FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2007 Commission File Number 1-4773
AMERICAN BILTRITE INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-1701350
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
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(Address of Principal Executive Offices)
(781) 237-6655
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 9, 2007
------------------------------------ -----------------------------------
Common Stock 3,441,551 shares
FORWARD LOOKING STATEMENTS
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and
other words of similar meaning. In particular, these include statements relating
to intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies, such as
bankruptcy and other legal proceedings, and financial conditions. These
statements do not relate strictly to historical or current facts. These
forward-looking statements are based on American Biltrite Inc.'s expectations
and American Biltrite Inc.'s understanding of its majority-owned subsidiary
Congoleum Corporation's expectations, as of the date of this report, of future
events, and American Biltrite Inc. undertakes no obligation to update any of
these forward-looking statements, except as required by federal securities laws.
Although American Biltrite Inc. believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Any or all of these statements may
turn out to be incorrect. By their nature, forward-looking statements involve
risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. Any forward-looking
statements made in this report speak only as of the date of this report unless
the statement indicates that another date applies. It is not possible to predict
or identify all factors that could potentially cause actual results to differ
materially from expected and historical results. Factors that could cause or
contribute to American Biltrite Inc.'s actual results differing from its
expectations include those factors discussed in Item 1A of Part II of this
Quarterly Report on Form 10-Q and in American Biltrite Inc.'s other filings with
the Securities and Exchange Commission.
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets - Assets as of
March 31, 2007 (unaudited) and December 31, 2006..............1
Consolidating Condensed Balance Sheets - Liabilities and
Stockholders' Equity as of March 31, 2007 (unaudited)
and December 31, 2006.........................................2
Consolidating Condensed Statements of Operations (unaudited)
for the three months ended March 31, 2007 and 2006............3
Consolidating Condensed Statements of Cash Flows -
Operating Activities (unaudited) for the three months
ended March 31, 2007 and 2006.................................4
Consolidating Condensed Statements of Cash Flows -
Investing & Financing Activities (unaudited) for the
three months ended March 31, 2007 and 2006....................5
Notes to Unaudited Consolidating Condensed Financial
Statements....................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................30
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................44
Item 4. Controls and Procedures......................................45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................46
Item 1A Risk Factors.................................................46
Item 3. Defaults Upon Senior Securities..............................55
Item 5. Other Information............................................55
Item 6. Exhibits.....................................................56
Signature............................................................57
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
March 31, December 31, March 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 20,186 $ 21,180
Restricted cash 8,783 9,656
Accounts receivable, net 43,655 40,791 $(111) $(226)
Inventories 83,293 80,471 (140) (143)
Deferred income taxes 1,818 1,818
Prepaid expense & other current
assets 26,759 28,406
----------------------------------------------------------------
Total current assets 184,494 182,322 (251) (369)
Property, plant & equipment, net 103,225 106,380
Other assets:
Insurance for asbestos-related
liabilities 9,320 9,320
Goodwill, net 11,490 11,475
Other assets 22,117 22,175 (126) (135)
----------------------------------------------------------------
42,927 42,970 (126) (135)
----------------------------------------------------------------
Total assets $330,646 $331,672 $(377) $(504)
================================================================
Congoleum American Biltrite
March 31, December 31, March 31, December 31,
2007 2006 2007 2006
-----------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 17,543 $ 18,591 $ 2,643 $ 2,589
Restricted cash 8,783 9,656
Accounts receivable, net 18,249 17,598 25,517 23,419
Inventories 34,752 34,220 48,681 46,394
Deferred income taxes 1,818 1,818
Prepaid expense & other current
assets 24,471 25,610 2,288 2,796
-----------------------------------------------------------------
Total current assets 103,798 105,675 80,947 77,016
Property, plant & equipment, net 65,487 67,757 37,738 38,623
Other assets:
Insurance for asbestos-related
liabilities 9,320 9,320
Goodwill, net 11,490 11,475
Other assets 10,806 10,770 11,437 11,540
-----------------------------------------------------------------
10,806 10,770 32,247 32,335
-----------------------------------------------------------------
Total assets $180,091 $184,202 $150,932 $147,974
=================================================================
See accompanying notes to consolidating condensed financial statements.
1
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations
March 31, December 31, March 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 21,915 $ 21,769 $ (111) $ (226)
Accrued expenses 34,601 37,411
Asbestos-related liabilities 10,372 13,950
Notes payable 35,459 31,284
Current portion of long-term debt 2,426 2,424
Liabilities subject to compromise 37,377 34,602
----------------------------------------------------------------
Total current liabilities 142,150 141,440 (111) (226)
Long-term debt, less current portion 8,401 8,971
Asbestos-related liabilities 10,420 10,300
Other liabilities 15,153 15,441
Noncontrolling interests 988 1,087
Liabilities subject to compromise 136,000 136,398 (126) (135)
----------------------------------------------------------------
Total liabilities 313,112 313,637 (237) (361)
Stockholders' equity
Common stock 46 46 (93) (93)
Additional paid-in capital 19,591 19,591 (49,354) (49,349)
Retained earnings 32,085 32,821 35,383 35,376
Accumulated other comprehensive
loss (19,056) (19,291) 6,111 6,110
Less treasury shares (15,132) (15,132) 7,813 7,813
----------------------------------------------------------------
Total stockholders' equity 17,534 18,035 (140) (143)
----------------------------------------------------------------
Total liabilities and
stockholders' equity $330,646 $331,672 $ (377) $ (504)
================================================================
Congoleum American Biltrite
March 31, December 31, March 31, December 31,
2007 2006 2007 2006
---------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 11,643 $ 10,654 $ 10,383 $ 11,341
Accrued expenses 18,521 22,301 16,080 15,110
Asbestos-related liabilities 10,372 13,950
Notes payable 12,951 12,715 22,508 18,569
Current portion of long-term debt 2,426 2,424
Liabilities subject to compromise 37,377 34,602
---------------------------------------------------------------
Total current liabilities 90,864 94,222 51,397 47,444
Long-term debt, less current portion 8,401 8,971
Asbestos-related liabilities 10,420 10,300
Other liabilities 15,153 15,441
Noncontrolling interests 988 1,087
Liabilities subject to compromise 136,126 136,533
---------------------------------------------------------------
Total liabilities 226,990 230,755 86,359 83,243
Stockholders' equity
Common stock 93 93 46 46
Additional paid-in capital 49,354 49,349 19,591 19,591
Retained earnings (65,077) (64,726) 61,779 62,171
Accumulated other comprehensive
loss (23,456) (23,456) (1,711) (1,945)
Less treasury shares (7,813) (7,813) (15,132) (15,132)
---------------------------------------------------------------
Total stockholders' equity (46,899) (46,553) 64,573 64,731
---------------------------------------------------------------
Total liabilities and
stockholders' equity $180,091 $184,202 $150,932 $147,974
===============================================================
See accompanying notes to consolidating condensed financial statements.
2
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended March 31, 2007 and 2006
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------------------
Net sales $ 100,031 $ 111,721 $ 49,315 $ 57,237 $ 50,716 $ 54,484
Cost of products sold 74,195 83,364 $(183) $ (127) 37,316 43,960 37,062 39,531
Selling, general & administrative expenses 23,254 24,390 9,451 10,396 13,803 13,994
--------------------------------------------------------------------------------------
Income (loss) from operations 2,582 3,967 183 127 2,548 2,881 (149) 959
Other income (expense)
Interest income 156 244 124 157 32 87
Interest expense (3,548) (3,414) (2,981) (2,734) (567) (680)
Other (expense) income (48) 14 (181) (104) (42) (42) 175 160
--------------------------------------------------------------------------------------
(3,440) (3,156) (181) (104) (2,899) (2,619) (360) (433)
--------------------------------------------------------------------------------------
(Loss) income before taxes and other items (858) 811 2 23 (351) 262 (509) 526
(Benefit from) provision for income taxes (122) 247 -- 51 (122) 196
Noncontrolling interests (5) (16) (5) (16)
--------------------------------------------------------------------------------------
(Loss) income from continuing operations (741) 548 2 23 (351) 211 (392) 314
Discontinued operation -- (62) -- (62)
--------------------------------------------------------------------------------------
Net (loss) income $ (741) $ 486 $ 2 $ 23 $ (351) $ 211 $ (392) $ 252
======================================================================================
Basic Diluted
2007 2006 2007 2006
------------------------------ ------------------------------
(Loss) income per common share from
continuing operations $ (0.22) $ 0.16 $ (0.22) $ 0.16
Discontinued operation -- (0.02) -- (0.02)
------------------------------ ------------------------------
Net (loss) income per common share $ (0.22) $ 0.14 $ (0.22) $ 0.14
============================== ==============================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,441,551 3,468,537
============================== ==============================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS - OPERATING ACTIVITIES
(Unaudited) For the Three Months Ended March 31, 2007 and 2006
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
---------------------------------------------------------------------------------
Operating activities
Net (loss) income $ (741) $ 486 $ 2 $ 23 $ (351) $ 211 $ (392) $ 252
Net loss from discontinued operation -- 62 -- 62
---------------------------------------------------------------------------------
(Loss) income from continuing operations (741) 548 2 23 (351) 211 (392) 314
Adjustments to reconcile net (loss) income to
net cash used by operating activities:
Depreciation and amortization 4,098 4,086 2,750 2,661 1,348 1,425
Stock compensation expense 5 55 5 55 -- --
Change in operating assets and liabilities:
Accounts and notes receivable (2,489) (8,818) 11 (343) (651) (5,745) (1,849) (2,730)
Inventories (2,502) (4,762) (2) (23) (532) (3,894) (1,968) (845)
Prepaid expenses and other assets 2,539 1,446 2,022 1,257 517 189
Accounts payable and accrued expenses (53) 852 (11) 343 47 928 (89) (419)
Asbestos-related expenses (4,657) (5,853) (4,657) (5,853)
Noncontrolling interests (99) (183) (99) (183)
Other (496) (205) (406) (382) (90) 177
---------------------------------------------------------------------------------
Net cash used by operating activities of
continuing operations (4,395) (12,834) -- -- (1,773) (10,762) (2,622) (2,072)
Net cash used by operating activities of
discontinued operations -- (59) -- (59)
---------------------------------------------------------------------------------
Net cash used by operating activities $(4,395) $(12,893) $ -- $ -- $(1,773) $(10,762) $(2,622) $(2,131)
=================================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
INVESTING & FINANCING ACTIVITIES
(Unaudited)
For the Three Months Ended March 31, 2007 and 2006
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------------
Investing activities
Investments in property, plant and equipment $ (656) $ (920) $ -- $ -- $ (384) $ (502) $ (272) $ (418)
----------------------------------------------------------------------------------
Net cash used by investing activities of
continuing operations (656) (920) -- -- (384) (502) (272) (418)
Financing activities
Net short-term borrowings 4,093 1,799 236 1,886 3,857 (87)
Payments on long-term debt (573) (75) (573) (75)
Net change in restricted cash 873 (474) 873 (474)
----------------------------------------------------------------------------------
Net cash provided (used) by financing
activities of continuing operations 4,393 1,250 -- -- 1,109 1,412 3,284 (162)
Effect of foreign exchange rate changes
on cash (336) (40) (336) (40)
----------------------------------------------------------------------------------
Net (decrease) increase in cash (994) (12,603) -- -- (1,048) (9,852) 54 (2,751)
Cash and cash equivalents at beginning
of period 21,180 29,184 18,591 24,511 2,589 4,673
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 20,186 $ 16,581 $ -- $ -- $ 17,543 $ 14,659 $ 2,643 $ 1,922
==================================================================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the proposed amended plan of
reorganization of Congoleum Corporation, a majority-owned subsidiary of the
Company, to settle asbestos liabilities) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2007 are not necessarily indicative of the results that may be
expected for future periods, including the year ending December 31, 2007. For
further information, refer to the consolidating financial statements and the
notes to those financial statements included in American Biltrite Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2006.
