UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of principal executive offices, including zip code)
(609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2007
-------------------- -----------------------------
Class A Common Stock 3,663,390
Class B Common Stock 4,608,945
1
CONGOLEUM CORPORATION
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 2007
(unaudited) and December 31, 2006.................................. 4
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 (unaudited)................... 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006 (unaudited).......................... 6
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)........................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 34
Item 4. Controls and Procedures............................................ 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 35
Item 1A. Risk Factors....................................................... 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........ 43
Item 3. Defaults Upon Senior Securities.................................... 43
Item 4. Submission of Matters to a Vote of Security Holders................ 44
Item 5. Other Information.................................................. 44
Item 6. Exhibits .......................................................... 44
Signatures ................................................................. 45
2
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 statements can be identified by the use of
the words such as "anticipate," "believe," "estimate," "expect," "intend,"
"plan," "project" and other words of similar meaning. In particular, these
include statements relating to intentions, beliefs or current expectations
concerning, among other things, future performance, results of operations, the
outcome of contingencies such as bankruptcy and other legal proceedings, and
financial conditions. These statements do not relate strictly to historical or
current facts. These forward-looking statements are based on the expectations of
Congoleum Corporation (the "Company" or "Congoleum"), as of the date of this
report, of future events, and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on any forward-looking statements. Any or all of
these statements may turn out to be incorrect. By their nature, forward-looking
statements involve risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. Any
forward-looking statements made in this report speak only as of the date of such
statement. It is not possible to predict or identify all factors that could
potentially cause actual results to differ materially from expected and
historical results. Factors that could cause or contribute to the Company's
actual results differing from its expectations include those factors discussed
elsewhere in this report, including in the section of this report entitled "Risk
Factors" and in the Company's other filings with the Securities and Exchange
Commission.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
March 31, December 31,
2007 2006
(Unaudited)
=====================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 17,543 $ 18,591
Restricted cash ................................................................... 8,783 9,656
Accounts receivable, less allowances of $1,141 and $1,142 as of March 31, 2007
and December 31, 2006, respectively ............................................ 18,249 17,598
Inventories ....................................................................... 34,752 34,220
Prepaid expenses and other current assets ......................................... 24,471 25,610
---------------------------------------------------------------------------------------------------------------------
Total current assets .......................................................... 103,798 105,675
Property, plant and equipment, net ................................................ 65,487 67,757
Other assets, net ................................................................. 10,806 10,770
---------------------------------------------------------------------------------------------------------------------
Total assets ................................................................. $ 180,091 $ 184,202
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable .................................................................. $ 11,643 $ 10,428
Accrued liabilities ............................................................... 18,256 22,263
Asbestos-related liabilities ...................................................... 10,372 13,950
Revolving credit loan ............................................................. 12,951 12,715
Accrued taxes ..................................................................... 265 264
Liabilities subject to compromise - current ....................................... 37,377 34,602
---------------------------------------------------------------------------------------------------------------------
Total current liabilities .................................................... 90,864 94,222
Liabilities subject to compromise - long term ....................................... 136,126 136,533
---------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................ 226,990 230,755
=====================================================================================================================
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
shares issued and 3,663,390 shares outstanding as of March 31, 2007 and
4,736,950 shares issued and 3,662,790 shares outstanding as of
December 31, 2006 ................................................................ 47 47
Class B common stock, par value $0.01; 4,608,945 shares authorized, issued and
outstanding at March 31, 2007 and December 31, 2006 .............................. 46 46
Additional paid-in capital .......................................................... 49,354 49,349
Retained deficit .................................................................... (65,077) (64,726)
Accumulated other comprehensive loss ................................................ (23,456) (23,456)
---------------------------------------------------------------------------------------------------------------------
(39,086) (38,740)
Less Class A common stock held in treasury, at cost; 1,073,560 shares at March 31,
2007 and 1,074,160 shares at December 31, 2006 .................................. 7,813 7,813
=====================================================================================================================
Total stockholders' equity (deficit) ............................................ (46,899) (46,553)
=====================================================================================================================
Total liabilities and stockholders' equity (deficit) ............................ $ 180,091 $ 184,202
=====================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
2007 2006
---- ----
======================================================================================
Net sales .................................................... $ 49,315 $ 57,237
Cost of sales ................................................ 37,316 43,960
Selling, general and administrative expenses ................. 9,451 10,396
--------------------------------------------------------------------------------------
Income from operations .................................. 2,548 2,881
Other income (expense):
Interest income ......................................... 124 157
Interest expense ........................................ (2,981) (2,734)
Other expense ........................................... (42) (42)
--------------------------------------------------------------------------------------
(Loss) income before income taxes ....................... (351) 262
Provision for income taxes .............................. -- 51
--------------------------------------------------------------------------------------
Net (loss) income ....................................... $ (351) $ 211
======================================================================================
Net (loss) income per common share
Basic .......................................... $ (0.04) $ 0.03
Diluted ........................................ (0.04) 0.03
======================================================================================
Weighted average number of common shares outstanding:
Basic .......................................... 8,272 8,271
Diluted ........................................ 8,272 8,321
--------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2007 2006
---- ----
Cash flows from operating activities:
Net (loss) income ............................................... $ (351) $ 211
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation ............................................ 2,654 2,565
Amortization ............................................ 96 96
Stock based compensation expense ........................ 5 55
Changes in certain assets and liabilities:
Accounts and notes receivable ....................... (651) (5,745)
Inventories ......................................... (532) (3,894)
Prepaid expenses and other assets ................... 461 1,257
Insurance recovery (net) for oven replacement ....... 1,561 --
Accounts payable .................................... 1,215 (99)
Accrued liabilities ................................. (1,168) 1,027
Asbestos-related liabilities ........................ (4,657) (5,853)
Other ............................................... (406) (382)
----------------------------------------------------------------------------------------------
Net cash used in operating activities ............ (1,773) (10,762)
==============================================================================================
Cash flows from investing activities:
Capital expenditures .................................... (384) (502)
----------------------------------------------------------------------------------------------
Net cash used in investing activities ............ (384) (502)
==============================================================================================
Cash flows from financing activities:
Net short-term borrowings ............................... 236 1,886
Net change in restricted cash ........................... 873 (474)
----------------------------------------------------------------------------------------------
Net cash provided by financing activities ........ 1,108 1,412
==============================================================================================
Net decrease in cash and cash equivalents ............................ (1,048) (9,852)
Cash and cash equivalents:
Beginning of period ...................................... 18,591 24,511
==============================================================================================
End of period ............................................ $ 17,543 $ 14,659
==============================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of Congoleum Corporation's (the "Company" or
"Congoleum") condensed consolidated financial position, results of operations
and cash flows have been included. Operating results for the three month period
ended March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. For further information, refer
to the consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2006.
Based upon the nature of the Company's operations, facilities and
management structure, the Company considers its business to constitute a single
segment for financial reporting purposes.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
The financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more fully below
and in Note 6, there is substantial doubt about the Company'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
United States Bankruptcy Code (the "Bankruptcy Code").
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 Bankruptcy Code as a
means to resolve claims asserted against it related to the use of asbestos in
its products decades ago. In January 2004, the Company filed its proposed plan
of reorganization and disclosure statement with the Bankruptcy Court.
In November 2004, Congoleum filed a modified plan of reorganization and
related documents (the "Fourth Plan") with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee (the "ACC"), the Future Claimants' Representative (the "FCR") and
other asbestos claimant representatives. The Bankruptcy Court approved the
disclosure statement and plan voting procedures in December 2004 and Congoleum
obtained the requisite votes of asbestos personal injury claimants necessary to
seek approval of the Fourth Plan.
