guarantee, dated as of May 20, 2005,
among American Biltrite Inc., certain domestic
subsidiaries of American Biltrite Inc. and The
Prudential Insurance Company of America
4.2 III Security Agreement, dated as of October 14,
2003, among American Biltrite Inc., K&M
Associates L.P., Fleet National Bank and the
subsidiaries of American Biltrite Inc. from
time to time party thereto
4.3 Intercreditor and Collateral Agency Agreement,
dated as of May 20, 2005, by and among Fleet
National Bank, a Bank of America company, The
Prudential Insurance Company of America, and the
other banks from time to time party thereto, and
Fleet National Bank, a Bank of America company,
as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor
and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic
guarantor subsidiaries
4.4 III Guarantor Joinder Agreement, dated as of
October 14, 2003, made by ABTRE, Inc., AIMPAR,
Inc., American Biltrite Intellectual
Properties, Inc., Ideal Tape Co., Inc.,
Majestic Jewelry, Inc., Ocean State Jewelry,
Inc. and 425 Dexter Associates, L.P. in favor
of The Prudential Insurance Company
4.5 Joinder Agreement, dated as of May 20, 2005,
between Abimex, LLC and Fleet National Bank, a
Bank of America Company, as domestic agent
4.6 Joinder Agreement, dated as of May 20, 2005,
between ABItalia, Inc. and Fleet National Bank,
a Bank of America Company, as domestic agent
4.7 Joinder Agreement, dated as of May 20, 2005,
between American Biltrite Far East, Inc. and
Fleet National Bank, a Bank of America Company,
as domestic agent
57
Exhibit No. Description
--------------------------------------------------------------------------------
4.8 Joinder Agreement, dated as of May 20, 2005,
between K&M Legendary Services, Inc and Fleet
National Bank, a Bank of America Company, as
domestic agent
4.9 II Indenture, dated as of August 3, 1998, by and
between Congoleum Corporation and First Union
National Bank, as trustee
4.10 II First Supplemental Indenture, dated as of March
28, 2003, between Congoleum Corporation and
Wachovia Bank, National Association (as
successor to First Union National Bank), as
trustee
4.11 II Second Supplemental Indenture, dated as of
August 7, 2003, between Congoleum Corporation
and Wachovia Bank, National Association (as
successor to First Union National Bank), as
trustee
10.1 Amended and Restated Credit Agreement, dated as
of May 20, 2005, among American Biltrite Inc,
K&M Associates L.P., and American Biltrite
(Canada) Ltd., Fleet National Bank, a Bank of
America company, both in its capacity as a
domestic lender and as a domestic administrative
agent, Bank of America, National Association,
acting through its Canadian branch, both in its
capacity as a Canadian lender and as Canadian
administrative agent, and the other lenders from
time to time party thereto
10.2 Intercreditor and Collateral Agency Agreement,
dated as of May 20, 2005, by and among Fleet
National Bank, a Bank of America company, The
Prudential Insurance Company of America, and the
other banks from time to time party thereto, and
Fleet National Bank, a Bank of America company,
as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor
and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic
guarantor subsidiaries (filed as Exhibit 4.3 to
this Quarterly Report on Form 10-Q)
10.3 Joinder Agreement, dated as of May 20, 2005,
between Abimex, LLC and Fleet National Bank, a
Bank of America Company, as domestic agent
(filed as Exhibit 4.5 to this Quarterly Report
on Form 10-Q)
58
Exhibit No. Description
--------------------------------------------------------------------------------
10.4 Joinder Agreement, dated as of May 20, 2005,
between ABItalia, Inc. and Fleet National Bank,
a Bank of America Company, as domestic agent
(filed as Exhibit 4.6 to this Quarterly Report
on Form 10-Q)
10.5 Joinder Agreement, dated as of May 20, 2005,
between American Biltrite Far East, Inc. and
Fleet National Bank, a Bank of America Company,
as domestic agent (filed as Exhibit 4.7 to this
Quarterly Report on Form 10-Q)
10.6 Joinder Agreement, dated as of May 20, 2005,
between K&M Legendary Services, Inc and Fleet
National Bank, a Bank of America Company, as
domestic agent (filed as Exhibit 4.8 to this
Quarterly Report on Form 10-Q)
10.7 Deed of Hypothec and Issue of Mortgage Bonds,
dated May 20, 2005, by American Biltrite
(Canada) Ltd. in favor of Bank of America,
National Association
10.8 Hypothec and Pledge of Bonds, dated May 20,
2005, between American Biltrite (Canada) Ltd.
