UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
57 River Street
Wellesley Hills, MA 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES |_| NO |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is 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|
The aggregate market value of the registrant's common stock held by
non-affiliates as of June 30, 2006 was $16.9 million.
The number of shares of the registrant's common stock, par value $.01 per share,
outstanding as of March 15, 2007 was 3,441,551.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 8, 2007, which will be filed by the registrant within 120 days after
December 31, 2006, are incorporated by reference into Part III of this Annual
Report on Form 10-K.
Factors That May Affect Future Results - Some of the information presented in or
incorporated by reference in this report constitutes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 that involve risks, uncertainties and assumptions. These forward-looking
statements are based on the Registrant's expectations, as of the date of this
report, of future events. Except as required by applicable law, the Registrant
undertakes no obligation to update any of these forward-looking statements.
Although the Registrant believes that its expectations are based on reasonable
assumptions, within the bounds of its knowledge of its business and operations,
there can be no assurance that actual results will not differ materially from
its expectations. Readers are cautioned not to place undue reliance on any
forward-looking statements. Factors that could cause or contribute to the
Registrant's actual results differing from its expectations include those
factors discussed elsewhere in this report, including in Item 1A (Risk Factors).
PART I
ITEM 1. BUSINESS
General Development of Business
American Biltrite Inc. (together with, unless the context otherwise indicates,
its wholly-owned subsidiaries and K&M Associates L.P., "ABI" or the "Company")
was organized in 1908 and is a Delaware corporation. ABI's major operations
include its Tape Division as well as a controlling interest in Congoleum
Corporation, a Delaware corporation ("Congoleum"), a controlling interest in K&M
Associates L.P., a Rhode Island limited partnership ("K&M"), and ownership of a
Canadian subsidiary, American Biltrite (Canada) Ltd. ("AB Canada").
The Tape Division produces adhesive-coated, pressure-sensitive papers and films
used to protect material during handling or storage or to serve as a carrier for
transferring decals or die-cut lettering. The Tape Division also produces
pressure sensitive tapes and adhesive products used for applications in the
heating, ventilating and air conditioning (HVAC), footwear, automotive,
electrical and electronic industries.
In 1995, ABI acquired a controlling interest in K&M, a designer, supplier,
distributor and servicer of a wide variety of adult, children's and specialty
items of fashion jewelry and related accessories throughout the U.S. and Canada.
ABI, through wholly-owned subsidiaries, owns an aggregate 95.5% interest (7% as
sole general partner and 88.5% in limited partner interests) in K&M. K&M
wholesales its products to mass merchandisers, specialty stores and department
stores.
Congoleum is a leading manufacturer of resilient sheet and tile flooring. In
1993, ABI acquired an ownership position in Congoleum in exchange for its U.S.
tile business (the "Tile Division"). In 1995, ABI acquired voting control of
Congoleum when Congoleum sold a new issue of shares of its Class A common stock
to the public which had one vote per share and used the proceeds to redeem most
of the two-vote-per-share Class B shares held by the then majority shareholder.
ABI's interest has increased further since then as a result of Congoleum's
repurchases of its common stock combined with open market purchases of Congoleum
common stock by ABI. As of December 31, 2006, ABI's ownership of 151,100 shares
of Congoleum's Class A common stock and 4,395,605 shares of Congoleum's Class B
common stock represented 69.4% of the outstanding equity voting interests of
Congoleum.
Congoleum is a defendant in a large number of asbestos-related lawsuits. On
December 31, 2003, Congoleum filed a voluntary petition with the United States
Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court") (Case
No. 03-51524) seeking relief under Chapter 11 of the United States Bankruptcy
Code (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 a modified plan of reorganization and related documents
with the Bankruptcy Court (the "Fourth Plan") reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee (the
"ACC"), the Future Claimants' Representative (the "FCR") and other asbestos
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claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures in December 2004 and Congoleum obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of the
Fourth Plan. In April 2005, Congoleum announced that it had reached an agreement
in principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code (the "Plan Trust") to
pay asbestos claims against Congoleum. In July 2005, Congoleum filed an amended
plan of reorganization (the "Sixth Plan") and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn. In November 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. In March 2006, Congoleum filed a
new amended plan of reorganization (the "Eighth Plan"). In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, "CNA"), filed a plan of reorganization and the
Official Committee of Bondholders (the "Bondholders' Committee") (representing
holders of Congoleum's 8 5/8% Senior Notes due August 1, 2008 (the "Senior
Notes")) also filed a plan of reorganization. In May 2006, the Bankruptcy Court
ordered 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 the CNA 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 the Tenth Plan and the CNA Plan are each not confirmable as a matter of
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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. In March 2007, Congoleum and other parties in interest
resumed 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"). See Notes 1 and 9 of the Notes to Consolidated Financial Statements set
forth in Item 8 of this Annual Report on Form 10-K. Given the pending plan
mediation discussions and Congoleum's appeal, the outcome of Congoleum's plan of
reorganization process remains uncertain.
Outside the United States, the Tape Division operates production facilities in
Belgium, Italy and Singapore, where bulk tape products are converted into
various sizes. Sales offices at the Singapore and Italy locations and a sales
representative in Shanghai, China enable quicker response to customer demands in
the European and Asian markets. The Company's wholly-owned Canadian subsidiary,
American Biltrite (Canada) Ltd., produces resilient floor tile, rubber tiles and
rolled rubber flooring and industrial products (including conveyor belting,
truck and trailer splash guards and sheet rubber material) and imports certain
rubber and tile products from China for resale. K&M maintains a purchasing
office in China, from which it sources the majority of the products its sells.
ABI owns 50% of Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran
corporation, which produces soles, heels, sandals and other footwear products
under license from ABI. Hulera Sula in turn owns 100% of Hulera Sacatepequez,
S.A., a Guatemalan corporation which manufactures products in Guatemala similar
to those of Hulera Sula. Hulera Sula also owns 60% of Fomtex, S.A., a Guatemalan
corporation, which manufactures foam mattresses, beds and other foam products.
In October 2003, ABI discontinued the operations of its wholly owned subsidiary
Janus Flooring Corporation ("Janus Flooring"), which manufactured pre-finished
hardwood flooring in Canada. Results from Janus Flooring, including charges
resulting from the shutdown, are reported as a discontinued operation in the
Company's consolidated financial statement set forth in Item 8 of this Annual
Report on Form 10-K. During 2006, the remaining assets of Janus Flooring were
sold, and the discontinued operation was effectively dissolved. As of December
31, 2006, the Company merged Janus Flooring with and into American Biltrite
(Canada) Ltd.
For financial reporting purposes, ABI operates in four industry segments:
flooring products, the Tape Division, jewelry and the Canadian division, which
produces flooring and rubber products. See Note 14 of the Notes to Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Financial Information about Industry Segments
Business segment information is included in Note 14 of the Notes to Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
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Narrative Description of Business
Marketing, Distribution and Sales The Tape Division's protective papers and
films are sold domestically and throughout the world, principally through
distributors, but also directly to certain manufacturers. Other tape products
are marketed through the Tape Division's own sales force and by third-party
sales representatives and distributors throughout the world. ABI's Belgian,
Italian and Singapore facilities sell these products throughout Europe and the
Far East.
The products of K&M are sold domestically and in Canada through its own direct
sales force and through third-party sales representatives. K&M's business and
operations experience seasonal variations. In general, fashion jewelry supply,
distribution and service businesses respond to the seasonal demands of mass
merchandisers and other major retailers, which typically peak in preparation for
end-of-year holiday shopping. Accordingly, K&M's working capital needs tend to
be greatest in the second and third fiscal quarters as it increases inventories
in advance of its peak selling season, while its revenues tend to be greater
toward the end of each fiscal year, especially in the latter part of the third
quarter and the first half of the fourth quarter.
AB Canada's floor tile, rubber products and industrial products are marketed
principally through distributors. Seasonal variations in the sales and working
capital requirements of this division are not significant.
Congoleum currently sells its products through approximately 13 distributors
providing approximately 74 distribution points in the United States and Canada,
as well as directly to a limited number of mass market retailers. Congoleum
considers its distribution network to be very important to maintaining a
competitive position. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
customers, the loss of a major customer could have a materially adverse impact
on Congoleum's business, results of operations and financial condition, at least
until a suitable replacement is in place. The sales pattern for Congoleum's
products is seasonal, with peaks in retail sales typically occurring during
March/April/May and September/October. Orders are generally shipped as soon as a
truckload quantity has been accumulated, and backorders can be canceled without
penalty.
Hulera Sula's footwear and foam products are marketed and distributed in certain
Central American countries.
Financial information about products that contributed more than 10% of the
Company's consolidated revenue during the last three fiscal years is included in
Note 14 of the Notes to the Consolidated Financial Statements set forth in Item
8 of this Annual Report on Form 10-K.
Working Capital and Cash Flow In general, ABI's working capital requirements are
not affected by accelerated delivery requirements of major customers or by
obtaining a continuous allotment of raw material from suppliers. ABI does not
provide special rights for customers to return merchandise and does not provide
special seasonal or extended terms to its customers. K&M does provide
pre-approved allowances in the form of markdowns and return authorizations as
required.
4
Congoleum produces goods for inventory and sells on credit to customers.
Generally, Congoleum's distributors carry inventory as needed to meet local or
rapid delivery requirements. Congoleum's typical credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
During 2006, Congoleum paid $18.7 million in fees and expenses (net of
recoveries) related to implementation of its planned reorganization under
Chapter 11 and litigation with certain insurance companies. 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 obtaining it.
In connection with Congoleum's plan of reorganization, ABI expects to spend $750
thousand in 2007, which is not expected to have a material adverse effect on
ABI's working capital or cash flow. ABI and Congoleum have separate credit
facilities which are governed by independent credit agreements, and ABI is
generally not otherwise liable for the separate obligations of Congoleum.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - ABI and Non-Debtor Subsidiaries"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Congoleum" in Item 7 of this
Annual Report on Form 10-K.
Raw Materials ABI generally designs and engineers its own products. Most of the
raw materials required by ABI for its manufacturing operations are available
from multiple sources; however, ABI does purchase some of its raw materials from
a single source or supplier. Any significant delay in or disruption of the
supply of raw materials could substantially increase ABI's cost of materials,
require product reformulation or require qualification of new suppliers, any one
or more of which could materially adversely affect the business, operations or
financial condition of ABI. Congoleum does not have readily available
alternative sources of supply for specific designs of transfer print film, which
are produced utilizing print cylinders engraved to Congoleum's specifications.
Although no loss of this source of supply is anticipated, replacement could take
a considerable period of time and interrupt production of certain products.
Congoleum maintains a raw material inventory and has an ongoing program to
develop new sources, which is designed to provide continuity of supply for its
raw material requirements. Although the Company and Congoleum have generally not
had difficulty in obtaining their requirements for these materials, they have
occasionally experienced significant price increases for some of these
materials. Although the Company and Congoleum have been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that they may not experience difficulty obtaining supplies and raw
materials in the future, particularly if global supply conditions deteriorate,
which could have a material adverse effect on profit margins.
5
Competition All businesses in which ABI is engaged are highly competitive,
principally based upon pricing of the product, the quality of the product and
service to the customer. ABI's tape products compete with products of some of
the largest fully integrated rubber and plastic companies, as well as those of
smaller producers. Included among its competitors are 3M, Nitto Permacel,
Ivex/Novasol and R-Tape. AB Canada's flooring products compete with those of
other manufacturers of rubber and resilient floor tiles and with all other types
of floor covering. AB Canada also competes with Armstrong World Industries,
Inc., Flexco/Roppe, Nora and Mondo and with other manufacturers of alternate
floor covering products. In the rubber products category, AB Canada has several
competitors, principally among them being GRT Division of Enpro and West America
Rubber Company.
The market for Congoleum's products is highly competitive. Resilient sheet and
tile compete for both residential and commercial customers primarily with
carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. Congoleum believes, based upon its market research, that purchase
decisions are influenced primarily by fashion elements such as design, color and
style, durability, ease of maintenance, price and ease of installation. Both
tile and sheet resilient flooring are easy to replace for repair and
redecoration and, in Congoleum's view, have advantages over other floor covering
products in terms of both price and ease of installation and maintenance.
Congoleum encounters competition from three other manufacturers in North America
and, to a lesser extent, foreign manufacturers. In the resilient category,
Armstrong World Industries, Inc. has the largest market share. Some of
Congoleum's competitors have substantially greater financial and other resources
and access to capital than Congoleum.
K&M competes with other companies that make similar products on the basis of
product pricing and the effectiveness of merchandising services offered. In
assessing K&M's products and services, K&M's customers tend to focus on margin
dollars realized from the customers' sales of product and return on inventory
investment needed to be made by the customer in order to generate sales. In its
business of supplying and servicing fashion jewelry and accessory products, K&M
competes with a variety of competitors, among them are Liz Claiborne Inc., Jones
Apparel Group and a number of other companies offering similar products and/or
services. K&M also competes with numerous importers and overseas suppliers of
similar items.
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Patents and Trademarks ABI and its subsidiaries own many trademarks, including
the Congoleum brand name, the AB(R) logo, TransferRite(R) and Ideal(R) at the
Tape Division, Estrie(R), AB Colors Plus(R) and Dura-Shield(R) at AB Canada, and
Amtico(R), which is used solely in the Canadian market. K&M also licenses the
Panama Jack(R), Guess?(R), Bratz(R) and MUDD(R) trademarks as well as certain
others. These trademarks are important for the Company in maintaining its
competitive position. The licensing agreements are subject to expiration dates
and other termination provisions, and the licensor or the Company may choose not
to extend or renew certain agreements. The Company has an ongoing program
seeking additional or replacement licenses. The Company also believes that
patents and know-how play an important role in maintaining competitive position.
Research and Development Research and development efforts at the Company
concentrate on new product development, increasing efficiencies of the various
manufacturing processes, and improving the features and performance of existing
products. Expenditures for research and development were $6.2 million, $7.0
million and $5.8 million, on a consolidated basis, for the years ended December
31, 2006, 2005 and 2004, respectively.
Key Customers For the year ended December 31, 2006, two customers of Congoleum
accounted for over 10% of ABI's consolidated net sales. The two customers
together accounted for 67% of Congoleum's net sales of $219.5 million. These
customers are Congoleum's distributor to the manufactured housing market,
LaSalle-Bristol, and its largest retail distributor, Mohawk Industries, Inc. No
other customer accounted for more than 10% of ABI's consolidated sales.
K&M's top three customers in terms of net sales in 2006 together accounted for
54% of K&M's net sales. 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.
Sales to five unaffiliated customers of the Tape Division together constitute
approximately 22% of the net sales for the Tape Division. The loss of the
largest of these unaffiliated customers and/or two or more of the other four
unaffiliated customers could have a material adverse effect on the Tape
Division's business, results of operations and financial condition.
AB Canada's sales to Congoleum accounted for approximately 9% of AB Canada's net
sales in 2006. The loss of Congoleum's business would have a significant,
adverse affect on AB Canada's revenue. These intercompany sales are eliminated
from the Company's consolidated financial statements, in accordance with
generally accepted accounting principles. See Note 14 of the Notes to
Consolidated Financial Statements set forth in Item 8 of this Annual Report on
Form 10-K.
Backlog The dollar amount of backlog of orders believed to be firm as of
December 31, 2006 and 2005 was $15.4 million and $16.0 million, respectively. It
is anticipated that all of the backlog as of December 31, 2006 will be filled
within the current fiscal year. There are no seasonal or other significant
aspects of the backlog. In the opinion of management, backlog is not significant
to the business of ABI.
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Environmental Compliance Because of the nature of the operations conducted by
ABI and Congoleum, each company's facilities are subject to a broad range of
federal, state, local and foreign legal and regulatory provisions relating to
the environment, including those regulating the discharge of materials into the
environment, the handling and disposal of solid and hazardous substances and
wastes, and the remediation of contamination associated with releases of
hazardous substances at owned or leased facilities and off-site disposal
locations.
ABI and its subsidiaries, including Congoleum, have historically expended
substantial amounts for compliance with existing environmental laws and
regulations, including those matters described in Item 3 (Legal Proceedings) and
Note 8 to the Notes to the Consolidated Financial Statements set forth in Item 8
of this Annual Report on Form 10-K. ABI and Congoleum will continue to be
required to expend amounts in the future, due to the nature of past activities
at their facilities, to comply with existing environmental laws, and those
amounts may be substantial. Because environmental requirements have grown
increasingly strict, however, ABI is unable to determine the ultimate cost of
compliance with environmental laws and enforcement policies. The Company has
established accruals for matters for which management considers a loss to be
probable and reasonably estimable. ABI and Congoleum believe that compliance
with existing federal, state, local and foreign provisions will not have a
material adverse effect upon their financial positions nor do ABI and Congoleum
expect to incur material recurring costs or capital expenditures relating to
environmental matters, except as disclosed in Item 3 (Legal Proceedings) and
Note 8 to the Notes to Consolidated Financial Statements set forth in Item 8 of
this Annual Report on Form 10-K. However, there can be no assurances that the
ultimate liability concerning these matters will not have a material adverse
effect on the Company's business, results of operations and financial condition.
Employees As of December 31, 2006, ABI and its subsidiaries employed
approximately 1,590 people.
Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations is in Note 14
of the Notes to the Consolidated Financial Statements set forth in Item 8 of
this Annual Report on Form 10-K. The Company's consolidated export sales from
the United States were $28.3 million in 2006, $25.1 million in 2005 and $23.0
million in 2004.
Available Information
The Company is subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended, and files annual, quarterly,
and current reports, proxy statements and other documents with the Securities
and Exchange Commission pursuant to those requirements. The public may read and
copy any materials that the Company files with the Securities and Exchange
Commission at the Securities and Exchange Commission's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. Also, the Securities and Exchange
Commission maintains an Internet website that contains reports, proxy and
8
information statements, and other information regarding issuers, including the
Company, that file electronically with the Securities and Exchange Commission.
The public can obtain any documents that the Company files with the Securities
and Exchange Commission at http://www.sec.gov.
Congoleum is also subject to the reporting and other information requirements of
the Securities Exchange Act of 1934, as amended, and files annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission pursuant to those requirements. Such reports, proxy
statements and other information filed by or in connection with Congoleum with
the Securities and Exchange Commission (the "Congoleum Reports") are available
from the Securities and Exchange Commission in a similar manner as are the
reports, proxy statements and other information filed by the Company with the
Securities and Exchange Commission. The Company is providing this information
regarding the availability of Congoleum Reports for informational purposes only.
The Congoleum Reports are expressly not incorporated into or made a part of this
report or any other reports, statements or other information filed by the
Company with the Securities and Exchange Commission or otherwise made available
by the Company. The Company expressly disclaims any liability for information
disclosed or omitted in the Congoleum Reports and, except as required by the
federal securities laws, expressly disclaims any obligation to update or correct
any information included in the Congoleum Reports.
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.
As more fully set forth in Notes 1, 8 and 9 of the Notes to Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K, 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.
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
9
carriers (as further discussed elsewhere in this Annual Report on Form 10-K). 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 third 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 of such Claimant Agreement claimants 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 Coverage Action, 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 a Phase 1 ruling
that is adverse to Congoleum. However, there can be no assurances of the outcome
10
of these matters. 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.
Some additional factors that could cause actual results to differ from
Congoleum's goals for resolving its asbestos liability through an amended plan
of reorganization include: (i) the future cost and timing of estimated asbestos
liabilities and payments, (ii) the availability of insurance coverage and
reimbursement from insurance companies that underwrote the applicable insurance
policies for Congoleum for asbestos-related claims, 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 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 the 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 Congoleum's strategy to resolve its asbestos liabilities, (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 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, 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
11
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.
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 1, 8 and 9 of the Notes to Consolidated Financial Statements
set forth in Item 8 of this Annual Report on Form 10-K.
Any plan of reorganization for Congoleum will likely result in substantial
dilution or even elimination of the interests 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 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.
12
Elimination of ABI's controlling equity interest in Congoleum could have a
material adverse impact on Congoleum's business, operations and financial
condition, the business relationships between ABI and Congoleum, and ABI's
business, operations and financial condition.
The Company has had to amend its debt agreements in the past in order to avoid
being in default of those agreements and may have to do so again in the future,
and the Company's ability to obtain additional financing may be limited.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. Most recently, on September
25, 2006, the Company entered into an amendment and restatement to the credit
agreement it has with Bank of America, National Association and Bank of America,
National Association acting through its Canada branch, which is the agreement
that governs the Company's primary source of borrowings. In connection with that
amendment and restatement, certain financial covenants were amended under the
credit agreement to enable the Company to comply with those covenants. Although
the Company does not anticipate that it will need to further amend the credit
agreement to avoid being in default at some future date, there can be no
assurances in that regard. If the Company were to violate one of those covenants
and not amend the agreement to address or obtain a waiver of the violation, it
could breach the agreement, resulting in a default of the agreement. If such a
default were to occur, the lenders could require the Company to repay all
amounts outstanding under the credit agreement. If the Company were unable to
repay those amounts due, the lenders could have its rights over the collateral
(most of the Company's and its domestic subsidiaries' (excluding Congoleum)
assets) exercised, which would likely have a material adverse effect on the
Company's business, results of operations or financial condition.
In addition, under the terms of the credit agreement, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their 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
13
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
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of its raw materials. Raw
material prices in 2004 and 2005 increased significantly, and supplies of
certain materials, particularly vinyl resins, remained tight in the first half
of 2006 due to several factors, including 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.
14
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, one of Congoleum's major competitors has successfully confirmed a
plan of reorganization under Chapter 11 of the Bankruptcy Code. Having shed much
of its pre-filing asbestos and other liabilities, that competitor may have a
competitive cost advantage over Congoleum. In addition, in order to maintain
their competitive positions, the Company and Congoleum may need to make
substantial investments in their businesses, including, as applicable, product
development, manufacturing facilities, distribution network and sales and
marketing activities. Competitive pressures may also result in decreased demand
for their products and in the loss of market share for their products. Moreover,
due to the competitive nature of their industries, they may be commercially
restricted from raising or even maintaining the sales prices of their products,
which could result in the incurrence of significant operating losses if their
expenses were to increase or otherwise represent an increased percentage of
sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries. The slowdown in
the housing industry has resulted in reduced demand for the Company's and
Congoleum's products. These conditions could be exacerbated by contraction of
the sub-prime mortgage industry.
15
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's Tape Division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 22% of the
Company's Tape Division's net sales for the year ended December 31, 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.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 67% of
Congoleum's net sales for the years ended December 31, 2006 and 2005.
16
The Company's 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.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
17
ITEM 2. PROPERTIES
At December 31, 2006, ABI and its subsidiaries owned nine manufacturing plants
and a jewelry distribution center (located in Providence, Rhode Island) and
leased additional office and warehousing space as follows:
Owned Industry Segment
Or For Which
Location Square Feet Leased Properties Used
---------------------------------------------------------------------------------------------------------------
Trenton, NJ 1,050,000 Owned Flooring products
Marcus Hook, PA 1,000,000 Owned Flooring products
Trenton, NJ 282,000 Owned Flooring products
Finksburg, MD 107,000 Owned Flooring products
Mercerville, NJ 56,000 Leased Flooring products
Sherbrooke, Quebec 379,000 Owned Canadian division
Moorestown, NJ 226,000 Owned Tape products
Lowell, MA 57,000 Owned Tape products
Billerica, MA 30,000 Leased Tape products
Renaix, Belgium 84,000 Owned Tape products
Singapore 32,000 Owned Tape products
Providence, RI 103,000 Owned Jewelry products
New York, NY, Qingdao, China, Orlando, FL and
Bentonville, AK 27,200 Leased Jewelry products
ABI knows of no material defect in the titles to any such properties or material
encumbrances thereon other than mortgages on the owned properties in Renaix,
Belgium, and Singapore securing outstanding debt in amounts equal to
approximately 15% and 51% of the original cost of the property, respectively,
and under the terms of the Company's principal debt agreements, pursuant to
which the Company has granted a security interest in the properties in
Moorestown, NJ, Lowell, MA and Providence, RI. ABI believes that all of its and
its subsidiaries' properties are in good condition and have been well
maintained.
It is estimated that during 2006, ABI's and its subsidiaries' plants for the
manufacture of floor covering products operated at approximately 71% of
aggregate capacity, its plants for the manufacture of tape products operated at
approximately 81% of aggregate capacity and the Canadian division operated at
approximately 71% of aggregate capacity. All estimates of aggregate capacity
have been made on the basis of a five-day, three-shift operation.
18
ITEM 3. LEGAL PROCEEDINGS
ABI has been named by the Environmental Protection Agency as a Potentially
Responsible Party ("PRP") within the meaning of the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended, as to six
sites in five separate states. In addition, ABI has been named a PRP by the
State of Maine's Department of Environmental Protection with regard to two sites
in Maine. ABI was also notified of potential claims against it on behalf of
approximately seventeen (17) families living (or formally resident) in the Town
of Wilmington, Massachusetts. See Note 8 of the Notes to the Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for
additional information about these matters.
In accordance with SFAS No. 5, Accounting for Contingencies, ABI has recorded a
reserve of approximately $4.2 million, which represents a probable and
reasonably estimable amount to cover the anticipated remediation costs at all
sites, net of recoveries, based on facts and circumstances known to the Company
at the present time.
