FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2007 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 9, 2007
-------------------------------- ------------------------------
Common Stock 3,441,551 shares
FORWARD LOOKING STATEMENTS
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and
other words of similar meaning. In particular, these include statements relating
to intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies, such as
bankruptcy and other legal proceedings, and financial conditions. These
statements do not relate strictly to historical or current facts. These
forward-looking statements are based on American Biltrite Inc.'s expectations
and American Biltrite Inc.'s understanding of its majority-owned subsidiary
Congoleum Corporation's expectations, as of the date of this report, of future
events, and American Biltrite Inc. undertakes no obligation to update any of
these forward-looking statements, except as required by federal securities laws.
Although American Biltrite Inc. believes that these expectations are based on
reasonable assumptions, within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Readers are cautioned not to place undue
reliance on any forward-looking statements. Any or all of these statements may
turn out to be incorrect. By their nature, forward-looking statements involve
risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. Any forward-looking
statements made in this report speak only as of the date of this report unless
the statement indicates that another date applies. It is not possible to predict
or identify all factors that could potentially cause actual results to differ
materially from expected and historical results. Factors that could cause or
contribute to American Biltrite Inc.'s actual results differing from its
expectations include those factors discussed in Item 1A of Part II of this
Quarterly Report on Form 10-Q and in American Biltrite Inc.'s other filings with
the Securities and Exchange Commission.
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets - Assets as of
June 30, 2007 (unaudited) and December 31, 2006..............1
Consolidating Condensed Balance Sheets - Liabilities and
Stockholders' Equity as of June 30, 2007 (unaudited) and
December 31, 2006............................................2
Consolidating Condensed Statements of Operations
(unaudited) for the three months ended June 30, 2007
and 2006.....................................................3
Consolidating Condensed Statements of Operations
(unaudited) for the six months ended June 30, 2007 and
2006.........................................................4
Consolidating Condensed Statements of Cash Flows -
Operating Activities (unaudited) for the six months
ended June 30, 2007 and 2006.................................5
Consolidating Condensed Statements of Cash Flows -
Investing & Financing Activities (unaudited) for the
six months ended June 30, 2007 and 2006......................6
Notes to Unaudited Consolidating Condensed
Financial Statements.........................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................34
Item 3. Quantitative and Qualitative Disclosures About Market Risk..49
Item 4. Controls and Procedures.....................................50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................51
Item 1A. Risk Factors................................................51
Item 3. Defaults Upon Senior Securities.............................60
Item 4. Submission of Matters to a Vote of Security Holders.........60
Item 6. Exhibits....................................................61
Signature............................................................62
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations
June 30, December 31, June 30, December 31,
2007 2006 2007 2006
------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 25,883 $ 21,180
Restricted cash 9,697 9,656
Accounts receivable, net 46,736 40,791 $(502) $(226)
Inventories 83,477 80,471 (137) (143)
Deferred income taxes 1,818 1,818
Prepaid expense & other current
assets 27,471 28,406
------------------------------------------------------------------
Total current assets 195,082 182,322 (639) (369)
Property, plant & equipment, net 101,692 106,380
Other assets:
Insurance for asbestos-related
liabilities 9,320 9,320
Goodwill, net 11,505 11,475
Other assets 22,930 22,175 (126) (135)
------------------------------------------------------------------
43,755 42,970 (126) (135)
------------------------------------------------------------------
Total assets $340,529 $331,672 $(765) $(504)
==================================================================
Congoleum American Biltrite
June 30, December 31, June 30, December 31,
2007 2006 2007 2006
-------------------------------------------------------------------
(Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 23,995 $ 18,591 $ 1,888 $ 2,589
Restricted cash 9,697 9,656
Accounts receivable, net 18,102 17,598 29,136 23,419
Inventories 35,549 34,220 48,065 46,394
Deferred income taxes 1,818 1,818
Prepaid expense & other current
assets 24,572 25,610 2,899 2,796
-------------------------------------------------------------------
Total current assets 111,915 105,675 83,806 77,016
Property, plant & equipment, net 63,629 67,757 38,063 38,623
Other assets:
Insurance for asbestos-related
liabilities 9,320 9,320
Goodwill, net 11,505 11,475
Other assets 11,072 10,770 11,984 11,540
-------------------------------------------------------------------
11,072 10,770 32,809 32,335
-------------------------------------------------------------------
Total assets $186,616 $184,202 $154,678 $147,974
===================================================================
See accompanying notes to consolidating condensed financial statements.
1
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations
June 30, December 31, June 30, December 31,
2007 2006 2007 2006
-----------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 23,704 $ 21,769 $ (502) $ (226)
Accrued expenses 38,649 37,411
Asbestos-related liabilities 8,560 13,950
Notes payable 36,583 31,284
Current portion of long-term debt 2,435 2,424
Liabilities subject to compromise 40,185 34,602
-----------------------------------------------------------------
Total current liabilities 150,116 141,440 (502) (226)
Long-term debt, less current portion 8,303 8,971
Asbestos-related liabilities 10,540 10,300
Other liabilities 15,035 15,441
Noncontrolling interests 1,036 1,087
Liabilities subject to compromise 135,356 136,398 (126) (135)
-----------------------------------------------------------------
Total liabilities 320,386 313,637 (628) (361)
Stockholders' equity
Common stock 46 46 (93) (93)
Additional paid-in capital 19,591 19,591 (49,359) (49,349)
Retained earnings 33,221 32,821 35,391 35,376
Accumulated other comprehensive loss (17,583) (19,291) 6,111 6,110
Less treasury shares (15,132) (15,132) 7,813 7,813
-----------------------------------------------------------------
Total stockholders' equity 20,143 18,035 (137) (143)
-----------------------------------------------------------------
Total liabilities and
stockholders' equity $340,529 $331,672 $ (765) $ (504)
==================================================================
Congoleum American Biltrite
June 30, December 31, June 30, December 31,
2007 2006 2007 2006
-----------------------------------------------------------------
(Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 12,721 $ 10,654 $ 11,485 $ 11,341
Accrued expenses 22,212 22,301 16,437 15,110
Asbestos-related liabilities 8,560 13,950
Notes payable 13,515 12,715 23,068 18,569
Current portion of long-term debt 2,435 2,424
Liabilities subject to compromise 40,185 34,602
-----------------------------------------------------------------
Total current liabilities 97,193 94,222 53,425 47,444
Long-term debt, less current portion 8,303 8,971
Asbestos-related liabilities 10,540 10,300
Other liabilities 15,035 15,441
Noncontrolling interests 1,036 1,087
Liabilities subject to compromise 135,482 136,533
-----------------------------------------------------------------
Total liabilities 232,675 230,755 88,339 83,243
Stockholders' equity
Common stock 93 93 46 46
Additional paid-in capital 49,359 49,349 19,591 19,591
Retained earnings (64,242) (64,726) 62,072 62,171
Accumulated other comprehensive loss (23,456) (23,456) (238) (1,945)
Less treasury shares (7,813) (7,813) (15,132) (15,132)
-----------------------------------------------------------------
Total stockholders' equity (46,059) (46,553) 66,339 64,731
-----------------------------------------------------------------
Total liabilities and
stockholders' equity $186,616 $184,202 $154,678 $147,974
=================================================================
See accompanying notes to consolidating condensed financial statements.
2
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2007 and 2006
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
------------------------------------------------------------------------------------------------------
Net sales $115,558 $117,465 $ -- $ -- $57,541 $58,743 $58,017 $58,722
Cost of products sold 86,058 88,279 (371) (224) 43,797 45,139 42,632 43,364
Selling, general &
administrative expenses 24,975 25,177 9,963 10,261 15,012 14,916
------------------------------------------------------------------------------------------------------
Income from operations 4,525 4,009 371 224 3,781 3,343 373 442
Other income (expense)
Interest income 180 237 130 126 50 111
Interest expense (3,687) (3,548) (3,077) (2,867) (610) (681)
Other income (expense) 196 511 (368) (184) 8 89 556 606
------------------------------------------------------------------------------------------------------
(3,311) (2,800) (368) (184) (2,939) (2,652) (4) 36
------------------------------------------------------------------------------------------------------
Income before taxes and
other items 1,214 1,209 3 40 842 691 369 478
Provision for income taxes 63 232 7 65 56 167
Noncontrolling interests (20) 3 (20) 3
------------------------------------------------------------------------------------------------------
Income from continuing
operations 1,131 980 3 40 835 626 293 314
Discontinued operation -- 36 -- 36
------------------------------------------------------------------------------------------------------
Net income $ 1,131 $ 1,016 $ 3 $ 40 $ 835 $ 626 $ 293 $ 350
======================================================================================================
Basic Diluted
2007 2006 2007 2006
----------------------- -----------------------
Income per common share from
continuing operations $ 0.33 $ 0.28 $ 0.33 $ 0.28
Discontinued operation -- 0.01 -- 0.01
----------------------- -----------------------
Net income per common share $ 0.33 $ 0.29 $ 0.33 $ 0.29
======================= =======================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,442,346 3,471,200
======================= =======================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2007 and 2006
(In thousands of dollars, except number of shares and per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
-----------------------------------------------------------------------------------------------------
Net sales $215,589 $229,186 $ -- $ -- $106,856 $115,980 $108,733 $113,206
Cost of products sold 160,253 171,643 (554) (351) 81,113 89,099 79,694 82,895
Selling, general &
administrative expenses 48,229 49,567 19,414 20,657 28,815 28,910
-----------------------------------------------------------------------------------------------------
Income from operations 7,107 7,976 554 351 6,329 6,224 224 1,401
Other income (expense)
Interest income 336 481 254 283 82 198
Interest expense (7,235) (6,962) (6,058) (5,601) (1,177) (1,361)
Other income (expense) 148 525 (549) (288) (34) 47 731 766
-----------------------------------------------------------------------------------------------------
(6,751) (5,956) (549) (288) (5,838) (5,271) (364) (397)
-----------------------------------------------------------------------------------------------------
Income (loss) before taxes
and other items 356 2,020 5 63 491 953 (140) 1,004
(Benefit from) provision
for income taxes (59) 479 7 116 (66) 363
Noncontrolling interests (25) (13) (25) (13)
-----------------------------------------------------------------------------------------------------
Income (loss) from
continuing operations 390 1,528 5 63 484 837 (99) 628
Discontinued operation -- (26) -- (26)
-----------------------------------------------------------------------------------------------------
Net income (loss) $ 390 $ 1,502 $ 5 $ 63 $ 484 $ 837 $ (99) $ 602
=====================================================================================================
Basic Diluted
2007 2006 2007 2006
----------------------- -----------------------
Income per common share from
continuing operations $ 0.11 $ 0.44 $ 0.11 $ 0.44
Discontinued operation -- (0.01) -- (0.01)
----------------------- -----------------------
Net income per common share $ 0.11 $ 0.43 $ 0.11 $ 0.43
======================= =======================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,442,326 3,469,869
======================= =======================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS - OPERATING ACTIVITIES
(Unaudited) For the Six Months Ended June 30, 2007 and 2006
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
----------------------------------------------------------------------------------
Operating activities
Net income (loss) $ 390 $ 1,502 $ 5 $ 63 $ 484 $ 837 $ (99) $ 602
Net loss from discontinued operation -- 26 -- 26
----------------------------------------------------------------------------------
Income (loss) from continuing operations 390 1,528 5 63 484 837 (99) 628
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and amortization 8,130 8,232 5,393 5,345 2,737 2,887
Stock compensation expense 10 110 10 110
Change in operating assets and liabilities:
Accounts and notes receivable (5,091) (9,744) 402 57 (504) (7,143) (4,989) (2,658)
Inventories (1,387) (6,754) (5) (63) (1,329) (4,874) (53) (1,817)
Prepaid expenses and other assets 2,770 2,069 2,805 1,888 (35) 181
Accounts payable and accrued expenses 8,027 4,786 (402) (57) 7,683 4,326 746 517
Asbestos-related expenses (7,783) (11,321) (7,783) (11,321)
Noncontrolling interests (51) (279) (51) (279)
Other (1,460) (297) (1,041) (800) (419) 503
----------------------------------------------------------------------------------
Net cash provided (used) by operating
activities of continuing operations 3,555 (11,670) -- -- 5,718 (11,632) (2,163) (38)
Net cash used by operating activities of
discontinued operations -- (85) - (85)
----------------------------------------------------------------------------------
Net cash provided (used) by operating
activities $3,555 $(11,755) $ -- $ -- $ 5,718 $(11,632) $(2,163) $ (123)
==================================================================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
INVESTING & FINANCING ACTIVITIES
(Unaudited) For the Six Months Ended June 30, 2007 and 2006
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2007 2006 2007 2006 2007 2006 2007 2006
--------------------------------------------------------------------------------
Investing activities
Investments in property, plant and equipment $(2,034) $(2,261) $ -- $ -- $(1,073) $ (996) $ (961) $(1,265)
----------------------------------------------------------------------------------
Net cash used by investing activities of
continuing operations (2,034) (2,261) -- -- (1,073) (996) (961) (1,265)
Net cash provided by investing
activities of discontinued operations -- 680 -- 680
----------------------------------------------------------------------------------
(2,034) (1,581) (1,073) (996) (961) (585)
Net cash used by investing activities
Financing activities
Net short-term borrowings 4,488 4,242 800 3,884 3,688 358
Payments on long-term debt (663) (383) (663) (383)
Net change in restricted cash (41) (323) (41) (323)
----------------------------------------------------------------------------------
Net cash provided (used) by financing 3,784 3,536 -- -- 759 3,561 3,025 (25)
activities of continuing operations
Effect of foreign exchange rate changes
on cash (602) (1,234) (602) (1,234)
----------------------------------------------------------------------------------
Net increase (decrease) in cash 4,703 (11,034) -- -- 5,404 (9,067) (701) (1,967)
Cash and cash equivalents at beginning
of period 21,180 29,184 18,591 24,511 2,589 4,673
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $25,883 $18,150 $ -- $ -- $23,995 $15,444 $1,888 $ 2,706
==================================================================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements, which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control, have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the proposed amended plan of
reorganization of Congoleum Corporation, a majority-owned subsidiary of the
Company ("Congoleum"), to settle asbestos liabilities) considered necessary for
a fair presentation have been included. Operating results for the three and six
months ended June 30, 2007 are not necessarily indicative of the results that
may be expected for future periods, including the year ending December 31, 2007.