The consolidating balance sheet at December 31, 2006 has been derived from the
audited financial statements as of that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Historical financial results
were restated to reflect the classification of Janus as a discontinued operation
in accordance with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. Results of Janus, including charges
resulting from the shutdown, are being reported as a discontinued operation. In
April 2006, the Company completed the sale of Janus' remaining building and land
(see Note C). As a result of the sale of property, the discontinued operation
was effectively dissolved during 2006. As of December 31, 2006, the Company
merged Janus with and into American Biltrite (Canada) Ltd. ("AB Canada"),
primarily for the purposes of utilizing Janus' prior years' net operating losses
against future taxable income.
6
Note A - Basis of Presentation (continued)
As discussed more fully below and elsewhere in these footnotes, on December 31,
2003, the Company's majority owned subsidiary Congoleum Corporation
("Congoleum") and two of Congoleum's subsidiaries filed in the United States
Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court")
voluntary petitions commencing cases for reorganization relief under Chapter 11
of the United States Bankruptcy Code (the "Bankruptcy Code"). The accompanying
consolidating condensed financial statements include the results for Congoleum
for all periods presented. ABI continues to own a majority of the voting stock
of Congoleum and expects to continue to control Congoleum while it is in
reorganization proceedings.
In January 2004, Congoleum filed its proposed plan of reorganization and
disclosure statement with the Bankruptcy Court. In November 2004, Congoleum
filed a modified plan of reorganization and related documents (the "Fourth
Plan") with the Bankruptcy Court reflecting the result of further negotiations
with representatives of the Asbestos Claimants' Committee (the "ACC"), the
Future Claimants' Representative (the "FCR") and other asbestos claimant
representatives. The Bankruptcy Court approved the disclosure statement and plan
voting procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code to pay asbestos claims against Congoleum (the
"Plan Trust").
In July 2005, Congoleum filed an amended plan of reorganization (the "Sixth
Plan") and related documents with the Bankruptcy Court which reflected the
result of plan modification negotiations, as well as other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures and Congoleum commenced solicitation of acceptances of the Sixth Plan
in August 2005. In September 2005, Congoleum learned that certain asbestos
claimants were unwilling to agree to forbear from exercising their security
interest as contemplated by the Sixth Plan and subsequently withdrew the Sixth
Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed a new amended plan of reorganization
(the "Eighth Plan"). In addition, an insurance company, Continental Casualty
Company, and its affiliate, Continental Insurance Company (collectively, "CNA"),
filed a plan of reorganization and the Official Bondholders' Committee (the
"Bondholders' Committee") (representing holders of Congoleum's 8-5/8% Senior
Notes due
7
Note A - Basis of Presentation (continued)
August 1, 2008 (the "Senior Notes")) also filed a plan of reorganization. In May
2006, the Bankruptcy Court ordered the principal parties in interest in
Congoleum's reorganization proceedings to participate in reorganization plan
mediation discussions. Several mediation sessions took place from June through
September 2006. During the initial mediation negotiations, Congoleum reached an
agreement in principle, subject to mutually agreeable definitive documentation,
with the ACC, the FCR and ABI, Congoleum's controlling shareholder, on certain
terms of an amended plan of reorganization (the "Ninth Plan"), which Congoleum
filed and proposed jointly with the ACC in August 2006. CNA and the Bondholders'
Committee jointly filed a new, competing plan in August 2006 and each withdrew
its prior plan of reorganization. Following further mediated negotiations,
Congoleum, the ACC, the FCR, ABI and the Bondholders' Committee reached
agreement on terms of a new amended plan (the "Tenth Plan"), which Congoleum
filed jointly with the ACC in September 2006. In light of the Bondholders'
Committee's support of the Tenth Plan, the Bondholders' Committee withdrew its
support of CNA's plan. Following the Bondholders' Committee's withdrawal of
support for CNA's plan, CNA filed an amended plan of reorganization (the "CNA
Plan"). In October 2006, Congoleum and the ACC jointly filed a revised version
of the Tenth Plan (the "Eleventh Plan"), which reflected minor technical changes
agreed to by the various parties supporting Congoleum's plan. In October 2006,
the Bankruptcy Court held a hearing to consider the adequacy of the disclosure
statements with respect to the Tenth Plan and the CNA Plan and to hear argument
on summary judgment motions seeking determinations that the Tenth Plan and the
CNA Plan, respectively, are not confirmable as a matter of law. The Bankruptcy
Court provisionally approved the disclosure statements for both the Tenth Plan
and the CNA Plan subject to the Bankruptcy Court's rulings on the summary
judgment motions. In February 2007, the Bankruptcy Court entered on its docket
two separate opinions ruling that neither the Tenth Plan nor the CNA Plan is
confirmable as a matter of law. Because the Tenth Plan and Eleventh Plan are
substantially identical, Congoleum believes the ruling issued with respect to
the Tenth Plan also applies to the Eleventh Plan. Following the Bankruptcy
Court's rulings, in March 2007, Congoleum and other parties in interest resumed
reorganization plan mediation discussions seeking to resolve the plan
confirmation issues raised in the Bankruptcy Court's ruling with respect to the
Tenth Plan. Congoleum has also appealed the ruling with respect to the Tenth
Plan to the United States District Court for the District of New Jersey (the
"District Court"). Given the pending plan mediation discussions and Congoleum's
appeal, the outcome of Congoleum's plan of reorganization process remains
uncertain.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued
8
Note A - Basis of Presentation (continued)
litigation with respect to Congoleum's Chapter 11 case or the New Jersey state
court insurance coverage case which Congoleum is pursuing against certain of its
insurance carriers. It also is unclear whether any other person will attempt to
propose a plan or what any such plan would provide or propose, and whether the
Bankruptcy Court would approve such a plan.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J.
Although there can be no assurances, the Company believes that there is
reasonable basis to expect it will maintain control of Congoleum during the
pendency of Congoleum's reorganization proceedings. 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 current 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
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.
9
Note A - Basis of Presentation (continued)
Recently Issued Accounting Principles
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("FAS 109"). This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition of tax benefits,
classification on the balance sheet, interest and penalties, accounting in
interim periods, disclosure and transition. The Company adopted FIN 48 effective
January 1, 2007. As a result of the adoption, the Company determined that no
cumulative effect adjustment was necessary to the opening balance of retained
earnings as of January 1, 2007. The Company's unrecognized tax benefits as of
January 1, 2007 were immaterial, and recognition of such tax benefits is not
expected to have a material impact on the Company's income tax provision in
future periods. Changes in the Company's unrecognized tax benefits during the
three months ended March 31, 2007 were immaterial. Furthermore, the Company does
not expect such changes in the next twelve months to be material to the
Company's financial position or results of operation.
For tax return purposes, ABI and Congoleum are not part of a consolidated group
and, consequently, file separate federal and state tax returns. ABI's and
Congoleum's federal income tax returns are open and subject to examination from
the 2004 and 2003 tax return years and forward, respectively. ABI's and
Congoleum's various state income tax returns are generally open from the 2002
and later tax return years based on individual state statute of limitations.
Congoleum's tax return net operating loss carryforwards are significant. The tax
years in which losses arose may be subject to audit when such carryforwards are
utilized to offset taxable income in future periods. AB Canada's federal and
provincial tax returns are open and subject to examination from 2002 and later.
The Company records tax penalties and interest as a component of income tax
expense.
10
Note A - Basis of Presentation (continued)
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"), which
amends SFAS No. 87, Employers Accounting for Pensions ("SFAS 87"), SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits ("SFAS 88"), SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than Pensions ("SFAS 106"), and
SFAS No. 132R, Employers' Disclosures about Pensions and Other Postretirement
Benefits (revised 2003) ("SFAS 132R"). SFAS 158 requires companies to recognize
an asset or liability for the overfunded or underfunded status of their benefit
plans in their financial statements. SFAS 158 also requires the measurement date
for plan assets and liabilities to coincide with the sponsor's year end. This
standard provides two transition alternatives related to the change in
measurement date provisions. The recognition of an asset and liability related
to the funded status provision was effective for fiscal years ending after
December 15, 2006, and the change in measurement date provisions is effective
for fiscal years ending after December 15, 2008.
The adoption of SFAS 158 had no effect on the Company's consolidated statement
of income for the year ended December 31, 2006, and it will not affect the
Company's operating results in future periods. The incremental effects of
adopting the provisions of SFAS 158 on the Company's consolidated balance sheet
at December 31, 2006 are presented in the following table.
Prior to Effect of
Adopting SFAS 158 Adopting SFAS158 As Reported
----------------- ---------------- -----------
(in thousands)
Other assets, non-current $ -- $ 1,316 $ 1,316
Accrued benefit liability - other liabilities,
non-current (3,169) 199 (2,970)
Accrued benefit liability - liabilities subject to
compromise (21,375) (3,791) (25,166)
Deferred taxes (199) (440) (639)
Accumulated other comprehensive loss 16,917 2,716 19,633
Note B - Inventories
Inventories at March 31, 2007 and December 31, 2006 consisted of the following
(in thousands):
March 31, December 31,
2007 2006
----------- ------------
Finished goods $57,379 $56,374
Work-in-process 12,700 11,813
Raw materials and supplies 13,214 12,284
----------- ------------
$83,293 $80,471
=========== ============
11
Note C - Sale of Property
In April 2006, the Company completed the sale of a building and land owned by
Janus, a discontinued operation (see Note A). The building and land were sold
for $5.0 million Canadian dollars ("C$"). The Company received C$1.0 million in
cash and a C$4.0 million note. Commissions and other expenses incurred in
connection with the sale totaled C$200 thousand, resulting in net cash proceeds
of C$800 thousand. Payment of the note is contingent upon obtaining an
environmental certification on the land sold. In order to obtain that
certification, the Company expects to incur approximately C$200 thousand to
remediate the property. Remediation is expected to be completed during 2007. As
of March 31, 2007, the Company has recorded a deferred gain of approximately
C$935 thousand. The Company expects to recognize a final gain of approximately
C$850 thousand after the completion of the remediation in 2007 and the
incurrence of related expenses.
Note D - Accrued Expenses
Accrued Expenses at March 31, 2007 and December 31, 2006 consisted of the
following (in thousands):
March 31, December 31,
2007 2006
------------- -------------
Accrued advertising and sales promotions $18,184 $22,478
Employee compensation and related benefits 8,415 7,084
Interest 3 2
Environmental matters 632 632
Royalties 722 837
Income taxes 685 838
Other 5,960 5,540
------------- -------------
$34,601 $37,411
============= =============
See Note G for Liabilities Subject to Compromise.