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately 1,332 pending claims involving
approximately 1,918 individuals as of December 31, 2006. These claims relate to
products of the Company's former Tile Division, which was previously acquired by
Congoleum. The claimants allege personal injury from exposure to asbestos or
asbestos-containing products. The Company utilizes an actuarial study to assist
it in developing estimates of the Company's potential liability for resolving
present and possible future asbestos claims. Projecting future asbestos claims
costs requires estimating numerous variables that are extremely difficult to
predict, including the incidence of claims, the disease that may be alleged by
future claimants, future settlement and trial results, future court dismissal
rates for claims, and possible asbestos legislation developments. Furthermore,
any predictions with respect to these variables are subject to even greater
uncertainty as the projection period lengthens. In light of these inherent
uncertainties, and based upon consultations with third party advisors, the
Company believes that six years is the most reasonable period over which to
include future claims that may be brought against the Company for recognizing a
reserve for future costs. The Company believes that costs for claims that might
be brought after that period are not reasonably estimable.
The estimated range of liability for settlement of current claims pending and
claims anticipated to be filed through 2012 was $10.3 million to $35.3 million
as of December 31, 2006. The Company believes no amount within this range is
more likely than any other and, accordingly, has recorded a liability of $10.3
million in its financial statements, which represents the minimum probable and
reasonably estimable amount for the future liability at the present time. The
Company also believes that based on this liability estimate, the corresponding
amount of insurance probable of recovery is $9.3 million at December 31, 2006,
which has been included in other assets. The estimated amount of insurance that
is probable of recovery depends on the liability estimate as well as a number of
additional factors, including 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
19
the effect on coverage of various policy terms and limits and their
interrelationships. The recorded liability and related insurance asset do not
include any related defense costs, which are typically paid in addition to the
indemnity limits under the primary layer insurance policies. Defense costs
historically paid by ABI's carriers have been approximately 156% of the related
indemnity costs.
The recorded 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, the
allocation of claims to specific insurance policies, 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.
There can be no assurance that the Company's actual asbestos-related settlement
and defense costs will not exceed its accrued asbestos liabilities, or that its
accrued insurance recoveries will be realized. It is reasonably possible that
the Company will incur charges for resolution of asbestos claims in the future,
which could exceed the Company's existing reserves. The Company will continue to
vigorously defend itself and believes it has substantial insurance coverage to
mitigate future costs related to this matter.
See Note 8 of the Notes to the Consolidated Financial Statements set forth in
Item 8 of this Annual Report on Form 10-K for additional information about these
claims.
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 to be formed upon
confirmation of the plan under Section 524(g) of the Bankruptcy Code to pay
asbestos claims against Congoleum. In July 2005, Congoleum filed the Sixth Plan
and related documents with the Bankruptcy Court which reflected the result of
these negotiations, as well as other technical modifications. The Bankruptcy
Court approved the disclosure statement and voting procedures and Congoleum
commenced solicitation of acceptances of the Sixth Plan in August 2005. In
September 2005, Congoleum learned that certain asbestos claimants were unwilling
to agree to forbear from exercising their security interest as contemplated by
the Sixth Plan and the Sixth Plan was subsequently withdrawn. In November 2005,
the Bankruptcy Court denied a request to extend Congoleum's exclusive right to
file a plan of reorganization and solicit acceptances thereof. In March 2006,
20
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, it withdrew its
support of the CNA 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, 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 the Tenth Plan and the CNA Plan are
each not 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. In March 2007,
Congoleum and other parties in interest resumed plan mediation discussions
seeking to resolve the 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.
See Notes 1 and 9 of the Notes to Consolidated Financial Statements set forth in
Item 8 of this report.
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 its
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 (as further discussed in Note 9 to the Consolidated Financial
Statements set forth in Item 8 of this Annual Report on Form 10-K). 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. Under any outcome, ABI anticipates its equity interest in Congoleum
is likely to be substantially diluted or eliminated.
21
Congoleum, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility. ABI had also signed a similar consent
order with regard to its former Trenton tile facility. Congoleum agreed to be
financially responsible for the clean-up of the Trenton tile facility as part of
the acquisition of ABI's former Tile Division. See Note 8 of Notes to
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K for additional information about these matters.
Together with a large number (in most cases, hundreds) of other companies,
Congoleum is named as a PRP in pending proceedings under CERCLA and similar
state laws. See Note 8 of Notes to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K for additional information
about these matters.
Congoleum also accrues remediation costs for certain of its owned facilities on
an undiscounted basis. Estimated total cleanup costs, including capital outlays
and future maintenance costs for soil and groundwater remediation are primarily
based on engineering studies. In the ordinary course of its business, ABI and
its consolidated entities become involved in lawsuits, administrative
proceedings, product liability and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years.
Notes 1, 8 and the 9 of Notes to Consolidated Financial Statements set forth in
Item 8 of this Annual Report on Form 10-K, to the extent addressing matters
reportable under this Item 3, are incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
American Biltrite Inc.'s Common Stock is traded on the American Stock Exchange
(ticker symbol: ABL). At the close of business on March 15, 2007, the closing
price of ABI's Common Stock was $9.25 per share and the approximate number of
record holders was 285. High and low stock prices for each quarter over the last
two years were:
Sale Prices of Common Shares
2006 2005
------------------------------------------------
Quarter Ended High Low High Low
-------------------------------------------------------------------------
March 31 $11.60 $9.08 $12.47 $11.00
June 30 11.72 9.25 11.17 8.90
September 30 11.00 9.41 12.35 9.00
December 31 10.99 8.01 13.09 9.90
The following graph compares the cumulative total stockholder return of American
Biltrite Inc.'s Common Stock to the cumulative returns of the American Stock
Exchange Market Value Index and a Peer Group Index, which includes companies in
Standard Industrial Classification (SIC) code number 3089 - Plastic Products,
N.E.C.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG AMERICAN BILTRITE INC.,
AMEX MARKET INDEX AND SIC CODE INDEX
[LINE GRAPH IN THE PRINTED MATERIALS]
ASSUMES $100 INVESTED ON JANUARY 1, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2006
No dividends on the Common Stock were declared during 2006, 2005 or 2004. The
Company's debt agreements restrict the ability of the Company to declare and pay
dividends. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - ABI and Non-Debtor
Subsidiaries" set forth in Item 7 of this Annual Report on Form 10-K.
23
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2006.
Number of
Securities
Number of Remaining
Securities to Weighted- Available for
Be Average Future Issuance
Issued Upon Exercise Under Equity
Exercise of Price of Compensation
Outstanding Outstanding Plans (excluding
Options, Options, securities
Warrants and Warrants and reflected in
Plan Category Rights Rights Column (a))
------------------------------- ------------ ------------ ----------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 454,500 $15.59 78,520
Equity Compensation Plans Not
Approved by Security Holders 31,500 12.62 18,500
--------- --------
Total 486,000 15.40 97,020(1)
========= ========
(1) Includes 78,520 shares of Common Stock available for issuance under the
Company's 1993 Stock Award and Incentive Plan, as amended and restated as
of March 4, 1997. In addition to stock options, awards under the Company's
1993 Stock Award and Incentive Plan, as amended and restated as of March
4, 1997, may take the form of stock appreciation rights (SARs), limited
SARs, restricted stock units and other stock awards specified in the Plan.
If such awards are granted, they will reduce the number of shares of
Common Stock available for issuance pursuant to future stock option
awards.
On July 1, 1999 the Company established its 1999 Stock Option Plan for
Non-Employee Directors (as amended, the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase
shares of Common Stock. The maximum number of shares of Common Stock that may be
issued pursuant to the 1999 Plan is 50,000 shares. The 1999 Plan was not
submitted to stockholders for approval. Under the 1999 Plan, each new
non-employee member of the Board who has not previously been a non-employee
member of the Board during the term of the 1999 Plan will be granted on the date
he or she is elected to the Board during the term of the 1999 Plan an Option to
purchase 1,000 shares of Common Stock. In addition, under the 1999 Plan, each
non-employee member of the board receives each year on July 1 an Option to
purchase 500 shares of Common Stock. The options granted under the 1999 Plan
have ten-year terms and fully vest 6 months from the grant date. The exercise
price for each Option is 100% of the fair market value on the date of the grant.
No Options may be granted under the 1999 Plan on or after July 1, 2009. As of
December 31, 2006 an aggregate of 27,500 shares of common stock were issuable
upon the exercise of outstanding Options.
Congoleum maintains separate equity compensation plans.
24
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
2006 2005 2004 2003 2002
-------------------------------------------------------------------------
(In thousands, except per share amounts)
Financial Position
Total assets $ 331,672 $ 340,109 $ 355,285 $ 318,933 $ 361,870
Long-term debt(1) 111,395 122,414 124,201 124,915 125,271
Total stockholders' equity 18,035 18,485 38,072 32,979 47,538
Summary of Operations
Net sales $ 435,537 $ 445,172 $ 433,869 $ 416,569 $ 434,495
Income (loss) before income
taxes and other items 142 (18,294) 808 (9,946) (11,813)
(Benefit from) provision for
income taxes (609) (1,534) (1,681) (3,323) 1,248
Noncontrolling interests (47) (636) (107) (174) 6,221
Income (loss) from
continuing operations 704 (17,396) 2,382 (6,797) (6,840)
Discontinued operations (2) (19) (237) (429) (7,361) (2,073)
Cumulative effect of
accounting change (3) -- -- -- -- (7,742)
Net income (loss) 685 (17,633) 1,953 (14,158) (16,655)
Earnings (loss) per share
Basic $ 0.20 $ (5.12) $ 0.57 $ (4.11) $ (4.84)
Diluted(4) 0.20 (5.12) 0.54 (4.11) (4.84)
Cash dividends per common
share -- -- -- 0.1875 0.50
Number of shares used in computing
earnings (loss)
per share:
Basic 3,442 3,442 3,442 3,442 3,442
Diluted 3,457 3,442 3,458 3,442 3,442
----------
(1) Long-term debt includes Congoleum's $100,000 8 5/8% Senior Notes due 2008.
At December 31, 2006, 2005 and 2004, these notes were classified as a
liability subject to compromise as a result of Congoleum's Chapter 11
filing. See Notes 5 and 9 of the Notes to Consolidated Financial
Statements set forth in Item 8 of this Annual Report on Form 10-K.
(2) Historical financial results have been restated to reflect the
classification of Janus as a discontinued operation in accordance with the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
(3) Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). In accordance with the provisions of
SFAS 142, the Company recorded a transitional goodwill impairment charge
of $7.7 million.
(4) Diluted earnings per share for the year ended December 31, 2004 includes
the dilutive effect of Congoleum's stock options during the year. During
the years ended December 31, 2006, 2005, 2003, and 2002, Congoleum's stock
options had no effect on American Biltrite Inc.'s diluted earnings per
share.
25
As described elsewhere in this Annual Report on Form 10-K, Congoleum has
commenced a Chapter 11 case for the purpose of resolving its asbestos-related
liabilities. It is not known how those proceedings and related matters will
impact the Company, including the Company's business, operations and liquidity.
A Congoleum plan of reorganization may eliminate the Company's Congoleum equity
interests or dilute or reduce those interests to a level where the Company would
no longer include Congoleum in its consolidated results. As a result of these
uncertainties, the financial data set forth in the above table may not be
indicative of the Company's future financial condition or results of operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
American Biltrite's consolidated financial statements include its majority-owned
subsidiary, Congoleum. 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 to be formed upon confirmation of the plan under
Section 524(g) of the Bankruptcy Code to pay asbestos claims against Congoleum.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn. In November 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. In March 2006, Congoleum filed
the Eighth Plan. In addition, an insurance company, 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
26
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 the CNA 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 Eleventh 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, are not confirmable as a matter of law. The Bankruptcy Court
provisionally approved the disclosure statements for both the Tenth Plan and the
CNA Plan subject to the Bankruptcy Court's ruling on the respective summary
judgment motions. In February 2007, the Bankruptcy Court entered on its docket
two separate opinions ruling that the Tenth Plan and the CNA Plan are each not
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. In March 2007, Congoleum and
other parties in interest resumed 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.
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 plan proposed 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 (as further discussed elsewhere in this Annual Report on Form 10-K). 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 third 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.
27
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 a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing a
pre-petition trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and granting the Collateral Trust a
security interest in Congoleum's rights under its applicable insurance coverage
and payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced an avoidance action seeking to void the security interest
granted to the Collateral Trust. 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. Due to, among
other things, the on-going 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.
ABI estimates that it will spend an additional $500 thousand for legal fees in
2007, which it has accrued, and has also accrued $250 thousand for a
contribution to the Plan Trust in connection with Congoleum's reorganization
plan. Actual amounts that will be contributed to the Plan Trust by Congoleum and
ABI and costs for pursuing and implementing the plan of reorganization could be
materially higher, and Congoleum and the Company may record significant
additional charges should the minimum estimated cost increase. Treatment of
Congoleum's existing shareholders, including ABI, under any future plan of
reorganization cannot be determined at this time. ABI anticipates that, under
any outcome, its equity interest in Congoleum is likely to be substantially
diluted or eliminated.
In addition, ABI is also a defendant in a number of asbestos-related lawsuits in
addition to those brought against Congoleum. See Note 8 of the Notes to
Consolidated Financial Statements set forth in Item 8 of this Annual Report on
Form 10-K, which is incorporated herein by reference. These matters could have a
material adverse impact on the Company's financial position and results of
operations.
28
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary, a manufacturer of pre-finished hardwood
flooring, and sell the related assets. Results of Janus Flooring, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
Due to Congoleum's reorganization and separate capital structure, the Company
believes that presenting ABI and its non-debtor subsidiaries separately from
Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations.
Results of Operations
ABI and Non-Debtor Subsidiaries
2006 2005 2004
--------- --------- ---------
(In thousands of dollars)
Net sales $216,063 $207,256 $204,219
Cost of sales 159,009 150,705 147,456
--------- --------- ---------
Gross profit 57,054 26.4% 56,551 27.3% 56,763 27.8%
Selling, general & administrative
expenses 55,515 25.7% 50,619 24.4% 54,765 26.8%
--------- --------- ---------
Operating income 1,539 5,932 1,998
Interest expense, net (2,324) (2,416) (3,005)
Other income, net 1,068 2,238 1,440
--------- --------- ---------
Income before taxes and other items 283 5,754 433
Provision for income taxes 235 1,041 864
Noncontrolling interests (47) (636) (107)
--------- --------- ---------
Income (loss) from continuing
operations $ 1 $ 4,077 $ (538)
========= ========= =========
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net sales for the year ended December 31, 2006 were $216.1 million, an increase
of $8.8 million or 4.2% from sales of $207.3 million in 2005. Tape segment sales
increased $6.9 million or 7.1% due to selling price increases for most product
lines and improved sales volume, mainly in the automotive category. Canadian
segment sales increased $5.0 million or 10.3% on increased sales of flooring
products coupled with the result of foreign currency translation. Jewelry
segment sales declined $3.0 million or 4.9% due to a decline in sales in the
department store channel, where industry consolidation reduced the number of
stores buying K&M's products. This decline in K&M sales was partially offset by
improvements in K&M sales to specialty retailers and a full year of sales of Jay
Jewelry, a business K&M acquired in October 2005.
Gross profit was 26.4% of net sales in 2006 compared to 27.3% in 2005. Tape
segment gross margins declined by 2.6 percentage points of net sales primarily
due to $1.2 million in costs incurred for a product recall necessitated by
defective material from a supplier. Increased costs for raw materials and
energy, which exceeded what was recovered through increased selling prices, also
contributed to the decline in margin percentage. Canadian division gross margins
improved by 0.9 percentage points of net sales due to a more profitable sales
mix within the flooring category, a greater proportion of flooring versus
industrial sales, and higher sales volume. Jewelry segment margins improved by
1.4 percentage points of net sales as a result of a more profitable customer
mix. The decline in jewelry sales, which is the highest margin segment as a
percent of total sales, also contributed to the decline in consolidated margin.
29
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 years ended December 31, 2006 and 2005 would have been
26.0% and 26.9%, respectively.
Selling, general and administrative expenses for the year ended December 31,
2006 were $55.5 million, up from $50.6 million in 2005. During 2005, ABI entered
into a settlement agreement with one of its insurance carriers. The settlement
resolved disputes regarding the carrier's coverage obligations for environmental
liability defense and indemnity costs at certain sites where ABI, as a result of
activities conducted many years ago, is alleged to have damaged property. As a
result of this settlement, ABI received $2.9 million in cash, which reduced
selling, general and administrative expenses and accounted for the majority of
the increase from 2005 to 2006. Expenses for legal and professional fees,
selling costs, wages and benefits also increased from 2005 to 2006.
Net interest expense decreased from $2.4 million in 2005 to $2.3 million in 2006
due to slightly lower borrowings and the benefit of interest earned on the note
received by AB Canada from the buyer of the former Janus real estate as part of
the consideration paid by the buyer for that property.
Other income decreased from $2.2 million in 2005 to $1.1 million in 2006 as a
result of income from the sale of a warehouse in 2005 for $2.3 million. The
impact of the warehouse sale on the Company's net income after taxes and
non-controlling interest was $887 thousand, or $0.26 per share. The Company also
incurred $860 thousand in other expense in 2006 for prepayment costs in
connection with refinancing a note and received $642 thousand in other income in
connection with certain rubber chemicals antitrust settlements.
The effective tax rate in 2006 of 83% is due primarily to the effect of
combining various segments with differing statutory rates applied to pretax
losses in certain locations and pretax income in other locations. Future
effective tax rates are expected to be closer to statutory rates, but could
fluctuate widely depending on the actual and relative results of individual
segments, as well as other factors.
Income from continuing operations was $1 thousand in 2006, compared with $4.1
million in 2005. As discussed above, the decrease was largely due to the sale of
the warehouse and insurance settlement in 2005. The Company had a net loss of
$18 thousand in 2006 compared with net income of $3.8 million in 2005.
30
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 were $207.3 million, an increase
of $3.1 million or 1.5% from sales of $204.2 million in 2004. Tape segment sales
increased 12.3% due to increased volume and selling price increases, with all
product lines contributing to the increase. Canadian segment sales increased
12.7% on increased sales of flooring and industrial products coupled with the
result of foreign currency translation. Jewelry segment sales declined 17.1% to
the mass merchandiser channel primarily due to a product strategy change by a
major customer, which resulted in lost business and additional markdowns. Lower
sales to mid-tier retailers due to fewer programs also contributed to the
decline.
Gross profit was 27.3% of net sales in 2005 compared to 27.8% in 2004. Gross
margins in the Tape segment improved 1.4 points as a percentage of net sales due
to higher selling prices and increased volume, which mitigated increases in raw
material costs and other expenses. Canadian segment gross margins were level
with the prior year as margin increases in flooring products were offset by
lower margins on industrial sales. Margins in the jewelry business declined 2.3
points as a percentage of net sales due to the effect of markdowns and higher
product costs which could not be recovered in pricing. The decline in jewelry
sales, which is the highest margin segment as a percent of total sales, also
contributed to the overall margin decline.
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 years ended December 31, 2005 and 2004 would have been
26.9% and 27.2%, respectively.
Selling, general and administrative expenses for the year ended December 31,
2005 were $50.6 million, down from $54.8 million in 2004. During 2005, ABI
entered into a settlement agreement with one of its insurance carriers. The
settlement resolved disputes regarding the carrier's coverage obligations for
environmental liability defense and indemnity costs at certain sites where ABI,
as a result of activities conducted many years ago, is alleged to have damaged
property. As a result of this settlement, ABI received $2.9 million in cash,
which reduced selling, general and administrative expenses and accounted for the
majority of the decrease from 2004 to 2005. Also contributing to the decrease
was a significant decline in professional fees in connection with the Congoleum
reorganization and modification of the Company's debt agreements. Selling,
general and administrative expenses increased $0.7 million, primarily due to
increased freight costs and inflation on salaries and benefits, offset by
expense reduction initiatives. As a percentage of sales, selling, general and
administrative expenses declined from 26.8% of net sales in 2004 to 24.4% of net
sales in 2005.
Net interest expense decreased from $3.0 million in 2004 to $2.4 million in 2005
due to a decrease in the leverage fee under the Company's note agreement
governing its outstanding $20 million aggregate principal amount notes. Interest
rates on the Company's revolving credit facility were slightly higher in 2005
compared with 2004, but average borrowings were lower.
31
Other income increased from $1.4 million in 2004 to $2.2 million in 2005 as a
result of income from the sale of a warehouse in 2005 for $2.3 million after
expenses partly offset by a $900 thousand decrease in management fees paid by
Congoleum to ABI from 2004 to 2005. The impact of the warehouse sale on the
Company's net income after taxes and non-controlling interest was $887 thousand,
or $0.26 per share.
The effective tax rate in 2005 of 18% arises primarily from the Company's
ability to recognize certain tax benefits not previously recognized, coupled
with the effect of combining various segments with differing statutory rates.
Income from continuing operations was $4.1 million in 2005, compared with a loss
of $538 thousand in 2004. This improvement was largely due to the sale of the
warehouse and insurance settlement in 2005. Net income was $3.8 million in 2005
compared with a net loss of $1.0 million in 2004 reflecting the improved results
from continuing operations.
Congoleum
2006 2005 2004
--------- --------- ---------
(In thousands of dollars)
Net sales $219,474 $237,626 $229,493
Cost of sales 169,023 183,734 167,844
--------- --------- ---------
Gross profit 50,451 23.0% 53,892 22.7% 61,649 26.9%
Selling, general & administrative
expenses 41,172 18.8% 43,503 18.3% 47,925 20.9%
Asbestos-related reorganization
expenses -- 25,326 5,000
--------- --------- ---------
Operating income (loss) 9,279 (14,937) 8,724
Interest expense, net (10,872) (9,973) (9,332)
Other income, net 1,428 760 1,011
--------- --------- ---------
(Loss) income before taxes (165) (24,150) 403
Benefit from income taxes (844) (2,575) (2,545)
--------- --------- ---------
Net income (loss) $ 679 $(21,575) $ 2,948
========= ========= =========
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net sales for the year ended December 31, 2006 totaled $219.5 million as
compared to $237.6 million for the year ended December 31, 2005, a decrease of
$18.1 million or 7.6%. The decrease in sales resulted primarily from volume
declines in residential sheet sales to both the remodel and builder segments
primarily in the fourth quarter of 2006, and lower sales to the manufactured
housing industry reflecting reduced demand versus that experienced in 2005 as a
result of hurricane related business. This was partially mitigated by the impact
of selling price increases instituted in late 2005 and in 2006 (4.3% of net
sales).
32
Gross profit for the year ended December 31, 2006 totaled $50.5 million, or
23.0% of net sales compared to $53.9 million or 22.7% of net sales. The decline
in gross margin dollars was due to lower volume. The increase in gross margin
percent as a percent of net sales reflected the impact of selling price
increases partially offset by continued increases in raw material costs which
increased costs by 1.2% of net sales, a less favorable product mix which reduced
gross margins by 1.2% of net sales, and the negative impact of lower production
volumes over which to spread fixed manufacturing overhead costs (1.0% of net
sales).
Selling, general and administrative expenses were $41.2 million for the year
ended December 31, 2006 as compared to $43.5 million for the year ended December
31, 2005, a decrease of $2.3 million. As a percent of net sales, selling,
general and administrative expenses were 18.8% for the year ended December 31,
2006 as compared to 18.3% for the same period in the prior year. The reduction
in selling, general and administrative expenses reflected the impact of lower
unit sales volume on freight, merchandising and other incentive programs ($3.0
million) offset by higher medical, pension and retiree benefits ($0.7 million).
There were no asbestos-related charges in 2006, compared to $25.3 million in
2005.
Income from operations was $9.3 million for the year ended December 31, 2006
compared to a loss of $14.9 million for the same period in the prior year, an
increase of $24.2 million. This increase in operating income reflects the
charges for asbestos related claims taken in 2005, coupled with reductions in
operating expenses, partially offset by lower gross margins.
Interest income was $0.5 million, which was $0.1 million higher than the prior
year reflecting higher interest rates. Interest expense increased from $10.4
million in 2005 to $11.4 million in 2006, primarily reflecting the interest
accrued on the unpaid interest on its Senior Notes. Due to the Chapter 11
proceedings, Congoleum was precluded from making the interest payments due
February 1, 2004, August 1, 2004, February 1, 2005, August 1, 2005, February 1,
2006 and August 1, 2006 on the Senior Notes.
In August 2006, an explosion caused extensive damage to components of a major
production line at Congoleum's Marcus Hook facility. By implementing a seven-day
operation on its other production line and purchasing base material from a
competitor, Congoleum was able to meet substantially all production
requirements. Congoleum's insurance carrier paid substantially all excess costs
(beyond a deductible) for replacing the damaged equipment and expenses to
replace production capacity. Fabrication and installation of replacement
equipment was completed by December 31, 2006. The line was operational by
January 2007. The cost to replace equipment and excess expenses incurred to meet
production requirements totaled $10.1 million which was reimbursed to Congoleum
by the insurer. Congoleum recognized a $1.3 million gain to recognize the
difference between insurance proceeds for the replacement of fixed assets and
their respective book value, which is reported in other income.
Congoleum recorded a tax benefit of $0.8 million on a loss before income taxes
of $0.2 million in 2006, resulting in net income after tax of $0.7 million. This
benefit arose from Congoleum entering into a closing agreement with the Internal
Revenue Service in December 2006, with respect to tax returns for years 2000 to
2003, resulting in reversing previously established reserves for the years under
audit. Congoleum recorded a tax benefit of $2.6 million on a loss before taxes
of $24.2 million in 2005.
33
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net sales for the year ended December 31, 2005 totaled $237.6 million as
compared to $229.5 million for the year ended December 31, 2004, an increase of
$8.1 million or 3.5%. The increase in sales resulted primarily from the impact
of selling price increases instituted in late 2004 and during 2005 (7% of net
sales), and higher shipments to the manufactured housing industry reflecting
post-hurricane demand for both manufactured housing and RV homes. This was
partially offset by a sales decrease of do-it-yourself tile reflecting the loss
of a major mass merchandiser customer coupled with decreased demand for
residential sheet products.