For further information, refer to the consolidating financial statements and the
notes to those financial statements included in American Biltrite Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2006.
The consolidating balance sheet at December 31, 2006 has been derived from the
audited financial statements as of that date but does not include all of the
information and notes required by accounting principles generally accepted in
the United States for complete financial statements.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Historical financial results
were restated to reflect the classification of Janus as a discontinued operation
in accordance with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. Results of Janus, including charges
resulting from the shutdown, are being reported as a discontinued operation. In
April 2006, the Company completed the sale of Janus' remaining building and land
(see Note C). As a result of the sale of property, the discontinued operation
was effectively dissolved during 2006. As of December 31, 2006, the Company
merged Janus with and into American Biltrite (Canada) Ltd. ("AB Canada"),
primarily for the purposes of utilizing Janus' prior years' net operating losses
against future taxable income.
7
Note A - Basis of Presentation (continued)
As discussed more fully below and elsewhere in these footnotes, on December 31,
2003, the Company's majority owned subsidiary Congoleum and two of Congoleum's
subsidiaries filed in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court") voluntary petitions commencing cases for
reorganization relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). The accompanying consolidating condensed financial
statements include the results for Congoleum for all periods presented. ABI
continues to own a majority of the voting stock of Congoleum and expects to
continue to control a majority of the voting stock of Congoleum while it is in
reorganization proceedings.
In January 2004, Congoleum filed its proposed plan of reorganization and
disclosure statement with the Bankruptcy Court. In November 2004, Congoleum
filed a modified plan of reorganization and related documents (the "Fourth
Plan") with the Bankruptcy Court reflecting the result of further negotiations
with representatives of the Asbestos Claimants' Committee (the "ACC"), the
Future Claimants' Representative (the "FCR") and other asbestos claimant
representatives. The Bankruptcy Court approved the disclosure statement and plan
voting procedures in December 2004, and Congoleum obtained the requisite votes
of asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the ACC and the FCR to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code to pay asbestos claims against Congoleum (the
"Plan Trust").
In July 2005, Congoleum filed an amended plan of reorganization (the "Sixth
Plan") and related documents with the Bankruptcy Court which reflected the
result of plan modification negotiations, as well as other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures, and Congoleum commenced solicitation of acceptances of the Sixth
Plan in August 2005. In September 2005, Congoleum learned that certain asbestos
claimants were unwilling to agree to forbear from exercising their security
interest as contemplated by the Sixth Plan and subsequently withdrew the Sixth
Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In March 2006, Congoleum filed a new amended plan of reorganization
(the "Eighth Plan"). In addition, an insurance company, Continental Casualty
Company, and its affiliate, Continental Insurance Company (collectively, "CNA"),
filed a plan of reorganization and the Official Bondholders' Committee (the
"Bondholders' Committee") (representing holders of Congoleum's 8-5/8% Senior
Notes due August 1, 2008 (the "Senior Notes")) also filed a plan of
reorganization. In May 2006, the Bankruptcy Court ordered
8
Note A - Basis of Presentation (continued)
the principal parties in interest in Congoleum's reorganization proceedings to
participate in reorganization plan mediation discussions. Several mediation
sessions took place from June through September 2006. During the initial
mediation negotiations, Congoleum reached an agreement in principle, subject to
mutually agreeable definitive documentation, with the ACC, the FCR and
Congoleum's controlling shareholder, 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. In light of the Bondholders' Committee's support of the Tenth
Plan, the Bondholders' Committee withdrew its support of CNA's plan. Following
the Bondholders' Committee's withdrawal of support for CNA's plan, CNA filed an
amended plan of reorganization (the "CNA Plan"). In October 2006, Congoleum and
the ACC jointly filed a revised version of the Tenth Plan (the "Eleventh Plan"),
which reflected minor technical changes agreed to by the various parties
supporting Congoleum's plan. In October 2006, the Bankruptcy Court held a
hearing to consider the adequacy of the disclosure statements with respect to
the Tenth Plan and the CNA Plan and to hear argument on summary judgment motions
seeking determinations that the Tenth Plan and the CNA Plan, respectively, are
not confirmable as a matter of law. The Bankruptcy Court provisionally approved
the disclosure statements for both the Tenth Plan and the CNA Plan subject to
the Bankruptcy Court's rulings on the summary judgment motions. In February
2007, the Bankruptcy Court entered on its docket two separate opinions ruling
that neither the Tenth Plan nor the CNA Plan was confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, Congoleum
believes the ruling issued with respect to the Tenth Plan also applies to the
Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum and other parties in interest resumed reorganization plan mediation
discussions seeking to resolve the plan confirmation issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum has also
appealed the ruling with respect to the Tenth Plan to the United States District
Court for the District of New Jersey (the "District Court").
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive
9
Note A - Basis of Presentation (continued)
necessary court approvals from the Bankruptcy Court and the District Court, or
that such approvals will be received in a timely fashion, that a plan will be
confirmed, that a plan, if confirmed, will become effective, or that there will
be sufficient funds to pay for continued litigation with respect to Congoleum's
Chapter 11 case or the New Jersey state court insurance coverage case which
Congoleum is pursuing against certain of its insurance carriers. It is uncertain
whether any person will be successful in proposing and confirming a plan.
On May 18, 2007, the New Jersey state court (the "State Court") issued a
decision ruling that Congoleum's insurers have no coverage obligations under New
Jersey law for a pre-petition settlement agreement (the "Claimant Agreement")
between Congoleum and approximately 9,000 asbestos personal injury claimants. In
that ruling, the State Court judge also cited trial testimony in his opinion
that the releases (given by claimants who signed the Claimant Agreement) were
non-recourse to Congoleum whether or not anyone recovered insurance proceeds.
Based in part upon that finding, Congoleum filed an objection (the "Omnibus
Objection") in the Bankruptcy Court on June 7, 2007 requesting that all
asbestos-related personal injury claims settled and / or liquidated (the
"Settled Claims") pursuant to either a pre-petition settlement agreement, the
Claimant Agreement or the agreements establishing a pre-petition trust (the
"Collateral Trust") be disallowed and expunged. The Omnibus Objection also
requests that if the Bankruptcy Court finds that the holders of Settled Claims
retain viable tort claims with recourse against Congoleum, that the Bankruptcy
Court rescind the pre-petition settlement agreements and the Claimant Agreement
and those claims be disallowed and expunged because, since the filing of
Congoleum's bankruptcy case, supervening events have resulted in a substantial
frustration of the purpose of those agreements. The Bankruptcy Court heard
arguments on the Omnibus Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the legal
status of the Settled Claims. One decision held that the relief requested in the
Omnibus Objection should be heard in the context of an adversary proceeding (a
formal lawsuit) in order to insure that the Bankruptcy Court has jurisdiction
over all the affected claimants and that their due process rights are otherwise
protected. Congoleum amended the complaint in the existing adversary proceeding
to seek the relief requested in the Omnibus Objection. The Bankruptcy Court also
reiterated its view that all the asbestos claims, unless they had obtained a
final judgment as to liability and damages, are similarly situated and must
receive similar treatment in any section 524(g) reorganization plan.
In its other decision, the Bankruptcy Court ruled that the security interests in
insurance collateral that were conveyed to the settled claimants pre-bankruptcy
were ineffective and unenforceable against Congoleum's insurance policies or the
proceeds of those policies because the attempts to create security interests
were outside the scope of Article 9 of the Uniform Commercial Code; nor could
such security interest be considered to be a common law pledge. The Bankruptcy
Court therefore granted summary judgment in Congoleum's favor on Counts V and VI
of the Avoidance Actions, which counts sought to void the security interests and
liens securing the pre-petition settlements of asbestos claims.
10
Note A - Basis of Presentation (continued)
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Action, adding new counts that encompass the subject matter and relief
requested in the Omnibus Objection. The Third Amended Complaint remains pending.
The FCR filed a plan of reorganization and proposed disclosure statement ("FCR
Plan") on July 3, 2007. The FCR Plan is premised upon, among other things,
treatment of all asbestos claimants holding claims against Congoleum on a
substantially similar basis, although the FCR did not propose a resolution of
the Pre-Petition Settlement Agreements and Claimant Agreements. A disclosure
statement hearing was held on August 30, 2007, and the Bankruptcy Court ruled
that the FCR needed to amend his disclosure statement and set a further hearing
on this subject for November 8, 2007.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J.
Although there can be no assurances, the Company believes that there is
reasonable basis to expect it will maintain control of Congoleum during the
pendency of Congoleum's reorganization proceedings. Accordingly, the Company has
elected to continue to consolidate the financial statements of Congoleum in its
consolidated results because it believes that is the appropriate presentation
given its current control of Congoleum. However, the accompanying financial
statements also present the details of consolidation to separately show the
financial condition, operating results and cash flows of ABI (excluding
Congoleum and its wholly owned subsidiaries) and Congoleum and its wholly owned
subsidiaries, which may be more meaningful for certain analyses.
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy
Code are required to segregate pre-petition liabilities that are subject to
compromise and report them separately on the balance sheet. Liabilities that may
be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Liabilities for asbestos claims are recorded based upon the
11
Note A - Basis of Presentation (continued)
minimum amount Congoleum expects to spend for its contribution to, and costs to
settle asbestos liabilities through, the Plan Trust. Obligations arising
post-petition and pre-petition obligations that are secured or that the
Bankruptcy Court has authorized Congoleum to pay, are not classified as
liabilities subject to compromise. Other pre-petition claims (which would be
classified as liabilities subject to compromise) may arise due to the rejection
by Congoleum of executory contracts or unexpired leases pursuant to the
Bankruptcy Code or as a result of the allowance by the Bankruptcy Court of
contingent or disputed claims related to pre-petition matters.
Recently Issued Accounting Principles
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS 109"). This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition of tax benefits,
classification on the balance sheet, interest and penalties, accounting in
interim periods, disclosure and transition. The Company adopted FIN 48 effective
January 1, 2007. As a result of the adoption, the Company determined that no
cumulative effect adjustment was necessary to the opening balance of retained
earnings as of January 1, 2007. The Company's unrecognized tax benefits as of
January 1, 2007 were immaterial, and recognition of such tax benefits is not
expected to have a material impact on the Company's income tax provision in
future periods. Changes in the Company's unrecognized tax benefits during the
three and six months ended June 30, 2007 were immaterial. Furthermore, the
Company does not expect such changes in the next twelve months to be material to
the Company's financial position or results of operation.
For tax return purposes, ABI and Congoleum are not part of a consolidated group
and, consequently, file separate federal and state tax returns. ABI's and
Congoleum's federal income tax returns are open and subject to examination from
the 2004 and 2003 tax return years and forward, respectively. ABI's and
Congoleum's various state income tax returns are generally open from the 2002
and later tax return years based on individual state statute of limitations.
Congoleum's tax return net operating loss carryforwards are significant. The tax
years in which losses arose may be subject to audit when such carryforwards are
utilized to offset taxable income in future periods. AB Canada's federal and
provincial tax returns are open and subject to examination from 2002 and later.
The Company records tax penalties and interest as a component of income tax
expense.
12
Note A - Basis of Presentation (continued)
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans ("SFAS 158"), which
amends SFAS No. 87, Employers Accounting for Pensions, SFAS 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 158 requires
companies to recognize an asset or liability for the overfunded or underfunded
status of their benefit plans in their financial statements. SFAS 158 also
requires the measurement date for plan assets and liabilities to coincide with
the sponsor's year end. This standard provides two transition alternatives
related to the change in measurement date provisions. The recognition of an
asset and liability related to the funded status provision was effective for
fiscal years ending after December 15, 2006, and the change in measurement date
provisions is effective for fiscal years ending after December 15, 2008.
The adoption of SFAS 158 had no effect on the Company's consolidated statement
of income for the year ended December 31, 2006, and it will not affect the
Company's operating results in future periods. The incremental effects of
adopting the provisions of SFAS 158 on the Company's consolidated balance sheet
at December 31, 2006 are presented in the following table.