7
In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code to pay asbestos claims
against Congoleum (the "Plan Trust").
In July 2005, Congoleum filed an amended plan of reorganization (the
"Sixth Plan") and related documents with the Bankruptcy Court which reflected
the result of 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 a new amended plan of
reorganization (the "Eighth Plan"). In addition, an insurance company,
Continental Casualty Company, and its affiliate, Continental Insurance Company
(collectively, "CNA"), filed a plan of reorganization and the Official
Bondholders' Committee (the "Bondholders' Committee") (representing holders of
the Company'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 all
parties in interest in Congoleum's reorganization proceedings to participate in
global 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 the Company's controlling shareholder,
American Biltrite Inc. ("ABI"), 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. 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 arguments on respective
summary judgment motions that the Tenth Plan and the CNA Plan are not
confirmable as a matter of law. The Bankruptcy Court provisionally approved
8
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 issued two separate opinions ruling that
neither the Tenth Plan nor the CNA Plan is confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, the
Company believes the ruling issued with respect to the Tenth Plan also applies
to the Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum resumed global 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
United States District Court for the District of New Jersey (the "District
Court").
There can be no assurance that the Company 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 the
Company will obtain approval to solicit acceptances of a new plan of
reorganization, that the Company 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 over any plan of reorganization. It also is unclear whether
any other person will attempt to propose a plan or what any such plan would
provide or propose, and whether the Bankruptcy Court would approve such a plan.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 6.
American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7") provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. The Company implemented this guidance in
consolidated financial statements for periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of the Company's liabilities at
December 31, 2003 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.
9
2. Recent Accounting Principles:
Pension and Other Postretirement Plans
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS No.
158"), which amends SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, and SFAS No. 132R, Employers'
Disclosures about Pensions and Other Postretirement Benefits (revised 2003).
SFAS No. 158 requires companies to recognize an asset or liability for the
overfunded or underfunded status of their benefit plans in their financial
statements. SFAS No. 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. The impact from the recognition at December 31, 2006 of previously
unrecognized amounts reduced stockholders' equity by approximately $3.8 million,
net of $0.0 million of taxes.
Accounting for Uncertainty in Income Taxes
Effective January 1, 2007, Congoleum adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 ("FIN 48"). FASB requires that Congoleum recognize the impact of a tax
position taken, or expected to be taken, in tax returns if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. Under FIN 48, tax positions are evaluated for recognition using a
"more-likely-than-not" threshold, and those tax positions requiring recognition
are measured as the largest amount of tax benefit that is greater than fifty
percent likely of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. Congoleum
evaluated its tax positions in the tax returns filed, as well as unfiled tax
positions and the amounts comprising deferred tax assets. Congoleum determined
that the adoption of FIN 48 did not have a material impact on its financial
position or results of operations.
Congoleum's policy is to report interest (and penalties, if applicable) as
tax provision (benefit) in the Consolidated Statements of Operations.
Congoleum's federal income tax returns are open and subject to examination
from the 2003 calendar year and later. Congoleum's various state income tax
returns are generally open from the 2002 and later calendar years based on the
statutes of limitations of the various states. Congoleum's tax return net
operating loss carry forwards are significant. The calendar years in which
losses arose may be subject to audit when such carry forwards are utilized to
offset taxable income in future periods.
10
Reclassifications - Certain amounts appearing in the prior period's financial
statements have been reclassified to conform to the current period's
presentation. In 2006, the Company netted its deferred tax assets and
liabilities on the consolidated balance sheet, which in prior periods were
reported separately in assets and liabilities.
3. Inventories
A summary of the major components of inventories is as follows (in
thousands):
March 31, December 31,
2007 2006
----------------------------
Finished goods $ 26,283 $ 26,515
Work-in-process 3,338 1,912
Raw materials and supplies 5,131 5,793
---------- ----------
Total inventories $ 34,752 $ 34,220
========== ==========
4. Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted net income per share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period, unless their effect is anti-dilutive.
5. Environmental and Other Liabilities
The Company 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 March 31, 2007 and December 31, 2006, are
not reduced by the amount of insurance recoveries. Such estimated insurance
recoveries approximated $2.2 million at March 31, 2007 and December 31, 2006,
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.
11
The Company 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, the Company
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. The Company'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, the Company, as a PRP, can be held jointly and
severally liable for all environmental costs associated with a site.
The most significant exposure for which the Company 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 the Company is a part, has entered into a Consent Decree to perform the
remedy for OU-1 and resolve natural resource damage claims. The Consent Decree
also requires the 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 the Company'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 the
Company'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.
The Company 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 the Company to make certain payments that
have been invoiced to the Company 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.
12
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company 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.
The Company 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 the Company'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 the Company.
6. Asbestos Liabilities
Claims Settlement and Chapter 11 Reorganization
In early 2003, the Company 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, the
Company entered into a settlement agreement with various asbestos personal
injury claimants (the "Claimant Agreement"). As contemplated by the Claimant
Agreement, the Company 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 the Company's rights under its applicable insurance coverage and payments
from the Company'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 the
Company and participating claimants who qualified for payment under unfunded
settlement agreements entered into by the Company with plaintiffs that had
asbestos claims pending against the Company and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of the Company's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
13
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and
the settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, the Company
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 October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, the Company filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy
Court reflecting the result of further negotiations with representatives of the
ACC, the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with
the Bankruptcy Court which reflected the result of these negotiations, as well
as other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
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 all parties in interest in Congoleum's reorganization
proceedings to participate in global 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 the
14
Company's controlling shareholder, ABI, 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. 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 arguments on respective summary
judgment motions that the Tenth Plan and the CNA Plan were 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 issued two separate opinions ruling that neither the Tenth Plan
nor the CNA Plan is confirmable as a matter of law. Because the Tenth Plan and
Eleventh Plan are substantially identical, the Company believes the ruling
issued with respect to the Tenth Plan also applies to the Eleventh Plan.
Following the Bankruptcy Court's rulings, March 2007, Congoleum resumed global
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 the Company 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 the
Company will obtain approval to solicit acceptances of a new plan of
reorganization, that the Company 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 over a plan of reorganization. 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.
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.