12
Note E - Financing Arrangements
American Biltrite Inc.'s primary source of borrowings are the revolving credit
facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of
America, National Association ("BofA") and BofA acting through its Canada branch
(the "Canadian Lender") pursuant to an amended and restated credit agreement
(the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc.
and its subsidiary K&M Associates L.P. ("K&M") with (i) a $30.0 million
commitment under the Revolver with a $12.0 million borrowing sublimit (the
"Canadian Revolver") for American Biltrite Inc.'s subsidiary AB Canada and (ii)
the $10.0 million Term Loan. The Credit Agreement also provides for domestic and
Canadian letter of credit facilities with availability of up to $5.0 million and
$1.0 million, respectively, subject to availability under the Revolver and the
Canadian Revolver, respectively.
On September 25, 2006, American Biltrite Inc., K&M and AB Canada entered into an
amendment and restatement to the Credit Agreement with BofA and the Canadian
Lender, both in their capacities as lenders and administrative agents under the
Credit Agreement. Pursuant to the amendment and restatement, the Term Loan was
added to the Credit Agreement and the amount of the Revolver was increased by
$10.0 million to its current $30.0 million amount. In addition, the availability
for domestic letters of credit issued under the Credit Agreement was increased
from $4.0 million to $5.0 million. In connection with that amendment and
restatement, American Biltrite Inc. used approximately $17.0 million of new
borrowings from the proceeds of the Term Loan, which was fully drawn, and under
the Revolver to fully prepay $16.0 million of aggregate outstanding principal
amount of the Company's senior notes, all of which were held by The Prudential
Insurance Company of America, together with approximately $1.0 million in
interest and yield maintenance fees in connection with those notes and
prepayment. During the third quarter of 2006, a charge of approximately $860
thousand for early extinguishment of debt was recorded in Other Income (Expense)
in connection with this prepayment.
The Credit Agreement contains certain covenants that the Company must satisfy.
The covenants 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. At March 31, 2007, the Company was not in compliance with the financial
covenant that there be no consecutive quarterly net losses from continuing
operations. On May 14, 2007, American Biltrite Inc. and its subsidiaries, K&M
and AB Canada, entered into an amendment, effective as of March 31, 2007, to the
Credit Agreement with BofA and BofA acting through its Canada branch, each in
their respective capacities as lenders and administrative agents under the
Credit Agreement. The amendment revised the financial covenant requiring that
the Company not have any consecutive quarterly net losses from continuing
operations to provide that for each of the two consecutive fiscal quarters of
the Company ending December 31, 2006 and March 31, 2007, the Company not have a
quarterly net loss from continuing operations in excess of $400 thousand. Under
the Credit Agreement, the calculation of the Company's net income or loss from
continuing operations is based on the Company accounting for its majority-owned
subsidiary Congoleum Corporation on the equity method. Following the entering
into of this amendment, the Company was in compliance with this financial
covenant as of March 31, 2007.
13
Note E - Financing Arrangements (continued)
On September 29, 2006, American Biltrite Inc. entered into swap agreements to
convert the interest rates on the Term Loan and $6.0 million of borrowings under
the Revolver from floating rates to fixed rates of interest. The swap agreement
for the Term Loan (the "Term Loan Swap") has a five year term with the same
quarterly payment dates as the Term Loan and reduces proportionately in line
with the amortization of the Term Loan. The swap agreement for the $6.0 million
outstanding under the Revolver (the "Revolver Swap") has a three year term with
quarterly settlement dates beginning December 31, 2006. The Company expects its
borrowings under the Revolver to remain above $6.0 million through September 29,
2009, the termination date of the Revolver Swap. The Term Loan Swap and the
Revolver Swap are carried at fair value. Changes in the fair value of the swap
agreements are recorded in Other Income (Expense). For the three months ended
March 31, 2007, the Company recorded a charge of $44 thousand for the adjustment
of the fair values of the swap agreements.
Note F - Other Liabilities
Other Liabilities at March 31, 2007 and December 31, 2006 consisted of the
following (in thousands):
March 31, December 31,
2007 2006
--------- -----------
Pension benefits $ 2,882 $ 2,970
Environmental remediation and product related
liabilities 5,860 5,860
Deferred income taxes 4,065 4,095
Other 2,346 2,516
--------- ----------
$ 15,153 $ 15,441
========= ==========
See Note G for Liabilities Subject to Compromise.
14
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J), 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 for further discussion of Congoleum's asbestos liability. Liabilities
subject to compromise at March 31, 2007 and December 31, 2006 were as follows
(in thousands):
March 31, December 31,
2007 2006
----------- -----------
Current liability
Pre-petition other payables and accrued interest $ 37,377 $ 34,602
Non-current
Debt (at face value) 100,000 100,000
Pension liability 15,004 15,502
Other post-retirement benefit obligation 9,361 9,249
Pre-petition other liabilities 11,761 11,782
----------- -----------
136,126 136,533
Elimination - Payable to American Biltrite (126) (135)
----------- -----------
Total non-current liability 136,000 136,398
----------- -----------
Total liabilities subject to compromise $ 173,377 $ 171,000
=========== ===========
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.
15
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three
months ended March 31, 2007 and 2006 (in thousands):
Three Months Ended March 31,
2007 2006
------------------------ -------------------------
Other Other
Pension Benefits Pension Benefits
--------- --------- --------- ---------
Service cost $ 602 $ 53 $ 603 $ 48
Interest cost 1,595 142 1,493 132
Expected return on plan assets (1,597) -- (1,428) --
Recognized net actuarial loss 338 18 359 16
Amortization of prior service cost 26 3 (40) 9
--------- --------- --------- ---------
Net periodic benefit cost $ 964 $ 216 $ 987 $ 205
========= ========= ========= =========
The weighted average assumptions used to determine net periodic benefit cost for
the three months ended March 31, 2007 and 2006 were as follows:
2007 2006
-------------------------- -------------------------
Other Other
Pension Benefits Pension Benefits
-------------- --------- ------------- --------
Discount rate 5.20% - 6.00% 6.00% 5.20% - 6.00% 6.00%
Expected long-term return on plan
assets 7.00% - 7.50% -- 7.00% - 7.50% --
Rate of compensation increase 4.00% - 5.00% -- 4.00% - 5.00% --
16
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations, and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company's and Congoleum's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future cost and timing
of payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's and Congoleum's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. Provisions in the financial statements
have been recorded for the estimated probable loss associated with all known
general and environmental contingencies for the Company and Congoleum. While the
Company and Congoleum believe their estimate of the future amount of these
liabilities is reasonable, and that they will be paid over a period of five to
ten years, the timing and amount of such payments may differ significantly from
the Company's and Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's and
Congoleum's costs, the Company and Congoleum are not aware of any pending
legislation that would have such an effect. There can be no assurances that the
costs of any future government regulations could be passed along to their
customers. Estimated insurance recoveries related to these liabilities are
reflected in other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments, and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted as
appropriate 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.
17
Note I - Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,381 pending claims involving
approximately 1,967 individuals as of March 31, 2007. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Three Months Ended Year Ended
March 31, 2007 December 31, 2006
------------------ -----------------
Beginning claims 1,332 1,703
New claims 164 625
Settlements (3) (30)
Dismissals (112) (966)
------ ------
Ending claims 1,381 1,332
====== ======
The total indemnity costs incurred to settle claims during the three months
ended March 31, 2007 and twelve months ended December 31, 2006 were $19 thousand
and $3.1 million, respectively, all of which were paid by ABI's insurance
carriers pursuant to ABI's applicable insurance policies, as were the related
defense costs. The average indemnity cost per resolved claim was approximately
$2 hundred and $3 thousand for the three months ended March 31, 2007 and the
year ended December 31, 2006, respectively.
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 2006, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At December 31, 2006, the
estimated range of liability for settlement of current claims pending and claims
anticipated to be filed through
18
Note I - Commitments and Contingencies (continued)
2012 was $10.3 million to $35.3 million. The Company believed no amount within
this range is more likely than any other, and accordingly, recorded the minimum
liability estimate of $10.3 million in its consolidated financial statements at
December 31, 2006. At March 31, 2007, the Company has recorded $10.4 million for
the estimated minimum liability. The Company also believes that, based on this
minimum liability estimate, the corresponding amount of insurance probable of
recovery is $9.3 million at March 31, 2007 and December 31, 2006, which has been
included in other assets. The same factors that affect developing forecasts of
potential indemnity costs for asbestos-related liabilities also affect estimates
of the total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. These amounts were based on currently known facts
and a number of assumptions. However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claim, and the continuing solvency of various insurance companies, as
well as numerous uncertainties surrounding asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be higher or lower than those projected or recorded.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a six year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that any resolution of its asbestos related liabilities
that may result from any Congoleum reorganization plan will be limited at most
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, 2006 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 six sites located in five separate states
(the "CERCLA Sites"). There have been no material developments relating to these
sites or the other environmental matters described in that Annual Report on Form
10-K during the three month period ended March 31, 2007.
19
Note I - Commitments and Contingencies (continued)
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary reorganization case
under Chapter 11 of the Bankruptcy Code for purposes of resolving its
asbestos-related liabilities. See Note J.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable by Congoleum from relevant insurance
policies. However, under CERCLA, and certain other laws, as a PRP, Congoleum can
be held jointly and severally liable for all environmental costs associated with
a site.
The most significant exposure for which Congoleum has been named a PRP relates
to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund
Site"). The PRP group at this site is made up of 81 companies, substantially all
of which are large, financially solvent entities. Two removal actions were
substantially complete as of December 31, 1998, and a groundwater treatment
system was installed thereafter. The United States Environmental Protection
Agency has selected a remedy for the soil and shallow groundwater (Operable Unit
1 or OU-1); however, the remedial investigation/feasibility study related to the
deep groundwater (Operational Unit 2 or OU-2) has not been completed. The PRP
group, of which Congoleum is a part, has entered into a consent decree to
perform the remedy for OU-1 and resolve natural resource damage claims. The
consent decree also requires the PRP group to perform the OU-2 remedy, assuming
that the estimated cost of the remedy is not more than $10.0 million. If the
estimated cost of the OU-2 remedy is more than $10.0 million, the PRP group may
decline to perform it or they may elect to perform it anyway. Cost estimates for
the OU-1 and OU-2 work combined (including natural resource damages) range
between $22 million and $34 million, with Congoleum's share ranging between
approximately $1.0 million and $1.6 million. This assumes that all parties
participate and that none cash-out and pay a premium; those two factors may
account for some fluctuation in Congoleum's share of the costs. Fifty percent
(50%) of Congoleum's share of the costs is presently being paid by one of its
insurance carriers, Liberty Mutual Insurance Company, whose remaining policy
limits for this claim are expected to cover approximately $300 thousand in
additional costs. Congoleum expects to fund the balance to the extent further
insurance coverage is not available.