Prior to Effect of
Adopting Adopting
SFAS 158 SFAS 158 As Reported
-------- -------- -----------
(in thousands)
Other assets, non-current $ -- $ 1,316 $ 1,316
Accrued benefit liability - other liabilities, non-current (3,169) 199 (2,970)
Accrued benefit liability - liabilities subject to
compromise (21,375) (3,791) (25,166)
Deferred taxes (199) (440) (639)
Accumulated other comprehensive loss 16,917 2,716 19,633
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. The standard permits entities to choose to measure many
financial instruments and certain other items at fair value and is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157, Fair Value Measurements. The Company has not elected
to early adopt this standard and is in the process of evaluating the impact this
pronouncement may have on its results of operations and financial condition.
13
Note B - Inventories
Inventories at June 30, 2007 and December 31, 2006 consisted of the following
(in thousands):
June 30, December 31,
2007 2006
---------- ----------
Finished goods $ 58,010 $ 56,374
Work-in-process 12,821 11,813
Raw materials and supplies 12,646 12,284
---------- ----------
$ 83,477 $ 80,471
========== ==========
Note C - Sale of Property
In April 2006, the Company completed the sale of a building and land owned by
Janus, a discontinued operation (see Note A). The building and land were sold
for $5.0 million Canadian dollars ("C$"). The Company received C$1.0 million in
cash and a C$4.0 million note. Commissions and other expenses incurred in
connection with the sale totaled approximately C$200 thousand, resulting in net
cash proceeds of approximately C$800 thousand. Payment of the note is contingent
upon obtaining an environmental certification on the land sold. In order to
obtain that certification, the Company expects to incur approximately C$200
thousand to remediate the property. Remediation is expected to be completed
during 2007. As of June 30, 2007, the Company has recorded a deferred gain of
approximately C$910 thousand. The Company expects to recognize a final gain of
approximately C$850 thousand after the completion of the remediation in 2007 and
the incurrence of related expenses.
14
Note D - Accrued Expenses
Accrued expenses at June 30, 2007 and December 31, 2006 consisted of the
following (in thousands):
June 30, December 31,
2007 2006
---------- ----------
Accrued advertising and sales promotions $ 18,831 $ 22,478
Employee compensation and related benefits 8,618 7,084
Interest 222 2
Environmental matters 632 632
Royalties 799 837
Income taxes 688 838
Other 8,859 5,540
---------- ----------
$ 38,649 $ 37,411
========== ==========
See Note G for Liabilities Subject to Compromise.
Note E - Financing Arrangements
ABI's primary source of borrowings are the revolving credit facility (the
"Revolver") and the term loan ("Term Loan") it has with Bank of America,
National Association ("BofA") and BofA acting through its Canada branch (the
"Canadian Lender") pursuant to an amended and restated credit agreement (the
"Credit Agreement"). The Credit Agreement provides ABI and its subsidiary K&M
Associates L.P. ("K&M") with (i) a $30.0 million commitment under the Revolver
with a $12.0 million borrowing sublimit (the "Canadian Revolver") for ABI's
subsidiary AB Canada and (ii) the $10.0 million Term Loan. The Credit Agreement
also provides for domestic and Canadian letter of credit facilities with
availability of up to $5.0 million and $1.0 million, respectively, subject to
availability under the Revolver and the Canadian Revolver, respectively.
On September 25, 2006, ABI, K&M and AB Canada entered into an amendment and
restatement to the Credit Agreement with BofA and the Canadian Lender, both in
their capacities as lenders and administrative agents under the Credit
Agreement. Pursuant to the amendment and restatement, the Term Loan was added to
the Credit Agreement and the amount of the Revolver was increased by $10.0
million to its current $30.0 million amount. In addition, the availability for
domestic letters of credit issued under the Credit Agreement was increased from
$4.0 million to $5.0 million. In connection with that amendment and restatement,
ABI used approximately $17.0 million of new borrowings from the proceeds of the
Term Loan, which was fully drawn, and under the Revolver to fully prepay $16.0
million of aggregate outstanding principal amount of the Company's senior notes,
all of which were held by The Prudential Insurance Company of America, together
with approximately $1.0 million in interest and yield maintenance fees in
connection with those notes and prepayment. During the third quarter of 2006, a
charge of approximately $860 thousand for early extinguishment of debt was
recorded in Other Income (Expense) in connection with this prepayment.
15
Note E - Financing Arrangements (continued)
The Credit Agreement contains certain covenants that the Company must satisfy.
The covenants include certain financial tests, restrictions on the ability of
the Company to incur additional indebtedness or to grant liens on its assets,
and restrictions on the ability of the Company to pay dividends on its capital
stock. At March 31, 2007, the Company was not in compliance with the financial
covenant that there be no consecutive quarterly net losses from continuing
operations. On May 14, 2007, ABI and its subsidiaries, K&M and AB Canada,
entered into an amendment, effective as of March 31, 2007, to the Credit
Agreement with BofA and BofA acting through its Canada branch, each in their
respective capacities as lenders and administrative agents under the Credit
Agreement. The amendment revised the financial covenant requiring that the
Company not have any consecutive quarterly net losses from continuing operations
to provide that for each of the two consecutive fiscal quarters of the Company
ending December 31, 2006 and March 31, 2007, the Company not have a quarterly
net loss from continuing operations in excess of $400 thousand. Under the Credit
Agreement, the calculation of the Company's net income or loss from continuing
operations is based on the Company accounting for its majority-owned subsidiary
Congoleum Corporation on the equity method. Following the entering into of this
amendment, the Company was in compliance with this financial covenant as of
March 31, 2007.
On September 29, 2006, ABI entered into swap agreements to convert the interest
rates on the Term Loan and $6.0 million of borrowings under the Revolver from
floating rates to fixed rates of interest. The swap agreement for the Term Loan
(the "Term Loan Swap") has a five year term with the same quarterly payment
dates as the Term Loan and reduces proportionately in line with the amortization
of the Term Loan. The swap agreement for the $6.0 million outstanding under the
Revolver (the "Revolver Swap") has a three year term with quarterly settlement
dates beginning December 31, 2006. The Company expects its borrowings under the
Revolver to remain above $6.0 million through September 29, 2009, the
termination date of the Revolver Swap. The Term Loan Swap and the Revolver Swap
are carried at fair value. Changes in the fair value of the swap agreements are
recorded in Other Income (Expense). For the three and six months ended June 30,
2007, the Company recorded a gain of $134 thousand and $90 thousand,
respectively, for the adjustment of the fair values of the swap agreements.
16
Note F - Other Liabilities
Other Liabilities at June 30, 2007 and December 31, 2006 consisted of the
following (in thousands):
June 30, December 31,
2007 2006
---------- ----------
Pension benefits $ 2,743 $ 2,970
Environmental remediation and product
related liabilities 5,826 5,860
Deferred income taxes 4,107 4,095
Other 2,359 2,516
-------- --------
$ 15,035 $ 15,441
======== ========
See Note G for Liabilities Subject to Compromise.
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J), pursuant to
SOP 90-7, Congoleum is required to segregate pre-petition liabilities that are
subject to compromise and report them separately on the consolidated balance
sheet. Liabilities that may be affected by a plan of reorganization are recorded
at the amount of the expected allowed claims, even if they may be settled for
lesser amounts. Substantially all of Congoleum's pre-petition debt is recorded
at face value and is classified within liabilities subject to compromise. In
addition, Congoleum's accrued but unpaid interest expense on its 8 5/8% Senior
Notes Due 2008 is also recorded in liabilities subject to compromise. See Notes
A and J for further discussion of Congoleum's asbestos liability. Liabilities
subject to compromise at June 30, 2007 and December 31, 2006 were as follows (in
thousands):
June 30, December 31,
2007 2006
--------- ---------
Current liability
Pre-petition other payables and accrued interest $ 40,185 $ 34,602
Non-current
Debt (at face value) 100,000 100,000
Pension liability 14,245 15,502
Other post-retirement benefit obligation 9,476 9,249
Pre-petition other liabilities 11,761 11,782
--------- ---------
135,482 136,533
Elimination - Payable to American Biltrite (126) (135)
--------- ---------
Total non-current liability 135,356 136,398
--------- ---------
Total liabilities subject to compromise $ 175,541 $ 171,000
========= =========
17
Note G - Liabilities Subject to Compromise
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three and
six months ended June 30, 2007 and 2006 (in thousands):
Three Months Ended June 30,
2007 2006
--------------------- ---------------------
Other Other
Pension Benefits Pension Benefits
-------- -------- -------- --------
Service cost $ 611 $ 53 $ 607 $ 48
Interest cost 1,606 142 1,498 132
Expected return on plan assets (1,614) -- (1,435) --
Recognized net actuarial loss 337 18 359 16
Amortization of prior service cost 28 3 (40) 9
-------- -------- -------- --------
Net periodic benefit cost $ 968 $ 216 $ 989 $ 205
======== ======== ======== ========
Six Months Ended June 30,
2007 2006
--------------------- ---------------------
Other Other
Pension Benefits Pension Benefits
-------- -------- -------- --------
Service cost $ 1,214 $ 106 $ 1,210 $ 96
Interest cost 3,201 284 2,991 264
Expected return on plan assets (3,211) -- (2,863) --
Recognized net actuarial loss 675 36 718 32
Amortization of prior service cost 54 6 (80) 18
-------- -------- -------- --------
Net periodic benefit cost $ 1,933 $ 432 $ 1,976 $ 410
======== ======== ======== ========
18
Note H - Pension Plans (continued)
The weighted average assumptions used to determine net periodic benefit cost for
the three and six months ended June 30, 2007 and 2006 were as follows:
2007 2006
----------------------------- ----------------------------
Other Other
Pension Benefits Pension Benefits
------------- ------------ -------------- -----------
Discount rate 5.20% - 6.00% 6.00% 5.20% - 6.00% 6.00%
Expected long-term return on plan
assets 7.00% - 7.50% -- 7.00% - 7.50% --
Rate of compensation increase 4.00% - 5.00% -- 4.00% - 5.00% --
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations, and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company's and Congoleum's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future cost and timing
of payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's and Congoleum's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. Provisions in the financial statements
have been recorded for the estimated probable loss associated with all known
general and environmental contingencies for the Company and Congoleum. While the
Company and Congoleum believe their estimate of the future amount of these
liabilities is reasonable, and that they will be paid over a period of five to
ten years, the timing and amount of such payments may differ significantly from
the Company's and Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's and
Congoleum's costs, the Company and Congoleum are not aware of any pending
legislation that would have such an effect. There can be no assurances that the
costs of any future government regulations could be passed along to their
customers. Estimated insurance recoveries related to these liabilities are
reflected in other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments, and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted as
appropriate to reflect such revisions and progress.
19
Note I - Commitments and Contingencies (continued)
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidated balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability. However, since ABI includes Congoleum in
ABI's consolidating financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidating financial
statements.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,415 pending claims involving
approximately 2,001 individuals as of June 30, 2007. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Six Months Year Ended
Ended December 31,
June 30, 2007 2006
------------- ------------
Beginning claims 1,332 1,703
New claims 281 625
Settlements (8) (30)
Dismissals (190) (966)
-------- --------
Ending claims 1,415 1,332
======== ========
ABI has primary and multiple excess layers of insurance coverage for asbestos
claims. The total indemnity costs incurred to settle claims during the six
months ended June 30, 2007 and twelve months ended December 31, 2006 were $0.5
million and $3.1 million, respectively, all of which were paid by ABI's
insurance carriers pursuant to a February 1996 coverage-in-place agreement with
ABI's applicable primary layer insurance carriers, as were the related defense
costs. ABI will seek reimbursement for asbestos claims under its excess layer
coverage upon exhaustion of its primary insurance coverage. The amount of
indemnity coverage limits remaining at June 30, 2007 under ABI's primary
insurance coverage relating to policies underwritten from 1961 to 1985 ("Primary
Layer") was approximately $1.9 million to $3.0 million, depending on the
interpretation of the terms of the above-referenced coverage-in-place agreement.
ABI is negotiating with the three insurance carriers currently providing
coverage under the Primary Layer (the "Carrier Group") to determine the amount
of coverage remaining under that coverage-in-place agreement.
20
Note I - Commitments and Contingencies (continued)
ABI expects its first layer excess liability insurance will provide coverage for
ABI's asbestos claims after the Primary Layer has been exhausted. The same
insurance companies comprising the Carrier Group also underwrote ABI's first
layer excess coverage during the period from 1964-1984 (the "Umbrella
Coverage"). Coverage limits for the Umbrella Coverage are $105 million to $155
million, with certain policies providing defense costs within the coverage
limits and other policies providing defense costs in addition to coverage
limits. ABI is negotiating with the Carrier Group to reach agreement (the
"Umbrella Agreement") on how the Umbrella Coverage will apply to asbestos bodily
injury claims. The Umbrella Agreement is expected to address defense and
indemnity obligations, allocation of claims to specific policies, and other
matters.