Gross profit for the year ended December 31, 2005 totaled $53.9 million, or
22.7% of net sales, compared to $61.6 million or 26.9% of net sales for the year
ended December 31, 2004. The decrease in gross margins was driven by the sharp
increase in raw material pricing which increased costs by 8.4% of net sales, a
less favorable product mix which reduced gross margin by 2.5% of net sales, and
the negative impact of lower production volumes over which to spread fixed
manufacturing overhead costs (1.7% of net sales). This was partially mitigated
by price increases instituted during late 2004 and 2005 (7.0% of net sales),
lower warranty claims expense (0.5% of net sales) and the favorable impact of
manufacturing cost reduction programs initiated (1.0% of net sales).
Selling, general and administrative expenses were $43.5 million for the year
ended December 31, 2005 as compared to $47.9 million for the year ended December
31, 2004, a decrease of $4.4 million. As a percent of net sales, selling,
general and administrative expenses were 18.3% and 20.9% for the years ended
December 2005 and 2004, respectively. Selling, general and administrative
expenses were down $4.4 million (2.9% of net sales) reflecting cost savings
initiatives instituted in late 2005, including workforce reductions and related
benefits ($1.0 million), and the impact of lower unit sales volume on freight
and other incentive programs ($3.0 million).
Asbestos-related charges in 2005 were $25.3 million, compared to $5.0 million in
2004. Congoleum recorded a charge of $9.9 million in the fourth quarter of 2005
to increase its estimated recorded liability for resolving asbestos-related
claims.
Loss from operations was $14.9 million for the year ended December 31, 2005
compared to income of $8.7 million for the same period in the prior year, a
decline of $23.6 million. This decline in operating income reflects the charges
for asbestos related claims taken in 2005, coupled with lower gross margins,
partially offset by reductions in operating expenses.
Interest income was $0.4 million, which was $0.3 million higher than the prior
year reflecting higher cash balances and interest rates. Interest expense
increased from $9.4 million in 2004 to $10.4 million in 2005, primarily
reflecting the interest accrued on the unpaid interest on its Senior Notes. Due
to the Chapter 11 proceedings, Congoleum was precluded from making the interest
payments due February 1, 2004, August 1, 2004, February 1, 2005 and August 1,
2005 on the Senior Notes.
34
Congoleum recorded a tax benefit of $2.6 million on a loss before income taxes
of $24.2 million in 2005, and it also recorded a tax benefit of $2.5 million on
income before taxes of $0.4 million in 2004. This related primarily to
anticipated tax benefits associated with certain prior year expenditures for
resolving asbestos-related liabilities, which Congoleum carried back but were
not previously recognized.
Liquidity and Capital Resources - ABI and Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased by $2.1
million to $2.6 million at December 31, 2006 as compared to December 31, 2005.
Working capital at December 31, 2006 was $29.6 million, compared with $19.9
million at December 31, 2005. This change is due primarily to the refinancing in
September 2006 of certain borrowings classified as current liabilities at the
end of 2005 with longer term credit arrangements. The ratio of current assets to
current liabilities at December 31, 2006 was 1.62 compared to 1.33 at December
31, 2005, consistent with the increased amount of working capital at December
31, 2006.
Capital expenditures for 2006 were $1.8 million compared to $2.6 million for
2005. During the second quarter of 2006, the Company completed the sale of a
building and land owned by the Company's former subsidiary, Janus Flooring, a
discontinued operation, for $5.0 million Canadian dollars. The Company received
net cash proceeds of $800 thousand (Canadian), which was used to reduce
borrowings, and a note for $4.0 million (Canadian). Payment of the note is due
upon obtaining an environmental certification on the land sold, which is
expected to be completed during 2007 at an expected cost to the Company or its
subsidiary of $200 thousand (Canadian) or less.
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of one to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that any such costs could be passed along to its customers.
American Biltrite Inc.'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) a $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.
35
In September 2006, American Biltrite Inc. entered into an amendment and
restatement to the Credit Agreement with BofA and the Canadian Lender. Pursuant
to the amendment and restatement, the Term Loan was added to the Credit
Agreement and the amount of the Revolver was increased by $10.0 million to its
current $30.0 million amount. In addition, the availability for domestic letters
of credit issued under the Credit Agreement was increased from $4.0 million to
$5.0 million. In connection with that amendment and restatement, American
Biltrite Inc. used approximately $17.0 million of new borrowings from the
proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which is included in other expense.
The amount of borrowings available from time to time for American Biltrite Inc.
and K&M 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.
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.
36
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, is due 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 on the equity method and include a maximum ratio of total liabilities
to tangible net worth, a minimum ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA") less certain cash payments for taxes,
debt service, and dividends to interest expense, a minimum level of tangible net
worth, a requirement that there be no consecutive quarterly losses from
continuing operations, and a maximum level of capital spending. Pursuant to the
amendment and restatement to the Credit Agreement entered into on September 25,
2006, certain of the financial covenants under the Credit Agreement were amended
to, among other things, (i) increase the permitted ratio of the Company's
consolidated total liabilities to consolidated tangible net worth to 200%, (ii)
to provide for a higher threshold for satisfying the consolidated tangible net
worth test and (iii) to provide a higher permitted aggregate amount for capital
expenditures in any fiscal year. The Credit Agreement also requires, for each
fiscal quarter ending on and after September 30, 2006, the Company's
consolidated adjusted EBITDA for the four consecutive fiscal quarters then
ending to exceed 100% of the Company's consolidated fixed charges for the
12-month period ending on such date, as determined under the Credit Agreement.
37
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 shares of capital stock Congoleum or the assets of Congoleum. In
addition, pursuant to the Credit Agreement, certain of the Company's
subsidiaries have agreed to guarantee the Company's obligations (excluding AB
Canada's obligations) under the Credit Agreement.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. While the Company does not
anticipate that it will need to amend its current debt agreements to avoid being
in default at some future date, there can be no assurances in that regard, and
any required amendments, if obtained, could result in significant cost to the
Company.
Under the terms of the Congoleum's 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 that ABI and Congoleum are party to. 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 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.
38
The following table summarizes the Company's obligations at December 31, 2006
for future principal payments and related interest on its long-term debt, future
minimum rental payments on its non-cancelable operating leases, future estimated
contributions to pension plans, and future minimum royalty and advertising
payments for licensed brand names on K&M products.
Payments due by Period
(In thousands)
2012 and
Total 2007 2008 2009 2010 2011 Thereafter
--------------------------------------------------------------
Long-term debt $11,395 $2,424 $2,352 $2,089 $2,093 $1,597 $ 840
Interest (1) 2,260 769 589 421 257 94 130
Operating leases 5,803 1,985 1,656 1,153 500 197 312
Pension plan
funding (2) 4,525 725 300 600 825 725 1,350
Royalty &
advertising
commitments 5,202 1,687 1,775 1,740 -- -- --
--------------------------------------------------------------
$29,185 $7,590 $6,672 $6,003 $3,675 $2,613 $2,632
==============================================================
(1) For debt with variable interest rates, future interest payments are based
on rates and spreads as of December 31, 2006.
(2) The projected pension plans funding was actuarially determined using the
following assumptions: i) the funding provisions of the Pension Protection
Act of 2006 becomes effective in 2008, ii) assets and liabilities were
projected using generally accepted actuarial methods, and there are no
gains or losses for 2007 and later, iii) the discount rates used to value
the liabilities is the same as that used to value IRS Current Liability
and is assumed to remain unchanged after 2007. The total for "2012 and
Thereafter" includes projected contributions for the years 2012 through
2014. Contributions can be assumed to increase with inflation after 2014.
Liquidity and Capital Resources - Congoleum
The Consolidated Financial Statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the 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 Consolidated Financial Statements set forth in Item 8 of
this Annual Report on Form 10-K, there is substantial doubt about Congoleum's
ability to continue as a going concern unless it obtains relief from its
substantial asbestos liabilities through a successful reorganization under
Chapter 11 of the Bankruptcy Code.
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 1
and 9 of the Notes to the Consolidated Financial Statements set forth in Item 8
of his Annual Report on Form 10-K for a discussion on Congoleum's bankruptcy
proceedings. These matters continue to have a material adverse impact on
liquidity and capital resources. During 2006, Congoleum paid $18.7 million in
fees and expenses (net of recoveries) related to implementation of its planned
reorganization under Chapter 11 and litigation with certain insurance companies.
Furthermore, at December 31, 2006 Congoleum had incurred but not paid
approximately $9 million in additional fees and expenses for services rendered
through that date.
39
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 ($21.8 million at December 31, 2006). 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 obtaining confirmation of a 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 December 31, 2006 is approximately $33.2 million, including interest on the
unpaid interest due, of which $3.6 million was owed at the time of the Chapter
11 filing.
In March 2004, the Bankruptcy Court approved the retention of Gilbert, Heintz &
Randolph LLP ("GHR") as special insurance counsel to Congoleum. An insurance
company appealed the retention order. In October 2005, the Court of Appeals for
the Third Circuit issued an opinion disqualifying GHR from serving as counsel to
Congoleum. In February 2006, the Bankruptcy Court ordered GHR to disgorge all
fees and certain expenses it was paid by Congoleum. The amount of the
disgorgement is approximately $9.6 million. In October 2006, Congoleum and GHR
entered into a settlement agreement (the "GHR Settlement") under which GHR would
pay Congoleum approximately $9.2 million in full satisfaction of the
disgorgement order. The payment would be made secured by assets of GHR and would
be made over time according to a formula based on GHR's earnings. Congoleum has
filed a motion seeking Bankruptcy Court approval of the GHR Settlement which is
pending. 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
December 31, 2006, were $18.6 million, a decrease of $5.9 million from December
31, 2005. Under the terms of its revolving credit agreement, payments on
Congoleum's accounts receivable are deposited in an account assigned by
Congoleum to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $3.6 million and $2.7 million at December
31, 2006 and December 31, 2005, respectively, are recorded as restricted cash.
Additionally, $6.1 million remaining from a $14.5 million settlement received in
August 2004 from an insurance carrier, which is subject to the lien of the
Collateral Trust, is included as restricted cash at December 31, 2006. Congoleum
expects to contribute these funds, less any amounts withheld pursuant to
reimbursement arrangements, to the Plan Trust. Working capital was $11.5 million
at December 31, 2006, up from $11.3 million one year earlier. The ratio of
current assets to current liabilities at December 31, 2006 was 1.1 to 1.0, the
same ratio at December 31, 2005. Net cash used by operations during the year
ended December 31, 2006 was $8.2 million, as compared to net cash provided by
operations of $1.6 million in 2005.
40
Capital expenditures in 2006 totaled $4.6 million, which includes $1.6 million
reimbursed by Congoleum's property insurer for replacement of a damaged
production line. Congoleum is currently planning capital expenditures of
approximately $5 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 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 (i)
the earlier of 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 ("EBITDA"). It also
includes restrictions on the incurrence of additional debt and limitations on
capital expenditures. The covenants and conditions under this financing
agreement must be met in order for Congoleum to borrow from the facility.
Congoleum was in compliance with these covenants at December 31, 2006.
Borrowings under this facility are collateralized by inventory and receivables.
At December 31, 2006, based on the level of receivables and inventory, $18.4
million was available under the facility, of which $5.1 million was utilized for
outstanding letters of credit and $12.7 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 obtaining it.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 8 to the Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K).
These actions include possible obligations to remove or mitigate the effects on
the environment of wastes deposited at various sites, including Superfund sites
and certain of Congoleum's owned and previously owned facilities. The
contingencies also include claims for personal injury and/or property damage.
The exact amount of such future cost and timing of payments are indeterminable
due to such unknown factors as the magnitude of cleanup costs, the timing and
extent of the remedial actions that may be required, the determination of
Congoleum's liability in proportion to other potentially responsible parties,
and the extent to which costs may be recoverable from insurance. Congoleum has
recorded provisions in its financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While
Congoleum believes its estimate of the future amount of these liabilities is
41
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 in connection with obtaining confirmation of its 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.
The following table summarizes Congoleum's contractual obligations, for future
minimum rental payments on its non-cancelable operating leases and future
minimum pension plans and other post-employment benefits ("OPEB") funding. The
timing and amount of any future payments of principal and interest on long term
debt, and any contributions to any Plan Trust, will depend on the terms of any
future amended plan of reorganization, so these payments are not shown in the
following table.
Payments due by Period
(In thousands)
2012 and
Total 2007 2008 2009 2010 2011 Thereafter
---------------------------------------------------------------
Operating leases $ 9,301 $2,710 $2,465 $2,287 $1,839 $ -- $ --
Pension plans
funding(1) 22,180 6,700 3,900 3,225 3,025 2,625 2,705
OPEB funding(2) 7,831 517 606 661 719 794 4,534
---------------------------------------------------------------
$39,312 $9,927 $6,971 $6,173 $5,583 $3,419 $7,239
===============================================================
(1) The projected pension plans funding was actuarially determined using the
following assumptions: i) the funding provisions of the Pension Protection
Act of 2006 becomes effective in 2008, ii) assets and liabilities were
projected using generally accepted actuarial methods and there are no
gains or losses for 2007 and later, and iii) the discount rate used to
value the liabilities is the same as that used to value IRS Current
Liability and is assumed to remain unchanged after 2007. The total for
"2012 and Thereafter" include projected contributions for the years 2012
through 2014 for one of Congoleum's pension plans and through 2017 for two
of Congoleum's pension plans. Contributions can be assumed to increase
with inflation after 2014 and 2017, respectively.
(2) Congoleum's other post employment benefit plan is an unfunded plan.
Funding requirements each year are assumed to approximate the expenses for
each year (see Note 7 of Notes to Consolidated Financial Statements set
forth in Item 8 of this Annual Report on Form 10-K.)
42
Contingencies
ABI has recorded what it believes are adequate provisions for environmental
remediation and product-related liabilities, including provisions for testing
for potential remediation of conditions at its own facilities. While ABI
believes its estimate of the future amount of these liabilities is reasonable
and that they will be paid for the most part over a period of one to ten years,
the timing and amount of such payments may differ significantly from ABI's
assumptions. Although the effect of future government regulation could have a
significant effect on ABI's costs, ABI is not aware of any pending legislation
which could significantly affect the liabilities ABI has established for these
matters. There can be no assurances that the costs of any future government
regulations could be passed along by ABI to its customers.
Certain legal and administrative claims are pending or have been asserted
against ABI. Among these claims, ABI is a named party in several actions
associated with waste disposal sites and asbestos-related claims. These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites. The
exact amount of such future costs to ABI is indeterminable due to such unknown
factors as the magnitude of cleanup costs, the timing and extent of the remedial
actions that may be required, the determination of ABI's liability in proportion
to other potentially responsible parties and the extent to which costs may be
recoverable from insurance. ABI has recorded provisions in its consolidated
financial statements for the estimated probable loss associated with all known
environmental and asbestos-related contingencies. The contingencies also include
claims for personal injury and/or property damage. (See Notes 1, 8 and 9 of
Notes to Consolidated Financial Statements set forth in Item 8 of this Annual
Report on Form 10-K.)
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results and conditions may differ from these estimates
and assumptions.
Critical accounting policies are defined as those that entail significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies upon which its financial
condition depends, and which involve the most complex or subjective decisions or
assessments, are those described below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Asbestos Liabilities - As discussed previously, the Company is party to a
significant number of lawsuits stemming from their previous manufacture of
asbestos-containing products. ABI has recorded in its consolidated balance sheet
a liability and corresponding insurance receivable based on its estimates of the
future costs and related insurance recoveries to settle asbestos litigation and
pay for related legal and loss handling costs. These estimates are based on a
number of subjective assumptions, including the anticipated costs to settle
claims, the claims dismissal rate, the cost to litigate claims, the number of
claims expected to be received, and the applicability and allocation of
43
insurance coverage to these costs. Additionally, due to the numerous
uncertainties related to future asbestos litigation trends and costs, the
Company does not believe reasonable estimates can be developed for claim
developments beyond a six year horizon. Accordingly, the Company's estimated
liability is based on claims currently filed as well as claims anticipated to be
filed over the next six years. A change in assumptions could have a material
effect on the Company's estimated liability. For example, it is estimated that a
1% decrease in the Company's dismissal rate would result in a 26% increase in
liability assuming all other variables remained constant.
Due to the highly subjective nature of these assumptions, the Company has
estimated a wide range of potential future costs and insurance recoveries and,
because management believes that no amount within the range is more likely than
any other, has recorded a liability and insurance receivable based on the low
end of the range in accordance with accounting principles generally accepted in
the United States. As such, the selection of a different amount within the range
could have a material effect on the Company's consolidated financial statements,
as could future developments, which may differ from those assumed in developing
the Company's estimates. 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. The Company analyzes these estimates on an annual
basis and reassesses the assumptions used as additional information becomes
available over the course of time.
Congoleum is a party to a significant number of lawsuits stemming from its
manufacture of asbestos-containing products. During 2006, Congoleum paid $18.7
million in fees and expenses (net of recoveries) related to its reorganization
case under Chapter 11 of the Bankruptcy Code and litigation with certain
insurance companies. Pursuant to terms of the Eighth Plan and related documents,
Congoleum was entitled to reimbursement for certain expenses it incurs for
claims processing costs and expenses in connection with pursuit of insurance
coverage. At December 31, 2006, Congoleum had $21.8 million recorded as a
receivable for such reimbursements. Under the Eleventh Plan, Congoleum would be
entitled to reimbursement of only the $1.3 million in claims processing costs
and would not collect the balance of these receivables ($20.5 million at
December 31, 2006). Disposition of these balances, including their write-off or
any other applicable charges or credits pursuant to any new amended plan of
reorganization are expected to be recorded at a future date, the net effect of
which cannot be determined at this time. There can be no assurances that any
reimbursements will be received. 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 expects that insurance will provide the substantial majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of Congoleum itself.
Congoleum does not have the necessary financial resources to litigate and/or
settle asbestos claims in the ordinary course of business.
44
In light of its bankruptcy filing, Congoleum believes the most meaningful
measure of its probable loss due to asbestos litigation is the amount it will
have to contribute to the Plan Trust plus the costs to effect the
reorganization. Congoleum is not yet able to determine the additional costs that
may be required to affect a new amended plan and actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing any plan
of reorganization could be materially higher than recorded amounts and previous
estimates.
Congoleum will update its estimates, if appropriate, as additional information
becomes available during the reorganization process, which could result in
potentially material adjustments to Congoleum's earnings in future periods.
Consolidation of Congoleum - The Company's subsidiary Congoleum filed for
bankruptcy protection on December 31, 2003. The accompanying consolidated
financial statements include the results for Congoleum for all periods
presented. ABI continues to own a majority of the voting stock of Congoleum. The
Company expects to continue to control Congoleum while it is in bankruptcy.
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 (including its non-debtor subsidiaries) and Congoleum, which may be more
meaningful for certain analyses. ABI's reported consolidated financial
condition, operating results and cash flows consolidated results would be
materially different if they did not include Congoleum. The Company anticipates
its equity interest in Congoleum will be substantially reduced at a minimum in
connection with effectiveness of any future Congoleum plan of reorganization, at
which time it may no longer be appropriate to include Congoleum in the Company's
consolidated financial statements.
Environmental Contingencies - As discussed previously, the Company has incurred
liabilities related to environmental remediation costs at both third party sites
and Company owned sites. The Company accrues for its estimate of future
remediation activities when it is probable that a liability has been incurred
and the amount can be reasonably estimated. The most likely cost to be incurred
is accrued based on an evaluation of currently available facts with respect to
each individual site, including the extent of clean-up activities to be
performed, the methods employed in the clean-up activities, the Company's
relative share in costs at sites where other parties are involved, existing
technology, current laws and regulations and prior remediation experience. Where
no amount within a range of estimates is more likely to occur than another, the
minimum is accrued. For sites with multiple potentially responsible parties, the
Company considers its likely proportionate share of the anticipated remediation
costs and the ability of the other parties to fulfill their obligations in
establishing a provision for those costs. When future liabilities are determined
to be reimbursable by insurance coverage or payment from third parties, an
accrual is recorded for the potential liability and a receivable is recorded
related to the expected recovery. A receivable reserve is recorded when
recoveries are disputed or are not highly probable. These estimates are based on
certain assumptions such as the Company's relative share in costs at sites where
other parties are involved, and the ultimate insurance coverage available. These
projects tend to be long-term in nature, and assumptions are subject to
refinement as facts change. As such, it is possible that the Company may need to
revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods. The Company closely monitors existing and potential
environmental matters to minimize costs.
45
Valuation of Deferred Tax Assets - The Company provides for valuation reserves
against its deferred tax assets in accordance with the requirements of SFAS 109.
In evaluating the recovery of deferred tax assets, the Company makes certain
assumptions as to the future reversal of existing taxable temporary differences,
taxable income in prior carryback years, the feasibility of tax planning
strategies, and estimated future taxable income. The valuation allowance can be
affected by changes to tax laws, changes to statutory tax rates and changes to
future taxable income estimates. It is possible that the facts underlying these
assumptions may not materialize as anticipated in future periods, which may
require the Company to record additional deferred tax valuation allowances, or
to reduce previously recorded valuation allowances.
Pension and Other Postretirement Benefits - The Company sponsors several
noncontributory defined benefit pension plans covering most of the Company's
employees. The Company also maintains health and life insurance programs for
retirees. Benefits under the plans are based on years of service and employee
compensation. The costs and obligations associated with these plans are
dependent upon various actuarial assumptions used in calculating such amounts.
These assumptions include the long-term rate of return on plan assets, discount
rates and other factors. These assumptions are evaluated and updated annually by
management in consultation with outside actuaries and investment advisors. Other
assumptions used include employee demographic factors such as retirement
patterns, mortality, turnover and the rate of compensation increases.
To determine the expected long-term rate of return on plan assets, we consider
the current and expected asset allocation, as well as historical and expected
returns on each plan asset class. In 2006, the Company assumed that the expected
long-term rate of return on plan assets will be 7.0% - 7.5%. The assumed
long-term rate of return on assets is applied to a calculated value of plan
assets, which recognizes changes in the fair value of plan assets in a
systematic manner over four years. This produces the expected return on plan
assets that is included in pension expense. The difference between this expected
return and the actual return on plan assets is deferred. The net deferral of
past actuarial gains or losses affects the calculated value of plan assets and,
ultimately, future pension expense.
At the end of each year, the Company determines the discount rate to be used to
calculate the present value of plan liabilities. The discount rate is used to
determine expected future benefit payments as a present value on the measurement
date, reflecting the current rate at which the pension liabilities could be
effectively settled. In estimating this rate, the Company looks to rates of
return on high-quality, fixed-income investments that receive one of the two
highest ratings given by a recognized ratings agency. At December 31, 2006, the
Company determined this rate to be 6.0%.
Allowance for Doubtful Accounts - The Company's allowance for doubtful accounts
is determined based on a variety of factors that affect the potential
collectibility of the related receivables, including length of time receivables
are past due, customer credit ratings, financial stability of customers,
specific one-time events and past customer history. In addition, in
circumstances where the Company is made aware of specific customer's inability
to meet its financial obligations, a specific allowance is established. The
majority of accounts are individually evaluated on a regular basis and
appropriate reserves are established as deemed appropriate based on the criteria
previously noted. The remainder of the reserve is based on management's
estimates and takes into consideration historical trends, market conditions and
the composition of the Company's customer base. The risk associated with this
estimate is that the Company would not become aware of potential collectibility
46
issues related to specific accounts and thereby become exposed to potential
unreserved losses. Historically, the Company's estimates and assumptions around
the allowance have been reasonably accurate and the Company has processes and
controls in place to closely monitor customers and potential credit issues.
Inventory Allowances - The Company maintains obsolescence and slow-moving
allowances for inventory. Products and materials that are specifically
identified as obsolete are fully reserved. The remainder of the allowance is
based on management's estimates and fluctuates with market conditions, design
cycles and other economic factors. Risks associated with this allowance include
unforeseen changes in business cycles that could affect the marketability of
certain products and an unforecasted decline in current production. Management
closely monitors the market place and related inventory levels and has
historically maintained reasonably accurate allowance levels. In addition, the
Company values certain inventories using the last-in, first-out ("LIFO") method.
Accordingly, a LIFO valuation reserve is maintained to properly value these
inventories.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments. The Company invests primarily in highly liquid
debt instruments with strong credit ratings and short-term (less than one year)
maturities. The carrying amount of these investments approximates fair value due
to the short-term maturities. If market interest rates were to increase by 10%
from levels at December 31, 2006, the fair value of our investments would
decline by an immaterial amount. In addition, substantially all of the Company's
outstanding long-term debt as of December 31, 2006 consisted of indebtedness
with a fixed rate of interest, which is not subject to change based upon changes
in prevailing market interest rates, or the rate of interest on long-term debt
has been fixed through interest rate swap agreements. During 2006, in connection
with its debt refinancing, the Company entered into two interest rate swap
agreements to manage the Company's exposure to fluctuations in interest rates on
its term loan and portions of its revolver borrowings. These derivative
instruments are recorded at fair value on the consolidated balance sheet.
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 countries of 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 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
foreign currency sales decreases. When the U.S. dollar weakens, the U.S. dollar
value of the foreign currency amount of sales increases.
Under their current policies, other than the interest rate swap agreements,
neither the Company nor Congoleum use derivative financial instruments,
derivative commodity instruments or other financial instruments to manage their
exposure to changes in foreign currency exchange rates, commodity prices or
equity prices and does not hold any instruments for trading purposes.