20
Note I - Commitments and Contingencies (continued)
Congoleum filed a motion before the Bankruptcy Court seeking authorization and
approval of the consent decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual
Insurance Company and Congoleum to make certain payments that have been invoiced
to Congoleum with respect to the consent decree and related settlement
agreements. An order authorizing and approving consent decree and settlement
agreements was issued by the Bankruptcy Court in August 2006.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.3 million for Congoleum's expected portion of those
remediation funding obligations, including capital outlays and future
maintenance costs for soil and groundwater remediation, are primarily based on
engineering studies. Of this amount, $300 thousand was included in current
liabilities subject to compromise and $1.0 million was included in non-current
liabilities subject to compromise as of March 31, 2007 and December 31, 2006.
At March 31, 2007 and December 31, 2006, Congoleum had recorded a total of $4.4
million for estimated environmental liabilities that are not reduced by the
amount of insurance recoveries. At March 31, 2007 and December 31, 2006, such
estimated insurance recoveries are approximately $2.2 million. Receivables for
expected insurance recoveries are recorded if the related carriers are solvent
and paying claims under a reservation of rights or under an obligation pursuant
to coverage in place or a settlement agreement. Substantially all of Congoleum's
recorded insurance asset for environmental matters is collectible from a single
carrier.
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, funding of
the costs by Congoleum will not have a material adverse impact on Congoleum's
liquidity or financial position. However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on Congoleum's and the Company's business, results of
operations or financial condition.
Other
In addition to the matters referenced above and in Note 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.
21
Note J - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"). As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing a pre-petition trust (the
"Collateral Trust") to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and all other claims it settled were
for a secured claim against the Collateral Trust equal to 75% of the claim value
and an unsecured claim for the remaining 25%. In December 2005, Congoleum
commenced an omnibus avoidance action and a sealed avoidance action
(collectively, the "Avoidance Actions") seeking to void the security interest
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006, and the Avoidance Actions remain pending.
In April 2007, Congoleum filed another summary judgment motion seeking to avoid
the Claimant Agreement liens, and such motion remains pending before the
Bankruptcy Court.
In October 2003, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization, and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, Congoleum filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
22
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the ACC,
the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004,
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court, which reflected the result of plan modification negotiations,
as well as other technical modifications. The Bankruptcy Court approved the
disclosure statement and voting procedures, and Congoleum commenced solicitation
of acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed the Eighth Plan. In addition, an
insurance company, CNA, filed a plan of reorganization and the Bondholders'
Committee also filed a plan of reorganization. In May 2006, the Bankruptcy Court
ordered the principal parties in interest in Congoleum's reorganization
proceedings to participate in reorganization plan mediation discussions. Several
mediation sessions took place from June through September 2006. During the
initial mediation negotiations, Congoleum reached an agreement in principle,
subject to mutually agreeable definitive documentation, with the ACC, the FCR
and ABI, Congoleum's controlling shareholder, on certain terms of the Ninth
Plan, which Congoleum filed and proposed jointly with the ACC in August 2006.
CNA and the Bondholders' Committee jointly filed a new, competing plan in August
2006, and each withdrew its prior plan of reorganization. Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders'
Committee reached agreement on terms of the Tenth Plan, which Congoleum filed
jointly with the ACC in September 2006. In light of the Bondholders' Committee's
support of the Tenth Plan, the Bondholders' Committee withdrew its support of
CNA's plan. Following the Bondholders' Committee's withdrawal of support for
CNA's plan, CNA filed the CNA Plan. In October 2006, Congoleum and the ACC
jointly filed the Eleventh Plan, which reflected minor technical changes to the
Tenth Plan agreed to by the various parties supporting Congoleum's plan. In
October 2006, the Bankruptcy Court held a hearing to consider the adequacy of
the disclosure statements with respect to the Tenth Plan and the CNA Plan and to
hear argument on summary judgment motions seeking determinations that the Tenth
Plan and the CNA Plan, respectively, were
23
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
not confirmable as a matter of law. The Bankruptcy Court provisionally approved
the disclosure statements for both the Tenth Plan and the CNA Plan subject to
the Bankruptcy Court's rulings on the summary judgment motions. In February
2007, the Bankruptcy Court entered on its docket two separate opinions ruling
that neither the Tenth Plan nor the CNA Plan is confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, Congoleum
believes the ruling issued with respect to the Tenth Plan also applies to the
Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum and other parties in interest resumed reorganization plan mediation
discussions seeking to resolve the plan confirmation issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum has also
appealed the ruling with respect to the Tenth Plan to the District Court. Given
the pending plan mediation discussions and Congoleum's appeal, the outcome of
Congoleum's plan of reorganization process remains uncertain.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation with
respect to Congoleum's Chapter 11 case or the New Jersey state court insurance
coverage case which Congoleum is pursuing against certain of its insurance
carriers. It also is unclear whether any other person will attempt to propose a
plan or what any such plan would provide or propose and whether the Bankruptcy
Court would approve such a plan.
The terms of any new plan of reorganization are likely to be materially
different from the Tenth and Eleventh Plans, including with respect to the
Company and its interests, such as the Company's Congoleum equity interests and
the amount and form of any contribution the Company may be required to make to
the Plan Trust in order to receive the limited channeling injunctive relief that
would have been provided to the Company under the Eleventh Plan. Further, any
new plan of reorganization could be amended or modified as a result of further
negotiations with various parties. Congoleum expects that it will take until
some time late in the fourth quarter of 2007 at the earliest to obtain
confirmation of any plan of reorganization. Furthermore, the estimated costs and
contributions to effect any plan of reorganization could be significantly
greater than currently estimated. Under any outcome, ABI anticipates its equity
interest in Congoleum is likely to be substantially diluted or eliminated. 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.
24
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to any future plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to any future plan.
During 2005 and 2006, Congoleum entered into a number of settlement agreements
with excess insurance carriers over coverage for asbestos-related claims. In May
2005, certain American International Group, Inc. ("AIG") companies agreed to pay
approximately $103 million over ten years to the Plan Trust. This settlement
resolves coverage obligations of policies with a total of $114 million in
liability limits for asbestos bodily injury claims. Payment is subject to
various conditions, including without limitation, the effectiveness of a plan of
reorganization that provides AIG with certain specified relief including a
channeling injunction pursuant to Section 524(g) of the Bankruptcy Code. An
insurer appealed the approval order granted by the Bankruptcy Court to the
District Court. The District Court, however, entered an order in September 2006
that administratively terminated the appeal. The AIG settlement provides that
any party may declare that the settlement agreement is null and void if the
settlement agreement confirmation order fails to become a final order by May 12,
2007, and AIG may terminate the settlement agreement pursuant to this provision.
At this time, it is not known whether AIG will seek to terminate the settlement
agreement after May 12, 2007. In June 2005, Congoleum entered into a settlement
agreement with certain underwriters at Lloyd's, London, pursuant to which the
certain underwriters paid approximately $20 million into an escrow account in
exchange for a release of insurance coverage obligations. Pursuant to the
settlement, the escrow agent will transfer the funds to the Plan Trust once a
plan of reorganization with the Section 524(g) protection specified in the
settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. The settlement provided that any party may declare that
the settlement was null and void if the settlement agreement confirmation order
fails to become a final order by June 22, 2007. At this time, it is not known
whether those certain underwriters will seek to terminate the settlement
agreement after June 22, 2007. In August 2005, Congoleum entered into a
settlement agreement with Federal Insurance Company ("Federal") pursuant to
which Federal will pay $4 million to the Plan Trust, subject to certain
adjustments, once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The FCR appealed the approval order granted
by the Bankruptcy Court to the District Court. The FCR, Federal and Congoleum
have reached an agreement to resolve the appeal pursuant to which the Federal
settlement agreement will be amended to fix the settlement amount payable by
Federal at $2.1 million and to delete from the settlement agreement the
adjustment mechanism, which operated under certain circumstances to reduce the
settlement amount, and the Bankruptcy Court has approved this treatment. In
October 2005, Congoleum entered into a settlement agreement with Mt. McKinley
Insurance Company ("Mt. McKinley") and Everest Reinsurance Company ("Everest")
pursuant to which Mt. McKinley and Everest paid $21.5 million into an escrow
25
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
account. The escrow agent will transfer the funds to the Plan Trust once a plan
of reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds. An insurer and the FCR have appealed the approval order granted by the
Bankruptcy Court to the District Court, but the appeal has been administratively
terminated by agreement. In March 2006, Congoleum entered into a settlement
agreement with Harper Insurance Limited ("Harper"). Under the terms of this
settlement, Harper will pay approximately $1.4 million to Congoleum or the Plan
Trust once certain conditions are satisfied, including the effectiveness of a
plan of reorganization containing the Section 524(g) protection specified in the
settlement agreement. The Bankruptcy Court approved this settlement in April
2006. In April 2006, Congoleum entered into a settlement agreement with
Travelers Casualty and Surety Company and St. Paul Fire and Marine Insurance
Company (collectively, "Travelers") and ABI. Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The FCR sought, and was granted, limited
discovery with respect to the Travelers settlement to which the FCR has
objected. A hearing to consider approval of the Travelers settlement was held in
April 2007, and on May 11, 2007, the Bankruptcy Court issued a decision denying
approval of the Travelers Settlement. In April 2006, Congoleum also entered into
a settlement agreement with Fireman's Fund Insurance Company ("Fireman's Fund").
Under the terms of this settlement, Fireman's Fund will pay $1 million to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement becomes effective and the Bankruptcy Court
approves the transfer of the funds. The settlement was approved by the
Bankruptcy Court in September 2006. In August 2006, Congoleum entered into a
settlement agreement with Century Indemnity Company and its affiliates
("Century"). Under the terms of this settlement, Century will pay $16.95 million
to the Plan Trust in four installments over a three-year period commencing 60
days after all conditions to the agreement have been satisfied. The Bankruptcy
Court approved this settlement in September 2006. Certain insurance companies
appealed the Bankruptcy Court approval order to the District Court. Upon the
entry of stipulations with the appellants, the Century appeal was dismissed. It
is possible that one or more of the settling insurers may argue temporal,
plan-related, and other conditions to payment have not been satisfied and
therefore such insurer is relieved of certain of its settlement obligations. If
Congoleum is unable to confirm a plan of reorganization with the applicable
Section 524(g) protection, the settlements described in this paragraph are
subject to termination.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($22.8 million at March 31, 2007).
26
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
The write-off, as well as forgiveness of indebtedness income pursuant to any
future plan and any other applicable charges or credits are expected to be
recorded at a future date, the net effect of which cannot be determined.
Congoleum is unable to predict whether it will be reimbursed for claims
processing fees and coverage litigation costs to the extent not already
reimbursed.
There were no asbestos related property damage claims asserted against Congoleum
at the time of its bankruptcy filing. The Bankruptcy Court approved an order
establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in Congoleum's bankruptcy proceeding
advised Congoleum that, as of the bar date, it received 35 timely filed asbestos
property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. Congoleum
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand. It is anticipated that any
plan of reorganization will provide for payment of those claims in full from
certain insurance proceeds.