In addition to the Umbrella Agreement, ABI has additional excess liability
insurance policies that should provide further coverage if and when coverage
limits under the Umbrella Agreement are exhausted. Depending on the terms of the
Umbrella Agreement and the dates of asbestos exposure alleged in claims, ABI may
incur uninsured costs related to asbestos claims once the Primary Layer has been
exhausted. ABI does not expect these costs to have a material adverse impact on
its financial condition or results of operations, although there can be no
assurances in that regard.
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable.
The Company estimates its liability to defend and resolve current and reasonably
anticipated future asbestos-related claims (not including claims asserted
against Congoleum) based upon a strategy to actively defend or seek settlement
for those claims in the normal course of business. Factors such as recent and
historical settlement and trial results, the incidence of past and recent
claims, the number of cases pending against it and asbestos litigation
developments that may impact the exposure of the Company were considered in
performing these estimates. In 2006, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At December 31, 2006, the
estimated range of liability for settlement of current claims pending and claims
anticipated to be filed through 2012 was $10.3 million to $35.3 million. The
Company believed no amount within this range is more likely than any other, and
accordingly, recorded the minimum liability estimate of $10.3 million in its
consolidated financial statements at December 31, 2006. At June 30, 2007, the
Company has recorded $10.5 million for the estimated minimum liability. The
Company also believes that, based on this minimum liability estimate, the
corresponding amount of insurance probable of recovery is $9.3 million at June
30, 2007 and December 31, 2006, which has been included in other assets. The
same factors that affect developing forecasts of potential indemnity
21
Note I - Commitments and Contingencies (continued)
costs for asbestos-related liabilities also affect estimates of the total amount
of insurance that is probable of recovery, as do a number of additional factors.
These additional factors include the financial viability of some of the
insurance companies, the method in which losses will be allocated to the various
insurance policies and the years covered by those policies, how legal and other
loss handling costs will be covered by the insurance policies, and
interpretation of the effect on coverage of various policy terms and limits and
their interrelationships. These amounts were based on currently known facts and
a number of assumptions. However, projecting future events, such as the number
of new claims to be filed each year, the average cost of disposing of each such
claim, and the continuing solvency of various insurance companies, as well as
numerous uncertainties surrounding asbestos legislation in the United States,
could cause the actual liability and insurance recoveries for the Company to be
higher or lower than those projected or recorded.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a six year horizon. The
Company will continue to evaluate its range of future exposure, and the related
insurance coverage available, and when appropriate, record future adjustments to
those estimates, which could be material.
The Company anticipates that any resolution of its asbestos related liabilities
that may result from any reorganization plan for Congoleum will be limited at
most to liabilities derivative of claims asserted against Congoleum as may be
afforded under Section 524(g)(4) of the Bankruptcy Code.
ABI reported in its Annual Report on Form 10-K for the year ended December 31,
2006 that it has been named as a Potentially Responsible Party ("PRP") within
the meaning of the Federal Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), as amended, with respect to six sites located in five
separate states. On May 21, 2007, ABI entered into a Response Cost Sharing and
Alternative Dispute Resolution Agreement, dated as of May 21, 2007, with Miller
Industries, Inc., which provides for a cost sharing arrangement in connection
with the clean-up of two sites in Lisbon Falls, Maine (which sites are referred
to as "Parcel A" and "Parcel B," respectively, and the "Maine Sites,"
collectively, in ABI's Annual Report on Form 10-K for the year ended December
31, 2006). Under the agreement, each of the parties agrees to fund fifty percent
of the budgeted costs of the remedial investigation, feasibility study and
remediation of the two sites, subject to a final determination of the parties'
respective allocation of its share of the applicable costs, which will be made
either by mutual agreement of the parties or by arbitration, as provided under
the agreement. The agreement provides for procedures for the funding of these
costs as well as allocates oversight responsibility for the clean up of the
sites to the parties based upon a party's determined share of responsibility for
the clean up of the sites. The Company's estimated share of costs under the
terms of the agreement are consistent with the Company's previously estimated
costs and recorded liability as of December 31, 2006.
22
Note I - Commitments and Contingencies (continued)
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary reorganization case
under Chapter 11 of the Bankruptcy Code for purposes of resolving its
asbestos-related liabilities. See Note J.
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. The pending proceedings in
which Congoleum is a named PRP currently relate to eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable by Congoleum from relevant insurance
policies. However, under CERCLA and certain other laws, Congoleum, as a PRP, can
be held jointly and severally liable for all environmental costs associated with
a site.
The most significant exposure for which Congoleum has been named a PRP relates
to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund
Site"). The PRP group at this site is made up of 81 companies, substantially all
of which are large, financially solvent entities. Two removal actions were
substantially complete as of December 31, 1998, and a groundwater treatment
system was installed thereafter. The United States Environmental Protection
Agency has selected a remedy for the soil and shallow groundwater (Operable Unit
1 or OU-1); however, the remedial investigation/feasibility study related to the
deep groundwater (Operational Unit 2 or OU-2) has not been completed. The PRP
group, of which Congoleum is a part, has entered into a consent decree to
perform the remedy for OU-1 and resolve natural resource damage claims. The
consent decree also requires the PRP group to perform the OU-2 remedy, assuming
that the estimated cost of the remedy is not more than $10.0 million. If the
estimated cost of the OU-2 remedy is more than $10.0 million, the PRP group may
decline to perform it or they may elect to perform it anyway. Cost estimates for
the OU-1 and OU-2 work combined (including natural resource damages) range
between $22 million and $34 million, with Congoleum's share ranging between
approximately $1.0 million and $1.6 million. This assumes that all parties
participate and that none cash-out and pay a premium; those two factors may
account for some fluctuation in Congoleum's share of the costs. Fifty percent
(50%) of Congoleum's share of the costs is presently being paid by one of its
insurance carriers, Liberty Mutual Insurance Company, whose remaining policy
limits for this claim are expected to cover approximately $300 thousand in
additional costs. Congoleum expects to fund the balance to the extent further
insurance coverage is not available.
23
Note I - Commitments and Contingencies (continued)
Congoleum filed a motion before the Bankruptcy Court seeking authorization and
approval of the consent decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual
Insurance Company and Congoleum to make certain payments that have been invoiced
to Congoleum with respect to the consent decree and related settlement
agreements. An order authorizing and approving consent decree and settlement
agreements was issued by the Bankruptcy Court in August 2006.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.3 million for Congoleum's expected portion of those
remediation funding obligations, including capital outlays and future
maintenance costs for soil and groundwater remediation, are primarily based on
engineering studies. Of this amount, $300 thousand was included in current
liabilities subject to compromise and $1.0 million was included in non-current
liabilities subject to compromise as of June 30, 2007 and December 31, 2006.
At June 30, 2007 and December 31, 2006, Congoleum had recorded a total of $4.4
million for estimated environmental liabilities none of which have been reduced
by the amount of expected insurance recoveries. At June 30, 2007 and December
31, 2006, such estimated insurance recoveries are approximately $2.2 million.
Receivables for expected insurance recoveries are recorded if the related
carriers are solvent and paying claims under a reservation of rights or under an
obligation pursuant to coverage in place or a settlement agreement.
Substantially all of Congoleum's recorded insurance asset for environmental
matters is collectible from a single carrier.
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, funding of
the costs by Congoleum will not have a material adverse impact on Congoleum's
liquidity or financial position. However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on Congoleum's and the Company's business, results of
operations or financial condition.
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings in connection with product liability claims
and other matters. In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts, and the matters may remain unresolved
for several years.
24
Note J - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into the Claimant Agreement. As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing the Collateral Trust to
distribute funds in accordance with the terms of the Claimant Agreement and
granting the Collateral Trust a security interest in Congoleum's rights under
its applicable insurance coverage and payments from Congoleum's insurers for
asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, Congoleum commenced
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, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, Congoleum filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
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.
25
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the 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 Congoleum'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 was confirmable as a matter of law. Because the Tenth Plan and
Eleventh Plan are substantially identical, Congoleum believes the ruling issued
with respect to the Tenth Plan also applies to the Eleventh Plan. Following the
Bankruptcy Court's rulings, in March 2007, Congoleum resumed global plan
mediation discussions seeking to resolve the issues raised in the
26
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum has also
appealed the ruling with respect to the Tenth Plan to the District Court.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation over a
plan of reorganization.
On May 18, 2007, the State Court issued a decision ruling that Congoleum's
insurers have no coverage obligations under New Jersey law for the Claimant
Agreement. In that ruling, the State Court judge also citied trial testimony in
his opinion that the releases (given by claimants who signed the Claimant
Agreement) were non-recourse to Congoleum whether or not anyone recovered
insurance proceeds. Based in part upon that finding, Congoleum filed the Omnibus
Objection in the Bankruptcy Court on June 7, 2007 requesting that the settled
Claims be disallowed and expunged. The Omnibus Objection also requests that if
the Bankruptcy Court finds that the holders of Settled Claims retain viable tort
claims with recourse against Congoleum, that the Bankruptcy Court rescind the
pre-petition settlement agreements and the Claimant Agreement and those claims
be disallowed and expunged because, since the filing of Congoleum's bankruptcy
case, supervening events have resulted in a substantial frustration of the
purpose of those agreements. The Bankruptcy Court heard arguments on the Omnibus
Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the legal
status of the Settled Claims. One decision held that the relief requested in the
Omnibus Objection should be heard in the context of an adversary proceeding (a
formal lawsuit) in order to insure that the Bankruptcy Court has jurisdiction
over all the affected claimants and that their due process rights are otherwise
protected. Congoleum amended the complaint in the existing adversary proceeding
to seek the relief requested in the Omnibus Objection. The Bankruptcy Court also
reiterated its view that all the asbestos claims, unless they had obtained a
final judgment as to liability and damages, are similarly situated and must
receive similar treatment in any section 524(g) reorganization plan.
In its other decision, the Bankruptcy Court ruled that the security interests in
insurance collateral that were conveyed to the settled claimants pre-bankruptcy
were ineffective and unenforceable against Congoleum's insurance policies or the
proceeds of those policies because the attempts to create security interests
were outside the scope of Article 9 of the Uniform Commercial Code; nor could
such security interest be considered to be a common law pledge. The Bankruptcy
Court therefore granted summary judgment in Congoleum's favor on Counts V and VI
of the Avoidance Actions, which counts sought to void the security interests and
liens securing the pre-petition settlements of asbestos claims.
27
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Action, adding new counts that encompass the subject matter and relief
requested in the Omnibus Objection. The Third Amended Complaint remains pending.
The FCR filed a plan of reorganization and proposed disclosure statement on July
3, 2007. The FCR Plan is premised upon, among other things, treatment of all
asbestos claimants holding claims against Congoleum on a substantially similar
basis, although the FCR did not propose a resolution of the Pre-Petition
Settlement Agreements and Claimant Agreements. A disclosure statement hearing
was held on August 30, 2007, and the Bankruptcy Court ruled that the FCR needed
to amend his disclosure statement and set a further hearing on this subject for
November 8, 2007.
Congoleum continues to be involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to any future plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to any future plan.
During 2005 and 2006, Congoleum entered into a number of settlement agreements
with excess insurance carriers over coverage for asbestos-related claims. In May
2005, certain AIG companies agreed to pay approximately $103 million over ten
years to the Plan Trust. This settlement resolves coverage obligations of
policies with a total of $114 million in liability limits for asbestos bodily
injury claims. Payment is subject to various conditions, including without
limitation, the effectiveness of a plan of reorganization that provides AIG with
certain specified relief including a channeling injunction pursuant to Section
524(g) of the Bankruptcy Code. An insurer appealed the approval order granted by
the Bankruptcy Court to the District Court. The District Court, however, entered
an order in September 2006 that administratively terminated the appeal. The AIG
settlement provides that any party may declare that the settlement agreement is
null and void if the Confirmation Order fails to become a final order by May 12,
2007, and AIG may terminate the settlement agreement pursuant to this provision.
On or about June 25, 2007, Congoleum and AIG executed a letter agreement
providing that the parties would provide 45 days advance notice of their intent
to terminate the AIG settlement. To date, neither party has given notice of an
intent to terminate the agreement. At this time, it is not known whether AIG
ultimately will seek to terminate the settlement agreement. In June 2005,
Congoleum entered into a settlement agreement with certain underwriters at
Lloyd's, London, pursuant to which the certain underwriters paid approximately
$20 million into an escrow account in exchange for a release of insurance
coverage obligations. The escrow agent will transfer the funds to the Plan Trust
once a plan of reorganization with the Section 524(g) protection specified in
the settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. 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 and the parties have agreed
28
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
through counsel that neither party will terminate prior to early November 2007,
absent ten days advance notice of an intent to terminate. At this time, it is
not known whether those certain underwriters have not sought to terminate the
settlement agreement. In August 2005, Congoleum entered into a settlement
agreement with Federal Insurance Company pursuant to which Federal will pay $4
million to the Plan Trust, subject to certain adjustments, once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds. The FCR appealed the approval order granted by the Bankruptcy Court to
the District Court. The FCR, Federal and Congoleum 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 appealed the approval order
granted by the Bankruptcy Court to the District Court, but the appeal has been
administratively terminated by agreement. The Mount McKinley settlement
agreement contains a provision that any Party may declare the agreement to be
null and void if the Confirmation Order and Approval Order do not become Final
Orders within two years of the Execution Date (as those terms are defined in the
Mount McKinley Settlement Agreement). At this time, Mount McKinley has not
sought to terminate the Settlement 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
April 2007, and on May 11, 2007 the Bankruptcy Court issued a decision denying
approval of the Travelers settlement. Congoleum and Travelers have appealed that
decision to the United States District Court for the District of New Jersey. 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
29
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
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 appeal was
dismissed. It is possible that one or more of the settling insurers may argue
temporal, Plan-related, and other conditions to payment have not been satisfied
and therefore such insurer is relieved of certain of its settlement obligations.