47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details - Assets
(In thousands of dollars)
December 31 Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 21,180 $ 29,184 $ 18,591 $ 24,511 $ 2,589 $ 4,673
Restricted cash 9,656 11,644 9,656 11,644
Accounts and notes receivable, less
allowances for doubtful accounts and
discounts of $3,070 in 2006 and
$2,820 in 2005 40,791 41,742 $(226) $(455) 17,598 17,092 23,419 25,105
Inventories 80,471 77,127 (143) (166) 34,220 34,607 46,394 42,686
Assets of discontinued operations -- 3,142 -- 3,142
Deferred income taxes 1,818 1,301 1,818 1,301
Prepaid expenses & other current assets 28,406 24,062 25,610 20,139 2,796 3,923
--------------------------------------------------------------------------------------
Total current assets 182,322 188,202 (369) (621) 105,675 107,993 77,016 80,830
Property, plant & equipment, net 106,380 115,336 67,757 73,207 38,623 42,129
Other assets:
Insurance for asbestos-related
liabilities 9,320 8,950 9,320 8,950
Goodwill, net 11,475 11,726 11,475 11,726
Other assets 22,175 15,895 (135) (147) 10,770 9,412 11,540 6,630
--------------------------------------------------------------------------------------
42,970 36,571 (135) (147) 10,770 9,412 32,335 27,306
--------------------------------------------------------------------------------------
Total assets $331,672 $340,109 $(504) $(768) $184,202 $190,612 $147,974 $150,265
======================================================================================
See accompanying notes.
48
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets with Consolidating Details -
Liabilities and Stockholders' Equity
(In thousands of dollars, except per share amounts)
December 31 Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
---------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Accounts payable $ 21,769 $ 22,144 $ (226) $ (455) $ 10,654 $ 12,245 $ 11,341 $ 10,354
Accrued expenses 37,411 42,976 22,301 22,703 15,110 20,273
Asbestos-related liabilities 13,950 28,369 13,950 28,369
Liabilities of discontinued operations - 200 -- 200
Notes payable 31,284 19,062 12,715 9,404 18,569 9,658
Current portion of long-term debt 2,424 20,451 2,424 20,451
Liabilities subject to compromise 34,602 23,990 34,602 23,990
---------------------------------------------------------------------------------------
Total current liabilities 141,440 157,192 (226) (455) 94,222 96,711 47,444 60,936
Long-term debt, less current portion 8,971 1,963 8,971 1,963
Asbestos-related liabilities 10,300 9,500 10,300 9,500
Other liabilities 15,441 12,890 15,441 12,890
Noncontrolling interests 1,087 1,365 1,087 1,365
Liabilities subject to compromise 136,398 138,714 (135) (147) 136,533 138,861
---------------------------------------------------------------------------------------
Total liabilities 313,637 321,624 (361) (602) 230,755 235,572 83,243 86,654
Stockholders' equity
Common stock, par value $.01, authorized
15,000,000 shares, issued 4,607,902
shares 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,591 19,570 (49,349) (49,126) 49,349 49,126 19,591 19,570
Retained earnings 32,821 31,913 35,376 35,129 (64,726) (65,405) 62,171 62,189
Accumulated other comprehensive loss (19,291) (17,912) 6,110 6,111 (23,456) (20,961) (1,945) (3,062)
Less cost of 1,166,351 shares of common
stock in treasury (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
---------------------------------------------------------------------------------------
Total stockholders' equity 18,035 18,485 (143) (166) (46,553) (44,960) 64,731 63,611
---------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $331,672 $340,109 $ (504) $ (768) $184,202 $190,612 $147,974 $150,265
=======================================================================================
See accompanying notes.
49
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Operations with Consolidating Details
(In thousands of dollars, except per share amounts)
Years Ended December 31 Eliminations
2006 2005 2004 2006 2005 2004
--------------------------------------------------------------
Net sales $435,537 $445,172 $433,869 $ -- $ 290 $ 157
Cost of products sold 327,585 334,324 315,270 (447) (115) (30)
Selling, general & administrative expenses 96,687 94,122 101,790 -- -- (900)
Asbestos-related reorganization charges -- 25,326 5,000
--------------------------------------------------------------
Income (loss) from operations 11,265 (8,600) 11,809 447 405 1,087
Other income (expense)
Interest income 869 639 128
Interest expense (14,065) (13,028) (12,465)
Other income 2,073 2,695 1,336 (423) (303) (1,115)
--------------------------------------------------------------
(11,123) (9,694) (11,001) (423) (303) (1,115)
--------------------------------------------------------------
Income (loss) before taxes and other items 142 (18,294) 808 24 102 (28)
(Benefit from) provision for income taxes (609) (1,534) (1,681)
Noncontrolling interests (47) (636) (107)
--------------------------------------------------------------
Net income (loss) from continuing operations 704 (17,396) 2,382 24 102 (28)
Discontinued operations (19) (237) (429)
--------------------------------------------------------------
Net income (loss) $ 685 $(17,633) $ 1,953 $ 24 $ 102 $ (28)
==============================================================
Congoleum American Biltrite
2006 2005 2004 2006 2005 2004
-------------------------------------------------------------------
Net sales $219,474 $237,626 $229,493 $216,063 $207,256 $204,219
Cost of products sold 169,023 183,734 167,844 159,009 150,705 147,456
Selling, general & administrative expenses 41,172 43,503 47,925 55,515 50,619 54,765
Asbestos-related reorganization charges -- 25,326 5,000
-------------------------------------------------------------------
Income (loss) from operations 9,279 (14,937) 8,724 1,539 5,932 1,998
Other income (expense)
Interest income 515 438 114 354 201 14
Interest expense (11,387) (10,411) (9,446) (2,678) (2,617) (3,019)
Other income 1,428 760 1,011 1,068 2,238 1,440
-------------------------------------------------------------------
(9,444) (9,213) (8,321) (1,256) (178) (1,565)
-------------------------------------------------------------------
Income (loss) before taxes and other items (165) (24,150) 403 283 5,754 433
(Benefit from) provision for income taxes (844) (2,575) (2,545) 235 1,041 864
Noncontrolling interests (47) (636) (107)
-------------------------------------------------------------------
Net income (loss) from continuing operations 679 (21,575) 2,948 1 4,077 (538)
Discontinued operations (19) (237) (429)
-------------------------------------------------------------------
Net income (loss) $ 679 $(21,575) $ 2,948 $ (18) $ 3,840 $ (967)
===================================================================
Basic Diluted
2006 2005 2004 2006 2005 2004
------------------------------- -------------------------------
Net income (loss) per common share $ 0.20 $(5.05) $ 0.69 $ 0.20 $(5.05) $ 0.66
from continuing operations
Discontinued operations -- (0.07) (0.12) -- (0.07) (0.12)
------------------------------- -------------------------------
Net income (loss) per common share $ 0.20 $(5.12) $ 0.57 $ 0.20 $(5.12) $ 0.54
=============================== ===============================
Weighted average number of common
and equivalent shares outstanding 3,442 3,442 3,442 3,457 3,442 3,458
=============================== ===============================
See accompanying notes.
50
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows with Consolidating Details -
Operating Activities
(In thousands of dollars)
Years Ended December 31 Eliminations
2006 2005 2004 2006 2005 2004
---------------------------------------------------------------
Operating activities
Net income (loss) $ 685 $(17,633) $ 1,953 $ 24 $ 102 $ (28)
Net loss from discontinued operations 19 237 429
---------------------------------------------------------------
Net income (loss) from continuing 704 (17,396) 2,382 24 102 (28)
operations
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Depreciation and amortization 16,245 16,468 17,539
Provision for doubtful accounts and
discounts 3,627 2,922 2,631
Deferred income taxes (2,856) (588) 457
Asbestos-related charge -- 25,326 5,000
Gain on sale of property -- (2,303) --
Gain on replacement of property (1,266) -- --
Charge for early extinguishment of debt 860 -- --
Stock compensation charge 244 -- --
Change in operating assets and
liabilities:
Accounts and notes receivable (2,617) (1,091) (11,146) (376) (434) (756)
Inventories (3,038) (599) 6,620 (24) (102) 28
Prepaid expenses & other current
assets 843 (5,368) 4,733
Accounts payable and accrued
expenses 1,727 8,793 25,528 376 434 756
Asbestos-related liabilities (22,373) (27,220) (10,754)
Asbestos-related reimbursement from
insurance settlement 3,684 6,091 -
Noncontrolling interests (278) 742 107
Other (1,156) (2,299) (3,046)
---------------------------------------------------------------
Net cash (used) provided by operating (5,650) 3,478 40,051 -- -- --
activities of continuing operations
Net cash used by operating activities of
discontinued operations (180) (289) (1,002)
---------------------------------------------------------------
Net cash (used) provided by operating
activities $ (5,830) $ 3,189 $ 39,049 $ -- $ -- $ --
===============================================================
Congoleum American Biltrite
2006 2005 2004 2006 2005 2004
------------------------------------------------------------------
Operating activities
Net income (loss) $ 679 $(21,575) $ 2,948 $ (18) $ 3,840 $ (967)
Net loss from discontinued operations 19 237 429
------------------------------------------------------------------
Net income (loss) from continuing 679 (21,575) 2,948 1 4,077 (538)
operations
Adjustments to reconcile net income (loss)
to net cash (used) provided by operating
activities:
Depreciation and amortization 10,478 11,002 11,428 5,767 5,466 6,111
Provision for doubtful accounts and
discounts 3,627 2,922 2,631
Deferred income taxes (2,856) (588) 457
Asbestos-related charge -- 25,326 5,000
Gain on sale of property -- (2,303) --
Gain on replacement of property (1,266) -- --
Charge for early extinguishment of debt 860 -- --
Stock compensation charge 223 -- -- 21 -- --
Change in operating assets and
liabilities:
Accounts and notes receivable (506) 529 (4,061) (1,735) (1,186) (6,329)
Inventories 387 5,016 5,372 (3,401) (5,513) 1,220
Prepaid expenses & other current
assets (347) (3,160) 2,340 1,190 (2,208) 2,393
Accounts payable and accrued
expenses 5,662 7,866 21,894 (4,311) 493 2,878
Asbestos-related liabilities (22,373) (27,220) (10,754)
Asbestos-related reimbursement from
insurance settlement 3,684 6,091 --
Noncontrolling interests (278) 742 107
Other (4,784) (2,315) (3,102) 3,628 16 56
------------------------------------------------------------------
Net cash (used) provided by operating (8,163) 1,560 31,065 2,513 1,918 8,986
activities of continuing operations
Net cash used by operating activities of
discontinued operations (180) (289) (1,002)
------------------------------------------------------------------
Net cash (used) provided by operating
activities $(8,163) $ 1,560 $ 31,065 $ 2,333 $ 1,629 $ 7,984
==================================================================
See accompanying notes.
51
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows with Consolidating Details -
Investing & Financing Activities
(In thousands of dollars)
Years Ended December 31 Eliminations
2006 2005 2004 2006 2005 2004
---------------------------------------------------------------------
Investing activities
Investments in property, plant and
equipment $ (6,417) $ (6,885) $ (5,855)
Insurance proceeds for oven line
replacement 1,586 -- --
Proceeds from sale of property -- 2,327 30
Acquisition -- (1,400) --
---------------------------------------------------------------------
Net cash used by investing activities of (4,831) (5,958) (5,825)
continuing operations
Net cash provided by investing activities
of discontinued operations 680 -- --
---------------------------------------------------------------------
Net cash used by investing activities (4,151) (5,958) (5,825)
Financing activities
Net short-term borrowings (payments) 22,163 1,742 (1,675)
Payments on long-term debt (20,777) (2,748) (941)
Net change in restricted cash 1,988 (2,408) 605
Exercise of subsidiary stock options -- 20 1
Payment for early extinguishment of debt (860) -- --
---------------------------------------------------------------------
Net cash provided (used) by financing 2,514 (3,394) (2,010)
activities of continuing operations
Net cash provided (used) by financing
activities of discontinued operations -- -- --
---------------------------------------------------------------------
Net cash provided (used) by financing
activities 2,514 (3,394) (2,010)
Effect of foreign exchange rate changes on
cash (537) 656 (482)
---------------------------------------------------------------------
Net (decrease) increase in cash (8,004) (5,507) 30,732
Cash and cash equivalents at beginning of
year 29,184 34,691 3,959
---------------------------------------------------------------------
Cash and cash equivalents at end of year $ 21,180 $ 29,184 $ 34,691
=====================================================================
Congoleum American Biltrite
2006 2005 2004 2006 2005 2004
-------------------------------------------------------------------
Investing activities
Investments in property, plant and
equipment $ (4,642) $ (4,274) $ (3,428) $(1,775) $(2,611) $(2,427)
Insurance proceeds for oven line
replacement 1,586 -- --
Proceeds from sale of property -- -- 30 -- 2,327 --
Acquisition -- (1,400) --
-------------------------------------------------------------------
Net cash used by investing activities of (3,056) (4,274) (3,398) (1,775) (1,684) (2,427)
continuing operations
Net cash provided by investing activities
of discontinued operations 680 -- --
-------------------------------------------------------------------
Net cash used by investing activities (3,056) (4,274) (3,398) (1,095) (1,684) (2,427)
Financing activities
Net short-term borrowings (payments) 3,311 (97) (732) 18,852 1,839 (943)
Payments on long-term debt (20,777) (2,748) (941)
Net change in restricted cash 1,988 (2,408) 605
Exercise of subsidiary stock options -- 20 1
Payment for early extinguishment of debt (860) -- --
-------------------------------------------------------------------
Net cash provided (used) by financing 5,299 (2,485) (126) (2,785) (909) (1,884)
activities of continuing operations
Net cash provided (used) by financing
activities of discontinued operations -- -- --
-------------------------------------------------------------------
Net cash provided (used) by financing
activities 5,299 (2,485) (126) (2,785) (909) (1,884)
Effect of foreign exchange rate changes on
cash (537) 656 (482)
-------------------------------------------------------------------
Net (decrease) increase in cash (5,920) (5,199) 27,541 (2,084) (308) 3,191
Cash and cash equivalents at beginning of
year 24,511 29,710 2,169 4,673 4,981 1,790
-------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18,591 $ 24,511 $ 29,710 $ 2,589 $ 4,673 $ 4,981
===================================================================
See accompanying notes.
52
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands of dollars, except per share amounts)
Additional Accumulated Total
Paid-in Retained Other Treasury Stockholders'
Common Stock Capital Earnings Comprehensive Loss Stock Equity
--------------------------------------------------------------------------------------------
Balance at December 31, 2003 $46 $19,548 $ 47,573 $(19,056) $(15,132) $ 32,979
Comprehensive income:
Net income for 2004 1,953 1,953
Foreign currency translation
adjustments 1,301 1,301
Minimum pension liability adjustment 1,839 1,839
----------------
Total comprehensive income 5,093
--------------------------------------------------------------------------------------------
Balance at December 31, 2004 46 19,548 49,526 (15,916) (15,132) 38,072
Comprehensive loss:
Net loss for 2005 (17,633) (17,633)
Foreign currency translation
adjustments 420 420
Minimum pension liability adjustment (2,416) (2,416)
----------------
Total comprehensive loss (19,629)
Stock compensation 22 22
Effect of Congoleum stock option
exercises 20 20
--------------------------------------------------------------------------------------------
Balance at December 31, 2005 46 19,570 31,913 (17,912) (15,132) 18,485
Comprehensive income:
Net income for 2006 685 685
Foreign currency translation
adjustments 41 41
Minimum pension liability adjustment 1,296 1,296
----------------
Total comprehensive income 2,022
SFAS 158 cumulative adjustment,
including taxes of $440 (2,716) (2,716)
Stock compensation 21 21
Effect of Congoleum stock compensation 223 223
--------------------------------------------------------------------------------------------
Balance at December 31, 2006 $46 $19,591 $ 32,821 $(19,291) $(15,132) $ 18,035
============================================================================================
See accompanying notes.
53
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2006
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American Biltrite
Inc. and its wholly-owned subsidiaries (referred to as "ABI" or the "Company"),
as well as entities over which it has voting control. In 1995, ABI gained voting
control over Congoleum Corporation ("Congoleum") and K&M Associates L.P.
("K&M"). Upon consolidation, intercompany accounts and transactions, including
transactions with associated companies that result in intercompany profit, are
eliminated.
As discussed more fully below and elsewhere in these footnotes, the Company's
subsidiary Congoleum filed for bankruptcy protection on December 31, 2003. The
accompanying consolidated financial statements include the results for Congoleum
for all periods presented. Congoleum's results include losses (including other
comprehensive losses) of $47.0 million in excess of the value of ABI's
investment in Congoleum at December 31, 2006. ABI continues to own a majority of
the voting stock of Congoleum. The Company expects to continue to control
Congoleum while it is in bankruptcy. Additionally, under the terms of
Congoleum's previous proposed reorganization plans, ABI would have continued to
maintain voting control, although its interest in Congoleum would be diluted by
the issuance of additional Congoleum Class A Common Stock to the Plan Trust, and
upon the occurrence of certain events, it could have had its equity interests in
Congoleum reduced to level where it no longer would have had voting control. In
February 2007, the Bankruptcy Court entered on its docket an opinion ruling that
the Tenth Plan (as defined in Note 9) was not confirmable as a matter of law.
Treatment of ABI's equity interest in Congoleum under any future plan of
reorganization is unknown, as are other terms, including any contributions to a
plan trust that would be formed upon effectiveness of such a plan. Congoleum
believes that its bankruptcy proceeding could be concluded during 2007. 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
(including its non-debtor subsidiaries) and Congoleum, which may be more
meaningful for certain analyses.
For more information regarding Congoleum's and ABI's asbestos liabilities and
plans for resolving those liabilities, please refer to Notes 8 and 9.
54
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
AICPA Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
The Company implemented this guidance in its consolidated financial statements
for periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of Congoleum's liabilities as of
December 31, 2003 have been reclassified as liabilities subject to compromise.
Obligations arising post-petition, and pre-petition obligations that are
secured, are not classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
Included in other assets on the accompanying balance sheets is ABI's investment
in Compania Hulera Sula, S.A., a 50%-owned venture. The investment is accounted
for on the cost method due to the uncertainty of the political climate and
currency restrictions in Honduras.
Use of Estimates and Critical Accounting Policies
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent liabilities, at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Some of the more significant estimates
include asbestos liabilities, environmental contingencies, valuation of deferred
tax assets, and actuarial assumptions for the pension plan and post-retirement
benefits. Although the Company believes it uses reasonable and appropriate
estimates and assumptions in the preparation of its financial statements and in
the application of accounting policies, if business conditions were different,
or if the Company used different estimates and assumptions, it is possible that
actual results could differ from such estimates.
55
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Credit losses in previous
years have generally been within management's expectations. For the years ended
December 31, 2006, 2005 and 2004, the Company had two customers that accounted
for 34%, 36% and 37% of net sales, respectively. At December 31, 2006 and 2005,
one customer accounted for 21% and 10% of trade receivables outstanding,
respectively. Also at December 31, 2005, another customer accounted for 13% of
trade receivables outstanding.
Cash
Cash equivalents represent highly liquid investments with maturities of three
months or less at the date of purchase. The carrying value of cash equivalents
approximates fair value.
Restricted Cash
Under the terms of its revolving credit agreement, payments on Congoleum's
accounts receivable are deposited in an account assigned by Congoleum to its
lender, and the funds in that account are used by the lender to pay down any
loan balance. Funds deposited in this account but not immediately applied to the
loan balance are recorded as restricted cash. At December 31, 2006 and 2005,
cash of approximately $3.6 million and $2.7 million, respectively, was
restricted under Congoleum's financing agreement. Additionally, $6.1 million and
$8.9 million remaining from a $14.5 million settlement received in August 2004
from an insurance carrier are included as restricted cash at December 31, 2006
and 2005, respectively.
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is determined based on a variety
of factors that affect the potential collectibility of the related receivables,
including length of time receivables are past due, customer credit ratings,
financial stability of customers, specific one-time events and past customer
history. In addition, in circumstances where the Company is made aware of a
specific customer's inability to meet its financial obligations, a specific
allowance is established. The majority of accounts are individually evaluated on
a regular basis and appropriate reserves are established as deemed appropriate
based on the criteria previously mentioned. The remainder of the reserve is
based on management's estimates and takes into consideration historical trends,
market conditions and the composition of the Company's customer base.
56
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for most of the Company's domestic inventories.
The use of LIFO results in a better matching of costs and revenues. Cost is
determined by the first-in, first-out (FIFO) method for the Company's foreign
inventories. The Company records as a charge to cost of products sold any
amounts required to reduce the carrying value of inventories to net realizable
value.
Inventory costs include expenses that are directly or indirectly incurred in the
acquisition and production of merchandise and manufactured products for sale.
Expenses include the cost of materials and supplies used in production, direct
labor costs and allocated overhead costs such as depreciation, utilities,
insurance, employee benefits, and indirect labor.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for
improvements that increase asset values and extend useful lives are capitalized.
Depreciation, which is determined using the straight-line method, is provided
over the estimated useful lives (thirty to forty years for buildings and
building improvements, ten to fifteen years for production equipment and
heavy-duty vehicles, and three to ten years for light-duty vehicles and office
furnishings and equipment).
Debt Issue Costs
Costs incurred in connection with the issuance of debt have been capitalized and
are being amortized over the life of the related debt agreements. Debt issue
costs at December 31, 2006 and 2005 amounted to $0.7 million and $0.8 million,
respectively, net of accumulated amortization of $2.8 million and $2.5 million,
respectively, and are included in other noncurrent assets.
Derivative Instruments
During 2006, in connection with its debt refinancing (see Notes 5 and 17), the
Company entered into two interest rate swap agreements to manage the Company's
exposure to fluctuations in interest rates on its term loan and portions of its
revolver borrowings. These derivative instruments are recorded at fair value on
the consolidated balance sheet. The Company did not qualify for hedge accounting
treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") for these instruments. Changes in the fair value of the
interest rate swap agreements are recognized in Other income (expense) on the
consolidated statement of operations in accordance with SFAS 133.
57
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Goodwill
Goodwill represents the excess of acquisition costs over the estimated fair
value of the net assets acquired. The Company evaluates the recoverability of
goodwill and indefinite-lived intangible assets annually in the fourth quarter,
or more frequently if events or changes in circumstances, such as a decline in
sales, earnings, or cash flows, or material adverse changes in the business
climate, indicate that the carrying value of an asset might be impaired.
Goodwill is considered to be impaired when the net book value of a reporting
unit exceeds its estimated fair value.
Goodwill includes $11.3 million recorded in connection with the Company's
acquisitions of partnership interests in K&M, the majority of which occurred in
1995. During the fourth quarter of 2005, the Company acquired certain assets and
assumed certain liabilities of Jay Jewelry division, a Florida distributor of
costume jewelry of JayRam, Inc. Goodwill of $426 thousand was recorded for this
acquisition in October 2005. During 2006, the purchase price was adjusted and
goodwill was reduced by $251 thousand (see Note 15).
The Company completed its annual impairment test in the fourth quarter of 2006
and concluded that no adjustment was required to the carrying value of goodwill
based on the analysis performed.
Impairment of Long-Lived Assets
The Company assesses its long-lived assets other than goodwill and
indefinite-lived assets for impairment whenever facts and circumstances indicate
that the carrying amount may not be fully recoverable. To analyze
recoverability, it projects undiscounted net future cash flows over the
remaining life of such assets. If these projected cash flows are less than the
carrying amount, an impairment would be recognized, resulting in a write-down of
the assets with a corresponding charge to earnings. The impairment loss is
measured based upon the difference between the carrying amount and the fair
value of the assets.
58
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Product Warranties
The Company provides product warranties for specific product lines and accrues
for estimated future warranty cost in the period in which the revenue is
recognized. The following table sets forth activity in the Company's warranty
reserves (in thousands):
2006 2005 2004
--------------------------------------------
Beginning balance $2,543 $3,039 $ 3,554
Accruals 4,472 4,318 5,280
Charges (4,585) (4,814) (5,795)
--------------------------------------------
Ending balance $2,430 $2,543 $ 3,039
============================================
Environmental and Product Liabilities
The Company accrues for costs associated with its environmental claims when it
is probable that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an evaluation
of currently available facts with respect to each individual site, including the
extent of clean-up activities to be performed, the methods employed in the
clean-up activities, the Company's relative share in costs at sites where other
parties are involved, existing technology, current laws and regulations and
prior remediation experience. Where no amount within a range of estimates is
more likely to occur than another, the minimum is accrued. For sites with
multiple potentially responsible parties, the Company considers its likely
proportionate share of the anticipated remediation costs and the ability of the
other parties to fulfill their obligations in establishing a provision for those
costs. When future liabilities are determined to be reimbursable by insurance
coverage or other reimbursement, an accrual is recorded for the potential
liability and a receivable is recorded related to the expected recovery. A
receivable reserve is recorded when recoveries are disputed or are not highly
probable. Legal fees associated with these claims are accrued when the Company
deems that their occurrence is probable and the fees are reasonably estimable
(see Notes 4, 6 and 8).
59
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Asbestos Liabilities and Congoleum Plan of Reorganization
The Company is a party to a number of lawsuits stemming from its manufacture of
asbestos-containing products years ago. The Company records a liability and a
corresponding insurance receivable based on its estimates of the future costs
and related insurance recoveries to settle asbestos litigation. In estimating
the Company's asbestos-related exposures, the Company analyzes and considers the
possibility of any uncertainties including the anticipated costs to settle
claims, the claims dismissal rate, the number of claims expected to be received,
the applicability and allocation of insurance coverage to these costs, and the
solvency of insurance carriers. 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.
The Company's subsidiary Congoleum is a defendant in a large number of
asbestos-related lawsuits and has commenced proceedings under Chapter 11 of the
United States Bankruptcy Code as part of its strategy to resolve this liability
(see Notes 8 and 9). The recorded liability for Congoleum's asbestos-related
exposures is based on the minimum estimated cost to resolve these liabilities
through the confirmation of a plan of reorganization.