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through a Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years and is not yet able to determine the amount of the additional cost that
will be required to complete any future plan of reorganization. Amounts that may
be contributed to any Plan Trust and costs for pursuing and implementing any
plan of reorganization could be materially higher than currently recorded or
previously estimated. Delays in proposing, filing or obtaining approval of a new
amended plan of reorganization, or the proposal or solicitation of additional
plans by other parties could result in a proceeding that takes longer and is
more costly than Congoleum has previously estimated. Congoleum may record
significant additional charges in connection with its reorganization
proceedings.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income for the three months
ended March 31, 2007 and 2006 (in thousands):
Three Months Ended
March 31,
2007 2006
----------- -----------
Net (loss) income $(741) $486
Foreign currency translation adjustments 235 29
----------- -----------
Total comprehensive (loss) income $(506) $515
=========== ===========
27
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 share equivalents outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape division,
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 division
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 months ended March 31, 2007 and 2006 were as
follows (in thousands):
2007 2006
--------- ---------
Net sales to external customers:
Flooring products $ 49,315 $ 57,237
Tape products 24,118 26,123
Jewelry 13,590 15,084
Canadian division 13,008 13,277
--------- ---------
Total net sales to external customers 100,031 111,721
Intersegment net sales:
Flooring products -- --
Tape products -- --
Jewelry -- --
Canadian division 1,265 1,448
--------- ---------
Total intersegment net sales 1,265 1,448
Reconciling items -- --
Intersegment net sales (1,265) (1,448)
--------- ---------
Consolidated net sales $ 100,031 $ 111,721
========= =========
28
Note M - Industry Segments (continued)
Segment profit or loss is before income tax expense or benefit, noncontrolling
interests, and net income (loss) from discontinued operations. Profit (loss) by
segment for the three months ended March 31, 2007 and 2006 was as follows (in
thousands):
2007 2006
------- -------
Segment (loss) profit
Flooring products $ (351) $ 262
Tape products (421) 151
Jewelry (238) 171
Canadian division 87 260
------- -------
Total segment (loss) profit (923) 844
------- -------
Reconciling items
Corporate items 63 (57)
Intercompany profit 2 24
------- -------
Consolidated (loss) income before income
taxes and other items $ (858) $ 811
======= =======
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
March 31, December 31,
2007 2006
---------- ----------
Segment assets
Flooring products $ 180,091 $ 184,202
Tape products 61,502 52,848
Jewelry 37,440 38,913
Canadian division 36,571 36,396
---------- ----------
Total segment assets 315,604 312,359
Reconciling items
Corporate items 35,486 32,008
Intersegment accounts receivable (20,177) (12,416)
Intersegment profit in inventory (141) (144)
Intersegment other asset (126) (135)
---------- ----------
Consolidated assets $ 330,646 $ 331,672
========== ==========
29
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, Congoleum filed
its proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. In November 2004, Congoleum filed the Fourth Plan reflecting the result
of further negotiations with representatives of the ACC, the FCR and other
asbestos claimant representatives. The Bankruptcy Court approved the disclosure
statement and plan voting procedures in December 2004, and Congoleum obtained
the requisite votes of asbestos personal injury claimants necessary to seek
approval of the Fourth Plan. In April 2005, Congoleum announced that it had
reached an agreement in principle with representatives of the ACC and the FCR to
make certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust. In July 2005, Congoleum
filed the Sixth Plan and related documents with the Bankruptcy Court, which
reflected the result of plan modification negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005. In September 2005, Congoleum learned that certain
asbestos claimants were unwilling to agree to forbear from exercising their
security interest as contemplated by the Sixth Plan, and the Sixth Plan was
subsequently withdrawn. In November 2005, the Bankruptcy Court denied a request
to extend Congoleum's exclusive right to file a plan of reorganization and
solicit acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In
addition, an insurance company, CNA, filed a plan of reorganization and the
Bondholders' Committee also filed a plan of reorganization. In May 2006, the
Bankruptcy Court ordered the principal parties in interest in Congoleum's
reorganization proceedings to participate in reorganization plan mediation
discussions. Several mediation sessions took place from June through September
2006. During the initial mediation negotiations, Congoleum reached an agreement
in principle, subject to mutually agreeable definitive documentation, with the
ACC, the FCR and ABI, Congoleum's controlling shareholder, on certain terms of
the Ninth Plan, which Congoleum filed and proposed jointly with the ACC in
August 2006. CNA and the Bondholders' Committee jointly filed a new, competing
plan in August 2006, and each withdrew its prior plan of reorganization.
Following further mediated negotiations, Congoleum, the ACC, the FCR, ABI and
the Bondholders' Committee reached agreement on terms of the Tenth Plan, which
Congoleum filed jointly with the ACC in September 2006. In light of the
Bondholders' Committee's support of the Tenth Plan, the Bondholders' Committee
withdrew its support of CNA's plan. Following the Bondholders' Committee's
withdrawal of support for CNA's plan, CNA filed the CNA Plan. In October 2006,
Congoleum and the ACC jointly filed the Eleventh Plan, which reflected minor
technical changes to the Tenth Plan agreed to by the various parties supporting
Congoleum's plan. In October 2006, the Bankruptcy Court held a hearing to
30
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear argument on summary judgment motions seeking
determinations that the Tenth Plan and the CNA Plan, respectively, are not
confirmable as a matter of law. The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court's rulings on the summary judgment motions. In February 2007,
the Bankruptcy Court entered on its docket two separate opinions ruling that
neither the Tenth Plan nor the CNA Plan is confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, Congoleum
believes the ruling issued with respect to the Tenth Plan also applies to the
Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum and other parties in interest resumed reorganization plan mediation
discussions seeking to resolve the plan confirmation issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum has also
appealed the ruling with respect to the Tenth Plan to the District Court. Given
the pending plan mediation discussions and Congoleum's appeal, the outcome of
Congoleum's plan of reorganization process remains uncertain.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation with
respect to Congoleum's Chapter 11 case or the New Jersey state court insurance
coverage case which Congoleum is pursuing against certain of its insurance
carriers. It also is unclear whether any other person will attempt to propose a
plan or what any such plan would provide or propose, and whether the Bankruptcy
Court would approve such a plan.
The terms of any new plan of reorganization are likely to be materially
different from the Tenth and Eleventh Plans, including with respect to the
Company and its interests, such as the Company's Congoleum equity interests and
the amount and form of any contribution the Company may be required to
contribute to the Plan Trust in order to receive the limited channeling
injunctive relief that would have been provided to the Company under the
Eleventh Plan. Further, any new plan of reorganization could be amended or
modified as a result of further negotiations with various parties. Congoleum
expects that it will take until some time late in the fourth quarter of 2007 at
the earliest to obtain confirmation of any plan of reorganization. Furthermore,
the estimated costs and contributions to effect any plan of reorganization could
be significantly greater than currently estimated. Under any outcome, ABI
anticipates its equity interest in Congoleum is likely to be substantially
diluted or eliminated. 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.
31
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 any future plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to any future plan.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing the
Collateral Trust to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories, which motion
was denied in June 2006, and the Avoidance Actions remain pending. In April
2007, Congoleum filed another summary judgment motion seeking to avoid the
Claimant Agreement liens, and such motion remains pending before the Bankruptcy
Court. Due to, among other things, the ongoing Avoidance Actions, the liability
associated with the asbestos personal injury claims against Congoleum may be
materially different than the present estimates of such items. As a result of
tabulating ballots on the Fourth Plan, Congoleum is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.
Please refer to "Risk Factors - The Company and its majority-owned subsidiary
Congoleum have significant asbestos liability and funding exposure, and the
Company's and Congoleum's strategies for resolving this exposure may not be
successful," and "Any plan of reorganization for Congoleum will likely result in
substantial dilution or elimination of Congoleum's equity holders, including the
Company" included in Part II, Item 1A of this Quarterly Report on Form 10-Q for
a discussion of certain factors that could cause actual results to differ from
the Company's and Congoleum's goals for resolving its asbestos liability.
During 2003, the Company decided to discontinue the operations of its subsidiary
Janus, a manufacturer of pre-finished hardwood flooring, and sell the related
assets. Results of Janus, including charges resulting from the shutdown, were
reported as a discontinued operation. During 2006, the remaining assets of Janus
were sold, and the discontinued operation was effectively dissolved. As of
December 31, 2006, the Company merged Janus with and into AB Canada.
32
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M) 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, 2006, 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.
33
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended March 31
2007 2006
-------- --------
(In thousands of dollars)
Net sales $ 50,716 $ 54,484
Cost of sales 37,062 39,531
-------- --------
Gross profit 13,654 26.9% 14,953 27.4%
Selling, general & administrative expenses 13,803 27.2% 13,994 25.7%
-------- --------
Operating (loss) income (149) 959
Interest expense, net 535 593
Other income, net 175 160
-------- --------
(Loss) income before taxes and other items
(509) 526
(Benefit from) provision for income taxes (122) 196
Noncontrolling interests (5) (16)
-------- --------
(Loss) income from continuing operations $ (392) $ 314
======== ========
Net sales in the first quarter of 2007 were $50.7 million compared to $54.5
million in the first quarter of 2006, a decrease of $3.8 million or 6.9%. Tape
division sales decreased $2.0 million or 7.7% from year earlier levels as a
result of lower sales volume in HVAC, film and automotive product lines,
partially offset by price increases averaging 3%. Canadian division sales
decreased $300 thousand or 2.0% from the first quarter of 2006 due to decreased
sales of commercial and electrostatic tile and industrial rubber products,
partly offset by increased sales of luxury tile. Jewelry sales decreased $1.5
million or 9.9% primarily as a result of sales declines resulting from
department store consolidations.
Gross profit decreased from 27.4% for the first quarter of 2006 to 26.9% for the
first quarter of 2007. The decrease in gross profit as a percent of sales was
due to lower margins at the Canadian division (due to lower production volumes),
slightly lower Jewelry margins due to increases in product cost, and the effect
of lower jewelry sales, which has higher gross profit margins than other
segments, in the overall sales mix.
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended March 31, 2007 and 2006 would have been
26.3% and 26.9%, respectively.
34
Selling, general and administrative ("SG&A") expenses in the first quarter of
2007 decreased by $191 thousand or 1.4% compared to the first quarter of 2006.
The reduction in SG&A was due to lower expenses in the Jewelry business as the
cost structure was adjusted to the decline in department store sales. The Tape
and Canadian divisions had minor increases in SG&A reflecting some inflation on
wages and benefits, which offset declines in selling costs. As a percentage of
net sales, SG&A increased from 25.7% to 27.2% due to the sales decline.
Net interest expense for the first quarter of 2007 was lower than the first
quarter of 2006 primarily due to a lower weighted average interest rate on the
Company's borrowings.
The effective tax rate was 24% in the first quarter of 2007 compared to 37% in
the first quarter of 2006. The decrease in tax rate is primarily attributed to
the expected utilization of net operating loss carryforwards ("NOLs") by the
Canadian division during the current year. A full valuation allowance was
recorded against the NOLs as of December 31, 2006, and use of some portion of
the NOLs this year will result in a tax benefit from the release of a portion of
the allowance.
American Biltrite incurred a loss from continuing operations of $392 thousand
for the first quarter of 2007 compared to income from continuing operations of
$314 thousand for the same quarter last year.