15
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 12, 2007, and AIG may
terminate the settlement agreement pursuant to this provision. At this time, it
is not known whether AIG will seek to terminate the settlement agreement after
May 12, 2007. In June 2005, the Company entered into a settlement agreement with
certain underwriters at Lloyd's, London, pursuant to which the certain
underwriters paid approximately $20 million into an escrow account in exchange
for a release of insurance coverage obligations. The escrow agent will transfer
the funds to the Plan Trust once a plan of reorganization with the Section
524(g) protection specified in the settlement agreement goes effective and the
Bankruptcy Court approves the transfer of the funds. The settlement provided
that any party may declare that the settlement was null and void if the
confirmation order fails to become a final order by June 22, 2007. At this time,
it is not known whether those certain underwriters will seek to terminate the
settlement agreement after June 22, 2007. In August 2005, the Company entered
into a settlement agreement with Federal Insurance Company pursuant to which
Federal will pay $4 million to the Plan Trust, subject to certain adjustments,
once a plan of reorganization with the Section 524(g) protection specified in
the settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. The FCR appealed the approval order granted by the
Bankruptcy Court to the District Court. The FCR, Federal and the Company 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
approximately $1.4 million to Congoleum or the Plan Trust once certain
conditions are satisfied, including the effectiveness of a plan of
reorganization containing the Section 524(g) protection specified in the
settlement agreement. The Bankruptcy Court approved this settlement in April
2006. In April 2006, Congoleum entered into a settlement agreement with
Travelers Casualty and Surety Company and St. Paul Fire and Marine Insurance
Company (collectively, "Travelers"). Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The FCR sought, and was granted, limited
discovery with respect to the Travelers settlement to which the FCR has
objected. A hearing to consider approval of the Travelers settlement was held in
16
April 2007 and a ruling of the Bankruptcy Court is pending. 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 becomes effective and the
Bankruptcy Court approves the transfer of the funds. The settlement was approved
by the Bankruptcy Court in September 2006. In August 2006, Congoleum entered
into a settlement agreement with Century Indemnity Company and its affiliates
("Century"). Under the terms of this settlement, Century will pay $16.95 million
to the Plan Trust in four installments over a three-year period commencing 60
days after all conditions to the agreement have been satisfied. The Bankruptcy
Court approved this settlement in September 2006. Certain insurance companies
appealed the Bankruptcy Court approval order to the District Court. Upon the
entry of stipulations with the appellants, the Century appeal was dismissed. It
is possible that one or more of the settling insurers may argue temporal,
Plan-related, and other conditions to payment have not been satisfied and
therefore such insurer is relieved of certain of its settlement obligations. If
the Company is unable to confirm a plan of reorganization with Section 524(g)
protection, the settlements described in this paragraph are subject to
termination.
The terms of any new plan of reorganization are likely to be materially
different from the Eleventh Plan, and could be amended or modified as a result
of further negotiations with various parties. The Company expects that it will
take until some time late in the fourth quarter of 2007 at the earliest to
obtain confirmation of any plan of reorganization.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($22.8 million at March 31, 2007). The write-off,
as well as forgiveness of indebtedness income pursuant to any future plan and
any other applicable charges or credits 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 the
Company 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 the Company's bankruptcy proceeding
advised the Company 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. The Company
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.
17
Based on the Eighth Plan, the Company has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through a Plan Trust. The
Company 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 the Company has previously estimated. The Company may record
significant additional charges in connection with its reorganization
proceedings.
Pending Asbestos Claims
In 2003, the Company was one of many defendants in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. Claims involving
approximately 80 thousand individuals were settled pursuant to the Claimant
Agreement and litigation related to unsettled or new claims is presently stayed
by the Bankruptcy Code. The Company expects unsettled and future claims to be
handled in accordance with the terms of a plan of reorganization and a Plan
Trust. In December 2005, Congoleum commenced the Avoidance Actions seeking to
void the security interest granted to the Collateral Trust and such settlements.
In March 2006, Congoleum filed a motion for summary judgment in the Avoidance
Actions seeking to avoid the Claimant Agreement settlements and liens under
various bankruptcy theories, which motion was denied in June 2006. In April
2007, the Company filed a new motion for summary judgment in the Avoidance
Actions, seeking to avoid the security interests in insurance allegedly securing
the Claimant Agreement settlements. A hearing on this summary judgment motion is
set for June 4, 2007.
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and tile
manufactured by the Company (or, in the workers' compensation cases, exposure to
asbestos in the course of employment with the Company). The Company discontinued
the manufacture of asbestos-containing sheet products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing materials in the sheet and tile
products are non-friable (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 non-friable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
18
Status of Insurance Coverage
During the period that Congoleum produced asbestos-containing products,
until claims for asbestos were excluded under insurance policies, the Company
purchased primary and excess insurance policies providing in excess of $1
billion of coverage for general and product liability claims. Through August
2002, substantially all asbestos-related claims and defense costs were paid
through primary insurance coverage. In August 2002, the Company received notice
that its primary insurance limits had been paid in full. The payment of limits
in full by one of the primary insurance companies was based on its contention
that limits in successive policies were not cumulative for asbestos claims and
that Congoleum was limited to only one policy limit for multiple years of
coverage. Certain excess insurance carriers claimed that the non-cumulation
provisions of the primary policies were not binding on them and that there
remained an additional $13 million in primary insurance limits plus related
defense costs before their policies were implicated. There is insurance coverage
litigation currently pending in New Jersey state court (the "State Court")
between Congoleum and its excess insurance carriers, and the guaranty funds and
associations for the State of New Jersey. The litigation was initiated in
September 2001, by one of Congoleum's excess insurers (the "Coverage Action").
In April 2003, the New Jersey Supreme Court ruled in another case involving the
same non-cumulation provisions as in the Congoleum primary policies (the
"Spaulding Case") that the non-cumulation provisions are invalid under New
Jersey law and that the primary policies provide coverage for the full amount of
their annual limits for all successive policies. Congoleum has reached a
settlement agreement (the "Liberty Settlement") with the insurance carrier whose
policies contained the non-cumulation provisions, pursuant to which the
insurance carrier will pay Congoleum $15.4 million in full satisfaction of the
applicable policy limits, of which $14.5 million has been paid to date. Pursuant
to the terms of the Security Agreement, the Company is obligated to pay any
insurance proceeds it receives under the Liberty Settlement, net of any fees and
expenses it may be entitled to deduct, to the Collateral Trust or Plan Trust.
Payment of such fees and expenses are subject to Bankruptcy Court order or
approval. As of December 31, 2002, the Company had already entered into
settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage. Based on these settlements, the Company
contended that, even allowing for annual limits of all primary policies, primary
coverage was exhausted and the excess policies triggered. The excess carriers
have objected to the reasonableness of several of these settlements, and
Congoleum believes that they will continue to dispute the reasonableness of the
settlements and contend that their policies still are not implicated and will
dispute their coverage for that and other various reasons in ongoing coverage
litigation.
The excess insurance carriers have objected to the global settlement of
the asbestos claims currently pending against Congoleum as contemplated by the
Claimant Agreement on the grounds that, among other things, the negotiations
leading to the settlement and the Claimant Agreement violate provisions in their
insurance policies, including but not limited to the carriers' right to
associate in the defense of the asbestos cases, the duty of Congoleum to
cooperate with the carriers and the right of the carriers to consent to any
settlement. The excess insurance carriers also contend the settlement terms in
the Claimant Agreement are not fair or reasonable and/or that the
19
Claimant Agreement was not negotiated at arm's length or in good faith.
Additionally, certain insurers have argued that Congoleum's entering into the
Claimant Agreement voids the insurance for the underlying claims in their
entirety. Certain insurers also have claimed that the Claimant Agreement voids
their entire policy obligations. Congoleum has disputed the allegations and
contentions of the excess insurance carriers. In November 2003, the State Court
denied a motion for summary judgment by the excess insurance carriers that the
Claimant Agreement was not fair, reasonable or in good faith, ruling that
material facts concerning these issues were in dispute. In April 2004, the State
Court denied motions for summary judgment by the excess carriers that the
Claimant Agreement was not binding on them because Congoleum had breached the
consent and cooperation clauses of their insurance policies by, among other
things, entering into the Claimant Agreement without their consent. Congoleum
has argued, among other things, that it was entitled to enter into the Claimant
Agreement and/or the Claimant Agreement was binding on the excess insurance
carriers because they were in breach of their policies and/or had denied
coverage and/or had created a conflict with Congoleum by reserving rights to
deny coverage and/or the Claimant Agreement was fair, reasonable and in good
faith and/or there was and is no prejudice to the excess insurance carriers from
the Claimant Agreement and/or the excess insurance carriers had breached their
duties of good faith and fair dealing.