Accounting for asbestos-related costs includes significant assumptions and
estimates, and actual results could differ materially from the estimates
recorded.
Revenue Recognition
Revenue is recognized when products are shipped and title has passed to the
customer. Net sales are comprised of the total sales billed during the period
less the sales value of estimated returns and sales incentives, which consist
primarily of trade discounts and customers' allowances. The Company defers
recognition of revenue for its estimate of potential sales returns under
right-of-return agreements with its customers until the right-of-return period
lapses.
60
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Selling, General and Administrative Expenses
Selling, general and administrative expenses are charged to income as incurred.
Expenses incurred for promoting and selling products are classified as selling
expenses and include such items as advertising, sales commissions and travel.
Advertising expense (including cooperative advertising) amounted to $1.6
million, $2.3 million and $2.4 million for 2006, 2005 and 2004, respectively.
General and administrative expenses include such items as officers' salaries,
office supplies, insurance and office rental. In addition, general and
administrative expenses include other operating items such as provision for
doubtful accounts, professional (accounting and legal) fees, and environmental
remediation costs. The Company also records shipping, handling, purchasing and
finished goods inspection costs in general and administrative expenses. Shipping
and handling costs for the years ended December 31, 2006, 2005 and 2004 were
$6.9 million, $7.9 million and $7.3 million, respectively. Purchasing and
finished goods inspection costs were $2.3 million for 2006 and 2005 and $2.7
million for 2004.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes, the Company
recognizes deferred income taxes based on the expected future tax consequences
of differences between the financial statement basis and the tax basis of assets
and liabilities, calculated using enacted tax rates in effect for the year in
which the differences are expected to be reflected in the tax return.
The Company reduces its deferred tax assets by a valuation allowance if, based
upon the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Relevant
evidence, both positive and negative, is considered in determining the need for
a valuation allowance. Information evaluated includes the Company's financial
position and results of operations for the current and preceding years as well
as an evaluation of currently available information about future years.
The Company operates within multiple taxing jurisdictions and could be subject
to audit in these jurisdictions. These audits can involve complex issues, which
may require an extended period of time to resolve and may cover multiple years.
In the Company's opinion, adequate provisions for income taxes have been made
for all years subject to audit.
61
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the provisions of SFAS No.
123(R), Share-Based Payment, and related interpretations ("SFAS 123(R)") using
the modified prospective method and, accordingly, has not restated prior period
results. SFAS 123(R) establishes the accounting for equity instruments exchanged
for employee services. Under SFAS 123(R), share-based compensation cost is
measured at the grant date based on the calculated fair value of the award. The
expense is recognized over the employees' requisite service period, generally
the vesting period of the award. SFAS 123(R) also requires the related excess
tax benefit received upon exercise of stock options or vesting of restricted
stock, if any, to be reflected in the statement of cash flows as a financing
activity rather than an operating activity.
The Company has elected to continue to use the Black-Scholes option pricing
model to estimate the fair value of stock-based awards. The use of a
Black-Scholes option pricing model requires the input of assumptions determined
by management of the Company at the measurement date. These assumptions include
the risk-free interest rate, expected dividend yield, volatility factor of the
expected market price of the Company's common stock and the expected life of
stock option grants.
Prior to the adoption of SFAS 123(R), the Company accounted for stock options to
employees in accordance with Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and related interpretations. The
Company also provided the disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"), as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosures. As a
result, no expense was reflected in the Company's operating results for the
years ended December 31, 2005 and 2004 for stock options granted, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant.
On November 10, 2005, the Board of Directors of American Biltrite approved the
vesting of all outstanding and unvested options held by directors, officers and
employees under the Company's 1993 Stock Award and Incentive Plan, as amended
and restated as of March 4, 1997, and 1999 Stock Option Plan for Non-Employee
Directors (together, the "ABI Stock Plans"). As a result of the acceleration of
vesting, options to acquire 195,600 shares of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable in full. This action was taken to eliminate, to the
extent permitted, the transition expense that the Company otherwise would incur
in connection with the adoption of SFAS 123(R). The exercise prices of all of
the unvested options were lower than the closing trading price of the Company's
common stock on the modification date. Under the accounting guidance of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the accelerated vesting resulted in a charge for stock-based
compensation of approximately $22 thousand in 2005.
62
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
For purposes of pro forma disclosures, the estimated fair value of the ABI
options is amortized to expense over the options' vesting period. The estimated
pro forma compensation expense for 2005 includes the aggregate compensation
expense that would have been recognized in the Company's consolidating
statements of operations over the next four fiscal years, upon the adoption of
SFAS 123(R) on January 1, 2006. This expense was eliminated because of the
accelerated vesting of outstanding options in November 2005.
The following table reflects the pro forma net income (loss) and earnings (loss)
per share for the years ended December 31, 2005 and 2004 had compensation for
stock options been determined based on the fair value of the stock options at
the grant date, consistent with the methodology prescribed under SFAS 123 (in
thousands).
2005 2004
-----------------------------
Net (loss) income $(17,633) $ 1,953
Estimated pro forma compensation expense
from stock options, net of taxes (720) (105)
-----------------------------
Pro forma net (loss) income $(18,353) $ 1,848
=============================
Pro forma (loss) income per share:
Basic $ (5.33) $ 0.54
Diluted (5.33) 0.53
The pro forma expense for 2005 and 2004 represents the vesting of options
previously granted by ABI and Congoleum. The impact of the adoption of SFAS
123(R) on the Company's consolidated net income per share would have been to
reduce net income by approximately $0.01 and $0.03 per share for 2005 and 2004,
respectively.
On July 1, 2006, ABI and Congoleum granted 4,000 and 2,500 options,
respectively. The exercise price and estimated fair value of the ABI options
were $10.97 and $5.16, respectively. The exercise price and estimated fair value
of the Congoleum options were $2.11 and $1.87, respectively. The options granted
by ABI and Congoleum vest on January 1, 2007.
During the year ended December 31, 2006, the Company recognized compensation
expense related to the vesting of ABI and Congoleum options of $244 thousand. At
December 31, 2006, the unrecognized compensation expense related to unvested
options previously granted by Congoleum was approximately $235 thousand. This
compensation expense will be recognized during the years 2007 through 2010 when
the remaining unvested options as of December 31, 2006 will vest.
63
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
The fair value for the ABI options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2006, 2005 and 2004, respectively: risk-free interest rate of
4.53%, 3.96% and 4.53%, expected dividend yield of zero percent for each of the
three years, volatility factor of the expected market price of the Company's
common stock of 34.7%, 30.2% and 34.7%, and a weighted-average expected life of
the options of seven and one-half years.
The fair value for Congoleum's options granted under its directors' stock option
plan was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2006, 2005 and 2004,
respectively: risk-free interest rate of 4.9%, 5.9% and 2.4%, expected dividend
yield of zero percent for each of the three years, volatility factor of the
expected market price of Congoleum's common stock of 92.0% for each of the three
years, option forfeiture rate of 10.0% for each of the three years, and a
weighted-average expected life of the options of three years.
The fair value for Congoleum's options granted under its employee stock option
plan was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 2006, 2005 and 2004,
respectively: risk-free interest rate of 5.1%, 4.9% and 5.0%, expected dividend
yield of zero percent for each of the three years, volatility factor of the
expected market price of Congoleum's common stock of 92.0% for each of the three
years, option forfeiture rate of 10.0% for each of the three years, and a
weighted-average expected life of the options of seven years.
Research and Development Costs
Expenditures relating to the development of new products are charged to
operations as incurred and amounted to $6.2 million, $6.3 million and $5.8
million for the years ended December 31, 2006, 2005 and 2004, respectively.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the applicable
local currency. Balance sheet accounts of foreign subsidiaries are translated at
the current exchange rate, and income statement items are translated at the
average exchange rate for the period; resulting translation adjustments are made
directly to accumulated other comprehensive income (loss) in stockholders'
equity. Realized exchange gains and losses (immaterial in amount) are included
in current operations.
64
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Issuances of Stock by Subsidiaries
The Company accounts for issuances of stock by its subsidiaries as capital
transactions.
Earnings Per Share
Basic earnings per share have been computed based on the weighted-average number
of common shares outstanding during the period. Diluted earnings per share have
been computed based upon the weighted-average number of common shares
outstanding during the year, adjusted for the dilutive effect of shares issuable
upon the exercise of stock options (common stock equivalent) unless their
inclusion would be antidilutive. In calculating diluted earnings per share, the
dilutive effect of a stock option is computed using the average market price for
the period.
Under its stock option plans, Congoleum grants stock options to employees and
non-employee directors. Congoleum's outstanding stock options may have a
dilutive effect on American Biltrite's earnings per share. The dilutive effect
of Congoleum's stock options is determined based on Congoleum's diluted earnings
per share and the number of shares of Congoleum stock owned by American
Biltrite.
Recently Issued Accounting Principles
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An interpretation of FASB Statement No. 109 ("FIN 48"). This
Interpretation provides for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The Company will adopt this Interpretation in the
first quarter of 2007. The cumulative effects, if any, of applying FIN 48 will
be recorded as an adjustment to retained earnings. The Company is evaluating the
impact of this Interpretation on its financial position and results of
operations.
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
65
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
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
is effective for fiscal years ending after December 15, 2006, and the change in
measurement date provisions is effective for fiscal years ending after December
15, 2008 (see Notes 7 and 11).
Reclassifications
Certain amounts in prior years have been reclassified to permit comparison with
2006 classifications. In 2006, the Company netted Congoleum's deferred tax
assets and liabilities on the consolidated balance sheet, which in prior periods
were reported separately in assets and liabilities.
2. Inventories
Inventories at December 31 consisted of the following (in thousands):
2006 2005
--------------------------------
Finished goods $56,374 $50,515
Work-in-process 11,813 10,370
Raw materials and supplies 12,284 16,242
--------------------------------
$80,471 $77,127
================================
At December 31, 2006, domestic inventories determined by the LIFO inventory
method amounted to $45.5 million ($44.1 million at December 31, 2005). If the
FIFO inventory method, which approximates replacement cost, had been used for
these inventories, they would have been $5.4 million and $3.8 million higher at
December 31, 2006 and 2005, respectively. During 2006, 2005 and 2004, certain
inventory quantities were reduced, which resulted in liquidations of LIFO
inventory layers. The liquidations increased cost of sales by $28 thousand and
$445 thousand for 2006 and 2005, respectively, and decreased cost of sales by
$170 thousand for 2004.
66
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property, Plant and Equipment
A summary of the major components of property, plant and equipment at December
31 is as follows (in thousands):
2006 2005
----------------------------------
Land and improvements $ 5,611 $ 5,526
Buildings 76,176 75,162
Machinery and equipment 275,547 270,203
Construction-in-progress 4,788 5,467
----------------------------------
362,122 356,358
Less accumulated depreciation 255,742 241,022
----------------------------------
$106,380 $115,336
==================================
Interest is capitalized in connection with the construction of major facilities.
Capitalized interest is recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. Capitalized interest costs
were approximately $100 thousand for 2006, $100 thousand for 2005 and $200
thousand for 2004.
Depreciation expense amounted to $15.5 million, $16.0 million and $17.0 million
in 2006, 2005 and 2004, respectively.
In August 2006, an explosion caused extensive damage to components of a major
production line at Congoleum's Marcus Hook facility. Congoleum's insurance
carrier paid substantially all excess costs, less a deductible, for the
replacement of the damaged equipment and expenses to replace production
capacity. Fabrication and installation of replacement equipment was completed by
December 31, 2006. The cost to replace equipment and excess expenses incurred to
meet production requirements totaled $10.1 million, which was reimbursed to
Congoleum by the insurer. Congoleum recognized a $1.3 million gain for the
difference between the insurance proceeds for the replacement of the production
equipment ($1.5 million) and the net book value of the equipment written off.
The gain was included in Other income (expense) in the fourth quarter of 2006.
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2004, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million (before non-controlling interest) was recognized and
included in Other income (expense) in the first quarter of 2005.
67
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Accrued Expenses
Accrued expenses at December 31 consisted of the following (in thousands):
2006 2005
--------------------------
Accrued advertising and sales promotions $22,478 $24,089
Employee compensation and related benefits 7,084 9,499
Interest 2 265
Environmental liabilities 632 1,124
Royalties 837 806
Income taxes 838 1,330
Other 5,540 5,863
--------------------------
$37,411 $42,976
==========================
As a result of Congoleum's Chapter 11 bankruptcy filing and in accordance with
SOP 90-7, certain liabilities are included in liabilities subject to compromise
on the balance sheet as of December 31, 2006 and 2005 (see Note 9).
5. Financing Arrangements
Long-term debt and notes payable under revolving credit facilities at December
31 were as follows (in thousands):
2006 2005
---------------------------------
Notes payable (current) $ 31,284 $ 19,062
=================================
Term loan $ 9,500 $ --
Note purchase agreement -- 20,000
Other notes 1,895 2,414
---------------------------------
11,395 22,414
Less current portion 2,424 20,451
---------------------------------
$ 8,971 $ 1,963
=================================
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
68
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
under the Revolver with a $12.0 million borrowing sublimit (the "Canadian
Revolver") for American Biltrite Inc.'s subsidiary American Biltrite (Canada)
Ltd. ("AB Canada") and (ii) a $10.0 million Term Loan. The Credit Agreement also
provides for domestic and Canadian letter of credit facilities with availability
of up to $5.0 million and $1.0 million, respectively, subject to availability
under the Revolver and the Canadian Revolver, respectively.
On September 25, 2006, American Biltrite Inc. entered into an amendment and
restatement to the Credit Agreement with BofA and the Canadian Lender. Pursuant
to the amendment and restatement, the Term Loan was added to the Credit
Agreement and the amount of the Revolver was increased by $10.0 million to its
current $30.0 million amount. In addition, the availability for domestic letters
of credit issued under the Credit Agreement was increased from $4.0 million to
$5.0 million. In connection with that amendment and restatement, American
Biltrite Inc. used approximately $17.0 million of new borrowings from the
proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which was included in Other income (expense)
during the third quarter of 2006.
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.
69
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
At December 31, 2006, $18.6 million was outstanding under the Revolver, and
outstanding letters of credit totaled $1.7 million. Unused borrowing
availability under the Revolver at December 31, 2006 was $9.7 million, of which
$2.0 million was available to AB Canada.
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 (see Note 17).
70
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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, is due 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 on the equity method and include a maximum ratio of total liabilities
to tangible net worth, a minimum ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA") less certain cash payments for taxes,
debt service, and dividends to interest expense, a minimum level of tangible net
worth, a requirement that there be no consecutive quarterly losses from
continuing operations, and a maximum level of capital spending. Pursuant to the
amendment and restatement to the Credit Agreement entered into on September 25,
2006, certain of the financial covenants under the Credit Agreement were amended
to, among other things, (i) increase the permitted ratio of the Company's
consolidated total liabilities to consolidated tangible net worth to 200%, (ii)
to provide for a higher threshold for satisfying the consolidated tangible net
worth test and (iii) to provide a higher permitted aggregate amount for capital
expenditures in any fiscal year. The Credit Agreement also requires, for each
fiscal quarter ending on and after September 30, 2006, the Company's
consolidated adjusted EBITDA for the four consecutive fiscal quarters then
ending to exceed 100% of the Company's consolidated fixed charges for the
12-month period ending on such date, as determined under the Credit Agreement.
Pursuant to the Credit Agreement, the Company and certain of its subsidiaries
previously granted BofA and the Canadian Lender a security interest in most of
the Company's and its subsidiaries' assets. The security interest granted does
not include the shares of capital stock 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.
The terms of the Company's Credit Agreement include restrictions on incurring
additional indebtedness, restrictions on some types of payments including
dividends, and limitations on capital expenditures. Retained earnings, which
were unrestricted as to such distributions, amounted to $1.4 million at December
31, 2006.
71
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
Other Notes
In 1998, the Company obtained loans from local banks in connection with the
acquisition of buildings in Belgium and Singapore. The loans were for 25,000
Belgian francs (US $681 thousand at the foreign currency exchange rate in effect
when the loan was entered into) and 2,700 Singapore dollars (US $1.5 million at
the foreign currency exchange rate in effect when the loan was obtained). The
loans are payable in equal installments through 2008 and 2018, respectively. The
interest rates on the loans are 5.6% for the Belgian loan and 1.5% above the
local bank's prime rate (5.0% at December 31, 2006) for the Singapore loan. The
loans are secured by the property acquired with the proceeds of the applicable
loan.
In connection with the acquisition of certain assets and assumption of certain
liabilities of a Florida distributor in October 2005, the Company issued a note
payable to the seller for $1.0 million. The note was subsequently reduced by
$251 thousand as a result of a purchase price adjustment in April 2006. At
December 31, 2006 and 2005, the outstanding balance on the note was $474
thousand and $949 thousand, respectively. The note is payable in equal monthly
installments of $23 thousand through October 2008, with interest at 6%.
Congoleum Debt
On August 3, 1998, Congoleum issued $100 million of the Senior Notes priced at
99.505% to yield 8.70%. The Senior Notes are redeemable at the option of
Congoleum, in whole or in part, at any time on or after August 1, 2003 at
predetermined redemption prices (ranging from 104% to 100%), plus accrued and
unpaid interest to the date of redemption. The indenture governing the Senior
Notes includes certain restrictions on additional indebtedness and uses of cash,
including dividend payments. The commencement of the Chapter 11 proceedings
constituted an event of default under the indenture governing the Senior Notes.
During 2003, Congoleum and the trustee under the indenture governing the Senior
Notes amended the indenture, and sufficient note holders consented, to
explicitly permit Congoleum to take steps in connection with preparing and
filing its prepackaged plan of reorganization under Chapter 11 of the Bankruptcy
Code. In addition, due to the Chapter 11 proceedings, Congoleum was precluded
from making the interest payments due on the Senior Notes on February 1st and
August 1st of each of the years 2006, 2005 and 2004. The amount of accrued
interest that was not paid on the Senior Notes as of December 31, 2006 is
approximately $29.5 million. As of December 31, 2006, the principal amount of
the Senior Notes, net of unamortized original issue discount, was $99.9 million.
These amounts, plus $3.7 million of accrued interest on the interest due but not
paid from February 1st and August 1st of each of the years 2006, 2005 and 2004
are included in "Liabilities Subject to Compromise."
72
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
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 case as confirmed by the Bankruptcy Court becomes
effective. Total borrowings 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 December 31, 2006. Borrowings under this
facility are collateralized by inventory and receivables. At December 31, 2006,
based on the level of receivables and inventory, $18.4 million was available
under the facility, of which $5.1 million was utilized for outstanding letters
of credit and $12.7 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 obtaining it.
Interest
Interest paid on all outstanding debt amounted to $2.4 million in 2006, $3.2
million in 2005 and $3.3 million in 2004. As noted above, in connection with its
Chapter 11 bankruptcy proceedings, Congoleum did not pay the interest due on its
$100 million 8 5/8% Senior Notes during 2006, 2005 and 2004.
73
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Financing Arrangements (continued)
Future Payments
Principal payments on the Company's long-term debt obligations (other than
Congoleum debt classified as liability subject to compromise) due in each of the
next five years are as follows (in thousands):
2007 $2,424
2008 2,352
2009 2,089
2010 2,093
2011 1,597
2012 and thereafter 840
6. Other Liabilities
Other liabilities at December 31 consisted of the following (in thousands):
2006 2005
-------------------------------
Pension benefit obligations
(less current portion) $ 2,970 $ 2,557
Environmental remediation and product
related liabilities 5,860 4,259
Deferred income taxes 4,095 4,608
Other 2,516 1,466
-------------------------------
$15,441 $12,890
===============================
As a result of Congoleum's Chapter 11 bankruptcy filing and in accordance with
SOP 90-7, certain liabilities are included in liabilities subject to compromise
on the balance sheet as of December 31, 2006 and 2005 (see Note 9).
74
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans
The Company sponsors several noncontributory defined benefit pension plans
covering most of the Company's employees. Benefits under the plan are based on
years of service and employee compensation. Amounts funded annually by the
Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below under "Other Benefits").
The following summarizes the change in the benefit obligation, the change in
plan assets, reconciliation to the amounts recognized in the balance sheets for
the pension benefits and other benefits plans, and the funded status of the
plans. The measurement date for all items set forth below is the last day of the
fiscal year presented.
Pension Benefits Other Benefits
2006 2005 2006 2005
--------------------------- ---------------------------
(In thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 101,695 $ 94,957 $ 8,988 $ 8,542
Service cost 2,112 1,991 194 183
Interest cost 5,976 5,792 537 520
Plan participants contributions 181 156
Actuarial (gain) loss 3,957 4,242 420 212
Foreign currency exchange rate changes 51 391
Benefits paid (6,445) (5,834) (475) (469)
--------------------------- ---------------------------
Benefit obligation at end of year $ 107,527 $ 101,695 $ 9,664 $ 8,988
=========================== ===========================
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 79,612 $ 75,170
Actual return on plan assets 9,626 4,639
Employer contribution 7,372 5,086
Plan participants contribution 181 156
Foreign currency exchange rate changes 25 395
Benefits paid (6,445) (5,834)
---------------------------
Fair value of plan assets at end of year $ 90,371 $ 79,612
===========================
75
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
The weighted-average assumptions used to determine benefit obligation for the
pension benefits as of year-end were as follows:
2006 2005
----------------- ------------------
Discount rate 5.20% - 6.00% 5.35% - 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%
The funded status of the plans and the unrecognized amounts included in
accumulated other comprehensive loss as of December 31, 2006 and 2005 were as
follows (in thousands):
Pension Benefits Other Benefits
2006 2005 2006 2005
--------------------------- ---------------------------
Unfunded status $(17,156) $(22,083) $(9,664) $(8,988)
Unrecognized net actuarial loss 20,270 21,662 458 118
Unrecognized transition obligations (56) 118 13 47
Unamortized prior service cost 1,057 937
--------------------------- ---------------------------
Net amount recognized $ 4,115 $ 634 $(9,193) $(8,823)
=========================== ===========================
The amounts recorded in the consolidated balance sheets as of December 31, 2006
and 2005 were as follows (in thousands):
Pension Benefits Other Benefits
2006 2005 2006 2005
--------------------------- ---------------------------
Other assets (noncurrent) $ 1,316
Accrued expenses (current liabilities) -- $ (825)
Accrued benefit liability (noncurrent liabilities) (18,472) (19,636) $(9,664) $(8,988)
Intangible asset -- 134
Accumulated other comprehensive loss 19,162 18,213 471 165
--------------------------- ---------------------------
Net amount recorded $ 2,006 $ (2,114) $(9,193) $(8,823)
=========================== ===========================
As a result of the adoption of SFAS 158, the Company recorded an asset of $1.3
million for the overfunded status of its pension plans covering employees of AB
Canada. The accrued benefit liability includes Congoleum's pension liability of
$15.5 million and $17.1 million as of December 31, 2006 and 2005, respectively.
The accrued benefit liability for other benefits is Congoleum's liability for
post-retirement benefits. Congoleum's pension and post-retirement benefit
liabilities have been included in liabilities subject to compromise as of
December 31, 2006 and 2005 (see Note 9).
76
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
At December 31, 2006 and 2005, accumulated other comprehensive loss also
included the tax effect of minimum pension liabilities recorded ($639 thousand
and $199 thousand, respectively) and the effect of excluding the non-controlling
interests' portion of Congoleum's minimum pension liability adjustments ($2.7
million) during periods when Congoleum had positive retained earnings and
stockholders' equity (see Note 11).
Some of the Company's pension plans have projected benefit obligations (PBO) and
accumulated benefit obligations (ABO) in excess of plan assets. The aggregate
benefit obligations and fair value of plans assets for plans that were
overfunded and underfunded as of December 31, 2006 and 2005 are as follows (in
thousands):
2006 2005
------------ -------------
Underfunded plans
PBO $ 94,162 $ 88,365
Fair value of plan assets 75,690 66,029
Funded status (18,472) (22,336)
ABO 88,471 83,955
Overfunded plans
PBO $ 13,365 $ 13,330
Fair value of plan assets 14,681 13,583
Funded status 1,316 253
ABO 11,479 9,319
All plans
PBO $ 107,527 $ 101,695
Fair value of plan assets 90,371 79,612
Funded status (17,156) (22,083)
ABO 99,950 93,274
The components of net periodic benefit cost for the years ended December 31,
2006, 2005 and 2004 are as follows (in thousands):
Pension Benefits Other Benefits
2006 2005 2004 2006 2005 2004
------------------------------- ------------------------------
Service cost $ 2,112 $ 1,991 $ 1,996 $ 194 $ 183 $ 170
Interest cost 5,976 5,792 5,598 537 520 484
Expected return on plan assets (5,715) (5,301) (4,832)
Recognized net actuarial loss (gain) 1,681 1,225 1,375 80 59 49
Amortization of prior service cost (111) (193) (198) 34 (188) (462)
Amortization of transition obligation (49) (99) (114)
------------------------------- ------------------------------
Net periodic benefit cost $ 3,894 $ 3,415 $ 3,825 $ 845 $ 574 $ 241
=============================== ==============================
77
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
The net actuarial loss and prior service credit recognized in other
comprehensive income for the year ended December 31, 2006 were $570 thousand and
$245 thousand, respectively.
For the Company's pension plans, the estimated net loss, prior service cost and
transition asset to be amortized from accumulated other comprehensive loss
during 2007 is expected to be $1.5 million, $158 thousand and $47 thousand
respectively. For the Company's post-retirement benefit plans, the estimated net
loss and prior service cost to be amortized from accumulated other comprehensive
loss during 2007 is expected to be $71 thousand and $10 thousand, respectively.