Congoleum
Three Months Ended March 31
2007 2006
---------- ----------
(In thousands of dollars)
Net sales $ 49,315 $ 57,237
Cost of sales 37,316 43,960
---------- ----------
Gross profit 11,999 24.3% 13,277 23.2%
Selling, general & administrative expenses 9,451 19.2% 10,396 18.2%
---------- ----------
Operating income 2,548 2,881
Interest expense, net 2,857 2,577
Other expense, net 42 42
---------- ----------
(Loss) income before taxes (351) 262
Provision for income taxes -- 51
---------- ----------
Net (loss) income $ (351) $ 211
========== ==========
Net sales for the three months ended March 31, 2007 were $49.3 million as
compared to $57.2 million for the three months ended March 31, 2006, a decrease
of $7.9 million or 13.8%. The decrease primarily reflected lower sales to the
manufactured housing industry which benefited from hurricane-related demand
during the first quarter of 2006. Additionally, Congoleum experienced weaker
sales in builder and trade-up resilient sheet products reflecting a slowdown in
the new housing construction market coupled with distributors reducing
inventories in light of market conditions. Offsetting these declines was the
impact of price increases instituted in the second half of 2006 (3.5% of net
sales).
35
Gross profit for the three months ended March 31, 2007 totaled $12.0 million, or
24.3% of net sales, compared to $13.3 million, or 23.2% of net sales, for the
same period last year. The decline in gross margin dollars was volume-related.
The major factors leading to the improvement in gross margin percent were the
price increases instituted in the second half of 2006 (3.5% of net sales)
coupled with cost reduction initiatives implemented in January 2007 across all
manufacturing facilities, which helped offset the negative impact on absorption
of lower production levels. In addition, Congoleum experienced manufacturing
inefficiencies in the first quarter of 2006 due to the need to obtain certain
raw materials from alternative suppliers.
Selling, general and administrative expenses were $9.5 million for the three
months ended March 31, 2007 as compared to $10.4 million for the three months
ended March 31, 2006, a decrease of $0.9 million. The reduction in expenses
reflects lower merchandising and sales support related costs (down by $0.8
million), lower compensation and related benefit costs reflecting workforce
reductions in January 2007 ($0.4 million) and lower depreciation expense ($0.1
million) partially offset by a $0.4 million charge for severance. As a percent
of net sales, selling, general and administrative costs were 19.2% for the three
months ended March 31, 2007 compared to 18.2% for the same period last year.
Operating income was $2.5 million for the quarter ended March 31, 2007 compared
to income of $2.9 million for the quarter ended March 31, 2006. The reduction in
operating income reflected the lower sales and gross margins, partially offset
by lower selling, general and administrative expenses.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, increased $54 thousand in the first three months of
2007 to $2.6 million. Working capital at March 31, 2007 was $29.6 million,
unchanged from December 31, 2006. The ratio of current assets to current
liabilities at March 31, 2007 was 1.57 compared to 1.62 at December 31, 2006.
Working capital and loan principal requirements during the first quarter of 2007
exceeded cash from operating activities and were financed with drawings under
the Company's revolving credit arrangements.
Capital expenditures in the first three months of 2007 were $272 thousand
compared to $418 thousand for the first three months of 2006. It is anticipated
that capital spending for the full year 2007 will be approximately $4 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of five to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
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 any such costs could be passed along to its customers.
American Biltrite Inc.'s primary source of borrowings are the revolving credit
facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of
America, National Association ("BofA") and BofA acting through its Canada branch
(the "Canadian Lender") pursuant to an amended and restated credit agreement
(the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc.
and its subsidiary K&M with (i) a $30.0 million commitment under the Revolver
with a $12.0 million borrowing sublimit (the "Canadian Revolver") for American
Biltrite Inc.'s subsidiary AB Canada and (ii) the $10.0 million Term Loan. The
Credit Agreement also provides for domestic and Canadian letter of credit
facilities with availability of up to $5.0 million and $1.0 million,
respectively, subject to availability under the Revolver and the Canadian
Revolver, respectively.
On September 25, 2006, American Biltrite Inc., K&M and AB Canada entered into an
amendment and restatement to the Credit Agreement with BofA and the Canadian
Lender. Pursuant to the amendment and restatement, the Term Loan was added to
the Credit Agreement and the amount of the Revolver was increased by $10.0
million to its current $30.0 million amount. In addition, the availability for
domestic letters of credit issued under the Credit Agreement was increased from
$4.0 million to $5.0 million. In connection with that amendment and restatement,
American Biltrite Inc. used approximately $17.0 million of new borrowings from
the proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which is included in other expense.
The amount of borrowings available from time to time for American Biltrite Inc.
and K&M under the Revolver may not exceed the lesser of (a) $30.0 million less
the then outstanding amount of borrowings by AB Canada under the Canadian
Revolver less any outstanding borrowings under the domestic letter of credit
facility and (b) the applicable borrowing base. The formula used for determining
the domestic borrowing base is based upon inventory, receivables and fixed
assets of the Company and certain of its subsidiaries (not including, among
others, AB Canada and Congoleum), reduced by amounts outstanding under the Term
Loan.
The amount of borrowings available from time to time for AB Canada under the
Canadian Revolver is limited to the lesser of (a) $12 million less any
outstanding borrowings under the Canadian letter of credit facility, (b) AB
Canada's borrowing base amount, which is based upon AB Canada's accounts
receivable, inventory and fixed assets, and (c) $30.0 million less the amount of
domestic borrowings outstanding under the Revolver on behalf of the Company and
K&M. AB Canada may borrow amounts under the Canadian Revolver in United States
or Canadian dollar denominations; however, solely for purposes of determining
amounts outstanding and borrowing availability under the Revolver, all Canadian
dollar denominated amounts will be converted into United States dollars in the
manner provided in the Credit Agreement.
37
Interest is payable quarterly on the Term Loan and Revolver borrowings by
American Biltrite Inc. and K&M under the Credit Agreement at rates which vary
depending on the applicable interest rate in effect and are generally determined
based upon: (a) if a LIBOR based rate is in effect, at a rate between a LIBOR
based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Agreement, (b) if a
fixed rate is in effect, at a rate between the fixed rate plus 1.0% to a fixed
rate plus 2.75%, depending on the Company's leverage ratio, as determined under
the Credit Agreement, and (c) for loans not based on a LIBOR or fixed rate, the
higher of (i) BofA's applicable prime rate and (ii) 0.50% plus the federal funds
rate, as determined under the Credit Agreement. Under the Credit Agreement,
American Biltrite Inc. and K&M may generally determine whether interest on
domestic revolving loans will be calculated based on a LIBOR based rate, and if
BofA elects to make a fixed rate option available, whether interest on revolving
loans will be calculated based on a fixed rate.
Interest is payable quarterly on revolving loans under the Canadian Revolver at
rates which vary depending on the applicable interest rate in effect and are
generally determined based upon: (a) if a LIBOR based rate is in effect, at a
rate between a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%,
depending on the Company's leverage ratio, as determined under the Credit
Agreement, and (b) if a LIBOR based rate is not in effect, for outstanding
revolving loans denominated in Canadian dollars, the higher of (i) 0.50% plus
the applicable 30-day average bankers' acceptance rate as quoted on Reuters CDOR
page and (ii) the Canadian Lender's applicable prime rate for loans made in
Canadian dollars to Canadian customers, and for outstanding revolving loans
denominated in United States dollars, the higher of (i) 0.50% plus the federal
funds rate as calculated under the Credit Agreement and (ii) the applicable rate
announced by the Canadian Lender as its reference rate for commercial loans
denominated in United States dollars made to a person in Canada. Under the
Credit Agreement, AB Canada may generally determine whether interest on Canadian
revolving loans will be calculated based on a LIBOR based rate.
American Biltrite Inc. has entered into interest rate swap agreements that
effectively fix the LIBOR rate component of the Term Loan and $6.0 million of
the Revolver at 5.18% and 5.15% respectively.
The Term Loan principal is payable in 20 quarterly installments of $500 thousand
beginning December 31, 2006 and ending on September 30, 2011. All indebtedness
under the Credit Agreement, other than the Term Loan, expires on September 30,
2009.
The Credit Agreement contains certain covenants that the Company must satisfy.
The covenants included in the Credit Agreement include certain financial tests,
restrictions on the ability of the Company to incur additional indebtedness or
to grant liens on its assets and restrictions on the ability of the Company to
pay dividends on its capital stock. The financial tests are required to be
calculated based on the Company accounting for its majority-owned subsidiary
Congoleum Corporation on the equity method and include a maximum ratio of total
38
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. Pursuant to
the amendment and restatement to the Credit Agreement entered into on September
25, 2006, certain of the financial covenants under the Credit Agreement were
amended to, among other things, (i) increase the permitted ratio of the
Company's consolidated total liabilities to consolidated tangible net worth to
200%, (ii) to provide for a higher threshold for satisfying the consolidated
tangible net worth test and (iii) to provide a higher permitted aggregate amount
for capital expenditures in any fiscal year. The Credit Agreement also requires,
for each fiscal quarter ending on and after March 31, 2007, the Company's
consolidated adjusted EBITDA for the four consecutive fiscal quarters then
ending to exceed 100% of the Company's consolidated fixed charges for the
12-month period ending on such date, as determined under the Credit Agreement.
Pursuant to the Credit Agreement, the Company and certain of its subsidiaries
previously granted BofA and the Canadian Lender a security interest in most of
the Company's and its subsidiaries' assets. The security interest granted does
not include the shares of capital stock of Congoleum or the assets of Congoleum.
In addition, pursuant to the Credit Agreement, certain of the Company's
subsidiaries have agreed to guarantee the Company's obligations (excluding AB
Canada's obligations) under the Credit Agreement.
In the past, including the most recently completed quarter, 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. At March 31, 2007, the Company was not in
compliance with the financial covenant under the Credit Agreement that there be
no consecutive quarterly net losses from continuing operations. On May 14, 2007,
American Biltrite Inc. and its subsidiaries, K&M and AB Canada, entered into an
amendment, effective as of March 31, 2007, to the Credit Agreement with BofA and
BofA acting through its Canada branch, each in their respective capacities as
lenders and administrative agents under the Credit Agreement. The amendment
revised that financial covenant to provide that for each of the two consecutive
fiscal quarters of the Company ending December 31, 2006 and March 31, 2007, the
Company not have a quarterly net loss from continuing operations in excess of
$400 thousand. While the Company does not currently anticipate that it will need
to amend its existing debt agreements to avoid being in default at some future
date, there can be no assurances in that regard, and any required amendments, if
obtained, could result in significant cost to the Company. If a default were to
occur and the Company was unable to obtain a waiver from BofA, the Company would
be required to repay all amounts outstanding under the Credit Agreement and the
Company would need to obtain funding from another source. Otherwise, the Company
would likely be unable to repay those outstanding amounts, in which case, BofA
might exercise its rights over the collateral. Any default by the Company of the
Credit Agreement that resulted in the Company being required to immediately
repay outstanding amounts under its debt agreements, and for which suitable
replacement financing were not timely obtained, would have a material adverse
effect on the Company's business, results of operations and financial condition.