In August 2004, the State Court entered a case management order that
divided the trial into three phases. A new judge was assigned to the case in
February 2005 and the schedule was modified as a result.
In February 2005, the State Court ruled on a series of summary judgment
motions filed by various insurers. The State Court denied a motion for summary
judgment filed by certain insurers, holding that there were disputed issues of
fact regarding whether the Claimant Agreement and other settlement agreements
between Congoleum and the claimants had released Congoleum and the insurers from
any liability for the asbestos bodily injury claims of the claimants who signed
the Claimant Agreement and the other settlement agreements.
The State Court also denied another motion for summary judgment filed by
various insurers who argued that they did not have to cover the liability
arising from the Claimant Agreement because they had not consented to it.
The State Court granted summary judgment regarding Congoleum's bad faith
claims against excess insurers (other than first-layer excess insurers), holding
that the refusal of these excess insurers to cover the Claimant Agreement was at
least fairly debatable and therefore not in bad faith.
In March 2005, the Company filed a motion in the Bankruptcy Court asking
the Bankruptcy Court to vacate its prior order lifting the automatic stay in
bankruptcy to permit the Coverage Action to proceed. The Company requested that
the Coverage Action proceedings be stayed until the Company has completed its
plan confirmation process in the Bankruptcy Court. A hearing on the Company's
motion was held in April 2005 and the motion was denied.
20
The first phase of the trial began in August 2005. Three months into the
trial, in October 2005, a federal appeals court ruled that the law firm of
Gilbert Heintz & Randolph ("GHR"), which had been acting as the Company's
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum. As a result of this
ruling, with Bankruptcy Court approval, Congoleum retained the firm of Covington
& Burling to represent it as co-counsel with Dughi & Hewit in the insurance
coverage litigation and insurance settlement matters previously handled by GHR.
In the middle of Congoleum presenting its case, in or about mid-November
2005, and in early December 2005, certain insurers filed motions for summary
judgment on the grounds, inter alia, that the decision of the United States
Court of Appeals for the Third Circuit reversing the Bankruptcy Court's order
approving the retention of GHR in In re Congoleum, 426 F.3d 675 (3d Cir. 2005),
and/or Congoleum's filing of the Avoidance Actions in the Bankruptcy Court,
entitled them to judgment as a matter of law on the Phase 1 issues. Congoleum
opposed the motions. The motions were argued in January 2006, and in March 2006
the State Court denied the motions for summary judgment.
Congoleum completed the presentation of its case in April 2006. Certain
insurers moved for a directed verdict in their favor during the first week of
May 2006. Hearings of arguments on the directed verdict motion took place in
June 2006. In July 2006 the State Court denied the motion for a directed
verdict. The trial resumed in September 2006. Defendant insurers presented their
case, for the most part, through documents and deposition designations. Post
trial briefs were submitted by the parties in November 2006. The parties have
completed Phase 1; all evidence has been submitted to the court and the parties
have also filed all post-trial briefs. The State Court has not decided Phase 1,
and the parties await the court's decision.
Phase 1 is limited to deciding whether the insurers are obligated to
provide coverage under the policies at issue in this litigation for the asbestos
claims settled under the terms of the global Claimant Agreement.
Some insurers contend that, if there is a ruling in Phase 1 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).
The Company 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, the Company 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 of these matters.
21
The second phase of the trial will address all coverage issues, including
but not limited to whether certain trial listed settlements were fair,
reasonable and negotiated in good faith and covered by insurance as well as
trigger and allocation of asbestos losses to insurance policies. Any additional
discovery, and scheduling of pre-trial motions and trial dates for Phase 2 will
be addressed by the State Court after the Phase 1 trial decision.
The third and final phase of the trial will address bad faith punitive
damages, if appropriate.
Given the actions of its excess insurance carriers, the Company believes
it likely that it would currently have to fund any asbestos-related expenses for
defense expense and indemnity itself. However, litigation by asbestos claimants
against the Company is stayed pursuant to the Company's bankruptcy proceedings,
and should the Company obtain a channeling injunction in a plan of
reorganization, the Company would not anticipate its future expenditures for
defense and indemnity of asbestos-related claims, other than expenditures
pursuant to a plan of reorganization, will be significant.
Accounting for Asbestos-Related Claims
Under the terms of the Claimant Agreement, the Company's claims processing
agent processed 79,630 claims meeting the requirements of the Claimant Agreement
with a settlement value in excess of $466 million. In addition, Pre-Existing
Settlement Agreements and Trial-Listed Settlement Agreements with claims secured
by the Collateral Trust total approximately $25 million. As a result of
tabulating ballots on its Fourth Plan, the Company is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.
The Company's gross liability of in excess of $491 million for these
settlements and contingent liability for the additional approximately $512
million in unsettled claims is substantially in excess of the total assets of
the Company. The Company believes that it does not have the necessary financial
resources to litigate and/or fund judgments and/or settlements of the asbestos
claims in the ordinary course of business. Therefore, the Company believes the
most meaningful measure of its probable loss due to asbestos litigation is the
amount it will have to contribute to a Plan Trust plus the costs to effect its
reorganization under Chapter 11. 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. Required expenditures
could be materially higher than amounts recorded in the financial statements or
previous estimates.
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 secured by assets of GHR and would be made over time according
to a formula based on GHR's earnings. The Bankruptcy Court approved the GHR
settlement in April 2007. 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.
22
The Company recorded charges aggregating approximately $51.3 million in
prior years, and is not yet able to determine the amount of the additional cost
that will be required to complete its reorganization. Additional charges may be
required in the future should the minimum estimated cost increase. The maximum
amount of the range of possible asbestos-related losses is limited to the going
concern or liquidation value of the Company, an amount which the Company
believes is substantially less than the minimum gross liability for the known
claims against it.
The Company has not attempted to make an estimate of its probable
insurance recoveries for financial statement purposes given the accounting for
its estimate of future asbestos-related costs. Substantially all future
insurance recoveries will be assigned to the Collateral Trust or a Plan Trust.
23
Amounts Recorded in Financial Statements
The table below provides an analysis of changes in the Company's asbestos
reserves and related receivables from December 31, 2006 to March 31, 2007:
Spending Recoveries
Balance at Additions Against From Balance at
(In thousands) 12/31/2006 (Deletions) Reserve Insurance 3/31/2007
--------------------------------------------------------------------------------------------------------
Reserves
Current $ 7,800 $ -- $ (3,654) $ -- $ 4,146
Long-Term -- -- -- --
Receivables
Current (21,813) -- $ (1,003) (22,816)
Long-Term -- -- -- -- --
--------------------------------------------------------------------------------------------------------
Net Asbestos Liability (Asset) $(14,013) $ -- $ (4,657) $ -- $(18,670)
======== ======== ======== ======== ========
Restricted Cash
Insurance Proceeds $ 6,149 $ -- $ 77 $ -- $ 6,226
======== ======== ======== ======== ========
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2005 to March 31, 2006:
Spending Recoveries
Balance at Additions Against From Balance at
(In thousands) 12/31/2005 (Deletions) Reserve Insurance 3/31/2006
-------------------------------------------------------------------------------------------------
Reserves
Current $ 19,469 $ -- $ (2,261) $ -- $ 17,208
Long-Term -- -- -- --
Receivables
Current (14,793) -- (3,592) -- (18,385)
Long-Term -- -- -- -- --
-------------------------------------------------------------------------------------------------
Net Asbestos Liability
$ 4,676 $ -- $ (5,853) $ -- $ (1,177)
======== ======== ======== ======== ========
Restricted Cash
Insurance Proceeds $ 8,901 $ -- $ -- $ 534 $ 9,435
======== ======== ======== ======== ========
24
7. 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):
Three months Ended March 31,
2007 2006
---- ----
Beginning balance $ 1,953 $ 2,121
Accruals 660 1,048
Charges (767) (1,048)
-------- --------
Ending balance $ 1,846 $ 2,121
======== ========
8. Liabilities Subject to Compromise
As a result of the Company's Chapter 11 filing (see Notes 1 and 6),
pursuant to SOP 90-7, the Company 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 the Company's
pre-petition debt is recorded at face value and is classified within liabilities
subject to compromise. In addition, the Company's accrued interest expense on
its Senior Notes is also recorded in liabilities subject to compromise.