If Congoleum is unable to confirm a plan of reorganization with 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. Congoleum expects that it will
take until some time in the first quarter of 2008 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 ($24.1 million at June 30, 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.
There were no asbestos related property damage claims asserted against Congoleum
at the time of its bankruptcy filing. The Bankruptcy Court approved an order
establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in Congoleum's bankruptcy proceeding
advised Congoleum that, as of the bar date, it received 35 timely filed asbestos
property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. Congoleum
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand. It is anticipated that any
plan of reorganization will provide for payment of those claims in full from
certain insurance proceeds.
30
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Based on Congoleum's Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through a Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete any future plan of reorganization. Amounts that may
be contributed to any Plan Trust and costs for pursuing and implementing any
plan of reorganization could be materially higher than currently recorded or
previously estimated. Delays in proposing, filing or obtaining approval of a new
amended plan of reorganization, or the proposal or solicitation of additional
plans by other parties could result in a proceeding that takes longer and is
more costly than Congoleum has previously estimated. Congoleum may record
significant additional charges in connection with its reorganization
proceedings.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income for the three and six
months ended June 30, 2007 and 2006 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
-------- -------- -------- --------
Net income $ 1,131 $ 1,016 $ 390 $ 1,502
Foreign currency translation adjustments 1,473 127 1,708 156
-------- -------- -------- --------
Total comprehensive income $ 2,604 $ 1,143 $ 2,098 $ 1,658
======== ======== ======== ========
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 requires both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common share equivalents outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
31
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape division,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings, which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape division
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber and
other industrial products.
Net sales by segment for the three and six months ended June 30, 2007 and 2006
were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
--------- --------- --------- ---------
Net sales to external customers:
Flooring products $ 57,541 $ 58,743 $ 106,856 $ 115,980
Tape products 25,804 28,587 49,922 54,710
Jewelry 17,143 14,924 30,733 30,008
Canadian division 15,070 15,211 28,078 28,488
--------- --------- --------- ---------
Total net sales to external
customers 115,558 117,465 215,589 229,186
Intersegment net sales:
Flooring products -- -- -- --
Tape products -- 6 -- 6
Jewelry -- -- -- --
Canadian division 1,334 1,414 2,599 2,862
--------- --------- --------- ---------
Total intersegment net sales 1,334 1,420 2,599 2,868
Reconciling items -- -- -- --
Intersegment net sales (1,334) (1,420) (2,599) (2,868)
--------- --------- --------- ---------
Total consolidated net sales $ 115,558 $ 117,465 $ 215,589 $ 229,186
========= ========= ========= =========
32
Note M - Industry Segments (continued)
Segment profit or loss is before income tax expense or benefit, noncontrolling
interests, and net income (loss) from discontinued operations. Profit (loss) by
segment for the three and six months ended June 30, 2007 and 2006 was as follows
(in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2007 2006 2007 2006
-------- -------- -------- --------
Segment profit (loss)
Flooring products $ 842 $ 691 $ 491 $ 953
Tape products (242) 1,116 (663) 1,267
Jewelry 774 (289) 536 (118)
Canadian division 295 415 382 675
-------- -------- -------- --------
Total segment profit 1,669 1,933 746 2,777
Reconciling items
Corporate expenses (458) (763) (395) (820)
Intercompany profit 3 39 5 63
-------- -------- -------- --------
Total consolidated income before
income taxes and other items $ 1,214 $ 1,209 $ 356 $ 2,020
======== ======== ======== ========
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
June 30, December 31,
2007 2006
--------- ---------
Segment assets
Flooring products $ 186,616 $ 184,202
Tape products 62,506 52,848
Jewelry 38,290 38,913
Canadian division 39,859 36,396
--------- ---------
Total segment assets 327,271 312,359
Reconciling items
Corporate items 32,565 32,008
Intersegment accounts receivable (19,043) (12,416)
Intersegment profit in inventory (138) (144)
Intersegment other asset (126) (135)
--------- ---------
Consolidated assets $ 340,529 $ 331,672
========= =========
33
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, Congoleum filed
its proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. In November 2004, Congoleum filed the Fourth Plan reflecting the result
of further negotiations with representatives of the ACC, the FCR and other
asbestos claimant representatives. The Bankruptcy Court approved the disclosure
statement and plan voting procedures in December 2004 and Congoleum obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of the Fourth Plan. In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust. In July 2005, Congoleum
filed the Sixth Plan and related documents with the Bankruptcy Court which
reflected the result of 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
Congoleum'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
34
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 was confirmable as a matter of law. Because the Tenth Plan and
Eleventh Plan are substantially identical, Congoleum believes the ruling issued
with respect to the Tenth Plan also applies to the Eleventh Plan. Following the
Bankruptcy Court's rulings, in March 2007, Congoleum 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 Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum will
obtain approval to solicit acceptances of a new plan of reorganization, that
Congoleum will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation over any
plan of reorganization.
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Action, adding new counts that encompass the subject matter and relief
requested in the Omnibus Objection. The Third Amended Complaint remains pending.
The FCR filed a plan of reorganization and proposed disclosure statement ("FCR
Plan") on July 3, 2007. The FCR Plan is premised upon, among other things,
treatment of all asbestos claimants holding claims against Congoleum on a
substantially similar basis, although the FCR did not propose a resolution of
the Pre-Petition Settlement Agreements and Claimant Agreements. A disclosure
statement hearing was held on August 30, 2007, and the Bankruptcy Court ruled
that the FCR needed to amend his disclosure statement and set a further hearing
on this subject for November 8, 2007.
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. Congoleum expects that it
will take until some time in the first quarter of 2008 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.
35
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. On June 7,
2007, Congoleum filed the Omnibus Objection in the Bankruptcy Court requesting
that the Settled Claims be disallowed and expunged. The Omnibus Objection also
requests that if the Bankruptcy Court finds that the holders of Settled Claims
retain viable tort claims with recourse against Congoleum, that the Bankruptcy
Court rescind the pre-petition settlement agreements and the Claimant Agreement
be rescinded and those claims be disallowed and expunged because, since the
filing of Congoleum's bankruptcy case, supervening events have resulted in a
substantial frustration of the purpose of those agreements. The Bankruptcy Court
heard arguments on the Omnibus Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the legal
status of the Settled Claims. One decision held that the relief requested in the
Omnibus Objection should be heard in the context of an adversary proceeding (a
formal lawsuit) in order to insure that the Bankruptcy Court has jurisdiction
over all the affected claimants and that their due process rights are otherwise
protected. Congoleum amended the complaint in the existing adversary proceeding
to seek the relief requested in the Omnibus Objection. The Bankruptcy Court also
reiterated its view that all the asbestos claims, unless they had obtained a
final judgment as to liability and damages, are similarly situated and must
receive similar treatment in any section 524(g) reorganization plan.
In its other decision, the Bankruptcy Court ruled that the security interests in
insurance collateral that were conveyed to the settled claimants pre-bankruptcy
were ineffective and unenforceable against Congoleum's insurance policies or the
proceeds of those policies because the attempts to create security interests
were outside the scope of Article 9 of the Uniform Commercial Code; nor could
such security interest be considered to be a common law pledge. The Bankruptcy
Court therefore granted summary judgment in Congoleum's favor on Counts V and VI
of the Avoidance Actions, which counts sought to void the security interests and
liens securing the pre-petition settlements of asbestos claims.
Due to, among other things, the ongoing Avoidance Actions and Omnibus Objection,
the liability associated with the asbestos personal injury claims against
Congoleum may be materially different than the present estimates of such items.
As a result of tabulating ballots on the Fourth Plan, Congoleum is also aware of
claims by approximately 33,000 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.
36
Please refer to "Risk Factors - The Company and its majority-owned subsidiary
Congoleum have significant asbestos liability and funding exposure, and the
Company's and Congoleum's strategies for resolving this exposure may not be
successful," and "Any plan of reorganization for Congoleum will likely result in
substantial dilution or elimination of Congoleum's equity holders, including the
Company" included in Part II, Item 1A of this Quarterly Report on Form 10-Q for
a discussion of certain factors that could cause actual results to differ from
the Company's and Congoleum's goals for resolving its asbestos liability.
During 2003, the Company decided to discontinue the operations of its subsidiary
Janus, a manufacturer of pre-finished hardwood flooring, and sell the related
assets. Results of Janus, including charges resulting from the shutdown, were
reported as a discontinued operation. During 2006, the remaining assets of Janus
were sold, and the discontinued operation was effectively dissolved. As of
December 31, 2006, the Company merged Janus with and into AB Canada.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M) and Canadian division segments as well as Corporate items and
Janus. Congoleum is the flooring products segment.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidating financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the Company's financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies, upon which its financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2006, filed with the Securities and Exchange
Commission.
There have been no material changes in what the Company considers to be its
critical accounting policies or the applicability of the disclosure the Company
provided regarding those policies in that Form 10-K.
37
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
------------------------------------- -------------------------------------
(In thousands)
Net sales $58,017 $58,722 $108,733 $113,206
Cost of sales 42,632 43,364 79,694 82,895
------- ------- -------- --------
Gross profit 15,385 26.5% 15,358 26.2% 29,039 26.7% 30,311 26.8%
Selling, general &
administrative expenses 15,012 25.9% 14,916 25.4% 28,815 26.5% 28,910 25.5%
------- ------- -------- --------
Operating income 373 442 224 1,401
Interest expense, net (560) (570) (1,095) (1,163)
Other income, net 556 606 731 766
------- ------- -------- --------
Income (loss) before taxes and
other items 369 478 (140) 1,004
Provision for (benefit from)
income taxes 56 167 (66) 363
Noncontrolling interests (20) 3 (25) (13)
------- ------- -------- --------
Income (loss) from continuing
operations $ 293 $ 314 $ (99) $ 628
======= ======= ======== ========
Net sales in the second quarter of 2007 were $58.8 million compared to $58.7
million in the second quarter of 2006, a decrease of $0.7 million or 1.2%. Tape
division sales decreased $2.8 million or 9.8% from year earlier levels as a
result of lower sales volumes of HVAC tapes, protective films, and protective
paper. Canadian division sales decreased $0.2 million or 1.3% from the second
quarter of 2006 due to lower sales of flooring products. Jewelry sales increased
$2.2 million or 14.9% primarily as a result of increased shipments to mass
merchandisers and higher sell-through rates.
Net sales for the first six months of 2007 decreased $4.5 million (4.0%) to
$108.7 million from $113.2 million for the first half of 2006. Tape division
sales decreased $4.8 million or 8.8% due to lower sales of HVAC tapes, films,
and automotive products. Canadian division sales in the first half of 2007 were
down $0.7 million or 2.1% from year earlier levels due to lower sales of
industrial rubber products. Jewelry sales for the first six months of 2006 were
increased $0.7 million or 2.4% as increased sales to mass merchandisers coupled
with higher retail sell-through rates more than offset lower sales to mid-tier
retailers and department stores.
Gross profit improved from 26.2% of net sales for the second quarter of 2006 to
26.5% for the second quarter of 2007. Tape division margins in the second
quarter of 2007 were below the same period in 2006 due to the raw material and
energy cost inflation and the effect of lower production volumes, partly offset
by price increases. Canadian division margins were consistent with year earlier
levels, and Jewelry margins improved due to the margin benefit of higher sell
through rates.
38
Gross profit for the six months ended June 30, 2007 was 26.7% compared to 26.8%
for the first six months of 2006. Tape division margins in the second quarter of
2007 were below the same period in 2006 due to the raw material and energy cost
inflation and the effect of lower production volumes, partly offset by price
increases. Canadian division margins were flat. Jewelry margins improved due to
the margin benefit of higher sell through rates.
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended June 30, 2007 and 2006 would have been
26.0% and 25.7%, respectively. The gross profit margins for the six months ended
June 30, 2007 and 2006 would have been 26.2% and 26.3%, respectively.
Selling, general and administrative ("SG&A") expenses in the second quarter of
2007 increased by $94 thousand or 0.6% compared to the second quarter of 2006.
As a percentage of net sales, SG&A increased from 25.4% to 25.9%. SG&A expenses
for the six months ended June 30, 2007 were $28.8 million (26.5% of net sales)
versus $28.9 million (25.5% of net sales) for the first half of 2006. Expense
reductions have generally offset inflationary increases on wages and benefits.
Net interest expense for the second quarter and first half of 2007 was slightly
lower compared to the same periods in 2006 due to lower average borrowing costs.