and Bank of America, National Association
10.9 Settlement Agreement and Release, dated June
18, 2004, by and between Congoleum Corporation
and Liberty Mutual Insurance Company
10.10 Settlement Agreement and Release (the
"Agreement"), dated May 12, 2005, by, between
and among Congoleum Corporation, Congoleum
Sales, Inc., Congoleum Fiscal, Inc. and AIG
Domestic Claims, Inc., as authorized agent for
the applicable AIG companies, and the Plan Trust
10.11 Confidential Settlement Agreement and Release,
dated June 22, 2005, by and between Congoleum
Corporation, the Plan Trust and certain
underwriters at Lloyd's, London
59
Exhibit No. Description
--------------------------------------------------------------------------------
10.12 Amendment, dated July 29, 2005, to the
Confidential Settlement Agreement and Release,
among Congoleum Corporation, the Plan Trust and
certain underwriters at Lloyd's, London
31.1 Certification of the Principal Executive
Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
31.2 Certification of the Principal Financial
Officer of the Registrant Pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer
and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
-------------------------------------
I Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996 (1-4773)
II Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004
III Incorporated by reference to the exhibits to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 16, 2003
60
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 15, 2005 BY: /s/ Howard N. Feist III
------------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
61
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11,
2004
4.1 Amended and Restated Note Purchase Agreement and
Facility Guarantee, dated as of May 20, 2005, among
American Biltrite Inc., certain domestic subsidiaries
of American Biltrite Inc. and The Prudential Insurance
Company of America
4.2 III Security Agreement, dated as of October 14, 2003,
among American Biltrite Inc., K&M Associates L.P.,
Fleet National Bank and the subsidiaries of American
Biltrite Inc. from time to time party thereto
4.3 Intercreditor and Collateral Agency Agreement,
dated as of May 20, 2005, by and among Fleet
National Bank, a Bank of America company, The
Prudential Insurance Company of America, and the
other banks from time to time party thereto, and
Fleet National Bank, a Bank of America company,
as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor
and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic
guarantor subsidiaries
4.4 III Guarantor Joinder Agreement, dated as of October 14,
2003, made by ABTRE, Inc., AIMPAR, Inc., American
Biltrite Intellectual Properties, Inc., Ideal Tape
Co., Inc., Majestic Jewelry, Inc., Ocean State
Jewelry, Inc. and 425 Dexter Associates, L.P. in
favor of The Prudential Insurance Company
4.5 Joinder Agreement, dated as of May 20, 2005, between
Abimex, LLC and Fleet National Bank, a Bank of
America Company, as domestic agent
4.6 Joinder Agreement, dated as of May 20, 2005, between
ABItalia, Inc. and Fleet National Bank, a Bank of
America Company, as domestic agent
4.7 Joinder Agreement, dated as of May 20, 2005, between
American Biltrite Far East, Inc. and Fleet National
Bank, a Bank of America Company, as domestic agent
62
Exhibit No. Description
--------------------------------------------------------------------------------
4.8 Joinder Agreement, dated as of May 20, 2005,
between K&M Legendary Services, Inc and Fleet
National Bank, a Bank of America Company, as
domestic agent
4.9 II Indenture, dated as of August 3, 1998, by and
between Congoleum Corporation and First Union
National Bank, as trustee
4.10 II First Supplemental Indenture, dated as of March 28,
2003, between Congoleum Corporation and Wachovia
Bank, National Association (as successor to First