Liabilities subject to compromise at March 31, 2007 and December 31, 2006
are as follows (in thousands):
March 31, December 31,
2007 2006
--------------------------------------------------------------------------
Current
Pre-petition other payables and accrued interest $ 37,377 $ 34,602
Non-current
Debt (at face value) 100,000 100,000
Pension liability 15,004 15,494
Other post-retirement benefit obligation 9,361 9,249
Pre-petition other liabilities 11,761 11,790
-------- --------
Non Current 136,126 136,533
-------- --------
Total liabilities subject to compromise $173,503 $171,135
==========================================================================
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.
25
9. Accrued Liabilities
A summary of the significant components of accrued liabilities consists of
the following (in thousands):
March 31, December 31,
2007 2006
--------------------------------------------------------------------------
Accrued warranty, marketing and sales promotion $14,240 $18,429
Employee compensation and related benefits 3,673 3,333
Other 343 501
--------------------------------------------------------------------------
Total accrued liabilities $18,256 $22,263
==========================================================================
As a result of the Company'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 March 31, 2007 and December 31,
2006 (see Note 8).
10. Pensions and Other Postretirement Plans
The Company sponsors several non-contributory defined benefit pension
plans covering most of the Company's employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below in "Other Benefits").
The following summarizes the components of the net periodic benefit cost
for the Pension and Other Benefit Plans for the three months ended March 31,
2007 and 2006 (in thousands):
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
-------------- --------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 366 $ 53 $ 361 $ 48
Interest cost (1,206) 142 1,113 132
Expected return on plan assets (1,146) -- (997) --
Recognized net actuarial loss 349 18 365 16
Amortization of transition obligation -- -- -- --
Amortization of prior service cost 11 3 (54) 9
------- ------- ------- -------
Net periodic benefit cost $ 786 $ 216 $ 788 $ 205
======= ======= ======= =======
26
The weighted average assumptions used to determine net periodic benefit
cost were as follows:
March 31, 2007 March 31, 2006
-------------- --------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Discount rate 6.00% 6.00% 6.00% 6.00%
Expected long-term return on plan assets 7.00% -- 7.00% --
Rate of compensation increase 5.00% -- 4.00% --
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto contained in Item
1 of Part I of this Quarterly Report on Form 10-Q.
Results of Operations
The Company's business is cyclical and is affected by the same economic
factors that affect the remodeling and housing industries in general, including
the availability of credit, consumer confidence, changes in interest rates,
market demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume and,
consequently, operating results fluctuate disproportionately with changes in
sales volume.
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, the
Company 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
27
reorganization and related documents governing the settlement and payment of
asbestos-related claims against Congoleum. Under the agreed-upon modifications,
asbestos claimants with claims settled under Congoleum's pre-petition settlement
agreements would agree to forbear from exercising the security interest they
were granted and share on a pari passu basis with all other present and future
asbestos claimants in insurance proceeds and other assets of the Plan Trust. In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn. In November 2005, the Bankruptcy Court
denied a request to extend Congoleum's exclusive right to file a plan of
reorganization and solicit acceptances thereof. In March 2006, Congoleum filed
the Eighth Plan. In addition, an insurance company, CNA, filed a plan of
reorganization and the Bondholders' Committee also filed a plan of
reorganization. In May 2006, the Bankruptcy Court ordered all parties in
interest in Congoleum's reorganization proceedings to participate in global
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 the Company's controlling shareholder, ABI, 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. 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 arguments
on respective summary judgment motions that the Tenth Plan and the CNA Plan 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 issued two separate opinions ruling that
neither the Tenth Plan nor the CNA Plan is confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, the
Company believes the ruling issued with respect to the Tenth Plan also applies
to the Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum resumed global 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.
28
There can be no assurance that the Company 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 the
Company will obtain approval to solicit acceptances of a new plan of
reorganization, that the Company 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 over any plan of reorganization. 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, and could be amended or modified as
a result of further negotiations with various parties. The Company expects that
it will take until some time late in the fourth quarter of 2007 at the earliest
to obtain confirmation of any plan of reorganization.
Congoleum is presently involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to any future plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to any future plan.
In anticipation of Congoleum's commencement of the Chapter 11 cases,
Congoleum entered into the Claimant Agreement, which provides for an aggregate
settlement value of at least $466 million as well as an additional number of
individually negotiated trial listed settlements with an aggregate value of
approximately $25 million, for total settlements in excess of $491 million. As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum's rights under its applicable insurance coverage and
payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced the Avoidance Actions seeking to void the security interest
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006 and the Avoidance Actions remain pending.
Due to, among other things, the ongoing Avoidance Actions, the liability
associated with the asbestos personal injury claims against Congoleum may be
materially different than the present estimates of such items. As a result of
tabulating ballots on the Fourth Plan, the Company is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.
29
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 17 of the Notes to
Consolidated Financial Statements contained in Item 8 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the
Securities and Exchange Commission. In addition, please refer to "Risk Factors -
The Company has significant asbestos liability and funding exposure, and its
most recent proposed amended plan of reorganization has been ruled unconfirmable
as a matter of law" contained in Part II, Item 1A, of this Quarterly Report on
Form 10-Q for a discussion of certain factors that could cause actual results to
differ from the Company's goals for resolving its asbestos liability through a
plan of reorganization.
Three months ended March 31, 2007 as compared to the three months ended
March 31, 2006:
Three Months Three Months
Ended Ended
March 31, 2007 March 31, 2006
-------------- --------------
(In thousands)
Net sales $ 49,315 $ 57,237
Cost of sales 37,316 43,960
-------- --------
Gross profit 11,999 24.3% 13,277 23.2%
Selling, general and
administrative expenses 9,451 19.2% 10,396 18.2%
-------- --------
Operating income 2,548 2,881
Interest expense, net (2,857) (2,577)
Other expense, net 42 42
-------- --------
(Loss) income before taxes (351) 262
Provision for income taxes -- 51
-------- --------
Net (loss) income $ (351) $ 211
======== ========
Net sales for the three months ended March 31, 2007 were $49.3 million as
compared to $57.2 million for the three months ended March 31, 2006, a decrease
of $7.9 million or 13.8%. The decrease primarily reflected lower sales to the
manufactured housing industry which benefited from hurricane-related demand
during the first quarter of 2006. Additionally, the Company experienced weaker
sales in builder and trade-up resilient sheet products reflecting a slowdown in
the new housing construction market coupled with distributors reducing
inventories in light of market conditions. Offsetting these declines was the
impact of price increases instituted in the second half of 2006 (3.5%).