Income from continuing operations in the second quarter of 2007 was $293
thousand compared to $314 thousand in the corresponding prior year period,
reflecting improved margins on slightly lower sales. For the six months ended
June 30, 2007, the loss from continuing operations was $99 thousand compared to
income of $628 thousand for the same period last year, with the decrease
resulting from the comparatively lower sales in the first quarter of 2007.
39
Congoleum
Three Months Ended June 30 Six Months Ended June 30
2007 2006 2007 2006
-------------------------------------- --------------------------------------
(In thousands)
Net sales $57,541 $58,743 $106,856 $115,980
Cost of sales 43,797 45,139 81,113 89,099
------- ------- -------- --------
Gross profit 13,744 23.9% 13,604 23.2% 25,743 24.1% 26,881 23.2%
Selling, general &
administrative expenses 9,963 17.3% 10,261 17.5% 19,414 18.2% 20,657 17.8%
------- ------- -------- --------
Operating income 3,781 3,343 6,329 6,224
Interest expense, net (2,947) (2,741) (5,804) (5,318)
Other income (expense), net 8 89 (34) 47
------- ------- -------- --------
Income before taxes 842 691 491 953
Provision for income taxes 7 65 7 116
------- ------- -------- --------
Net income $ 835 $ 626 $ 484 $ 837
======= ======= ======== ========
Net sales for the three months ended June 30, 2007 were $57.5 million as
compared to $58.7 million for the three months ended June 30, 2006, a decrease
of $1.2 million or 2.0%. The decrease primarily reflected continued weakness in
the remodel and new residential markets and a soft sales environment for the
manufactured housing segment. The sales shortfall was partially mitigated by the
impact of price increases instituted in late 2006.
Net sales for the six months ended June 30, 2007 were $106.9 million as compared
to $116.0 million for the six months ended June 30, 2006, a decrease of $9.1
million or 7.9%. The decrease is primarily attributable to volume declines in
resilient sheet sales to both the remodel and builder segments coupled with
lower demand in the manufactured housing sector. Partially offsetting this sales
decline was the impact of price increases instituted in late 2006 and increased
sales of lower priced resilient sheet specials.
Gross profit for the three months ended June 30, 2007 totaled $13.7 million, or
23.9% of net sales, compared to $13.6 million, or 23.2% of net sales, for the
same period last year. The major factors leading to the improvement in gross
margin percent were the price increases instituted in September 2006 (3.1% of
net sales), which helped offset the negative impact on absorption of lower
production levels and an unfavorable product mix. Gross profit for the six
months ended June 30, 2007 totaled $25.7 million or 24.1 % of net sales,
compared to $26.9 million or 23.2% of net sales for the same period last year.
The decrease in gross profit dollars reflects the lower sales volume, while the
improvement in gross margin percent resulted from selling price increases
instituted in September 2006 (4.3%) which offset the negative impact of lower
production levels on overhead absorption and an unfavorable product mix.
40
Selling, general and administrative expenses were $10.0 million for the three
months ended June 30, 2007 as compared to $10.3 million for the three months
ended June 30, 2006, a decrease of $0.3 million. The reduction in expenses
reflects lower merchandising and sales support related costs (down by $0.5
million), lower compensation and related benefit costs reflecting workforce
reductions in January 2007 ($0.2 million) and lower depreciation expense ($0.2
million), partially offset by higher medical costs ($0.3 million) and legal
expense ($0.2 million). As a percent of net sales, selling, general and
administrative costs were 17.3% for the second quarter of 2007 compared to 17.5%
for the same period last year. Selling, general and administrative expenses were
$19.4 million for the six months ended June 30, 2007 as compared to $20.7
million for the six months ended June 30, 2006, a decrease of $1.2 million. The
reduction in expenses primarily reflects lower sample and merchandising expense
($1.0 million), lower compensation related to headcount reductions ($0.4
million) partially offset by higher medical costs and retiree benefits ($0.6
million). As a percent of net sales, selling, general and administrative costs
were 18.2% for the six months ended June 30, 2007 compared to 17.8% for the same
period last year.
Income from operations totaled $3.8 million for the quarter ended June 30, 2007
compared to income from operations of $3.3 million for the quarter ended June
30, 2006. The increase in operating income reflected the improved gross margins
and lower operating expenses. Income from operations was $6.3 million for the
six months ended June 30, 2007 compared to income from operations of $6.2
million for the six months ended June 30, 2006. The improvement in operating
income for the six months ended June 30, 2007 versus the prior year reflects
lower operating expenses, partially offset by the volume related reduction in
gross margins.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents decreased $0.7 million in the first six months of 2007
to $1.9 million. Working capital at June 30, 2007 was $30.4 million, up from
$26.9 million at December 31, 2006. The ratio of current assets to current
liabilities at June 30, 2007 was 1.57 compared to 1.62 at December 31, 2006.
Working capital and loan principal requirements during the first six months of
2007 exceeded net cash provided by operating activities and were financed with
drawings under the Company's revolving credit arrangements.
Capital expenditures in the first six months of 2007 were $1.0 million compared
to $1.3 million for the first six months of 2006. It is anticipated that capital
spending for the full year 2007 will be approximately $3 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of five to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
41
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that any such costs could be passed along to its customers.
American Biltrite Inc.'s primary source of borrowings are the revolving credit
facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of
America, National Association ("BofA") and BofA acting through its Canada branch
(the "Canadian Lender") pursuant to an amended and restated credit agreement
(the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc.
and its subsidiary K&M with (i) a $30.0 million commitment under the Revolver
with a $12.0 million borrowing sublimit (the "Canadian Revolver") for American
Biltrite Inc.'s subsidiary AB Canada and (ii) the $10.0 million Term Loan. The
Credit Agreement also provides for domestic and Canadian letter of credit
facilities with availability of up to $5.0 million and $1.0 million,
respectively, subject to availability under the Revolver and the Canadian
Revolver, respectively.
On September 25, 2006, American Biltrite Inc., K&M and AB Canada entered into an
amendment and restatement to the Credit Agreement with BofA and the Canadian
Lender. Pursuant to the amendment and restatement, the Term Loan was added to
the Credit Agreement and the amount of the Revolver was increased by $10.0
million to its current $30.0 million amount. In addition, the availability for
domestic letters of credit issued under the Credit Agreement was increased from
$4.0 million to $5.0 million. In connection with that amendment and restatement,
American Biltrite Inc. used approximately $17.0 million of new borrowings from
the proceeds of the Term Loan, which was fully drawn, and under the Revolver to
fully prepay $16.0 million of aggregate outstanding principal amount of the
Company's senior notes, all of which were held by The Prudential Insurance
Company of America, together with approximately $1.0 million in interest and
yield maintenance fees in connection with those notes and prepayment. A charge
of approximately $860 thousand for early extinguishment of debt was recorded in
connection with this prepayment, which was included in other expense in the
third quarter of 2006.
The amount of borrowings available from time to time for American Biltrite Inc.
and K&M under the Revolver may not exceed the lesser of (a) $30.0 million less
the then outstanding amount of borrowings by AB Canada under the Canadian
Revolver less any outstanding borrowings under the domestic letter of credit
facility and (b) the applicable borrowing base. The formula used for determining
the domestic borrowing base is based upon inventory, receivables and fixed
assets of the Company and certain of its subsidiaries (not including, among
others, AB Canada and Congoleum), reduced by amounts outstanding under the Term
Loan.
42
The amount of borrowings available from time to time for AB Canada under the
Canadian Revolver is limited to the lesser of (a) $12 million less any
outstanding borrowings under the Canadian letter of credit facility, (b) AB
Canada's borrowing base amount, which is based upon AB Canada's accounts
receivable, inventory and fixed assets, and (c) $30.0 million less the amount of
domestic borrowings outstanding under the Revolver on behalf of the Company and
K&M. AB Canada may borrow amounts under the Canadian Revolver in United States
or Canadian dollar denominations; however, solely for purposes of determining
amounts outstanding and borrowing availability under the Revolver, all Canadian
dollar denominated amounts will be converted into United States dollars in the
manner provided in the Credit Agreement.
Interest is payable quarterly on the Term Loan and Revolver borrowings by
American Biltrite Inc. and K&M under the Credit Agreement at rates which vary
depending on the applicable interest rate in effect and are generally determined
based upon: (a) if a LIBOR based rate is in effect, at a rate between a LIBOR
based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Agreement, (b) if a
fixed rate is in effect, at a rate between the fixed rate plus 1.0% to a fixed
rate plus 2.75%, depending on the Company's leverage ratio, as determined under
the Credit Agreement, and (c) for loans not based on a LIBOR or fixed rate, the
higher of (i) BofA's applicable prime rate and (ii) 0.50% plus the federal funds
rate, as determined under the Credit Agreement. Under the Credit Agreement,
American Biltrite Inc. and K&M may generally determine whether interest on
domestic revolving loans will be calculated based on a LIBOR based rate, and if
BofA elects to make a fixed rate option available, whether interest on revolving
loans will be calculated based on a fixed rate.
Interest is payable quarterly on revolving loans under the Canadian Revolver at
rates which vary depending on the applicable interest rate in effect and are
generally determined based upon: (a) if a LIBOR based rate is in effect, at a
rate between a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%,
depending on the Company's leverage ratio, as determined under the Credit
Agreement, and (b) if a LIBOR based rate is not in effect, for outstanding
revolving loans denominated in Canadian dollars, the higher of (i) 0.50% plus
the applicable 30-day average bankers' acceptance rate as quoted on Reuters CDOR
page and (ii) the Canadian Lender's applicable prime rate for loans made in
Canadian dollars to Canadian customers, and for outstanding revolving loans
denominated in United States dollars, the higher of (i) 0.50% plus the federal
funds rate as calculated under the Credit Agreement and (ii) the applicable rate
announced by the Canadian Lender as its reference rate for commercial loans
denominated in United States dollars made to a person in Canada. Under the
Credit Agreement, AB Canada may generally determine whether interest on Canadian
revolving loans will be calculated based on a LIBOR based rate.
American Biltrite Inc. has entered into interest rate swap agreements that
effectively fix the LIBOR rate component of the Term Loan and $6.0 million of
the Revolver at 5.18% and 5.15% respectively.
The Term Loan principal is payable in 20 quarterly installments of $500 thousand
beginning December 31, 2006 and ending on September 30, 2011. All indebtedness
under the Credit Agreement, other than the Term Loan, expires on September 30,
2009.
43
The Credit Agreement contains certain covenants that the Company must satisfy.
The covenants included in the Credit Agreement include certain financial tests,
restrictions on the ability of the Company to incur additional indebtedness or
to grant liens on its assets and restrictions on the ability of the Company to
pay dividends on its capital stock. The financial tests are required to be
calculated based on the Company accounting for its majority-owned subsidiary
Congoleum Corporation on the equity method and include a maximum ratio of total
liabilities to tangible net worth, a minimum ratio of earnings before interest,
taxes, depreciation and amortization ("EBITDA") less certain cash payments for
taxes, debt service, and dividends to interest expense, a minimum level of
tangible net worth, a requirement that there be no consecutive quarterly losses
from continuing operations, and a maximum level of capital spending. Pursuant to
the amendment and restatement to the Credit Agreement entered into on September
25, 2006, certain of the financial covenants under the Credit Agreement were
amended to, among other things, (i) increase the permitted ratio of the
Company's consolidated total liabilities to consolidated tangible net worth to
200%, (ii) to provide for a higher threshold for satisfying the consolidated
tangible net worth test and (iii) to provide a higher permitted aggregate amount
for capital expenditures in any fiscal year. The Credit Agreement also requires,
for each fiscal quarter ending on and after June 30, 2007, the Company's
consolidated adjusted EBITDA for the four consecutive fiscal quarters then
ending to exceed 100% of the Company's consolidated fixed charges for the
12-month period ending on such date, as determined under the Credit Agreement.
Pursuant to the Credit Agreement, the Company and certain of its subsidiaries
previously granted BofA and the Canadian Lender a security interest in most of
the Company's and its subsidiaries' assets. The security interest granted does
not include the shares of capital stock of Congoleum or the assets of Congoleum.
In addition, pursuant to the Credit Agreement, certain of the Company's
subsidiaries have agreed to guarantee the Company's obligations (excluding AB
Canada's obligations) under the Credit Agreement.
In the past, including during the most recently completed quarter, the Company
has had to amend its debt agreements in order to avoid being in default of those
agreements as a result of failing to satisfy certain financial covenants
contained in those agreements. At March 31, 2007, the Company was not in
compliance with the financial covenant under the Credit Agreement that there be
no consecutive quarterly net losses from continuing operations. On May 14, 2007,
American Biltrite Inc. and its subsidiaries, K&M and AB Canada, entered into an
amendment, effective as of March 31, 2007, to the Credit Agreement with BofA and
BofA acting through its Canada branch, each in their respective capacities as
lenders and administrative agents under the Credit Agreement. The amendment
revised that financial covenant to provide that for each of the two consecutive
fiscal quarters of the Company ending December 31, 2006 and June 30, 2007, the
Company not have a quarterly net loss from continuing operations in excess of
$400 thousand. The Company was in compliance with the financial covenants of its
debt agreements at June 30, 2007. While the Company does not currently
anticipate that it will need to amend its existing debt agreements to avoid
being in default at some future date, there can be no assurances in that regard,
and any required amendments, if obtained, could result in significant cost to
the Company. If a default were to occur and the Company was unable to obtain a
waiver from BofA, the Company would be required to repay all amounts outstanding
under the Credit Agreement and the Company would need to obtain funding from
another source. Otherwise, the Company would likely be unable to repay those
outstanding amounts, in which case, BofA might exercise its rights over the
44
collateral. Any default by the Company of the Credit Agreement that resulted in
the Company being required to immediately repay outstanding amounts under its
debt agreements, and for which suitable replacement financing were not timely
obtained, would have a material adverse effect on the Company's business,
results of operations and financial condition.