39
Under the terms of the Eleventh Plan, ABI would have contributed $250 thousand
in cash to the Plan Trust on the effective date of the plan. In addition, ABI
would have agreed to forego certain rights it has to receive indemnification
payments from Congoleum for asbestos claims pursuant to a joint venture
agreement to which ABI and Congoleum are parties. ABI would also have received
certain relief as may be afforded under Section 524(g)(4) of the Bankruptcy Code
from asbestos personal injury claims that derive from claims made against
Congoleum, which claims were expected to have been channeled to the Plan Trust.
However, the Eleventh Plan did not provide that any other asbestos claims that
may be asserted against ABI would be channeled to the Plan Trust. The Bankruptcy
Court has ruled that Congoleum's Eleventh Plan is not confirmable as a matter of
law and that ABI's contribution of $250 thousand is not sufficient to entitle it
to relief under Section 524(g)(4) of the Bankruptcy Code. It is not yet known
what terms will be negotiated in any future amended plan of reorganization for
Congoleum, what contribution might be sought from ABI under the terms of such
plan, what benefits ABI might receive, and what action ABI might take in
response to any proposed plan terms.
It is also not known how any future amended plan of reorganization for Congoleum
will treat the interests of creditors and shareholders of Congoleum, including
ABI. Under the terms of the Eleventh Plan, ABI's equity interest in Congoleum
would have been significantly reduced, and any future amended plan could further
reduce or wholly eliminate ABI's Congoleum equity interests. While the Company
does not believe the loss of the value of its equity interest in Congoleum would
have a direct material adverse effect on ABI's liquidity, it could have a
material adverse impact on Congoleum's business, operations and financial
condition, and directly or indirectly, a material adverse impact on the business
relationships between ABI and Congoleum, which in turn could have a material
adverse impact on ABI's business, operations and financial condition.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's Board of Directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Agreement, aggregate dividend
payments (since June 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Agreement, earned from June 30,
2003.
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, Congoleum's
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, there is substantial doubt about Congoleum's ability to continue as a
going concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
40
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and J of the Notes to Unaudited Consolidating Condensed Financial Statements,
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a
discussion of Congoleum's bankruptcy proceedings. These matters continue to have
a material adverse impact on Congoleum's liquidity and capital resources. During
the first three months of 2007, Congoleum paid $4.7 million in fees and expenses
related to its Chapter 11 case and the New Jersey state insurance coverage case
which Congoleum is pursuing against certain insurance carriers. Furthermore, at
March 31, 2007 Congoleum had incurred but not paid approximately $6.3 million in
additional fees and expenses for services rendered through that date.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($22.8 million at March 31, 2007). The write-off,
as well as forgiveness of indebtedness income pursuant to any future plan and
any other applicable charges or credits is expected to be recorded at a future
date, the net effect of which cannot be determined. Congoleum is unable to
predict whether it will be reimbursed for claims processing fees and coverage
litigation costs to the extent not already reimbursed. Congoleum cannot
presently determine the amount of fees, expenses, and trust contributions it may
incur in connection with any plan of reorganization.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
at March 31, 2007 is approximately $34.6 million, including interest on the
unpaid interest due, of which $3.6 million was owed at the time of the Chapter
11 filing.
In February 2006, the Bankruptcy Court ordered Gilbert, Heintz & Randolph LLP
(currently named Gilbert & Randolph LLP), a law firm that previously represented
Congoleum, to disgorge all fees and certain expenses it was paid by Congoleum.
In October 2006, Congoleum and that law firm entered into a settlement agreement
(the "GHR Settlement") under which the law firm would pay Congoleum
approximately $9.2 million in full satisfaction of the disgorgement order. In
April 2007, the Bankruptcy Court approved the GHR Settlement. The payment
obligation is secured by assets of the law firm and the payment is to be made
over time according to a formula based on the law firm's earnings. Treatment of
funds received pursuant to the GHR Settlement under a future amended plan of
reorganization may differ from the treatment accorded by any prior plans.
Unrestricted cash and cash equivalents, including short-term investments at
March 31, 2007, were $17.5 million, a decrease of $1.0 million from December 31,
2006. Under the terms of Congoleum's 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
41
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $2.6 million and $3.6 million at March
31, 2007 and December 31, 2006, respectively, are recorded as restricted cash.
Additionally, $6.2 million remaining from a $14.5 million settlement received in
August 2004 from an insurance carrier, which is subject to the purported lien of
the Collateral Trust, is included as restricted cash at March 31, 2007.
Congoleum expects that any plan of reorganization it pursues will provide that
it contribute these funds to the Plan Trust. Working capital was $12.9 million
at March 31, 2007, up from $11.5 million at December 31, 2006. The ratio of
current assets to current liabilities at March 31, 2007 was 1.1 to 1.0, which is
unchanged from December 31, 2006. Net cash used in operations during the first
three months of 2007 was $1.8 million, as compared to net cash used in
operations of $10.8 in the first three months of 2006. The reduction in cash
used in operations was primarily due to lower working capital requirements for
inventory and receivables.
Capital expenditures for the three months ended March 31, 2007 totaled $0.4
million. Congoleum is currently planning capital expenditures of approximately
$5.0 million in 2007 and between $5 million and $7 million in 2008, primarily
for maintenance and improvement of plants and equipment, which it expects to
fund with cash from operations and borrowings under its 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 the
earlier of (i) June 30, 2007 and (ii) the date the plan of reorganization in
Congoleum's bankruptcy cases as confirmed by the Bankruptcy Court becomes
effective. Total borrowing under the facility may not exceed $30 million.
Interest is based on 0.25% above the prime rate. This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financing agreement must
be met in order for Congoleum to borrow from the facility. Congoleum was in
compliance with these covenants at March 31, 2007. Borrowings under this
facility are collateralized by inventory and receivables. At March 31, 2007,
based on the level of receivables and inventory, $20.5 million was available
under the facility, of which $4.3 million was utilized for outstanding letters
of credit and $13.0 million was utilized by the revolving loan. Congoleum
anticipates that its debtor-in-possession financing facility (including
anticipated extensions thereof) together with cash from operations, will provide
it with sufficient liquidity to operate during 2007 while under Chapter 11
protection. There can be no assurances that Congoleum will continue to be in
compliance with the required covenants under this facility or that the
debtor-in-possession facility (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time. For a
plan of reorganization to be confirmed, Congoleum will need to obtain and
demonstrate the sufficiency of exit financing. Congoleum cannot presently
determine the terms of such financing, nor can there be any assurances of its
success in obtaining it.
42
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 (in addition to
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 8 of the Notes to
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2006.) 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 costs
and timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of Congoleum's liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on Congoleum's costs,
Congoleum is not aware of any pending legislation which would reasonably have
such an effect. There can be no assurances that the costs of any future
government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets. The outcome of these environmental matters could result in
significant expenses incurred by or judgments assessed against Congoleum.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum cannot
presently determine the amount of fees, expenses, and trust contributions it may
incur or be required to make in connection with obtaining confirmation of a plan
of reorganization. Congoleum believes that its existing cash (including
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2007. Congoleum's ability to emerge from Chapter 11 will
depend on obtaining sufficient exit financing to settle administrative expenses
of the reorganization and any other related obligations, and to provide adequate
future liquidity.
43
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on its investments. The Company and Congoleum invest
primarily in highly liquid debt instruments with strong credit ratings and
short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. If market
interest rates were to increase by 10% from levels at March 31, 2007, the fair
value of our investments would decline by an immaterial amount. In addition,
substantially all of the Company's outstanding consolidated long-term debt as of
March 31, 2007 consisted of indebtedness with a fixed rate of interest, which is
not subject to change based upon changes in prevailing market interest rates, or
has been hedged with an interest rate swap agreement. The Company's interest
rate swap agreements have been designated cash flow hedges.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as in other countries in Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
the applicable foreign currency sales decreases. When the U.S. dollar weakens
against those currencies, the U.S. dollar value of the applicable foreign
currency sales increases.
Under their current policies, other than interest rate swap agreements, neither
the Company nor Congoleum use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in foreign currency exchange rates, commodity prices or equity prices
and does not hold any instruments for trading purposes.
44
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.
45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Part I, Item 2 of
this Quarterly Report on Form 10-Q, and in "Risk Factors - The Company and its
majority-owned subsidiary Congoleum have significant asbestos liability and
funding exposure, and the Company's and Congoleum's strategies for resolving
this exposure may not be successful," included in Part II, Item 1A of this
Quarterly Report on Form 10-Q, are incorporated herein by reference.
Item 1A. Risk Factors
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
The Company and Congoleum have significant liability and funding exposure for
asbestos personal injury claims. Congoleum has entered into settlement
agreements with various asbestos claimants totaling in excess of $491 million.
The Bankruptcy Court issued a ruling in February 2007 determining that such
claimants cannot receive, as a result of their pre-petition settlements,
preferential treatment under a plan. Congoleum has resumed plan mediation
discussions with parties in interest to resolve this and certain other plan
issues and has also appealed the Bankruptcy Court ruling to the District Court.
Given the pending plan mediation discussions and Congoleum's appeal, the outcome
of Congoleum's plan of reorganization process remains uncertain.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation with
respect to Congoleum's Chapter 11 case or the New Jersey state court insurance
coverage case which Congoleum is pursuing against certain of its insurance
carriers. It also is unclear whether any other person will attempt to propose a
plan or what any such plan would provide or propose, and whether the Bankruptcy
Court would approve such a plan.
The terms of any new plan of reorganization are likely to be materially
different from the Tenth and Eleventh Plans, including with respect to the
Company and its interests, such as the Company's Congoleum equity interests and
the amount and form of any contribution the Company may be required to make to
the Plan Trust in order to receive the limited channeling injunctive relief that
46
would have been provided to the Company under the Eleventh Plan. Further, any
new plan of reorganization could be amended or modified as a result of further
negotiations with various parties. Congoleum expects that it will take until
some time late in the fourth quarter of 2007 at the earliest to obtain
confirmation of any plan of reorganization. Furthermore, the estimated costs and
contributions to effect any 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.
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective. In addition, under the terms of the Tenth Plan and
Eleventh Plan, the Plan Trust was to provide Congoleum with a loan in an amount
not to exceed $14 million, unless otherwise agreed by the FCR and ACC. There can
be no assurance that any new plan of reorganization would provide Congoleum with
a similar financing arrangement. If Congoleum's cash flow from operations is
materially less than anticipated, and/or if the costs in connection with seeking
confirmation of Congoleum's plan of reorganization or in connection with
Congoleum's New Jersey state court insurance coverage litigation are materially
more than anticipated, or if sufficient funds from insurance proceeds or other
sources are not available upon plan confirmation, Congoleum may be unable to
obtain exit financing, when combined with net cash provided from operating
activities, that would provide it with sufficient funds, which would likely
result in Congoleum not being able to have an amended plan of reorganization
confirmed or have such plan become effective.