30
Gross profit for the three months ended March 31, 2007 totaled $12.0
million, or 24.3% of net sales, compared to $13.3 million, or 23.2% of net
sales, for the same period last year. The decline in gross margin dollars was
volume-related. The major factors leading to the improvement in gross margin
percent were the price increases instituted in the second half of 2006 (3.5% of
net sales) coupled with cost reduction initiatives implemented in January 2007
across all manufacturing facilities, which helped offset the negative impact on
absorption of lower production levels. In addition, the Company experienced
manufacturing inefficiencies in the first quarter of 2006 due to the need to
obtain certain raw materials from alternative supplier.
Selling, general and administrative expenses were $9.5 million for the
three months ended March 31, 2007 as compared to $10.4 million for the three
months ended March 31, 2006, a decrease of $0.9 million. The reduction in
expenses reflects lower merchandising and sales support related costs (down by
$0.8 million), lower compensation and related benefit costs reflecting workforce
reductions in January 2007 ($0.4 million) and lower depreciation expense ($0.1
million) partially offset by a $0.4 million charge for severance. As a percent
of net sales, selling, general and administrative costs were 19.2% for the three
months ended March 31, 2007 compared to 18.2% for the same period last year.
Income from operations was $2.5 million for the quarter ended March 31,
2007 compared to income of $2.9 million for the quarter ended March 31, 2006.
The reduction in operating income reflected the lower sales and gross margins,
partially offset by lower selling, general and administrative expenses.
Liquidity and Capital Resources
The Unaudited Condensed Consolidated Financial Statements of the Company
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
Accordingly, the Unaudited Condensed Consolidated Financial Statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. As described more fully in the Notes to Unaudited
Condensed Consolidated Financial Statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q, there is substantial doubt about the Company'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 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements, contained in Part I, Item 1 of this Quarterly Report on Form 10-Q,
for a discussion of the Company's bankruptcy proceedings. These matters continue
to have a material adverse impact on liquidity and capital resources. During the
first three months of 2007, the Company paid $4.7 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 and
litigation with certain insurance companies. Furthermore, at March 31, 2007 the
Company had incurred but not paid approximately $6.3 million in additional fees
and expenses for services rendered through that date.
31
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($22.8 million at March 31, 2007). The write-off,
as well as forgiveness of indebtedness income pursuant to any future plan and
any other applicable charges or credits is expected to be recorded at a future
date, the net effect of which cannot be determined. Congoleum is unable to
predict whether it will be reimbursed for claims processing fees and coverage
litigation costs to the extent not already reimbursed. Congoleum cannot
presently determine the amount of fees, expenses, and trust contributions it may
incur in connection with obtaining confirmation of a plan of reorganization.
Due to the Chapter 11 proceedings, the Company has been precluded from
making interest payments on its outstanding Senior Notes since January 1, 2004.
The amount of accrued interest that is due but has not been paid on the Senior
Notes at March 31, 2007 is approximately $34.6 million, including interest on
the unpaid interest due, of which $3.6 million was owed at the time of the
Chapter 11 filing.
In February 2006, the Bankruptcy Court ordered GHR to disgorge all fees
and certain expenses it was paid by Congoleum. In October 2006, Congoleum and
GHR entered into the GHR Settlement under which GHR will pay Congoleum
approximately $9.2 million in full satisfaction of the disgorgement order. In
April 2007, the Bankruptcy Court approved the GHR Settlement. The payment is
secured by assets of GHR and is to be made over time according to a formula
based on GHR's earnings. Treatment of funds received pursuant to the GHR
Settlement under a future amended plan of reorganization may differ from the
treatment accorded by any prior plans.
Unrestricted cash and cash equivalents, including short-term investments
at March 31, 2007, were $17.5 million, a decrease of $1.0 million from December
31, 2006. Under the terms of its revolving credit agreement, payments on the
Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $2.6 million and $3.6 million at March
31, 2007 and December 31, 2006, respectively, are recorded as restricted cash.
Additionally, $6.2 million remaining from a $14.5 million settlement received in
August 2004 from an insurance carrier, which is subject to the purported lien of
the Collateral Trust, is included as restricted cash at March 31, 2007. The
Company expects to contribute these funds to the Plan Trust. Working capital was
$12.9 million at March 31, 2007, up from $11.5 million at December 31, 2006. The
ratio of current assets to current liabilities at March 31, 2007 was 1.1 to 1.0,
which is unchanged from December 31, 2006. Net cash used in operations during
the first three months of 2007 was $1.8 million, as compared to net cash used in
operations of $10.8 in the first three months of 2006. The reduction in cash
used in operations was primarily due to lower working capital requirements for
inventory and receivables.
32
Capital expenditures for the three months ended March 31, 2007 totaled
$0.4 million. The Company is currently planning capital expenditures of
approximately $5.0 million in 2007 and between $5 million and $7 million in
2008, primarily for maintenance and improvement of plants and equipment, which
it expects to fund with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on the
earlier of (i) June 30, 2007 and (ii) the date the plan of reorganization in
Congoleum's bankruptcy cases as confirmed by the Bankruptcy Court becomes
effective. Total borrowing under the facility may not exceed $30 million.
Interest is based on 0.25% above the prime rate. This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization ("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 the Company to borrow from the facility. The
Company was in compliance with these covenants at March 31, 2007. Borrowings
under this facility are collateralized by inventory and receivables. At March
31, 2007, based on the level of receivables and inventory, $20.5 million was
available under the facility, of which $4.3 million was utilized for outstanding
letters of credit and $13.0 million was utilized by the revolving loan. The
Company 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 the Company 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, the Company will need to obtain and
demonstrate the sufficiency of exit financing. The Company cannot presently
determine the terms of such financing, nor can there be any assurances of its
success in obtaining it.
In addition to the provision for asbestos litigation discussed previously,
the Company 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. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 5 of the Notes to
Unaudited Condensed Consolidated Financial Statements contained in Part I, Item
1 of this Quarterly Report on Form 10-Q). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of the
Company's owned and previously owned facilities. The contingencies also include
claims for personal injury and/or property damage. The exact amount of such
future costs and timing of payments are indeterminable due to such unknown
factors as the magnitude of cleanup costs, the timing and extent of the remedial
33
actions that may be required, the determination of the Company's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company believes its
estimate of the future amount of these liabilities is reasonable, and that they
will be paid over a period of five to ten years, the timing and amount of such
payments may differ significantly from 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 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 the Company.
The Company'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. The Company 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 90%
of the Company's outstanding long-term debt as of March 31, 2007 consisted of
indebtedness with a fixed rate of interest which is not subject to change based
upon changes in prevailing market interest rates. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity
instruments or other financial instruments to manage its exposure to changes in
interest rates, foreign currency exchange rates, commodity prices or equity
prices and does not hold any instruments for trading purposes.
34
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act")) as of the end of the period covered by this
quarterly report (the "Evaluation Date"). Based on this evaluation,
such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to
the Company required to be included in the Company's reports filed
or submitted under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal controls over financial
reporting during the last quarter covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The information contained in Note 5, "Environmental and Other
Liabilities", and Note 6, "Asbestos Liabilities", of the Notes to
Unaudited Condensed Consolidated Financial Statements is incorporated
herein by reference.
Item 1A. Risk Factors:
The Company has significant asbestos liability and funding exposure, and
its most recent proposed amended plan of reorganization has been ruled
unconfirmable as a matter of law.