Under the terms of the Eleventh Plan, ABI would have contributed $250 thousand
in cash to the Plan Trust on the effective date of the plan. In addition, ABI
would have agreed to forego certain rights it has to receive indemnification
payments from Congoleum for asbestos claims pursuant to a joint venture
agreement to which ABI and Congoleum are parties. ABI would also have received
certain relief as may be afforded under Section 524(g)(4) of the Bankruptcy Code
from asbestos personal injury claims that derive from claims made against
Congoleum, which claims were expected to have been channeled to the Plan Trust.
However, the Eleventh Plan did not provide that any other asbestos claims that
may be asserted against ABI would be channeled to the Plan Trust. The Bankruptcy
Court has ruled that Congoleum's Tenth Plan is not confirmable as a matter of
law and that ABI's contribution of $250 thousand is not sufficient to entitle it
to relief under Section 524(g)(4) of the Bankruptcy Code. It is not yet known
what terms will be negotiated in any future amended plan of reorganization for
Congoleum, what contribution might be sought from ABI under the terms of such
plan, what benefits ABI might receive, and what action ABI might take in
response to any proposed plan terms.
It is also not known how any future amended plan of reorganization for Congoleum
that might be confirmed will treat the interests of creditors and shareholders
of Congoleum, including ABI. Under the terms of the Eleventh Plan, ABI's equity
interest in Congoleum would have been significantly reduced, and any future
amended plan, or plans proposed by other persons including the FCR Plan, would
likely further reduce or wholly eliminate ABI's Congoleum equity interests.
While the Company does not believe the loss of the value of its equity interest
in Congoleum would have a direct material adverse effect on ABI's liquidity, it
could have a material adverse impact on Congoleum's business, operations and
financial condition, and directly or indirectly, a material adverse impact on
the business relationships between ABI and Congoleum, which in turn could have a
material adverse impact on ABI's business, operations and financial condition.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's Board of Directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the Credit Agreement, aggregate dividend
payments (since June 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Agreement, earned from June 30,
2003.
45
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, Congoleum's
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, there is substantial doubt about Congoleum's ability to continue as a
going concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and J of the Notes to Unaudited Consolidating Condensed Financial Statements,
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a
discussion of Congoleum's bankruptcy proceedings. These matters continue to have
a material adverse impact on Congoleum's liquidity and capital resources. During
the first six months of 2007, Congoleum paid $5.5 million in fees and expenses
related to its Chapter 11 case and the New Jersey state insurance coverage case
which Congoleum is pursuing against certain insurance carriers. Furthermore, at
June 30, 2007 Congoleum had incurred but not paid approximately $6.0 million in
additional fees and expenses for services rendered through that date.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($24.1 million at June 30, 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 cannot presently
determine the amount of fees, expenses, and trust contributions it may incur or
be obligated to make in connection with obtaining confirmation of a plan of
reorganization.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
at June 30, 2007 is approximately $35.2 million, including interest on the
unpaid interest due, of which $3.6 million was owed at the time of the Chapter
11 filing.
46
In February 2006, the Bankruptcy Court ordered Gilbert, Heintz & Randolph LLP
(currently named Gilbert & Randolph LLP), a law firm that previously represented
Congoleum, to disgorge all fees and certain expenses it was paid by Congoleum.
In October 2006, Congoleum and that law firm entered into a settlement agreement
(the "GHR Settlement") under which the law firm would pay Congoleum
approximately $9.2 million in full satisfaction of the disgorgement order. In
April 2007, the Bankruptcy Court approved the GHR Settlement. The payment
obligation is secured by assets of the law firm and the payment is to be made
over time according to a formula based on the law firm's earnings. Treatment of
funds received pursuant to the GHR Settlement under a future amended plan of
reorganization may differ from the treatment accorded by any prior plans.
Unrestricted cash and cash equivalents, including short-term investments at June
30, 2007, were $24.0 million, an increase of $5.4 million from December 31,
2006. Under the terms of Congoleum's revolving credit agreement, payments on
Congoleum's accounts receivable are deposited in an account assigned by
Congoleum to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $3.4 million and $3.6 million at June 30,
2007 and December 31, 2006, respectively, are recorded as restricted cash.
Additionally, $6.3 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 June 30, 2007. Congoleum
expects that any plan of reorganization it pursues will provide that it
contribute these funds to the Plan Trust. Working capital was $14.7 million at
June 30, 2007, up from $11.5 million at December 31, 2006. The ratio of current
assets to current liabilities at June 30, 2007 was 1.2 to 1.0, which is up
slightly from 1.1 to 1.0 at December 31, 2006. Net cash provided by operations
during the first six months of 2007 was $5.7 million, as compared to net cash
used in operations of $11.6 in the first six months of 2006. The reduction in
cash used in operations was primarily due to lower working capital requirements
for inventory and receivables, as well as lower reorganization related
expenditures.
Capital expenditures for the six months ended June 30, 2007 totaled $1.1
million. Congoleum is currently planning capital expenditures of approximately
$5.0 million in 2007 and between $5 million and $7 million in 2008, primarily
for maintenance and improvement of plants and equipment, which it expects to
fund with cash from operations and borrowings under its credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on the
earlier of (i) December 31, 2007 and (ii) the date the plan of reorganization in
Congoleum's bankruptcy cases as confirmed by the Bankruptcy Court becomes
effective. Total borrowing under the facility may not exceed $30 million.
Interest is based on 0.25% above the prime rate. This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financing agreement must
be met in order for Congoleum to borrow from the facility. Congoleum was in
47
compliance with these covenants at June 30, 2007. Borrowings under this facility
are collateralized by inventory and receivables. At June 30, 2007, based on the
level of receivables and inventory, $19.4 million was available under the
facility, of which $2.2 million was utilized for outstanding letters of credit
and $13.5 million was utilized by the revolving loan. Congoleum anticipates that
its debtor-in-possession financing facility (including anticipated extensions
thereof) together with cash from operations, will provide it with sufficient
liquidity to operate during 2007 while under Chapter 11 protection. There can be
no assurances that Congoleum will continue to be in compliance with the required
covenants under this facility or that the debtor-in-possession facility (as
extended) will be renewed prior to its expiration if a plan of reorganization is
not confirmed before that time. For a plan of reorganization to be confirmed,
Congoleum or other plan proponent will need to obtain and demonstrate the
sufficiency of exit financing. Congoleum cannot presently determine the terms of
such financing, nor can there be any assurances of its success in obtaining it.
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (in addition to
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note I of the Notes to
Unaudited Consolidating Condensed 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 Congoleum's
owned and previously owned facilities. The contingencies also include claims for
personal injury and/or property damage. The exact amount of such future costs
and timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of Congoleum's liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on Congoleum's costs,
Congoleum is not aware of any pending legislation which would reasonably have
such an effect. There can be no assurances that the costs of any future
government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against Congoleum.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum cannot
presently determine the amount of fees, expenses, and trust contributions it may
incur or be required to make in connection with obtaining confirmation of a plan
of reorganization. Congoleum believes that its existing cash (including
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2007. Congoleum's ability to emerge from Chapter 11 will
depend on obtaining sufficient exit financing to settle administrative expenses
of the reorganization and any other related obligations, and to provide adequate
future liquidity.
48
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company and Congoleum are exposed to changes in prevailing market interest
rates affecting the return on its investments. The Company and Congoleum invest
primarily in highly liquid debt instruments with strong credit ratings and
short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. If market
interest rates were to increase by 10% from levels at June 30, 2007, the fair
value of our investments would decline by an immaterial amount. In addition,
substantially all of the Company's outstanding consolidated long-term debt as of
June 30, 2007 consisted of indebtedness with a fixed rate of interest, which is
not subject to change based upon changes in prevailing market interest rates, or
has been hedged with an interest rate swap agreement. The Company's interest
rate swap agreements have been designated cash flow hedges.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as in other countries in Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
the applicable foreign currency sales and expenses decreases. When the U.S.
dollar weakens against those currencies, the U.S. dollar value of the applicable
foreign currency sales and expenses increases.
Under their current policies, other than interest rate swap agreements, neither
the Company nor Congoleum use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in foreign currency exchange rates, commodity prices or equity prices
and does not hold any instruments for trading purposes.
49
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Part I, Item 2 of
this Quarterly Report on Form 10-Q, and in "Risk Factors - The Company and its
majority-owned subsidiary Congoleum have significant asbestos liability and
funding exposure, and the Company's and Congoleum's strategies for resolving
this exposure may not be successful" and "Risk Factors - Any plan of
reorganization for Congoleum will likely result in substantial dilution or
elimination of Congoleum's equity holders, including the Company" included in
Part II, Item 1A of this Quarterly Report on Form 10-Q, are incorporated herein
by reference.
Item 1A. Risk Factors
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM HAVE SIGNIFICANT
ASBESTOS LIABILITY AND FUNDING EXPOSURE, AND THE COMPANY'S AND CONGOLEUM'S
STRATEGIES FOR RESOLVING THIS EXPOSURE MAY NOT BE SUCCESSFUL.
The Company and Congoleum have significant liability and funding exposure for
asbestos personal injury claims. Congoleum has entered into settlement
agreements with various asbestos claimants totaling in excess of $491 million.
The Bankruptcy Court entered on its docket a ruling in February 2007 determining
that such claimants cannot receive, as a result of their pre-petition
settlements, preferential treatment under a plan. Congoleum has resumed plan
mediation discussions with parties in interest to resolve this and certain other
plan issues and has also appealed the Bankruptcy Court ruling to the District
Court. Given the pending plan mediation discussions and Congoleum's appeal, the
outcome of Congoleum's plan of reorganization process remains uncertain.
There can be no assurance that Congoleum will be successful in its appeal or in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that Congoleum or the
FCR will obtain approval to solicit acceptances of a new plan of reorganization,
that Congoleum or any other person will receive the acceptances necessary for
confirmation of a plan of reorganization, that any proposed plan will not be
modified further, that a plan will receive necessary court approvals from the
Bankruptcy Court and the District Court, or that such approvals will be received
in a timely fashion, that a plan will be confirmed, that a plan, if confirmed,
will become effective, or that there will be sufficient funds to pay for
continued litigation with respect to Congoleum's Chapter 11 case or the New
Jersey state court insurance coverage case which Congoleum is pursuing against
certain of its insurance carriers. It also is unclear whether any person in
addition to the FCR 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.
51
The terms of any new plan of reorganization are likely to be materially
different from the Tenth and Eleventh Plans, including with respect to the
Company and its interests, such as the Company's Congoleum equity interests and
the amount and form of any contribution the Company may be required to make to
the Plan Trust in order to receive the limited channeling injunctive relief that
would have been provided to the Company under the Eleventh Plan. Further, any
new plan of reorganization could be amended or modified as a result of further
negotiations with various parties. Congoleum expects that it will take until
some time late in the first quarter of 2008 at the earliest to obtain
confirmation of any plan of reorganization. Furthermore, the estimated costs and
contributions to effect any plan of reorganization could be significantly
greater than currently estimated. Any plan of reorganization pursued by
Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and District Court approvals, and there
can be no assurance that such conditions, approvals and other requirements will
be satisfied or obtained.
The Eleventh Plan and any alternative plan of reorganization pursued by
Congoleum 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 any plan of reorganization could be
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum or any other person 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 Congoleum or other plan
proponent obtaining exit financing to provide it with sufficient liquidity to
fund obligations upon the plan becoming effective. If Congoleum's cash flow from
operations is materially less than anticipated, and/or if the costs in
connection with seeking confirmation of a 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, Congoleum may be unable to obtain exit financing,
when combined with net cash provided from operating activities, that would
provide it with sufficient funds, which would likely result in not being able to
have an amended plan of reorganization confirmed or have such plan become
effective.