Union National Bank), as trustee
4.11 II Second Supplemental Indenture, dated as of August 7,
2003, between Congoleum Corporation and Wachovia
Bank, National Association (as successor to First
Union National Bank), as trustee
10.1 Amended and Restated Credit Agreement, dated as
of May 20, 2005, among American Biltrite Inc,
K&M Associates L.P., and American Biltrite
(Canada) Ltd., Fleet National Bank, a Bank of
America company, both in its capacity as a
domestic lender and as a domestic administrative
agent, Bank of America, National Association,
acting through its Canadian branch, both in its
capacity as a Canadian lender and as Canadian
administrative agent, and the other lenders from
time to time party thereto
10.2 Intercreditor and Collateral Agency Agreement,
dated as of May 20, 2005, by and among Fleet
National Bank, a Bank of America company, The
Prudential Insurance Company of America, and the
other banks from time to time party thereto, and
Fleet National Bank, a Bank of America company,
as administrative agent, and the Acknowledgment
of and Consent and Agreement to Intercreditor
and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic
guarantor subsidiaries (filed as Exhibit 4.3 to
this Quarterly Report on Form 10-Q)
10.3 Joinder Agreement, dated as of May 20, 2005,
between Abimex, LLC and Fleet National Bank, a
Bank of America Company, as domestic agent
(filed as Exhibit 4.5 to this Quarterly Report
on Form 10-Q)
63
Exhibit No. Description
--------------------------------------------------------------------------------
10.4 Joinder Agreement, dated as of May 20, 2005, between
ABItalia, Inc. and Fleet National Bank, a Bank of
America Company, as domestic agent (filed as Exhibit
4.6 to this Quarterly Report on Form 10-Q)
10.5 Joinder Agreement, dated as of May 20, 2005, between
American Biltrite Far East, Inc. and Fleet National
Bank, a Bank of America Company, as domestic agent
(filed as Exhibit 4.7 to this Quarterly Report on
Form 10-Q)
10.6 Joinder Agreement, dated as of May 20, 2005,
between K&M Legendary Services, Inc and Fleet
National Bank, a Bank of America Company, as
domestic agent (filed as Exhibit 4.8 to this
Quarterly Report on Form 10-Q)
10.7 Deed of Hypothec and Issue of Mortgage Bonds, dated
May 20, 2005, by American Biltrite (Canada) Ltd. in
favor of Bank of America, National Association
10.8 Hypothec and Pledge of Bonds, dated May 20, 2005,
between American Biltrite (Canada) Ltd. and Bank of
America, National Association
10.9 Settlement Agreement and Release, dated June 18,
2004, by and between Congoleum Corporation and
Liberty Mutual Insurance Company
10.10 Settlement Agreement and Release (the "Agreement"),
dated May 12, 2005, by, between and among Congoleum
Corporation, Congoleum Sales, Inc., Congoleum
Fiscal, Inc. and AIG Domestic Claims, Inc., as
authorized agent for the applicable AIG companies,
and the Plan Trust
10.11 Confidential Settlement Agreement and Release,
dated June 22, 2005, by and between Congoleum
Corporation, the Plan Trust and certain
underwriters at Lloyd's, London
64
Exhibit No. Description
--------------------------------------------------------------------------------
10.12 Amendment, dated July 29, 2005, to the
Confidential Settlement Agreement and Release,
among Congoleum Corporation, the Plan Trust and
certain underwriters at Lloyd's, London
31.1 Certification of the Principal Executive Officer of
the Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
31.2 Certification of the Principal Financial Officer of
the Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
----------------------------------
I Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996 (1-4773)
II Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004
III Incorporated by reference to the exhibits to the Company's
Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 16, 2003
65