As more fully set forth in Notes 1 and 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements, which are included in
this Quarterly Report on Form 10-Q, the Company has significant
liability and funding exposure for asbestos claims. The Company has
entered into settlement agreements with various asbestos claimants
totaling in excess of $491 million. The Bankruptcy Court issued a
ruling in February 2007 stating that these claimants cannot receive
more value as a result of their pre-petition settlements than is
afforded to other, unsettled, asbestos claimants. The Company has
resumed global plan mediation discussions to resolve this and
certain other plan issues, and has also appealed the Bankruptcy
Court ruling to the District Court.
35
There can be no assurance that the Company 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 the Company will obtain approval to solicit
acceptances of a new plan of reorganization, that the Company 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 over any plan of
reorganization. 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, and could be
amended or modified as a result of further negotiations with various
parties. The Company expects that it will take until some time late
in the fourth quarter of 2007 at the earliest to obtain confirmation
of any plan of reorganization.
Under the terms of the Eleventh Plan, on the effective date of the
Eleventh Plan (the "Effective Date"), the Plan Trust would have
provided a loan to Congoleum, which loan was intended, when combined
with cash on hand and available drawings under the revolving credit
facility, to provide Congoleum with $18 million of total liquidity,
on a pro forma basis as of December 31, 2006 (the "Plan Trust
Note"). The total liquidity required by Congoleum, and thus the
amount of the Plan Trust Note, would have been as mutually agreed
among the ACC, the FCR, the representatives of holders of
pre-petition secured asbestos claims (the "Claimants'
Representative") and Congoleum. The proceeds of the Plan Trust Note
would only have been used for working capital and general corporate
purposes. The Plan Trust Note would have been due and payable on
December 31, 2011, would have borne interest at 10% per annum
payable semi-annually until the maturity date, and would have
contained such covenants, warranties, and representations as agreed
among Congoleum, the ACC, the FCR and the Claimants' Representative.
The principal amount of the Plan Trust Note, which would have been
subject to review and approval by the FCR and the ACC, could not
have exceeded $14 million unless both the FCR and ACC agreed. There
can be no assurance that a new amended plan will provide Congoleum a
similar liquidity source, or that Congoleum will be able to obtain
such liquidity from an alternative source.
36
The Eleventh Plan and any alternative plan of reorganization pursued
by the Company or another plan proponent or confirmed by the
Bankruptcy Court and the District Court could materially differ from
the description of the Eleventh Plan contained in this Quarterly
Report on Form 10-Q. Furthermore, the estimated costs and
contributions to effect the Eleventh Plan or an alternative plan
could be significantly greater than currently estimated. Any plan of
reorganization pursued by the Company will be subject to numerous
conditions, approvals and other requirements, including Bankruptcy
Court and 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 the Company
obtaining exit financing to provide it with sufficient liquidity to
fund obligations upon the plan becoming effective. If the Company's
cash flow from operations is materially less than anticipated,
and/or if the costs in connection with seeking confirmation of the
Company's plan of reorganization or in connection with the State
Court insurance coverage litigation discussed elsewhere in this
Quarterly Report on Form 10-Q are materially more than anticipated,
or if sufficient funds from insurance proceeds or other sources are
not available at confirmation, the Company 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 the Company not being able to confirm an amended
plan of reorganization or have such plan become effective.
Some additional factors that could cause actual results to differ
from the Company'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 the Company for asbestos-related claims, (iii) the
costs relating to the execution and implementation of any plan of
reorganization pursued by the Company, (iv) timely agreement with
other creditors, or classes of creditors, that exist or may emerge,
(v) satisfaction of the conditions and obligations under the
Company's outstanding debt instruments, (vi) the response from time
to time of the lenders, customers, suppliers and other
constituencies of the Company and ABI to the ongoing process arising
from the Company's strategy to settle its asbestos liability, (vii)
the Company'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 creditor and court approval
(including the results of any relevant appeals) of any
reorganization plan pursued by the Company and the court overruling
any objections to the
37
Company's reorganization plan that may be filed, (ix) costs of,
developments in and the outcome of insurance coverage litigation
pending in the State Court involving Congoleum and certain insurers,
(x) compliance with the Bankruptcy Code, including Section 524(g),
and (xi) the possible adoption of another party's plan of
reorganization which may prove to be unfeasible. In any event, if
the Company is not successful in obtaining sufficient creditor and
court approval of its amended plan of reorganization, such failure
would have a material adverse effect upon its business, results of
operations and financial condition.
In addition, federal legislation has been proposed that, if adopted,
would establish a national trust to provide compensation to victims
of asbestos-related injuries and channel all current and future
asbestos-related personal injury claims to that trust. Due to the
uncertainties involved with the pending legislation, the Company
does not know what effects any such legislation, if adopted, may
have upon its business, results of operations or financial
condition, or upon any plan of reorganization it may decide to
pursue. To date, the Company has expended significant amounts to
resolve its asbestos liability relating to its proposed amended plan
of reorganization. To the extent any federal legislation is enacted,
which does not credit the Company for amounts paid by the Company
pursuant to a plan of reorganization or requires the Company to pay
significant amounts to any national trust or otherwise, such
legislation could have a material adverse effect on the Company's
business, results of operations and financial condition. As a result
of the Company's significant liability and funding exposure for
asbestos claims, there can be no assurance that if it 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.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability,
please see Notes 1 and 17 of Notes to the Consolidated Financial
Statements, which are included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, and Notes 1
and 6 of Notes to the Unaudited Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.
The American Stock Exchange has notified Congoleum that it does not meet
the minimum income and stockholders' equity requirements for continued
listing of its Class A Common Stock.
In April 2006, Congoleum received a letter from the American Stock
Exchange (the "Amex") indicating that Congoleum is not in compliance
with Section 1003(a)(i) of the Amex Company Guide, with
stockholders' equity of less than $2,000,000 and losses from
continuing operations and/or net losses in two of its three most
recent fiscal years; and Section 1003(a)(ii) of the Amex Company
Guide, with stockholders' equity of less than $4,000,000 and losses
from continuing operations and/or net losses in three of its four
most recent fiscal years. The letter also stated that the Company
must submit a plan by May 2006 advising the Amex of actions it has
taken or will take to achieve compliance with the continued listing
standards within eighteen months of receipt of the letter, and that
this plan must be approved by the Amex, for Congoleum to maintain
38
its listing. Congoleum submitted such a plan which was accepted by
the Amex, who will continue to monitor Congoleum's progress toward
compliance. There can be no assurance that Congoleum will be able to
achieve such compliance, or that the Amex will remain satisfied with
Congoleum's progress toward compliance. If Congoleum's Class A
common stock is delisted on the Amex, it may have an adverse impact
on the price and liquidity of the Company's Class A common stock.
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related claims, and its
insurance coverage and its likely recoverable insurance proceeds may be
substantially less than the liability incurred by the Company for these
claims.
Environmental Liabilities. Due to the nature of the Company's
business and certain of the substances which are or have been used,
produced or discharged by the Company, the Company's operations are
subject to extensive federal, state and local laws and regulations
relating to the generation, storage, disposal, handling, emission,
transportation and discharge into the environment of hazardous
substances. The Company has historically expended substantial
amounts for compliance with existing environmental laws or
regulations, including environmental remediation costs at both
third-party sites and Company-owned sites. The Company will continue
to be required to expend amounts in the future for costs related to
prior activities at its facilities and third party sites, and for
ongoing costs to comply with existing environmental laws and such
amounts may be substantial. There is no certainty that these amounts
will not have a material adverse effect on its business, results of
operations and financial condition because, as a result of
environmental requirements becoming increasingly strict, the Company
is unable 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 to modify or curtail its operations, which could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Product and General Liabilities. In the ordinary course of its
business, the Company becomes involved in lawsuits, administrative
proceedings, product liability claims (in addition to
asbestos-related claims) and other matters. In some of these
proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for
several years. These matters could have a material adverse effect on
the Company's business, results of operations and financial
condition if the Company is unable to successfully defend against or
settle these matters, its insurance coverage is insufficient to
satisfy unfavorable judgments or settlements relating to these
matters, or the Company is unable to collect insurance proceeds
relating to these matters.