The weighted-average assumptions used to determine net periodic benefit cost
related to the pension benefits were as follows:
2006 2005 2004
-------------- -------------- ---------------
Discount rate 5.20% - 6.00% 6.10% - 6.25% 6.10% - 6.25%
Expected long-term return on plan assets 7.00% - 7.50% 7.00% - 7.50% 7.00% - 7.50%
The weighted-average discount rate used to determine net periodic benefit cost
related to the Other Benefits was 6.00% for 2006 and 6.25% for 2005 and 2004.
In developing the overall expected long-term return on plan assets assumption, a
building block approach was used in which rates of return in excess of inflation
were considered separately for equity securities, debt securities, and other
assets. The excess returns were weighted by the representative target allocation
and added along with an appropriate rate of inflation to develop the overall
expected long-term return on plan assets assumption.
Assumed healthcare cost trend rates as of year-end were as follows:
December 31
2006 2005
----------------------
Healthcare cost trend rate assumed for next year 9.0% 10.0%
Ultimate healthcare cost trend rate 5.0% 5.0%
Year that the assumed rate reaches the ultimate rate 2011 2011
78
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for healthcare benefits. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects (in thousands):
1 Percentage 1 Percentage
Point Increase Point Decrease
---------------- ----------------
Effect on total of service and interest cost components $ 66 $ 58
Effect on post-retirement benefit obligation 715 649
For the Company's pension plans, the weighted-average asset allocation at
December 31, 2006 and 2005, by asset category, were as follows:
December 31
2006 2005
------------------------
Equity securities 62% 59%
Debt securities 35% 37%
Other 3% 4%
------------------------
Total 100% 100%
========================
The Company has an investment strategy for the pension plan that emphasizes
total return; that is, the aggregate return from capital appreciation and
dividend and interest income. The primary investment management objective for
the plan's assets is long-term capital appreciation primarily through investment
in equity and debt securities with an emphasis on consistent growth;
specifically, growth in a manner that protects the Plan's assets from excessive
volatility in market value from year to year. The investment policy takes into
consideration the benefit obligations, including timing of distributions. The
Company selects professional money managers whose investment policies are
consistent with the Company's investment strategy and monitors their performance
against appropriate benchmarks. The Company's target asset allocation is
consistent with the weighted-average allocation at December 31, 2006.
Contributions
Congoleum expects to contribute $6.7 million to its pension plan and $0.5
million to its other postretirement plan in 2007. American Biltrite expects to
contribute $0.7 million to its pension plan in 2007.
79
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect future service as appropriate, are
expected to be paid. The benefit payments are based on the same assumptions used
to measure the Company's benefit obligation at the end of fiscal 2006.
Pension Other
Benefits Benefits
------------ ------------
(In thousands)
2007 $ 6,460 $ 517
2008 6,576 606
2009 6,729 661
2010 6,933 719
2011 7,033 794
2012 - 2016 38,261 4,534
Adoption of SFAS 158
On December 31, 2006, the Company adopted the recognition and disclosure
provisions of SFAS 158. The effects of adopting SFAS 158 on the Company's
balance sheet at December 31, 2006 have been included in the accompanying
consolidated financial statements. SFAS 158 did not have an effect on the
Company's consolidated financial statements in prior years.
SFAS 158 required the Company to recognize the funded status (i.e., the
difference between the fair value of the plan assets and the project benefit
obligations) of its pension and other post-retirement plans in the December 31,
2006 consolidated balance sheet, with a corresponding adjustment to accumulated
other comprehensive income (loss), net of tax. The adjustment to accumulated
other comprehensive income (loss) at adoption represents the net unrecognized
actuarial gains (losses) and unrecognized prior service costs (income), all of
which were previously netted against the plan's funded status on the Company's
consolidated balance sheet pursuant to the provisions of SFAS 87. These amounts
will be subsequently recognized as net periodic pension cost pursuant to the
Company's historical accounting policy for amortizing such amounts. Further,
actuarial gains and losses that arise in subsequent periods and are not
recognized as net periodic pension cost in the same periods will be recognized
as a component of other comprehensive income (loss). These amounts will be
subsequently recognized as a component of net periodic pension cost on the same
basis as the amount recognized in accumulated other comprehensive income (loss)
at adoption of SFAS 158.
80
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Pension Plans (continued)
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. The adoption of SFAS 158 had no effect on the Company's consolidated
statement of income for the year ended December 31, 2006 or for any prior period
presented, and it will not affect the Company's operating results in future
periods.
Prior to Effect of
Adopting Adopting
SFAS 158 SFAS 158 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
Defined Contribution Plans
The Company also has three 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
to 20% of compensation (subject to annual Internal Revenue Code limits) with the
Company partially matching contributions. Defined contribution pension expense
for the Company was $974 thousand, $802 thousand and $982 thousand for the years
ended December 31, 2006, 2005 and 2004, respectively.
81
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies
Leases
The Company occupies certain warehouse and office space and uses certain
equipment and motor vehicles under lease agreements expiring at various dates
through 2010. The leases generally require the Company to pay for utilities,
insurance, taxes and maintenance, and some contain renewal options. Total rent
expense charged to operations was $5.1 million in 2006, $5.7 million in 2005 and
$6.0 million in 2004.
Future minimum payments relating to operating leases are as follows (in
thousands):
2007 $ 4,695
2008 4,121
2009 3,440
2010 2,339
2011 197
Thereafter 312
------------
Total future minimum lease payments $15,104
============
Royalty and Advertising Commitments
K&M maintains certain license arrangements for branded jewelry products. Under
the terms of these arrangements, K&M must make minimum royalty and advertising
payments based on defined percentages of net sales during the license terms.
These arrangements also include guaranteed minimum yearly royalty and
advertising payments based either on minimum levels of net sales or fixed
payment amounts. At December 31, 2006, the Company's minimum royalty and
advertising payments for 2006 and 2007 were $2.4 million and $51 thousand,
respectively. No commitments have been made beyond 2007.
Environmental and Other Liabilities
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described elsewhere in this Note 8 and in Note 9. In some of these
proceedings, plaintiffs may seek to recover large and sometimes unspecified
amounts, and the matters may remain unresolved for several years.
82
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
As of December 31, 2006 and 2005, liabilities of Congoleum comprised the
majority of the environmental and other liabilities reported on the Company's
consolidated balance sheets as shown in the following table. As a result of
Congoleum's Chapter 11 bankruptcy filing and in accordance with SOP 90-7,
certain liabilities are included in liabilities subject to compromise on the
balance sheet as of December 31, 2006 and 2005. Due to the relative magnitude
and wide range of estimates of these liabilities and that recourse related to
these liabilities is generally limited to Congoleum, these matters are discussed
separately following the discussion of ABI liabilities. However, because
Congoleum is included in ABI's consolidated financial statements, to the extent
that Congoleum incurs a liability or expense, it will be reflected in the
accompanying consolidated financial statements. Congoleum previously filed
several amended plans of reorganization under Chapter 11 of the United States
Bankruptcy Code as part of its efforts to resolve its asbestos-related
liabilities. See Notes 1 and 9 for a discussion of this subject.
The following table summarizes American Biltrite's and Congoleum's recorded
assets and liabilities for environmental, asbestos and other contingencies:
December 31
2006 2005
Liability Receivable Liability Receivable
--------------------------- ---------------------------
(In thousands)
American Biltrite
Environmental liabilities
Accrued expenses $ 632 $ 1,124
Other liabilities, non-current 5,860 4,259
Other assets, non-current -- $ 2,324 -- $ 1,974
--------------------------- ---------------------------
6,492 2,324 5,383 1,974
Asbestos product liability
Asbestos-related liabilities, non-current 10,300 -- 9,500 --
Insurance for asbestos-related liabilities -- 9,320 -- 8,950
--------------------------- ---------------------------
10,300 9,320 9,500 8,950
--------------------------- ------------- -------------
$16,792 $11,644 $14,883 $10,924
=========================== ===========================
83
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
December 31
2006 2005
Liability Receivable Liability Receivable
--------------------------- ---------------------------
(In thousands)
Congoleum
Environmental liabilities
Liabilities subject to compromise, current $ 640 $ 640
Liabilities subject to compromise, non-current 3,788 3,630
Other assets, non-current -- $ 2,150 -- $ 1,910
--------------------------- ---------------------------
4,428 2,150 4,270 1,910
Asbestos product liability
Asbestos-related liabilities, current 13,950 -- 28,369 --
Other assets, current -- 21,813 -- 14,793
--------------------------- ---------------------------
13,950 21,813 28,369 14,793
Other
Liabilities subject to compromise, current 50 -- 55 --
Liabilities subject to compromise, non-current 886 -- 1,056 --
Other assets, non-current -- 155 -- 265
--------------------------- ---------------------------
936 155 1,111 265
--------------------------- ---------------------------
$19,314 $24,118 $33,750 $16,968
=========================== ===========================
Consolidated
Environmental liabilities
Accrued expenses $ 632 $ 1,124
Liabilities subject to compromise, current 640 640
Liabilities subject to compromise, non-current 3,788 3,630
Other liabilities, non-current 5,860 4,259
Other assets, non-current -- $ 4,474 -- $ 3,884
--------------------------- ---------------------------
10,920 4,474 9,653 3,884
Asbestos product liability
Asbestos-related liabilities, current 13,950 -- 28,369 --
Asbestos-related liabilities, non-current 10,300 -- 9,500 --
Other assets, current -- 21,813 -- 14,793
Insurance for asbestos-related liabilities -- 9,320 -- 8,950
--------------------------- ---------------------------
24,250 31,133 37,869 23,743
Other
Liabilities subject to compromise, current 50 -- 55 --
Liabilities subject to compromise, non-current 886 -- 1,056 --
Other assets, non-current -- 155 -- 265
--------------------------- ---------------------------
936 155 1,111 265
--------------------------- ---------------------------
$36,106 $35,762 $48,633 $27,892
=========================== ===========================
84
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,332 pending claims involving
approximately 1,918 individuals as of December 31, 2006. These claims relate to
products of ABI's former Tile Division, which was previously acquired by
Congoleum. The claimants allege personal injury or death from exposure to
asbestos or asbestos-containing products. Activity related to asbestos claims
during the years ended December 31 was as follows:
2006 2005
------------------------------
Claims at January 1 1,703 1,838
New claims 625 621
Settlements (30) (24)
Dismissals (966) (732)
------------------------------
Claims at December 31 1,332 1,703
==============================
The total indemnity costs incurred to settle claims were approximately $3.1
million in 2006 and $1.3 million for each of the years 2005 and 2004, all of
which were paid by ABI's insurance carriers, as were the related defense costs.
The average indemnity cost per resolved claim was approximately $3.1 thousand,
$1.7 thousand and $2.0 thousand in 2006, 2005 and 2004, 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 for indemnity
to 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 court dismissal rate of claims, 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. Changes in factors could have a material impact on the Company's
liability. For example, it is estimated that a 1% increase in the Company's
acceptance rate of claims would result in a 26% increase in liability assuming
all other variables remained constant.
85
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The Company utilizes an actuarial study to assist it in developing estimates of
the Company's potential liability for resolving present and possible future
asbestos claims. Projecting future asbestos claim costs requires estimating
numerous variables that are extremely difficult to predict, including the
incidence of claims, the disease that may be alleged by future claimants, future
settlement and trial results, future court dismissal rates for claims, and
possible asbestos legislation developments. Furthermore, any predictions with
respect to these variables are subject to even greater uncertainty as the
projection period lengthens. In light of these inherent uncertainties, and based
upon consultations with third party advisors, the Company believes that six
years is the most reasonable period over which to include future claims that may
be brought against the Company for recognizing a reserve for future costs. Due
to the numerous variables and uncertainties, including the effect of Congoleum's
Chapter 11 case and any proposed plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for claims beyond a 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 estimated range of liability for settlement of current claims pending and
claims anticipated to be filed through 2012 was $10.3 million to $35.3 million
as of December 31, 2006. The Company believes no amount within this range is
more likely than any other, and accordingly has recorded a liability of $10.3
million in its financial statements which represents a probable and reasonably
estimable amount for the future liability at the present time. The Company also
believes that based on this liability estimate, the corresponding amount of
insurance probable of recovery is $9.3 million at 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.
86
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
There can be no assurance that the Company's accrued asbestos liabilities will
approximate its actual asbestos-related settlement costs, or that its accrued
insurance recoveries will be realized. The Company believes that it is
reasonably possible that it will incur charges for resolution of asbestos claims
in the future, which could exceed the Company's existing reserves. The Company
will continue to vigorously defend itself and believes it has substantial
insurance coverage to mitigate future costs related to this matter.
ABI has been named as a Potentially Responsible Party ("PRP") within the meaning
of the Federal Comprehensive Environmental Response Compensation and Liability
Act, as amended ("CERCLA"), with respect to six sites located in five separate
states (the "CERCLA Sites"). At one of the six sites, which is located in
Southington, Connecticut, (the "Southington Site"), an ABI subsidiary ("Ideal")
is also named as a PRP. At the Southington Site, the currently estimated
aggregate future cost of remediation and monitoring, Environmental Protection
Agency (the "EPA") reimbursable costs and potential natural resources damages
are between $85 million and $121 million, all subject to a final allocation
among the PRPs. ABI's and Ideal's aggregate share of the, the future remediation
costs, EPA's past costs and natural resource damages claim is currently
estimated to be between $990 thousand and $1.4 million. Under an agreement,
Ideal will share a percentage of this cost with the former owner of Ideal's
assets. Under an agreement between ABI and The Biltrite Corporation ("TBC"), TBC
is liable for 37.5% of the remediation costs incurred by ABI with respect to the
Southington Site.
At another site, ABI, together with a number of other PRPs, signed a consent
decree and site remediation agreement (the "Agreements"), which, without
admission of liability by the PRPs, requires remediation of the ILCO Superfund
site located in Leeds, Alabama (the "ILCO Site"). The currently estimated
aggregate future cost of remediation and associated transactional costs at the
ILCO Site ranges from $2.3 million to $4.3 million. Pursuant to a final
allocation among consent decree participants, ABI's share of the currently
estimated future remediation costs range from approximately $38 thousand to
about $91 thousand. These estimates consider commitments from de minimis and de
maximus settlors, the City of Leeds and its insurers, amounts currently held in
an escrow fund, a RCRA Closure Fund refund, and TBC's share, which by agreement
is 37.5% of the remediation costs incurred by ABI. A substantial share of ABI's
future remediation costs with respect to the ILCO site will be payable over the
next one to five years.
87
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
ABI is involved in two EPA sites in Georgia. At one of the EPA sites, ABI has
been named along with seven other PRPs with respect to three neighborhood sites
("Sites") in Atlanta, Georgia where properties within the boundaries of the
Sites contain lead in the surface soil in concentrations that exceed the EPA's
residential lead screening level. The EPA has requested that ABI sign an
Administrative Order on Consent ("AOC"). ABI has reviewed the EPA notification
letter and the AOC and is assessing its responsibility with respect to the Sites
and whether it is in its interest to sign the consent order. The former owners
have signed an AOC and will remediate the sites and seek contribution from the
other PRPs. At the other site in Fulton County (together with the "Sites," the
"Georgia Sites"), a former smelting and refinery site, ABI has not entered into
any negotiations with other PRP's or the site owner. ABI believes, based upon
current information available, that its liability at either site will not be
material. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
remediation costs, incurred by ABI at these Georgia Sites.
A lawsuit was brought by Olin Corporation, the present owner of a former
chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three defendants were liable for a portion of the site's
soil and groundwater response and remediation costs at the site. A wholly-owned
subsidiary of ABI owned and operated the Wilmington plant from 1959 to 1964 and
for approximately one month during 1964, ABI held title to the property
directly.
In 2000, ABI and TBC entered into a settlement agreement with Olin that resolved
all claims and counterclaims among the parties. Under the terms of the
agreement, ABI and TBC together paid Olin $4.1 million in settlement of their
share of Olin's $18.0 million of alleged past response costs incurred through
December 31, 1998. ABI and TBC also agreed to reimburse Olin for 21.7% of Olin's
response costs incurred at the site after January 1, 1999, plus an annual
reimbursement of $100 thousand for Olin's internal costs. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of the costs that may be incurred
by ABI in connection with this lawsuit and 37.5% of the amounts due under the
settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the site. Olin has estimated that the total
response costs for 2007 will be approximately $1.8 million. ABI has estimated
total costs, including 2007, to be in the range of $14.6 million to $58.8
million. As of December 31, 2006, ABI has estimated its potential liability for
Olin to be in the range of $3.1 million to $13.8 million after allocation for
the annual reimbursement of $100 thousand for Olin's internal costs and before
any recoveries from insurance and TBC. Costs are expected to be paid over the
next ten years. In January 2006, the EPA assumed the responsibility for the
oversight of the Olin Site from the Massachusetts Department of Environmental
Protection.
88
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
The State of Maine Department of Environmental Protection ("Maine DEP") has put
Miller Industries, Inc, ("Miller") the present owner of a former sheet vinyl
plant in Lisbon Falls, Maine, on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
In September of 2005, a lawsuit was brought by Miller against ABI, which alleged
that ABI and one other named defendant were liable for costs to clean up a
dumpsite ("Parcel A") and a second parcel of land ("Parcel B"), which is alleged
to contain polychlorinated biphenyls ("PCB's") in the soil. The lawsuit,
captioned Miller Industries, Inc. v American Biltrite Inc. et al, was filed on
September 22, 2005 in the Androscoggin Superior Court of Maine. Miller was
seeking indemnification or contribution from ABI for the clean-up of both
parcels of land (together, the "Maine Sites"). The lawsuit was dismissed by the
Superior Court of Maine on February 3, 2006 for lack of subject matter
jurisdiction and failure to state a claim upon which relief can be granted. In
January 2006, ABI was notified by the Maine DEP that it is a PRP as to both
Parcel A and Parcel B. Subsequently, Parcel B was named an EPA site.
Prior to the commencement of the lawsuit by Miller, ABI had been investigating
and reviewing the condition of the Parcel A and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
between approximately $1.1 million and $1.6 million. ABI has been advised by
Miller that the cost of site investigation, and remediation for Parcel B is
approximately $550 thousand. ABI has been assessing the potential availability
of insurance coverage for such costs. ABI is not at this time able to determine
what its potential liability will be with regard to the Maine Sites since ABI
has neither accepted nor negotiated its allocable share of the costs with
Miller. Under an agreement between ABI and TBC, TBC is liable for 37.5% of costs
incurred by ABI for the Maine Sites.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA Sites and the state supervised
sites in Maine as well as the Olin site with respect to the previous supervision
of that site by the Massachusetts Department of Environmental Protection. An
agreement was executed by ABI and its carriers regarding the payment of the
defense costs for the Olin Site. ABI has reached agreements with four of its
insurance carriers whereby the carriers have reimbursed the Company $6.5 million
for past and current environmental claims and 37.5% of the amount of that
reimbursement was shared with TBC pursuant to the Company's agreement with TBC.
Included in this insurance reimbursement is a payment of $4.6 million by one
carrier in December 2005. Another carrier has agreed to reimburse the Company
for 2.5% of the Company's liabilities regarding the future environmental
expenses related to the Olin Site, $70 thousand of which was reimbursed through
December 31, 2006 and 37.5% of the amount of that reimbursement was shared with
TBC pursuant to the Company's agreement with TBC. ABI and one of its insurance
carriers continue to discuss ABI's remaining demands for insurance coverage for
these sites.
89
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
ABI was notified of potential claims against it on behalf of approximately
seventeen (17) families living (or formerly resident) in the Town of Wilmington,
Massachusetts (the "Town"). The potential claimants either contracted cancer or
are family members of a person who contracted cancer and allege a connection
between such cancer and the Town water supply to which the claimants were
exposed. The potential claimants further allege that a source of the
contamination of the Town's water supply is the Olin site referenced above. The
Company is investigating these claims and discussing them with the claimants. At
this time, the Company is not able to ascertain what its potential liability
would be, if any, in the event of litigation. Under an agreement between ABI and
TBC, TBC is liable for 37.5% of the costs that may be incurred by ABI in
connection with this claim. The Company has not ascertained whether there is any
insurance coverage for this claim.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100 thousand as financial assurance for certain remediation funding
obligations. The Company remains contingently liable in the event that Congoleum
fails to perform or fund any required remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations and cash flows of the
Company.
In accordance with SFAS No. 5, Accounting for Contingencies, as of December 31,
2006, ABI maintains a reserve of approximately $6.5 million, which represents a
probable and reasonably estimable amount to cover the anticipated remediation
costs described above based on facts and circumstances known to the Company at
the present time. The Company has also recorded a receivable of $2.3 million for
ABI's estimable and probable recoveries for the contingencies described above.
These projects tend to be long-term in nature, and these assumptions are subject
to refinement as facts change. As such, it is possible that the Company may need
to revise its recorded liabilities and receivables for environmental costs in
future periods resulting in potentially material adjustments to the Company's
earnings in future periods. The Company closely monitors existing and potential
environmental matters to consider the reasonableness of its estimates and
assumptions.
90
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and has
commenced proceedings under Chapter 11 of the United States Bankruptcy Code for
purposes of resolving its asbestos-related liabilities (see Note 9).
Congoleum records a liability for environmental remediation claims when a
cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at December 31, 2006 and $4.3 million at
December 31, 2005, are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries approximated $2.2 million at December 31, 2006
and $1.9 million at December 31, 2005, and are reflected in other non-current
assets. Receivables for expected insurance recoveries are recorded if the
related carriers are solvent and paying claims under a reservation of rights or
under an obligation pursuant to coverage in place or a settlement agreement.
Substantially all of Congoleum's recorded insurance asset for environmental
matters is collectible from a single carrier.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and similar state laws. In addition,
in four other instances, although not named as a PRP, Congoleum has received a
request for information. The pending proceedings 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 sites depends on many factors, including the volume of
material contributed to the site, the number of other PRPs and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA and certain
other laws, Congoleum, as a PRP, 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 Environmental Protection Agency ("EPA") has
selected a remedy for the soil and shallow groundwater ("Operable Unit 1" or
OU-1); however, the remedial investigation/feasibility study related to the deep
groundwater (OU-2) has not been completed. The PRP group, of which Congoleum is
a part, has entered into a Consent Decree to perform the remedy
91
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
for OU-1 and resolve natural resource damage claims. The Consent Decree also
requires the PRPs to perform the OU-2 remedy, assuming that the estimated cost
of the remedy is not more than $10 million. If the estimated cost of the OU-2
remedy is more than $10 million, the PRPs may decline to perform it or they may
elect to perform anyway. Cost estimates for the OU-1 and OU-2 work combined
(including natural resource damages) range between $22 million and $34 million,
with Congoleum's share ranging between approximately $1.0 million and $1.6
million. This assumes that all parties participate and that none cash-out and
pay a premium; those two factors may account for some fluctuation in Congoleum's
share. Fifty percent (50%) of Congoleum's share of the costs is presently being
paid by one of its insurance carriers, Liberty Mutual Insurance Company, whose
remaining policy limits for this claim are expected to cover approximately $0.3
million in additional costs. Congoleum expects to fund the balance to the extent
further insurance coverage is not available.
Congoleum filed a motion before the Bankruptcy Court seeking authorization and
approval of the Consent Decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well 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 the Consent Decree and related
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
cleanup costs of $1.3 million, including capital outlays and future maintenance
costs for soil and groundwater remediation, are primarily based on engineering
studies. Of this amount, $0.3 million is included in current liabilities subject
to compromise and $1.0 million is included in non-current liabilities subject to
compromise.
Congoleum anticipates that these matters will be resolved over a period of years
and that after application of expected insurance recoveries, funding the costs
will not have a material adverse impact on Congoleum's liquidity or financial
position. However, unfavorable developments in these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of Congoleum.
Other
In the ordinary course of its business, ABI and Congoleum become involved in
lawsuits, administrative proceedings, product liability and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts, and the matters may remain unresolved for several years.
92
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned 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 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 United States Bankruptcy Court for
the District of New Jersey (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.
93
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the ACC,
the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed the Eighth Plan. In addition, an
insurance company, 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
94
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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 the CNA 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 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 the Tenth Plan and the CNA Plan are
each not 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. In March 2007,
Congoleum and other parties in interest resumed plan mediation discussions
seeking to resolve the 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.
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.
95
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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 third 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.
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 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 confirmation order fails to become a final order by May 10,
2007, and AIG may terminate the settlement agreement pursuant to this provision.
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. In August 2005,
Congoleum entered into a settlement agreement with Federal Insurance Company
pursuant to
96
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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 U.S. 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 and Everest Reinsurance Company pursuant to which Mt. McKinley
and Everest paid $21.5 million into an escrow account. The escrow agent will
transfer the funds to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds. An insurer and the
FCR have appealed the approval order granted by the Bankruptcy Court to the
District Court, but the appeal has been administratively terminated by
agreement. In March 2006, Congoleum entered into a settlement agreement with
Harper Insurance Limited. Under the terms of this settlement, Harper will pay
$1.4 million to Congoleum or the Plan Trust once certain conditions are
satisfied, including the effectiveness of a plan of reorganization containing
the Section 524(g) protection specified in the settlement agreement. The
Bankruptcy Court approved this settlement in April 2006. In April 2006,
Congoleum entered into a settlement agreement with Travelers Casualty and Surety
Company and St. Paul Fire and Marine Insurance Company (collectively,
"Travelers") 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. A hearing to consider the Travelers settlement has been
adjourned several times and is now scheduled for April 2007. In April 2006,
Congoleum also entered into a settlement agreement with Fireman's Fund Insurance
Company. Under the terms of this settlement, Fireman's Fund will pay $1 million
to the Plan Trust once a plan of reorganization with the Section 524(g)
protection specified in the settlement agreement goes effective and the
Bankruptcy Court approves the transfer of the funds. The settlement was approved
by the Bankruptcy Court in September 2006. In August 2006, Congoleum entered
into a settlement agreement with Century Indemnity Company and its affiliates
("Century"). Under the terms of this settlement, Century will pay $16.95 million
to the Plan Trust in four installments over a three-year period commencing 60
days after all conditions to the agreement have been satisfied. The Bankruptcy
Court approved this settlement in September 2006. Certain insurance companies
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.