In addition, in view of ABI's relationships with Congoleum, ABI will be affected
by Congoleum's negotiations regarding, and its pursuit of, a plan of
reorganization, and there can be no assurance as to what that impact, positive
or negative, might be. In any event, the failure of Congoleum to obtain
confirmation and consummation of a Chapter 11 plan of reorganization would have
a material adverse effect on Congoleum's business, results of operations or
financial condition and could have a material adverse effect on ABI's business,
results of operations or financial condition.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The amount
of coverage remaining under the Company's primary insurance coverage relating to
policies underwritten from 1961 to 1985 is uncertain, and the Company is
currently negotiating with the three insurance carriers currently providing such
52
coverage to determine this amount. Upon the exhaustion of the primary insurance
coverage, the Company intends to seek reimbursement for asbestos claims under
its excess layers of insurance coverage and expects that its first layer of
excess liability insurance will provide coverage for these claims. The same
three insurance carriers providing the Company's primary insurance coverage also
underwrote the Company's first layer excess coverage during the period from
1964-1984, and the Company is currently negotiating with these carriers on how
this first layer excess coverage will apply to asbestos bodily injury claims. If
the Company were not able to receive coverage from its insurers for the
Company's asbestos liabilities and expenses, that would likely have a material
adverse effect on the Company's financial position. In addition, certain of the
excess liability insurance policies that the Company purchased were underwritten
by companies that are now insolvent, which may limit the amount of funds
available to pay for any future claims covered by these policies. It is also
possible that asbestos claims may be asserted against the Company alleging
exposure allocable solely to years in which the Company's insurance policies
excluded coverage for asbestos.
Some additional factors that could cause actual results to differ from
Congoleum's goals for resolving its asbestos liability through an amended plan
of reorganization include: (i) the future cost and timing of estimated asbestos
liabilities and payments, (ii) the availability of insurance coverage and
reimbursement from insurance companies that underwrote the applicable insurance
policies for Congoleum for asbestos-related claims, (iii) the costs relating to
the execution and implementation of any plan of reorganization pursued by
Congoleum, (iv) timely agreement with other creditors, or classes of creditors,
that exist or may emerge, (v) satisfaction of the conditions and obligations
under Congoleum's outstanding debt instruments, (vi) the response from time to
time of the lenders, customers, suppliers and other constituencies of Congoleum
and ABI to the ongoing process arising from Congoleum's strategy to settle its
asbestos liability, (vii) Congoleum's ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms, (viii) timely
creditor and court approval (including the results of any relevant appeals) of
any reorganization plan pursued by Congoleum or another plan proponent, and the
court overruling any objections to confirmation of a reorganization plan for
Congoleum 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 Congoleum is not successful
in obtaining sufficient creditor and court approval of a plan of reorganization,
such failure would have a material adverse effect upon its business, results of
operations and financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties of this
legislation, the Company does not know what effects any such legislation, if
adopted, may have upon its or Congoleum's businesses, results of operations or
financial conditions, or upon any plan of reorganization Congoleum may decide to
pursue. To date, Congoleum has expended significant amounts to resolve its
asbestos liability pursuant to a Chapter 11 plan of reorganization. To the
extent any federal legislation is enacted which does not credit Congoleum for
amounts paid by Congoleum pursuant to its plan of reorganization strategy or
requires the Company or Congoleum to pay significant amounts to any national
trust or otherwise, such legislation could have a material adverse effect on the
Company or Congoleum's businesses, results of operations or financial
conditions.
53
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A and J of the Notes to Unaudited Consolidating Condensed
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," which are included in Part I, Item 1 and
Part I, Item 2, respectively, in this report.
ANY PLAN OF REORGANIZATION FOR CONGOLEUM WILL LIKELY RESULT IN SUBSTANTIAL
DILUTION OR ELIMINATION OF CONGOLEUM'S EQUITY HOLDERS, INCLUDING THE COMPANY.
Congoleum's Tenth Plan, which has been ruled unconfirmable as a matter of law by
the Bankruptcy Court, would have resulted in significant dilution of Congoleum's
existing equity interests, including the Company's Congoleum equity interests.
Congoleum has resumed reorganization plan mediation discussions with parties in
interest to negotiate a new amended plan. The terms of any new amended plan
proposed by Congoleum, or any proposed plan of reorganization (such as the FCR
Plan) proposed for Congoleum by other parties in interest, may provide for even
greater dilution of the Congoleum equity interests than was contemplated by the
Eleventh Plan, including cancellation of Congoleum's existing Class A and Class
B common stock. There can be no assurance as to how Congoleum's existing equity
interests, including ABI's Congoleum equity interests, will be treated under any
plan of reorganization for Congoleum that may ultimately be confirmed by the
Bankruptcy Court and consummated. Under any outcome, ABI anticipates its equity
interest in Congoleum is likely to be substantially diluted or eliminated.
Elimination of ABI's controlling equity interest in Congoleum could have a
material adverse impact on Congoleum's business, operations and financial
condition, the business relationships between ABI and Congoleum, and ABI's
business, operations and financial condition.
54
THE COMPANY HAS HAD TO AMEND ITS DEBT AGREEMENTS IN THE PAST IN ORDER TO AVOID
BEING IN DEFAULT OF THOSE AGREEMENTS AND MAY HAVE TO DO SO AGAIN IN THE FUTURE,
AND THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING MAY BE LIMITED.
In the past, including during the most recently completed quarter, the Company
has had to amend its debt agreements in order to avoid being in default of those
agreements as a result of failing to satisfy certain financial covenants
contained in those agreements. On September 25, 2006, the Company entered into
an amendment and restatement to the credit agreement it has with Bank of
America, National Association and Bank of America, National Association acting
through its Canada branch, which is the agreement that governs the Company's
primary source of borrowings. In connection with that amendment and restatement,
certain financial covenants were amended under the credit agreement to enable
the Company to comply with those covenants. In addition, the Company recently
entered into an amendment to the Credit Agreement to allow the Company to
satisfy the financial covenant requiring the Company to not have consecutive
quarterly net losses from continuing operations with respect to the Company's
two consecutive fiscal quarters ending December 31, 2006 and June 30, 2007.
Although the Company does not anticipate that it will need to further amend the
credit agreement to avoid being in default at some future date, there can be no
assurances in that regard. If the Company were to violate one of those covenants
and not amend the agreement to address or obtain a waiver of the violation, it
could breach the agreement, resulting in a default of the agreement. If such a
default were to occur, the lenders could require the Company to repay all
amounts outstanding under the credit agreement. If the Company were unable to
repay those amounts due, the lenders could have its rights over the collateral
(most of the Company's and its domestic subsidiaries' (excluding Congoleum)
assets) exercised, which would likely have a material adverse effect on the
Company's business, results of operations or financial condition.
In addition, under the terms of the credit agreement, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM MAY INCUR SUBSTANTIAL
LIABILITY FOR ENVIRONMENTAL CLAIMS AND COMPLIANCE MATTERS.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their current and previously owned
facilities, in order to comply with existing environmental laws, and those
55
amounts may be substantial. Although the Company and Congoleum believe that
those amounts should not have a material adverse effect on their respective
financial positions, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM, MAY INCUR SUBSTANTIAL
LIABILITY FOR OTHER PRODUCT AND GENERAL LIABILITY CLAIMS.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations or
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters, or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM ARE DEPENDENT UPON A
CONTINUOUS SUPPLY OF RAW MATERIALS FROM THIRD PARTY SUPPLIERS AND WOULD BE
HARMED IF THERE WERE A SIGNIFICANT, PROLONGED DISRUPTION IN SUPPLY OR INCREASE
IN ITS RAW MATERIAL COSTS.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary,
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of their raw materials. In
particular, industry supply conditions for specialty resins used in flooring
56
have been very tight, despite significant price increases, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and
remained high in 2006. They are expected to remain high until additional
capacity becomes available, and could increase further in response to oil prices
or other global market conditions.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM OPERATE IN HIGHLY
COMPETITIVE MARKETS AND SOME OF THEIR COMPETITORS HAVE GREATER RESOURCES, AND IN
ORDER TO BE SUCCESSFUL, THE COMPANY AND CONGOLEUM MUST KEEP PACE WITH AND
ANTICIPATE CHANGING CUSTOMER PREFERENCES.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the United States Bankruptcy Code and emerge from
bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum. In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
57
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM ARE SUBJECT TO GENERAL
ECONOMIC CONDITIONS AND CONDITIONS SPECIFIC TO THEIR RESPECTIVE INDUSTRIES.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM COULD REALIZE SHIPMENT
DELAYS, DEPLETION OF INVENTORY AND INCREASED PRODUCTION COSTS RESULTING FROM
UNEXPECTED DISRUPTIONS OF OPERATIONS AT ANY OF THE COMPANY'S OR CONGOLEUM'S
FACILITIES.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM OFFER LIMITED WARRANTIES
ON THEIR PRODUCTS WHICH COULD RESULT IN THE COMPANY OR CONGOLEUM INCURRING
SIGNIFICANT COSTS AS A RESULT OF WARRANTY CLAIMS.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
58
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM RELY ON A SMALL NUMBER
OF CUSTOMERS AND DISTRIBUTORS FOR A SIGNIFICANT PORTION OF THEIR SALES OR TO
SELL THEIR PRODUCTS.
The Company's Tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 22% of the
Company's Tape division's net sales for the year ended December 31, 2006 and 23%
of its net sales for the year ended December 31, 2005. The loss of the largest
unaffiliated customer and/or two or more of the other four unaffiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
Congoleum principally sells its products through distributors. Although
Congoleum has more than one distributor in some of its distribution territories
and actively manages its credit exposure to its distributors, the loss of a
major distributor could have a materially adverse impact on the Company's
business, results of operations, or financial condition. Congoleum derives a
significant percentage of its sales from two of its distributors. These two
distributors accounted for approximately 67% of Congoleum's net sales for each
of the years ended December 31, 2006 and 2005.
The Company's majority-owned subsidiary K&M sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M's customers accounted
for approximately 54% of its net sales for the year ended December 31, 2006 and
58% of its net sales for the year ended December 31, 2005. The loss of the
largest of these customers would have a material adverse effect on K&M's
business, results of operations and financial condition and would likely have a
material adverse effect on the Company's business, results of operations or
financial condition.
THE COMPANY AND ITS MAJORITY-OWNED SUBSIDIARY CONGOLEUM DEPEND ON KEY EXECUTIVES
TO RUN THEIR BUSINESSES, AND THE LOSS OF ANY OF THESE EXECUTIVES WOULD LIKELY
HARM THE COMPANY'S BUSINESS.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
59
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due on the Senior Notes on the following
dates: February 1, 2004, 2005, 2006 and 2007 and August 1, 2004, 2005, 2006 and
2007. The aggregate amount of the interest payments that was not paid on the
Senior Notes with respect to those interest payment due dates is approximately
$41.7 million. As of June 30, 2007, the aggregate outstanding principal amount
of the Senior Notes was $100.0 million. These amounts, which include $5.0
million of aggregate accrued interest on the unpaid interest that was due on
February 1, 2004, 2005, 2006 and 2007 and August 1, 2004, 2005, and 2006 with
respect to the Senior Notes, are included in the line item "Liabilities Subject
to Compromise" in the Company's consolidating condensed balance sheet included
in this report.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the Company's stockholders held on May 8, 2007, all
director nominees were elected.
The four nominees who were elected as Class II directors will hold office until
the annual meeting of stockholders to be held in 2010 and until their successors
are duly elected and qualified. The results of the vote for the election of
those directors are set forth below.
Number of Number of
Name Votes For Votes Withheld
----------------------- ------------- ----------------
Leo R. Breitman 3,095,646 68,348
John C. Garrels 3,095,616 68,378
James S. Marcus 3,095,646 68,348
Roger S. Marcus 2,954,947 209,047
60
Item 6. Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
4.1 III Response Cost Sharing and Alternative Dispute Resolution
Agreement dated as of May 21, 2007 by American Biltrite
Inc. and Miller Industries Inc.
10.1 III Response Cost Sharing and Alternative Dispute Resolution
Agreement dated as of May 21, 2007 by American Biltrite
Inc. and Miller Industries Inc.
10.2 Amendment No. 7 to Ratification and Amendment Agreement
and Amendment No. 9 to Loan and Security Agreement
between Congoleum Corporation and Wachovia Bank National
Association, successor by merger to Congress Financial
Corporation
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Officer of the Registrant pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------
I Incorporated by reference to the exhibits filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
filed with the Securities and Exchange Commission on April 2, 1997
(1-4773)
II Incorporated by reference to the exhibits filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 and
filed with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibit filed with the Company's
Current Report on Form 8-K dated May 21, 2007 and filed with the
Securities and Exchange Commission on May 21, 2007
61
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: October 9, 2007 BY: /s/ Howard N. Feist III
------------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
62
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
4.1 III Response Cost Sharing and Alternative Dispute Resolution
Agreement dated as of May 21, 2007 between American
Biltrite Inc. and Miller Industries Inc.
10.1 III Response Cost Sharing and Alternative Dispute Resolution
Agreement dated as of May 21, 2007 between American
Biltrite Inc. and Miller Industries Inc.
10.2 Amendment No. 7 to Ratification and Amendment Agreement
and Amendment No. 9 to Loan and Security Agreement
between Congoleum Corporation and Wachovia Bank National
Association, successor by merger to Congress Financial
Corporation
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Office of the Registrant pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
----------
I Incorporated by reference to the exhibits filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and
filed with the Securities and Exchange Commission on April 2, 1997
(1-4773)
II Incorporated by reference to the exhibits filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 and
filed with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibit filed with the Company's
Current Report on Form 8-K dated May 21, 2007 and filed with the
Securities and Exchange Commission on May 21, 2007
63