39
The Company is 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's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials
used by the Company in its manufacture of sheet and tile flooring
are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print film. The
Company purchases most of these raw materials from multiple sources.
Although the Company has historically been able to obtain its
requirements for these materials, it has occasionally experienced
significant price increases for some of these materials, and has
periodically needed to find new sources for cost, quality or
sufficiency of supply. 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 resins 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.
The Company believes that suitable alternative suppliers are
generally available for substantially all of its raw material
requirements, although quantities of certain materials available
from alternative suppliers may be in limited supply and production
trials may be required to qualify new materials for use. The Company
does not have readily available alternative sources of supply for
specific designs of transfer print film, which are produced
utilizing print cylinders engraved to the Company's specifications.
Although no loss of this source of supply is anticipated,
replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to
protect against this risk of loss of supply, the Company maintains a
raw material inventory and continually seeks to develop new sources
which will provide continuity of supply for its raw material
requirements. However, there is no certainty that the Company's
maintenance of its raw material inventory or its ongoing efforts to
develop new sources of supply would be successful in avoiding a
material adverse effect on its business, results of operations and
financial condition if it were to realize an extended interruption
in the supply of its raw materials.
In addition, the Company could incur significant increases in the
costs of its raw materials. Although the Company generally attempts
to pass on increases in the costs of its raw materials to its
customers, the Company's ability to do so is, to a large extent,
dependent upon the rate and magnitude of any increase, competitive
pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which
increases in these costs cannot be recovered. During those periods
of time, there could be a material adverse effect on the Company's
business, results of operations and financial condition.
40
The Company operates in a highly competitive flooring industry and some of
its competitor have greater resources and broader distribution channels
than the Company.
The market for the Company's products is highly competitive. The
Company encounters competition from three other manufacturers in
North America and, to a lesser extent, foreign manufacturers. Some
of the Company's competitors have greater financial and other
resources and access to capital than the Company. Furthermore, one
of the Company'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 the Company.
In addition, in order to maintain its competitive position, the
Company may need to make substantial investments in its business,
including its product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for the Company's
products and in the loss of the Company's market share for its
products. Moreover, due to the competitive nature of the Company's
industry, the Company may be commercially restricted from raising or
even maintaining the sales prices of its products, which could
result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increased
percentage of the Company's sales.
The Company's business is subject to general economic conditions and
conditions specific to the remodeling and housing industries.
The Company is 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, the Company's business
is cyclical and is affected by the economic factors that affect the
remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit,
consumer confidence, changes in interest rates, market demand and
general economic conditions. The Company has experienced a
significant decline in sales as a result of weakness in the housing
market. The Company may experience further sales declines resulting
from this weakness, which may be compounded by contraction in the
subprime lending industry.
41
The Company could realize shipment delays, depletion of inventory and
increased production costs resulting from unexpected disruptions of
operations at any of the Company's facilities.
The Company's business depends upon its ability to timely
manufacture and deliver products that meet the needs of its
customers and the end users of the Company's products. If the
Company 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 and financial condition
The Company offers limited warranties on its products which could result
in the Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its 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, the Company 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 were to incur a significant number of
warranty claims, the resulting warranty costs could be substantial
The Company is heavily dependent upon its distributors to sell the
Company's products and the loss of a major distributor of the Company
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company 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. The Company considers its distribution
network very important to maintaining its competitive position.
Although the Company 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 and financial condition. The Company derives a
significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc.
LaSalle-Bristol Corporation serves as the Company's manufactured
housing market distributor, and Mohawk Industries, Inc. serves as
its retail market distributor. These two distributors accounted for
65% and 67% of the Company's net sales for the three months ended
March 31, 2007 and 2006, respectively.
42
Stockholder votes are controlled by ABI; Congoleum's interests may not be
the same as ABI's interests.
ABI owns a majority (approximately 55% as of December 31, 2006) of
the outstanding shares of the Company's common stock, representing a
69.4% voting interest. As a result, ABI can elect all of the
Company's directors and can control the vote on all matters,
including determinations such as: approval of mergers or other
business combinations, sales of all or substantially all of the
Company's assets, any matters submitted to a vote of the Company's
stockholders, issuance of any additional common stock or other
equity securities, incurrence of debt other than in the ordinary
course of business, the selection and tenure of the Company's Chief
Executive Officer, payment of dividends with respect to common stock
or other equity securities, and other matters that might be
favorable to ABI. ABI's ability to prevent an unsolicited bid for
Congoleum or any other change in control could have an adverse
effect on the market price for the Company's common stock. In
addition, certain officers of Congoleum are officers of ABI and
members of the family group that owns a controlling interest in ABI.
Possible future sales of shares by ABI could adversely affect the market
for Congoleum's stock.
ABI may sell shares of the Company's common stock in compliance with
the federal securities laws. By virtue of ABI's current control of
Congoleum, ABI could sell large amounts of shares of the Company's
common stock by causing the Company to file a registration statement
that would allow them to sell shares more easily. In addition, ABI
could sell shares of the Company's common stock without
registration. Although the Company can make no prediction as to the
effect, if any, that such sales would have on the market price of
the Company's common stock, sales of substantial amounts of the
Company's common stock, or the perception that such sales could
occur, could adversely affect the market price of the Company's
common stock. If ABI sells or transfers shares of the Company's
common stock as a block, another person or entity could become the
Company's controlling stockholder.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities:
The commencement of the Chapter 11 proceedings constituted an event
of default under the indenture governing the Company's Senior Notes.
In addition, due to the Chapter 11 proceedings, the Company was
precluded from making the interest payments due February 1, 2004,
August 1, 2004, February 1, 2005, August 1, 2005, February 1, 2006,
August 1, 2006 and February 1, 2007, on the Senior Notes. The
aggregate amount of accrued interest that was not paid on the Senior
43
Notes on those dates is approximately $34.6 million. As of March 31,
2007, the principal amount of the Senior Notes, net of unamortized
original issue discount, was $99.8 million. These amounts, which
include $4.3 million of accrued interest on the interest due but not
paid from February 1, 2004, August 1, 2004, February 1, 2005, August
1, 2005, February 1, 2006, August 1, 2006 and February 1, 2007, are
included in "Liabilities Subject to Compromise." (See Note 8 of the
Notes to Unaudited Condensed Consolidated Financial Statements.)
Item 4. Submission of Matters to a Vote of Security Holders: None.
Item 5. Other Information: None
Item 6. Exhibits:
Exhibits
Exhibit
Number Exhibits
------ --------
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of the Chief Executive
Officer.
32.2 Section 1350 Certification of the Chief Financial
Officer.
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: May 11, 2007 By: /s/ Howard N. Feist III
-----------------------
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial & Accounting Officer)
45
Exhibit Index
Exhibit
Number Exhibits
------ --------
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of the Chief Executive Officer.
32.2 Section 1350 Certification of the Chief Financial Officer.
46