97
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
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 collect the balance of
these receivables ($21.8 million at December 31, 2006). The write-off, as well
as forgiveness of indebtedness income pursuant 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 the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete 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.
98
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Congoleum Asbestos Liabilities and Planned Reorganization (continued)
Liabilities Subject to Compromise
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 interest expense on its
Senior Notes is also recorded in liabilities subject to compromise.
Liabilities subject to compromise at December 31 were as follows (in thousands):
2006 2005
--------------------------
Current
Pre-petition other payables and accrued interest $ 34,602 $ 23,990
Non-current
Debt (at face value) 100,000 100,000
Pension liability 15,502 16,871
Other post-retirement benefit obligation 9,249 8,407
Pre-petition other liabilities 11,782 13,583
--------------------------
136,533 138,861
Elimination--Payable to American Biltrite (135) (147)
--------------------------
136,398 138,714
--------------------------
Total liabilities subject to compromise $171,000 $162,704
==========================
Additional pre-petition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
99
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2006 and
2005 were as follows (in thousands):
2006 2005
---------------------------
Deferred tax assets:
Accruals and reserves $ 4,349 $ 4,392
Environmental reserves 10,344 14,305
Postretirement benefit obligations 1,834 4,713
Net operating losses and credit carryforwards 20,272 9,564
---------------------------
Total deferred tax assets 36,799 32,974
Less valuation allowance (9,258) (5,134)
---------------------------
Net deferred tax assets 27,541 27,840
Deferred tax liabilities:
Depreciation 15,425 16,639
Insurance receivable 11,037 10,524
Inventory 1,779 1,742
Foreign taxes -- 958
Postretirement benefit obligations 572 -
Other 1,005 1,284
---------------------------
Total deferred tax liabilities 29,818 31,147
---------------------------
Net deferred tax liability $ (2,277) $ (3,307)
===========================
Credit carryforwards consisted primarily of alternative minimum tax credits and
state tax credits.
At December 31, 2006 and 2005, Congoleum had available federal net operating
loss carry forwards of approximately $30.5 million and $12.7 million,
respectively. These carry forwards were generated from Congoleum's losses and
may be utilized to offset Congoleum's future taxable income. The Company has
determined that a partial valuation allowance is necessary to reduce the
deferred tax assets to the amount expected to be realized. The federal loss
carry forwards will begin to expire in 2025.
100
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
As of December 31, 2006, the Company merged Janus with and into American
Biltrite (Canada) Ltd. As a result of the merger, Janus' prior years' net
operating losses may be utilized to reduce the Canadian division's taxable
income in future periods. The Company recorded a deferred tax asset of $3.7
million. However, due to the uncertainty of the Canadian division's ability to
generate sufficient future taxable income to utilize the net operating loss
carry forwards, a full valuation allowance was also recorded. A significant
portion of the net operating loss carry forwards expire in 2010.
The Company is subject to income taxes in the United States and certain foreign
jurisdictions. Judgment is required in determining the consolidated provision
for income taxes and recording the related assets and liabilities. In the
ordinary course of our business, there are transactions and calculations where
the ultimate tax determination is uncertain. Accruals for tax contingencies are
provided for in accordance with the requirements of SFAS No. 5, Accounting for
Contingencies.
The components of income (loss) before the provision for income taxes (and other
items) for the years ended December 31 were as follows (in thousands):
2006 2005 2004
------------------------------------------------
Domestic $ (932) $(17,328) $ 1,870
Foreign 1,074 (966) (1,062)
------------------------------------------------
$ 142 $(18,294) $ 808
================================================
During 2006, the Internal Revenue Service ("IRS") completed and closed its audit
of Congoleum's income tax returns for the years 2000 through 2003. In December
2006, Congoleum entered into a closing agreement with the IRS, resulting in a
benefit of $782 thousand from the reversal of previously established reserves
for the years under audit. For the years ended December 31, 2005 and 2004,
Congoleum recorded a tax benefit of $2.6 million and $2.5 million, respectively,
primarily as a result of carry back claims for prior year expenditures for
asbestos related liabilities.
During 2005, the IRS completed and closed its audits of American Biltrite Inc.'s
income tax returns for the years 2000 through 2003. In December 2005, the
Company entered into a closing agreement with the IRS for tax years 2000 through
2003, resulting in certain adjustments to our federal income tax liability for
those years. Accordingly, the Company's 2005 tax provision was reduced by $1.6
million as a result of reversing previously established reserves.
101
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Significant components of the benefit from income taxes for the years ended
December 31 were as follows (in thousands):
2006 2005 2004
--------------------------------------------
Current:
Federal $ 24 $ (998) $ 159
Foreign 618 (119) (119)
State 87 303 708
--------------------------------------------
Total current 729 (814) 748
Deferred:
Federal (1,507) (108) (3,525)
Foreign (309) (132) (257)
State 70 (283) (1,657)
Valuation allowance 408 (197) 3,010
--------------------------------------------
Total deferred (1,338) (720) (2,429)
--------------------------------------------
$ (609) $(1,534) $(1,681)
============================================
The reconciliation of income tax computed at the U.S. federal statutory tax rate
to the effective rate of the Company's tax benefit for the years ended December
31 was as follows:
2006 2005 2004
---------------------------------------
U.S. statutory rate 34.0% (34.0)% 34.0%
State income taxes, net of federal
benefits and valuation allowance 33.1 1.8 (21.8)
Foreign tax rate difference 39.5 0.2 35.6
Non-deductible items 104.2 (0.2) 17.1
Valuation allowance (14.8) 11.2 272.7
Benefit of net operating losses -- -- (544.2)
Research and development credits (33.8) -- --
Reorganization expenses -- 18.9 --
Prior year estimates 276.1 1.4 --
Change in tax liability reserves (844.4) (7.5) --
Other (22.8) (0.2) (1.4)
---------------------------------------
Effective tax rate (428.9)% (8.4)% (208.0)%
=======================================
102
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Income Taxes (continued)
Through December 31, 2006, the Company has not provided U.S. income taxes on
approximately $18.1 million of unremitted foreign earnings because such earnings
are intended to be indefinitely reinvested outside the U.S. The Company's
current intention is to indefinitely reinvest accumulated earnings of its
foreign subsidiaries, except in instances where the Company can remit such
earnings without a significant associated tax cost. The Company believes that
any U.S. tax liability due upon remittance of such earnings would be immaterial
due to availability of U.S. foreign tax credits generated from such remittance.
During 2006 and 2005, the Company made net payments for income taxes of $0.7
million and $3.0 million, respectively. During 2004, the Company received net
income tax refunds of $4.0 million.
11. Other Comprehensive Income
The Company records unrealized gains or losses on foreign currency translation
adjustments and changes in minimum pension liabilities in other comprehensive
income. During 2006, the Company recognized the effects of adopting SFAS 158 in
accumulated other comprehensive loss. Components of other comprehensive income
(loss) and the effects of adopting SFAS 158 for the years ended December 31,
2006, 2005 and 2004 were as follows (in thousands):
2006 2005 2004
-----------------------------------
Foreign currency translation adjustments $ 41 $ 420 $ 1,301
Change in additional minimum pension
liability under SFAS 87 1,296 (2,416) 1,839
-----------------------------------
Total included in other comprehensive
income (loss) 1,337 (1,996) 3,140
Cumulative adjustment for adoption of
SFAS 158 (2,276) -- --
Tax effect of SFAS 158 adjustment (440) -- --
-----------------------------------
Net change in accumulated other
comprehensive loss $(1,379) $(1,996) $ 3,140
===================================
During 2006, in accordance with SFAS 158, the Company determined the change in
additional minimum pension liability under SFAS 87, prior to the adoption of
SFAS 158. The change of $1.3 million is included as a component of other
comprehensive income for the year ended December 31, 2006. Upon adoption of SFAS
158, the Company recognized a cumulative adjustment of $2.3 million, before
taxes, in accumulated other comprehensive loss, reflecting the funded status of
the ABI and Congoleum pension and postretirement plans as of December 31, 2006.
The net adjustment increased accumulated other comprehensive loss and decreased
total equity. The Company also recorded a net deferred tax liability of $440
thousand arising from the
103
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Other Comprehensive Income (continued)
cumulative adjustment of ABI's pension plans, some of which were overfunded as
of December 31, 2006. Congoleum's benefit plans were underfunded as of December
31, 2006, resulting in a cumulative adjustment to accumulated other
comprehensive loss of $3.8 million, with no tax effect due to a full valuation
allowance recorded against its net deferred tax assets.
As of December 31, 2006 and 2005, the components of accumulated other
comprehensive loss, net of taxes, were as follows (in thousands):
2006 2005
-------------------------------
Foreign currency translation adjustments $ 342 $ 301
Minimum pension liability (19,633) (18,213)
-------------------------------
$(19,291) $(17,912)
===============================
12. Income (Loss) Per Share
The following table sets forth the computation of basic and diluted loss per
share for the years ended December 31, 2006, 2005 and 2004 (in thousands, except
per share amounts):
2006 2005 2004
-----------------------------------
Numerator:
Net income (loss) $ 685 $(17,633) $1,953
===================================
Denominator:
Basic income per share:
Weighted-average shares 3,442 3,442 3,442
Dilutive employee stock options 15 -- 16
-----------------------------------
Diluted income per share:
Adjusted weighted-average
shares and assumed conversions 3,457 3,442 3,458
===================================
Basic income (loss) per share $ 0.20 $ (5.12) $ 0.57
===================================
Diluted income (loss) per share $ 0.20 $ (5.12) $ 0.54
===================================
Diluted earnings per share for the year ended December 31, 2004 includes the
dilutive effect of Congoleum's stock options during the year. The impact of
Congoleum's dilutive stock options was $0.02 per share and was determined based
on Congoleum's diluted earnings per share of $0.35 for the year ended December
31, 2004. During 2006 and 2005, Congoleum's stock options had no effect on
American Biltrite Inc.'s diluted earnings per share.
104
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of
options to purchase up to 50,000 shares of ABI common stock to non-employee
directors. Under the terms of the plan, options granted are nonqualified and are
issued at a price equal to 100% of fair market value at the date of grant.
Options granted under the plan are exercisable six months after the date of
grant.
ABI maintains a stock award and incentive plan which permits the issuance of
options, stock appreciation rights ("SARs"), limited SARs, restricted stock,
restricted stock units and other stock-based awards of ABI to selected employees
and independent contractors of the Company. The amended plan reserved 550,000
shares of common stock for grant and provides that the term of each award be
determined by the committee of the Board of Directors (the "Committee") charged
with administering the plan.
Under the terms of the stock award and incentive plan, options granted may be
either nonqualified or incentive stock options and the exercise price may not be
less than the fair market value of a share on the date of grant, as determined
by the Committee. SARs and limited SARs granted in tandem with an option shall
be exercisable only to the extent the underlying option is exercisable and the
exercise price shall be equal to the exercise price of the underlying option. In
addition, the Committee may grant restricted stock to participants of the plan.
No SARs or restricted stock have been granted under the plan since its adoption.
Other than the restrictions that limit the sale and transfer of these SARs and
restricted stock, participants are entitled to all the rights of a shareholder.
The following tables summarize information about ABI's stock options:
2006 2005 2004
------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------
Outstanding at beginning of year 483,000 $15.42 486,000 $15.42 228,500 $22.04
Granted 4,000 10.97 4,000 9.30 261,500 9.66
Exercised -- -- -- -- -- --
Forfeited (1,000) 9.65 (7,000) 11.65 (4,000) 16.64
-------- -------- --------
Outstanding at end of year 486,000 15.40 483,000 15.42 486,000 15.42
======== ======== ========
Options exercisable at end of year 482,000 $15.44 479,000 $15.42 223,300 $22.14
Available for grant at end of year 97,020 100,020 97,020
105
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
Weighted- Weighted- Weighted-Average
Outstanding at Average Exercisable at Average Remaining
Range of December 31, Exercise December 31, Exercise Contractual Life
Exercise Price 2006 Price 2006 Price (Years)
-----------------------------------------------------------------------------------------------------------------------
$ 7.10 -$14.00 273,500 $ 9.75 269,500 $ 9.74 7.35
$14.01 -$17.25 21,000 $14.82 21,000 $14.82 3.07
$17.26 -$23.625 191,500 $23.53 191,500 $23.53 0.40
The total fair value of ABI options that vested during 2006, 2005 and 2004 was
$21 thousand, $266 thousand and $176 thousand, respectively. At December 31,
2006 and 2005, ABI had 4,000 options that vested on January 1st of the following
year. The weighted-average grant date fair value of these unvested options was
$5.16 and $3.95, respectively.
Congoleum Stock Option Plans
Congoleum maintains a Stock Option Plan and a Directors' Stock Option Plan.
Under these plans, options to purchase up to 850,000 shares of Congoleum's Class
A common stock may be issued to directors, officers and key employees. These
options may be either incentive stock options or nonqualified stock options, and
the options' exercise price must be at least equal to the fair value of
Congoleum's Class A common stock on the date of grant.
The following table summarizes information about Congoleum's stock options:
2006 2005 2004
-----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------
Outstanding at beginning of year 692,000 $2.04 703,500 $1.99 668,000 $1.99
Granted 2,500 2.11 9,500 4.98 41,000 1.98
Canceled -- -- -- --
Exercised (600) 0.36 (11,200) 1.81 (400) 2.05
Forfeited (32,900) 2.08 (8,300) 1.14 (5,100) 3.06
--------- --------- ---------
Outstanding at end of year 661,000 2.04 693,500 2.04 703,500 1.99
========= ========= =========
Weighted-average remaining contractual
life of options outstanding (years) 5.73 6.65 7.64
Options exercisable at end of year 509,700 2.04 400,600 2.03 270,100 2.03
Available for grant at end of year 174,800 142,900 144,100
The total fair value of Congoleum options that vested during 2006, 2005 and 2004
was $223 thousand, $232 thousand and $203 thousand, respectively.
106
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option Plans (continued)
Stock option information related to nonvested shares for the Congoleum Stock
Option Plans for the year ended December 31, 2006 was as follows:
Weighted-
Average Grant
Shares Date Fair Value
-----------------------------------
Nonvested at December 31, 2005 292,900 $1.60
Granted 2,500 1.68
Vested (140,500) 1.66
Forfeited (3,600) 1.50
-------------
Nonvested at December 31, 2006 151,300 1.55
=============
The intrinsic value of stock options exercised during 2006 and stock options
outstanding (whether or not then exercisable) and stock options outstanding and
exercisable at December 31, 2006 under the ABI Stock Plans and the Congoleum
Stock Option Plans were as follows (in thousands):
ABI Congoleum
--------------- ------------------
Exercised during 2006 $ -- $ 1
Outstanding at December 31, 2006 7 30
Exercisable at December 31, 2006 7 19
Upon exercise of stock options, ABI and Congoleum issue shares which are
issuable upon such exercise from their respective treasury stock.
14. 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 segment consists of Congoleum, which manufactures vinyl and vinyl
composition floor coverings and sells them primarily through floor covering
distributors, to retailers and contractors for commercial and residential use.
The tape division consists of two production facilities in the United States,
and finishing and sales facilities in Belgium, Italy and Singapore. The tape
division manufactures paper, film, HVAC, electrical, shoe, and other tape
products for use in industrial and automotive markets. The jewelry segment
consists of K&M Associates L.P., a national costume jewelry supplier to mass
merchandisers and department stores. The Company's Canadian division produces
flooring, rubber products, including materials used by footwear manufacturers,
and other industrial products.
107
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Factors Used to Identify Reportable Segments
Reportable segments are business units that offer different products and are
each managed separately. The Company's Canadian division manufactures certain
products which are similar to products of the flooring segment; however, the
Canadian division is managed and reports separately from the flooring segment.
Measurement of Segment Profit or Loss and Segment Assets
Costs specific to a segment, such as pension expense, are charged to the
segment. Certain Corporate office expenses are allocated to certain segments
based on resources allocated. Significant assets of the Corporate office include
cash, insurance assets related to accrued liabilities, and deferred tax assets.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales or transfers.
Segment Profit and Assets
Years ended December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Revenues
Revenues from external customers:
Flooring products $219,474 $237,916 $229,650
Tape products 102,971 96,103 85,560
Jewelry 59,741 62,790 75,757
Canadian division 53,351 48,363 42,902
----------------------------------------------------
Total revenues from external customers 435,537 445,172 433,869
Intersegment revenues:
Flooring products -- 13 58
Tape products 13 81 120
Jewelry -- -- --
Canadian division 5,311 5,144 6,207
----------------------------------------------------
Total intersegment revenues 5,324 5,238 6,385
----------------------------------------------------
Total revenues 440,861 450,410 440,254
Reconciling items
Intersegment revenues (5,324) (5,238) (6,385)
----------------------------------------------------
Total consolidated revenues $435,537 $445,172 $433,869
====================================================
108
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Approximately 50%, 48% and 48% of the Canadian division's revenues from external
customers were for flooring products for 2006, 2005 and 2004, respectively. The
remaining revenues from the Canadian division's external customers were from
sale of rubber and other industrial products.
For 2006, 2005 and 2004, one customer of the flooring division accounted for
20%, 21% and 23%, respectively, of the Company's consolidated revenues. Another
customer of the flooring division accounted for 14%, 15% and 14% of the
Company's consolidated revenues for 2006, 2005 and 2004, respectively.
Years ended December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Interest income
Flooring products $ 515 $ 438 $ 114
Tape products -- -- 4
Jewelry -- -- 3
Canadian division 165 -- --
----------------------------------------------------
Total segment interest revenue 680 438 121
Corporate office interest revenue 189 201 7
----------------------------------------------------
Total consolidated interest income $ 869 $ 639 $ 128
====================================================
Interest expense
Flooring products $11,387 $10,411 $ 9,446
Tape products 41 95 106
Jewelry 940 456 416
Canadian division 726 649 575
----------------------------------------------------
Total segment interest expense 13,094 11,611 10,543
Corporate office interest expense 971 1,417 1,922
----------------------------------------------------
Total consolidated interest expense $14,065 $13,028 $12,465
====================================================
Depreciation and amortization expense
Flooring products $10,478 $11,002 $11,428
Tape products 2,703 2,619 2,812
Jewelry 1,079 832 860
Canadian division 1,978 2,005 2,427
----------------------------------------------------
Total segment depreciation and amortization 16,238 16,458 17,527
Corporate office depreciation 7 10 12
----------------------------------------------------
Total consolidated depreciation and amortization $16,245 $16,468 $17,539
====================================================
109
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
Years ended December 31
2006 2005 2004
---------------------------------------------------
(In thousands)
Segment profit (loss)
Flooring products $ (165) $(24,150) $ 403
Tape products 536 1,101 (630)
Jewelry 916 2,162 5,400
Canadian division 744 (1,673) (2,264)
---------------------------------------------------
Total segment profit (loss) 2,031 (22,560) 2,909
Reconciling items
Corporate (expenses) income (1,913) 4,154 (2,089)
Intercompany profit 24 112 (12)
---------------------------------------------------
Total consolidated earnings (loss) from continuing
operations before income taxes and other items $ 142 $(18,294) $ 808
===================================================
Segment profit or loss is before income tax expense or benefit. The flooring
products segment loss includes charges related to asbestos claims of $25.3
million in 2005 and $5.0 million in 2004. Corporate income for 2005 includes a
gain of $2.3 million (before non-controlling interest) from the sale of a
warehouse during the first quarter and an expense recovery of $2.9 million from
an insurance settlement during the fourth quarter.
December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Segment assets
Flooring products $184,202 $190,612 $212,882
Tape products 52,848 51,679 51,788
Jewelry 38,913 39,421 37,158
Canadian division 44,657 43,139 39,953
----------------------------------------------------
Total segment assets 320,620 324,851 341,781
Reconciling items
Assets of discontinued operations -- 3,142 2,952
Corporate office assets 32,008 33,080 22,577
Intersegment accounts receivable (20,677) (20,650) (11,558)
Intersegment profit in inventory (144) (167) (281)
Intersegment other asset (135) (147) (186)
----------------------------------------------------
Total consolidated assets $331,672 $340,109 $355,285
====================================================
At December 31, 2005, assets of discontinued operations consisted primarily of a
building and land in Ontario, Canada. During 2006, the Company sold the building
and land for $5 million Canadian dollars (see Note 16).
110
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Industry Segments (continued)
The Jewelry segment assets include goodwill of $11.5 million and $11.7 million
at December 31, 2006 and 2005, respectively. Corporate office assets decreased
primarily as a result of a decrease in cash and cash equivalents. Proceeds from
an insurance settlement received in late December 2005 were used to reduced the
Company's borrowings in early January 2006.
Years ended December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Additions to long-lived assets
Flooring products $ 4,642 $ 4,274 $ 3,428
Tape products 496 858 670
Jewelry 442 578 1,105
Canadian division 837 1,175 652
Corporate office -- -- --
----------------------------------------------------
Total additions to long-lived assets $ 6,417 $ 6,885 $ 5,855
====================================================
Geographic Area Information
December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Long-lived assets by area
United States $129,718 $135,874 $146,078
Canada 16,746 13,045 13,527
Europe 885 904 1,115
Asia 2,001 2,084 2,151
----------------------------------------------------
Total long-lived assets $149,350 $151,907 $162,871
====================================================
Years ended December 31
2006 2005 2004
----------------------------------------------------
(In thousands)
Revenues from external customers
United States $349,547 $368,931 $361,410
Canada 43,766 40,589 39,808
Mexico 5,574 5,141 3,602
Europe 20,652 17,950 17,494
Asia 13,769 10,743 9,153
Other 2,229 1,818 2,402
----------------------------------------------------
Total revenues from external customers $435,537 $445,172 $433,869
====================================================
Revenues are attributed to regions based on the location of customers.
111
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Acquisition
On October 31, 2005, the Company acquired certain assets and assumed certain
liabilities of JayRam, Inc., comprising of JayRam Inc.'s Jay Jewelry division, a
Florida distributor of costume jewelry with a market focus on theme parks,
tourist attractions and surf and beach shops. The purchase price consisted of
$2.4 million, comprised of a cash payment of $1.4 million on the closing date
and a note payable to the seller for $1.0 million, plus additional payments to
the seller based on 25% of the acquired business's future earnings before
interest, taxes, depreciation and amortization ("Jay Jewelry EBITDA") for a
period of three years. The additional payment based on 2006 Jay Jewelry EBITDA
was immaterial to the consolidated financial statements and will be finalized in
accordance with the purchase agreement in the first quarter of 2007, at which
time goodwill will be adjusted.
The transaction was accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities acquired were recorded at their
estimated fair values at the closing date of the acquisition. The recorded fair
value of tangible assets acquired and liabilities assumed were $690 thousand and
$91 thousand, respectively. The purchase agreement includes a non-competition
and non-solicitation agreement with the seller. The Company obtained a valuation
for these intangible assets as well as the acquired trade name and customer
list. The aggregate value of these assets was $1.4 million, resulting in
goodwill of $426 thousand. During 2006, the seller and K&M agreed to a reduction
in the purchase price based on a review of the assets and liabilities of the
acquired company as of the acquisition date in accordance with the purchase
agreement. The $1.0 million note payable and goodwill were reduced by $251
thousand. The note is payable in equal monthly installments through October 2008
with interest at 6%.
The values assigned to the amortizable intangible assets acquired and the
amortization periods are as follows:
Value Amortization
Assigned Period
-----------------------------------
(In thousands)
Non-competition and non-solicitation
agreement $ 616 2 years
Customer list 640 7 years
Trade name 119 15 years
------------------
$1,375
==================
Accumulated amortization as of December 31, 2006 and 2005 was $356 thousand and
$51 thousand, respectively.
112
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Acquisition (continued)
Amortization expense for the years ended December 31, 2006 and 2005 was $305
thousand and $51 thousand, respectively. Amortization expense in each of the
next five years is as follows (in thousands):
2007 $ 305
2008 270
2009 99
2010 99
2011 99
16. Discontinued Operations
During the second quarter of 2003, the Company reassessed operations at its
Toronto, Canada subsidiary, Janus Flooring Corporation ("Janus"), a manufacturer
of prefinished hardwood flooring, and decided to exit and dispose of this
business before the end of 2003 due to its history of operating losses. In
connection with this decision to exit and dispose of Janus, the Company recorded
a charge of $8.5 million in the second quarter of 2003. Results of Janus,
including this charge, have been reported as a discontinued operation.
As of December 31, 2005, the remaining liabilities of Janus were insignificant,
and the primary remaining asset consisted of a building and land held for sale.
In April 2006, the Company completed the sale of the building and land owned by
Janus. The building and land were sold for $5.0 million Canadian dollars ("C$").
The Company received C$1.0 million in cash and a C$4.0 million note. Commissions
and other expenses incurred in connection with the sale totaled C$200 thousand,
resulting in net cash proceeds of C$800 thousand. Payment of the note is
contingent upon obtaining an environmental certification on the land sold. In
order to obtain that certification, the Company expects to incur approximately
C$200 thousand to remediate the property. Remediation is expected to be
completed during the first half of 2007. As of December 31, 2006, the Company
has recorded a deferred gain of approximately C$1.1 million. The Company expects
to recognize a final gain of approximately C$850 thousand after the completion
of the remediation in 2007 and the incurrence of related expenses.