Some insurers contend that, if there is a ruling in the first phase of the New
Jersey state court coverage litigation that there is no coverage for the claims
submitted by asbestos claimants and settled under the Claimant Agreement, and/or
depending on the factual and legal basis for such ruling, then the insurers will
also not owe coverage for any claims under such Claimant Agreement even if
Congoleum and such claimants agreed to amend the Claimant Agreement and/or to
settle their claims under other claims payment standards, including bankruptcy
trust distribution procedures (TDPs). Congoleum believes, however, that even if
the insurers were to succeed in the first phase of the New Jersey state court
coverage litigation, such result would not prohibit individual claimants and
Congoleum from negotiating new and/or different settlements, and/or amending the
Claimant Agreement, and then seeking payment from its insurers for such
settlements. In addition, Congoleum does not believe that it would be deprived
of coverage-in-place insurance for non-settled asbestos claims. However, there
can be no assurances of the outcome of these matters or their potential effect
on the Company's ability to obtain approval of a plan of reorganization.
Congoleum intends to contest any attempt by the insurers to enlarge or expand
upon any ruling in the first phase of the New Jersey state court coverage
litigation that is adverse to Congoleum. However, there can be no assurances of
the outcome of any aspect or phase of, or the potential ramifications of any
rulings with respect to, the New Jersey state court coverage litigation.
Congoleum spent approximately $31.6 million from January 31, 2003 through
December 31, 2006 related to this coverage litigation. Amounts necessary to fund
further coverage litigation in the future may also be material, and Congoleum
may not have the financial resources to provide such funding.
47
In addition, in view of ABI's relationships with Congoleum, ABI will be affected
by Congoleum's negotiations regarding, and its pursuit of, a plan of
reorganization, and there can be no assurance as to what that impact, positive
or negative, might be. In any event, the failure of Congoleum to obtain
confirmation and consummation of a Chapter 11 plan of reorganization would have
a material adverse effect on Congoleum's business, results of operations or
financial condition and could have a material adverse effect on ABI's business,
results of operations or financial condition.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses, that would likely have a material adverse effect on
the Company's financial position. In addition, certain of the excess liability
insurance policies that the Company purchased were underwritten by companies
that are now insolvent, which may limit the amount of funds available to pay for
any future claims covered by these policies. It is also possible that asbestos
claims may be asserted against the Company alleging exposure allocable solely to
years in which the Company's insurance policies excluded coverage for asbestos.
Some additional factors that could cause actual results to differ from the
Company's and Congoleum's goals for resolving asbestos liability include: (i)
the future cost and timing of estimated asbestos liabilities and payments; (ii)
the availability of insurance coverage and reimbursement from insurance
companies that underwrote the applicable insurance policies for asbestos-related
claims, including insurance coverage and reimbursement for asbestos claimants
under any Congoleum plan of reorganization, which certain insurers have objected
to in Bankruptcy Court and are litigating in New Jersey state court; (iii) the
costs relating to the execution and implementation of any Congoleum plan of
reorganization; (iv) timely reaching agreement with other creditors, or classes
of creditors, that exist or may emerge; (v) satisfaction of the conditions and
obligations under the Company's and Congoleum's outstanding debt instruments,
and amendment or waiver of those debt instruments, as necessary, to permit
Congoleum and the Company to satisfy their obligations under any plan of
reorganization; (vi) the response from time to time of lenders, customers,
suppliers, holders of the Senior Notes and their representatives, and other
creditors and constituencies of Congoleum and ABI 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 (including the results of any relevant appeals) of any
reorganization plan pursued by Congoleum and the court overruling any objections
to that reorganization plan that may be filed; (ix) developments in, costs
associated with and the outcome of insurance coverage litigation pending in New
Jersey state court involving Congoleum and certain insurers; (x) the extent to
which Congoleum is able to obtain reimbursement for costs it incurs in
connection with the insurance coverage litigation pending in
48
New Jersey state court; (xi) compliance with the Bankruptcy Code, including
Section 524(g); and (xii) the possible adoption of another party's plan of
reorganization, which may prove to be unfeasible.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties of this
legislation, the Company does not know what effects any such legislation, if
adopted, may have upon its or Congoleum's businesses, results of operations or
financial conditions, or upon any plan of reorganization Congoleum may decide to
pursue. To date, Congoleum has expended significant amounts to resolve its
asbestos liability pursuant to a Chapter 11 plan of reorganization. To the
extent any federal legislation is enacted which does not credit Congoleum for
amounts paid by Congoleum pursuant to its plan of reorganization strategy or
requires the Company or Congoleum to pay significant amounts to any national
trust or otherwise, such legislation could have a material adverse effect on the
Company or Congoleum's businesses, results of operations or financial
conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A and J of the Notes to Unaudited Consolidating Condensed
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which are included in Part I, Item 1 and
Part I, Item 2, respectively, in this report.
Any plan of reorganization for Congoleum will likely result in substantial
dilution or elimination of Congoleum's equity holders, including the Company.
Congoleum's Tenth Plan, which has been ruled unconfirmable as a matter of law by
the Bankruptcy Court, would have resulted in significant dilution of Congoleum's
existing equity interests, including the Company's Congoleum equity interests.
Congoleum has resumed reorganization plan mediation discussions with parties in
interest to negotiate a new amended plan. The terms of any new amended plan
proposed by Congoleum, or any proposed plan of reorganization proposed for
Congoleum by other parties in interest, may provide for even greater dilution of
the Congoleum equity interests than was contemplated by the Eleventh Plan,
including cancellation of Congoleum's existing Class A and Class B common stock.
There can be no assurance as to how Congoleum's existing equity interests,
including ABI's Congoleum equity interests, will be treated under any plan of
reorganization for Congoleum that may ultimately be confirmed by the Bankruptcy
Court and consummated. Under any outcome, ABI anticipates its equity interest in
Congoleum is likely to be substantially diluted or eliminated.
49
Elimination of ABI's controlling equity interest in Congoleum could have a
material adverse impact on Congoleum's business, operations and financial
condition, the business relationships between ABI and Congoleum, and ABI's
business, operations and financial condition.
The Company has had to amend its debt agreements in the past in order to avoid
being in default of those agreements and may have to do so again in the future,
and the Company's ability to obtain additional financing may be limited.
In the past, including the most recently completed quarter, 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. On September 25, 2006, the Company entered into
an amendment and restatement to the credit agreement it has with Bank of
America, National Association and Bank of America, National Association acting
through its Canada branch, which is the agreement that governs the Company's
primary source of borrowings. In connection with that amendment and restatement,
certain financial covenants were amended under the credit agreement to enable
the Company to comply with those covenants. In addition, the Company recently
entered into an amendment to the Credit Agreement to allow the Company to
satisfy the financial covenant requiring the Company to not have consecutive
quarterly net losses from continuing operations with respect to the Company's
two consecutive fiscal quarters ending December 31, 2006 and March 31, 2007.
Although the Company does not anticipate that it will need to further amend the
credit agreement to avoid being in default at some future date, there can be no
assurances in that regard. If the Company were to violate one of those covenants
and not amend the agreement to address or obtain a waiver of the violation, it
could breach the agreement, resulting in a default of the agreement. If such a
default were to occur, the lenders could require the Company to repay all
amounts outstanding under the credit agreement. If the Company were unable to
repay those amounts due, the lenders could have its rights over the collateral
(most of the Company's and its domestic subsidiaries' (excluding Congoleum)
assets) exercised, which would likely have a material adverse effect on the
Company's business, results of operations or financial condition.
In addition, under the terms of the credit agreement, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
50
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their current and previously owned
facilities, in order to comply with existing environmental laws, and those
amounts may be substantial. Although the Company and Congoleum believe that
those amounts should not have a material adverse effect on their respective
financial positions, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations or
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters, or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
51
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, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and
remained high in 2006. They are expected to remain high until additional
capacity becomes available, and could increase further in response to oil prices
or other global market conditions.
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.
52
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
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.(1)
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.
53
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's Tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 22% of the
Company's Tape division's net sales for the year ended December 31, 2006 and 23%
of its net sales for the year ended December 31, 2005. The loss of the largest
unaffiliated customer and/or two or more of the other four unaffiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
Congoleum principally sells its products through distributors. Although
Congoleum has more than one distributor in some of its distribution territories
and actively manages its credit exposure to its distributors, the loss of a
major distributor could have a materially adverse impact on the Company's
business, results of operations, or financial condition. Congoleum derives a
significant percentage of its sales from two of its distributors. These two
distributors accounted for approximately 67% of Congoleum's net sales for each
of the years ended December 31, 2006 and 2005.
The Company's majority-owned subsidiary K&M sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M's customers accounted
for approximately 54% of its net sales for the year ended December 31, 2006 and
58% of its net sales for the year ended December 31, 2005. The loss of the
largest of these customers would have a material adverse effect on K&M's
business, results of operations and financial condition and would likely have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
54
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due on the Senior Notes on the following
dates: February 1, 2004, 2005, 2006 and 2007 and August 1, 2004, 2005 and 2006.
The aggregate amount of the interest payments that was not paid on the Senior
Notes with respect to those interest payment due dates is approximately $34.6
million. As of May 14, 2007, the aggregate outstanding principal amount of the
Senior Notes was $100.0 million. These amounts, which include $4.3 million of
aggregate accrued interest on the unpaid interest that was due on February 1,
2004, 2005, 2006 and 2007 and August 1, 2004, 2005 and 2006 with respect to the
Senior Notes, are included in the line item "Liabilities Subject to Compromise"
in the Company's consolidating condensed balance sheet included in this report.
Item 5. Other Information
On May 14, 2007, American Biltrite Inc. and its subsidiaries, K&M Associates
L.P. and American Biltrite (Canada) Ltd., entered into an amendment, effective
as of March 31, 2007, to the Credit Agreement with BofA and BofA acting through
its Canada branch, each in their respective capacities as lenders and
administrative agents under the Credit Agreement. The amendment revised the
financial covenant requiring that the Company not have any consecutive quarterly
net losses from continuing operations to provide that for each of the two
consecutive fiscal quarters of the Company ending December 31, 2006 and March
31, 2007, the Company not have a quarterly net loss from continuing operations
in excess of $400 thousand. Under the Credit Agreement, the calculation of the
Company's net income or loss from continuing operations is based on the Company
accounting for its majority-owned subsidiary Congoleum Corporation on the equity
method. A copy of the amendment is attached as Exhibit 10.1 to this report and
is incorporated herein by reference.
55
Item 6. Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
10.1 Amendment No. 2 to Amended and Restated Credit
Agreement, dated as of May 14, 2007, among American
Biltrite Inc, K&M Associates L.P., and American
Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender
and as a domestic administrative agent, Bank of
America, National Association, acting through its
Canada branch, both in its capacity as a Canadian
lender and as Canadian administrative agent, and the
other lenders from time to time party thereto
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
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 and filed
with the Securities and Exchange Commission on April 2, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
56
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: May 14, 2007 BY: /s/ Howard N. Feist III
----------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
57
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
10.1 Amendment No. 2 to Amended and Restated Credit
Agreement, dated as of May 14, 2007, among American
Biltrite Inc, K&M Associates L.P., and American
Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender
and as a domestic administrative agent, Bank of
America, National Association, acting through its
Canada branch, both in its capacity as a Canadian
lender and as Canadian administrative agent, and the
other lenders from time to time party thereto
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934, as
amended
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 and filed
with the Securities and Exchange Commission on April 2, 1997
(1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005