As a result of the sale of the building and land and the recording of the note
receivable related to the sale, the discontinued operation was effectively
dissolved during 2006. At December 31, 2006, the note receivable and deferred
gain were included in the assets and liabilities of continuing operations.
As of December 31, 2006, the Company merged Janus with and into American
Biltrite (Canada) Ltd., primarily for the purposes of utilizing Janus' prior
years' net operating losses against future taxable income (see Note 10).
113
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Fair Value of Financial Instruments
The Company's consolidated cash and cash equivalents, restricted cash, accounts
receivable, accounts payable, notes payable and long-term debt are financial
instruments. Congoleum's $100 million 8 5/8% Senior Notes due 2008 had a book
value of $99.9 million and a fair market value of $91.0 million at December 31,
2006. The corresponding amounts at December 31, 2005 were a book value of $99.9
million and a fair market value of $63.5 million. The carrying value of the
Company's remaining financial instruments approximates their fair value at
December 31, 2006.
The fair value of the Company's publicly traded long-term debt is determined
based on quoted market values. The fair value of the Company's other financial
instruments is determined based on discounted cash flows. Due to the short
period over which the cash flows are expected to be realized, the carrying value
of the financial instruments approximates the net present value of cash flows
and changes in interest rate assumptions would not have a material effect on the
calculation.
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
loan 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. For the year ended December 31, 2006,
the Company recorded a loss of $56 thousand for the change in the fair value of
the swap agreements. Changes in the fair value of the swap agreements are
recorded in Other income (expense).
114
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------
(In thousands, except per share amounts)
2006
----
Net sales $111,721 $117,465 $108,474 $ 97,877
Gross profit 28,357 29,186 26,899 23,510
Income (loss) from continuing operations 548 980 (858) 34
Discontinued operations (62) 36 6 1
Net income (loss) 486 1,016 (852) 35
Net income (loss) per share, basic:
Income (loss) from continuing operations 0.16 0.28 (0.25) 0.01
Discontinued operations (0.02) 0.01 -- --
Net income (loss) 0.14 0.29 (0.25) 0.01
Net income (loss) per share, diluted:
Income (loss) from continuing operations 0.16 0.28 (0.25) 0.01
Discontinued operations (0.02) 0.01 -- --
Net income (loss) 0.14 0.29 (0.25) 0.01
2005(1)
-------
Net sales $107,424 $109,542 $114,152 $114,054
Gross profit 28,568 27,609 28,311 26,360
Income (loss) from continuing operations 680 (14,646) 1,088 (4,518)
Discontinued operations (56) (57) (80) (44)
Net income (loss) 624 (14,703) 1,008 (4,562)
Net income (loss) per share, basic:
Income (loss) from continuing operations 0.20 (4.25) 0.32 (1.31)
Discontinued operations (0.02) (0.02) (0.02) (0.01)
Net income (loss) 0.18 (4.27) 0.30 (1.32)
Net income (loss) per share, diluted:
Income (loss) from continuing operations 0.19 (4.25) 0.31 (1.31)
Discontinued operations (0.02) (0.02) (0.02) (0.01)
Net income (loss) 0.17 (4.27) 0.29 (1.32)
(1) The second and fourth quarters of 2005 include asbestos-related charges of
$15.5 million and $9.8 million, respectively, in Congoleum's selling,
general and administrative expenses for costs related to Congoleum's
reorganization plan. The impact of these charges to American Biltrite's
basic and diluted earnings per share for the second and fourth quarters
was $4.50 and $2.85, respectively.
115
Report of Registered Independent Public Accounting Firm
Board of Directors and Stockholders
American Biltrite Inc.
We have audited the accompanying consolidated balance sheets of American
Biltrite Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006.
Our audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Biltrite
Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Notes 1 and 7 to the consolidated financial statements, in 2006
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans--An amendment of FASB Statement Nos. 87, 88, 106, and 132(R)" and as
discussed in Notes 1 and 13 to the consolidated financial statements, in 2006
the Company adopted SFAS No. 123 (Revised 2004), "Share-Based Payment".
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 21, 2007
116
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's management,
with the participation of the Company's Chief Executive Officer, or CEO, and
Chief Financial Officer, or CFO, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of December 31, 2006.
Based on this evaluation, the Company's CEO and CFO concluded that, as of
December 31, 2006, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company, including
the Company's consolidated subsidiaries, is made known to the Company's CEO and
CFO by others within those entities, particularly during the period in which
this Annual Report on Form 10-K 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 Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Controls. No change in the Company's internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) occurred during the fiscal quarter
ended December 31, 2006 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
117
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company has adopted a code of ethics (as that term is defined in Item 406 of
Regulation S-K of the regulations promulgated by the SEC), which is included in
the Company's written code of conduct or corporate policies, that applies to the
principal executive officer, principal financial officer, principal accounting
officer, controller and all other employees of the Company. The text of the
Company's code of ethics is posted on our Internet website www.ambilt.com or may
be obtained without charge by sending a written request to Mr. Henry W.
Winkleman, Secretary of the Company, at the Company's office at 57 River Street,
Wellesley Hills, Massachusetts 02481. We intend to satisfy the disclosure
requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver
from, a provision of our code of ethics that applies to our principal executive
officer, principal financial and accounting officer or controller by posting
such information on our website at www.ambilt.com.
Other information required by this item is incorporated herein by reference to
ABI's Proxy Statement for its Annual Stockholders' Meeting to be held on May 8,
2007, which is to be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
ABI's Proxy Statement for its Annual Stockholders' Meeting to be held on May 8,
2007, which is to be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference in
part to Item 5 of this Annual Report on Form 10-K and in part to ABI's Proxy
Statement for its Annual Stockholders' Meeting to be held on May 8, 2007, which
is to be filed with the Securities and Exchange Commission within 120 days after
December 31, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to ABI's
Proxy Statement for its Annual Stockholders' Meeting to be held on May 8, 2007,
which is to be filed with the Securities and Exchange Commission within 120 days
after December 31, 2006.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to
ABI's Proxy Statement for its Annual Stockholders' Meeting to be held on May 8,
2007, which is to be filed with the Securities and Exchange Commission within
120 days after December 31, 2006.
118
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of American Biltrite
Inc. and its subsidiaries are included in Item 8 of this Annual
Report on Form 10-K:
Consolidated Balance Sheets with Consolidating Details -
December 31, 2006 and 2005, pages 48 & 49
Consolidated Statements of Operations with Consolidating
Details - Years ended December 31, 2006, 2005 and 2004,
page 50
Consolidated Statements of Cash Flows with Consolidating
Details - Years ended December 31, 2006, 2005 and 2004,
page 51 & 52
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2006, 2005 and 2004, page 53
Notes to Consolidated Financial Statements, pages 54
through 115
(2) The following financial statement schedule is included in Item 15(c)
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Listing of Exhibits
The listing of exhibits required under this item is incorporated
herein by reference to pages 123 through 130 of this Form 10-K.
(b) Exhibits: The required exhibits are filed herewith or incorporated by
reference following the required Exhibit Index.
(c) Financial Statement Schedule: The required consolidated financial
statement schedule is included on page 120 of this Form 10-K.
119
American Biltrite Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts
Years ended December 31, 2006, 2005 and 2004
(In thousands of dollars)
-----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
-----------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts -- Deductions - Balance at
Description Period Expenses Describe Other Describe End of Period
-----------------------------------------------------------------------------------------------------------------------------------
2006
Allowances for doubtful accounts and cash
discounts $2,820 $3,627 $3,377(A) $3,070
==================================================================================
2005
Allowances for doubtful accounts and cash
discounts $2,745 $2,922 $2,847 (A) $2,820
==================================================================================
2004
Allowances for doubtful accounts and cash
discounts $2,615 $2,648 $2,518 (A) $2,745
==================================================================================
(A) Represents accounts charged off during the year, net of recoveries.
120
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN BILTRITE INC.
(Registrant)
Date: March 27, 2007 by: /s/ Howard N. Feist III
----------------- ------------------------------------------------
Howard N. Feist III, Vice President
Finance and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 27, 2007 by: /s/ Roger S. Marcus
----------------- ------------------------------------------------
Roger S. Marcus, Chairman of the Board,
Chief Executive Officer and Director
Date: March 27, 2007 by: /s/ Richard G. Marcus
----------------- ------------------------------------------------
Richard G. Marcus, President,
Chief Operating Officer and Director
Date: March 27, 2007 by: /s/ William M. Marcus
----------------- ------------------------------------------------
William M. Marcus, Executive Vice President,
Treasurer, Chairman of the Executive
Committee and Director
Date: March 27, 2007 by: /s/ Leo R. Breitman
----------------- ------------------------------------------------
Leo R. Breitman, Director
Date: March 27, 2007 by: /s/ Gilbert K. Gailius
----------------- ------------------------------------------------
Gilbert K. Gailius, Director
Date: March 27, 2007 by: /s/ John C. Garrels III
----------------- ------------------------------------------------
John C. Garrels III, Director
Date: March 27, 2007 by: /s/ Frederick H. Joseph
----------------- ------------------------------------------------
Frederick H. Joseph, Director
Date: March 27, 2007 by: /s/ Mark N. Kaplan
----------------- ------------------------------------------------
Mark N. Kaplan, Director
Date: March 27, 2007 by: /s/ James S. Marcus
----------------- ------------------------------------------------
James S. Marcus, Director
121
Date: March 27, 2007 by: /s/ Natalie S. Marcus
----------------- ------------------------------------------------
Natalie S. Marcus, Director
Date: March 27, 2007 by: /s/ Kenneth I. Watchmaker
----------------- ------------------------------------------------
Kenneth I. Watchmaker, Director
Date: March 27, 2007 by: /s/ Howard N. Feist III
----------------- ------------------------------------------------
Howard N. Feist III, Vice President Finance,
Chief Financial Officer and Principal Accounting
Officer
122
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3 (1) VII Restated Certificate of Incorporation
3 (2) I By-Laws, amended and restated as of September 11, 2004
4 (1) XIX Amended and Restated Credit Agreement, dated as of
September 25, 2006, among American Biltrite Inc., K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a
domestic lender and as a domestic administrative agent, Bank
of America, National Association, acting through its Canada
branch, both in its capacity as a Canadian lender and as
Canadian administrative agent, and the other lenders from time
to time party thereto
4 (2)XX Amendment No. 1 to Amended and Restated Credit
Agreement, dated as of November 7, 2006, among American
Biltrite Inc, K&M Associates L.P., and American Biltrite
(Canada) Ltd., Bank of America, National Association, both in
its capacity as a domestic lender and as a domestic
administrative agent, Bank of America, National Association,
acting through its Canada branch, both in its capacity as a
Canadian lender and as Canadian administrative agent, and the
other lenders from time to time party thereto
4 (3)XIV Security Agreement, dated as of October 14, 2003, among
American Biltrite Inc., K&M Associates L.P., Fleet National
Bank and the subsidiaries of American Biltrite Inc. from time
to time party thereto
4 (4)XV Intercreditor and Collateral Agency Agreement, dated as of May
20, 2005, by and among Fleet National Bank, a Bank of America
company, The Prudential Insurance Company of America, and the
other banks from time to time party thereto, and Fleet
National Bank, a Bank of America company, as administrative
agent, and the Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic guarantor
subsidiaries
4 (5)XIV Guarantee Agreement dated as of October 14, 2003, among Abtre,
Inc., Aimpar, Inc., American Biltrite Intellectual Properties,
Inc., Ideal Tape Co., Inc., Majestic Jewelry, Inc., Ocean
State Jewelry, Inc., 425 Dexter Associates, L.P. and Fleet
National Bank
4 (6)XV Joinder Agreement, dated as of May 20, 2005, between Abimex,
LLC and Fleet National Bank, a Bank of America company, as
domestic agent
4 (7)XV Joinder Agreement, dated as of May 20, 2005, between ABItalia,
Inc. and Fleet National Bank, a Bank of America company, as
domestic agent
4 (8)XV Joinder Agreement, dated as of May 20, 2005, between American
Biltrite Far East, Inc. and Fleet National Bank, a Bank of
America company, as domestic agent
4 (9)XV Joinder Agreement, dated as of May 20, 2005, between K&M
Legendary Services, Inc. and Fleet National Bank, a Bank of
America company, as domestic agent
123
Exhibit No. Description
--------------------------------------------------------------------------------
4 (10) XV Deed of Hypothec and Issue of Mortgage Bonds, dated May 20,
2005, by American Biltrite (Canada) Ltd. in favor of Bank of
America, National Association
4 (11) XV Hypothec and Pledge of Bonds, dated May 20, 2005, between
American Biltrite (Canada) Ltd. and Bank of America, National
Association
4 (12) I Indenture, dated as of August 3, 1998, by and between
Congoleum Corporation and First Union National Bank, as
trustee
4 (13) I First Supplemental Indenture, dated as of March 28, 2003,
between Congoleum Corporation and Wachovia Bank, National
Association (as successor to First Union National Bank), as
trustee
4 (14) I Second Supplemental Indenture, dated as of August 7, 2003,
between Congoleum Corporation and Wachovia Bank, National
Association (as successor to First Union National Bank), as
trustee
4 (15) Instrument of Resignation, Appointment and Acceptance dated as
of November 15, 2005 among the Company, Wachovia Bank,
National Association and HSBC Bank USA, National Association,
as Successor Trustee.
10 (1) III Joint Venture Agreement dated as of December 16, 1992 by and
among American Biltrite Inc., Resilient Holdings Incorporated,
Congoleum Corporation, Hillside Industries Incorporated and
Hillside Capital Corporation
10 (2) IV Closing Agreement dated as of March 11, 1993 by and among
American Biltrite Inc., Resilient Holdings Incorporated,
Congoleum Corporation, Hillside Industries Incorporated and
Hillside Capital Corporation
10 (3) VIII, II 1993 Stock Award and Incentive Plan as Amended and Restated as
of March 4, 1997
10 (4) VI K&M Associates L.P. Amended and Restated Agreement of Limited
Partnership
10 (5) XVIII Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership of K&M Associates L.P., dated as of January 1,
2006
10 (6) V Purchase Agreement dated as of March 31, 1995 by and among
Ocean State Jewelry, Inc. and certain limited partners of K&M
Associates L.P.
10 (7) V Agreement and Plan of Merger dated as of April 1, 1995 by and
among the Company, Jewelco Acquisition Co., Inc., AIMPAR,
Inc., Arthur I. Maier, Bruce Maier and Edythe J. Wagner
10 (8) V Agreement and Plan of Merger dated as of May 3, 1995 by and
among the Company, Zirconia Acquisition Co., Inc., Wilbur A.
Cowett Incorporated and Wilbur A. Cowett
124
Exhibit No. Description
--------------------------------------------------------------------------------
10 (9) VII, II Split-Dollar Agreement dated as of December 20, 1996 by and
between American Biltrite Inc. and The Richard G. Marcus
Irrevocable Insurance Trust of 1990 Dated June 1, 1990
10 (10) VII, II Split-Dollar Agreement dated as of January 9, 1997 by and
between American Biltrite Inc. and Joseph D. Burns
10 (11) VII, II Description of Supplemental Retirement Benefits for Gilbert K.
Gailius
10 (12) IX American Biltrite 1999 Stock Option Plan for Non-Employee
Directors
10 (13) X, II Description of Employment Arrangement for Gilbert K. Gailius.
10 (14) XI, II Split-Dollar Agreement dated as of November 20, 2000 by and
between American Biltrite Inc. and Howard N. Feist III
10 (15) XII Personal Services Agreement, dated as of March 11, 1993, by
and between Congoleum Corporation and the Company; First
Amendment dated as of February 8, 1995; Second Amendment dated
as of November 15, 1996; Third Amendment dated as of March 10,
1998; Fourth Amendment dated as of November 7, 2002
10 (16) XIX Amended and Restated Credit Agreement, dated as of September
25, 2006, among American Biltrite Inc., K&M Associates L.P.,
and American Biltrite (Canada) Ltd., Bank of America, National
Association, both in its capacity as a domestic lender and as
a domestic administrative agent, Bank of America, National
Association, acting through its Canada branch, both in its
capacity as a Canadian lender and as Canadian administrative
agent, and the other lenders from time to time party thereto
10 (17) XX Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of November 7, 2006, among American Biltrite Inc, K&M
Associates L.P., and American Biltrite (Canada) Ltd., Bank of
America, National Association, both in its capacity as a
domestic lender and as a domestic administrative agent, Bank
of America, National Association, acting through its Canada
branch, both in its capacity as a Canadian lender and as
Canadian administrative agent, and the other lenders from time
to time party thereto
10 (18) XIV Security Agreement, dated as of October 14, 2003, among
American Biltrite Inc., K&M Associates L.P., Fleet National
Bank and the subsidiaries of American Biltrite Inc. from time
to time party thereto
10 (19) XV Intercreditor and Collateral Agency Agreement, dated as of May
20, 2005, by and among Fleet National Bank, a Bank of America
company, The Prudential Insurance Company of America, and the
other banks from time to time party thereto, and Fleet
National Bank, a Bank of America company, as administrative
agent, and the Acknowledgment of and Consent and Agreement to
Intercreditor and Collateral Agency Agreement by American
Biltrite Inc. and certain of its domestic guarantor
subsidiaries
125
Exhibit No. Description
--------------------------------------------------------------------------------
10 (20) XIV Guarantee Agreement dated as of October 14, 2003, among Abtre,
Inc., Aimpar, Inc., American Biltrite Intellectual Properties,
Inc., Ideal Tape Co., Inc., Majestic Jewelry, Inc., Ocean
State Jewelry, Inc., 425 Dexter Associates, L.P. and Fleet
National Bank
10 (21) XV Joinder Agreement, dated as of May 20, 2005, between Abimex,
LLC and Fleet National Bank, a Bank of America company, as
domestic agent
10 (22) XV Joinder Agreement, dated as of May 20, 2005, between ABItalia,
Inc. and Fleet National Bank, a Bank of America company, as
domestic agent
10 (23) XV Joinder Agreement, dated as of May 20, 2005, between American
Biltrite Far East, Inc. and Fleet National Bank, a Bank of
America company, as domestic agent
10 (24) XV Joinder Agreement, dated as of May 20, 2005, between K&M
Legendary Services, Inc and Fleet National Bank, a Bank of
America company, as domestic agent
10 (25) XV Deed of Hypothec and Issue of Mortgage Bonds, dated May 20,
2005, by American Biltrite (Canada) Ltd. in favor of Bank of
America, National Association
10 (26) XV Hypothec and Pledge of Bonds, dated May 20, 2005, between
American Biltrite (Canada) Ltd. and Bank of America, National
Association
10 (27) XVI Form of Stock Option Agreement for American Biltrite Inc.'s
1993 Stock Award and Incentive Plan, as amended and restated
as of March 4, 1997
10 (28) XVI Form of Stock Option Agreement for American Biltrite Inc.'s
1999 Stock Option Plan for Non-Employee Directors
10 (29) XIII Settlement Agreement Between Congoleum Corporation and Various
Asbestos Claimants dated April 10, 2003
10 (30) XIII First Amendment to Settlement Agreement Between Congoleum
Corporation and Various Asbestos Claimants dated June 6, 2003
10 (31) XIII Collateral Trust Agreement, dated April 16, 2003, by and
between Congoleum Corporation, Arthur J. Pergament, solely in
his capacity as the Collateral Trustee of the Collateral
Trust, and Wilmington Trust Company, solely in its capacity as
Delaware Trustee of the Collateral Trust
10 (32) XIII First Amendment to Collateral Trust Agreement, dated June 6,
2003, by and between Congoleum Corporation, Arthur J.
Pergament, solely in his capacity as the Collateral Trustee of
the Collateral Trust, and Wilmington Trust Company, solely in
its capacity as Delaware Trustee of the Collateral Trust
126
Exhibit No. Description
--------------------------------------------------------------------------------
10 (33) XIII Security Agreement, dated April 16, 2003, by and between
Congoleum Corporation and Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust
10 (34) XIII Second Security Agreement, dated April 17, 2003, by and
between Congoleum Corporation and Arthur J. Pergament, solely
in his capacity as the Collateral Trustee of the Collateral
Trust
10 (35) XIII Termination Agreement, dated June 6, 2003, by and between
Congoleum Corporation and Arthur J. Pergament, solely in his
capacity as the Collateral Trustee of the Collateral Trust
10 (36) XIII Superseding Security Agreement, dated June 11, 2003, by and
between Congoleum Corporation and Arthur J. Pergament, solely
in his capacity as the Collateral Trustee of the Collateral
Trust
10 (37) I Loan and Security Agreement, dated December 10, 2001 by and
between Congress Financial Corporation and Congoleum
Corporation
10 (38) I Amendment No. 1 to Loan and Security Agreement, dated
September 24, 2002, by and between Congress Financial
Corporation and Congoleum Corporation
10 (39) I Amendment No. 2 to Loan and Security Agreement, dated as of
February 27, 2003, by and between Congress Financial
Corporation and Congoleum Corporation
10 (40) I Ratification and Amendment Agreement dated January 7, 2004, by
and between Congoleum Corporation and Congress Financial
Corporation
10 (41) I Amendment No. 1 to Ratification and Amendment Agreement and
Amendment No. 3 to Loan and Security Agreement
10 (42) Amendment No. 2 to Ratification and Amendment Agreement and
Amendment No. 4 to Loan and Security Agreement
10(43) Amendment No. 3 to Ratification and Amendment Agreement and
Amendment No. 5 to Loan and Security Agreement
10 (44) XXI Amendment No. 4 to Ratification and Amendment Agreement and
Amendment No. 6 to Loan and Security Agreement
10 (45) Amendment No. 5 to Ratification and Amendment Agreement and
Amendment No. 7 to Loan and Security Agreement
127
Exhibit No. Description
--------------------------------------------------------------------------------
10 (46) Amendment No. 6 to Ratification and Amendment Agreement and
Amendment No. 8 to Loan and Security Agreement
21 (1) Subsidiaries of the Registrant (including each subsidiary's
jurisdiction of incorporation or organization and the name
under which each subsidiary does business)
23 (1) Consent of Independent Registered Public Accounting Firm
31 (1) Certification of the Chief 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 Chief 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 the Chief
Financial Officer of the Registrant pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99 (1) XX Eleventh Modified Joint Plan of Reorganization Under Chapter
11 of the Bankruptcy Code of Congoleum Corporation, et al.,
and the Asbestos Claimants' Committee, dated as of October 23,
2006, including the exhibits thereto
99 (2) XX Proposed Disclosure Statement with respect to Eleventh
Modified Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al., and Asbestos
Claimants' Committee, dated as of October 23, 2006, including
the exhibits thereto (except Exhibit A thereto, which is
included at Exhibit 99 (1) above)
99 (3) XV Settlement Agreement and Release, dated June 18, 2004, by and
between Congoleum Corporation and Liberty Mutual Insurance
Company
99 (4) XV Settlement Agreement and Release, dated May 12, 2005, by,
between and among Congoleum Corporation, Congoleum Sales,
Inc., Congoleum Fiscal, Inc. and AIG Domestic Claims, Inc., as
authorized agent for the applicable AIG companies, and the
Plan Trust
99 (5) XV Confidential Settlement Agreement and Release, dated June 22,
2005, by and between Congoleum Corporation, the Plan Trust and
certain underwriters at Lloyd's, London
99 (6) XV Amendment, dated July 29, 2005, to the Confidential Settlement
Agreement and Release, among Congoleum Corporation, the Plan
Trust and certain underwriters at Lloyd's, London
99 (7) XVI Settlement Agreement and Release dated August 3, 2005 by,
between and among Congoleum Corporation and Federal Insurance
Company
128
Exhibit No. Description
--------------------------------------------------------------------------------
99 (8) XVI Confidential Settlement Agreement and Release dated September
30, 2005 among Congoleum Corporation, the Plan Trust and Mt.
McKinley Insurance Company and Everest Reinsurance Company
99 (9) XVII Settlement Agreement and Release by and between Congoleum
Corporation and Harper Insurance Limited, formerly known as
Turegum Insurance Company
99 (10) XVII Settlement and Policy Buyback Agreement and Release by and
among Congoleum Corporation, the Plan Trust, American Biltrite
Inc. and Travelers Casualty and Surety Co., formerly known as
The Aetna Casualty and Surety Company, and St. Paul Fire and
Marine Insurance Company
99 (11) XVII Settlement Agreement, made as of April 27, 2006, by and
between Congoleum Corporation and Fireman's Fund Insurance
Company
99 (12) XX Settlement and Policy Buyback Agreement and Release, made as
of August 17, 2006, by and between Congoleum Corporation and
Century Indemnity Company and its affiliates
99 (13) Press release dated November 9, 2006
-------------------------------------------------------------
I Incorporated by reference to the exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
II Compensatory plans required to be filed as exhibits pursuant
to Item 15 of Form 10-K.
III Incorporated by reference to the exhibits filed with the
Company's Current Report on Form 8-K filed on December 21,
1992. (1-4773)
IV Incorporated by reference to the exhibits filed with the
Company's Current Report on Form 8-K filed on March 25,
1993. (1-4773)
V Incorporated by reference to the exhibits to the Company's
Current Report on Form 8-K as amended by the Form 8-K/A
filed respectively on May 17, 1995 and July 17, 1995.
(1-4773)
VI Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995. (1-4773)
VII Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1996. (1-4773)
VIII Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
28, 1997. (1-4773)
129
IX Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended July
3, 1999.
X Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
1999.
XI Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
2000.
XII Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31,
2002.
XIII Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2003.
XIV Incorporated by reference to the exhibits to the Company's
Current Report on Form 8-K filed on October 17, 2003.
XV Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2005.
XVI Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005.
XVII Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2006.
XVIII Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2006.
XIX Incorporated by reference to the exhibits to the Company's
Current Report on Form 8-K filed on September 27, 2006.
XX Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006.
XXI Incorporated by reference to the exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 2005.
130