eps3072.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended June 30,
2008
or
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ________ to _________
Commission
File Number 1-13612
CONGOLEUM
CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE |
02-0398678
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
(IRS Employer Identification
No.)
|
3500
Quakerbridge Road
P.O.
Box 3127
Mercerville,
NJ 08619-0127
(Address
of principal executive offices, including zip code)
(609)
584-3000
(Registrant's
telephone number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
YES x NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o
Non-accelerated filer o Smaller
reporting company x
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES o 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 July 31, 2008
|
|
|
|
Class
A Common Stock
|
|
3,663,390
|
Class
B Common Stock
|
|
4,608,945
|
CONGOLEUM
CORPORATION
Index
|
|
|
Page
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
Item
1.
|
Financial
Statements:
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of June 30, 2008 (unaudited) and December 31,
2007
|
5
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Operations for the three and six months ended
June 30, 2008 and 2007 (unaudited)
|
6
|
|
|
|
|
|
|
Condensed
Consolidated Statement of Cash Flows for the six months ended June 30,
2008 and 2007 (unaudited)
|
7
|
|
|
|
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
(unaudited)
|
8
|
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
26
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
34
|
|
|
|
|
Item
4T.
|
Controls
and Procedures
|
34
|
|
|
|
|
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
35
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
35
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
41
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
42
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
42
|
|
|
|
|
Item
5.
|
Other
Information
|
43
|
|
|
|
|
Item
6.
|
Exhibits
|
43
|
|
|
|
|
Signatures
|
44
|
Factors That May Affect
Future Results
Some of
the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project” and
other words of similar meaning. In particular, these include
statements relating to intentions, beliefs or current expectations concerning,
among other things, future performance, results of operations, the outcome of
contingencies such as bankruptcy and other legal proceedings, and financial
conditions. These statements do not relate strictly to historical or
current facts. These forward-looking statements are based on the
expectations of Congoleum Corporation (the “Company” or “Congoleum”), as of the
date of this report, of future events, and the Company undertakes no obligation
to update any of these forward-looking statements. Although the Company believes
that these expectations are based on reasonable assumptions, within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements. Any or
all of these statements may turn out to be incorrect. By their
nature, forward-looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that may or may not occur in the
future. Any forward-looking statement made in this report speaks only
as of the date of such statement. It is not possible to predict or
identify all factors that could potentially cause actual results to differ
materially from expected and historical results. Factors that could cause or
contribute to the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report, including in the
section of this report entitled "Risk Factors" and in the Company's other
filings with the Securities and Exchange Commission.
PART
I. FINANCIAL INFORMATION
Item
1. Financial
Statements
CONGOLEUM
CORPORATION
CONSOLIDATED
BALANCE SHEET
(In
thousands, except per share amounts)
|
|
June
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
26,474 |
|
|
$ |
26,327 |
|
Restricted
cash
|
|
|
29,373 |
|
|
|
6,501 |
|
Accounts
receivable, less allowances of $883 and $1,017 as of June 30,
2008
|
|
|
|
|
|
|
|
|
and
December 31, 2007, respectively
|
|
|
17,120 |
|
|
|
14,162 |
|
Inventories
|
|
|
40,979 |
|
|
|
35,182 |
|
Prepaid
expenses and other current assets
|
|
|
3,301 |
|
|
|
13,138 |
|
Total
current assets
|
|
|
117,247 |
|
|
|
95,310 |
|
Property,
plant and equipment, net
|
|
|
58,391 |
|
|
|
61,993 |
|
Other
assets, net
|
|
|
11,741 |
|
|
|
11,909 |
|
Total
assets
|
|
$ |
187,379 |
|
|
$ |
169,212 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
8,258 |
|
|
$ |
10,399 |
|
Accrued
liabilities
|
|
|
16,643 |
|
|
|
20,933 |
|
Asbestos-related
liabilities
|
|
|
45,647 |
|
|
|
31,207 |
|
Revolving
credit loan
|
|
|
17,436 |
|
|
|
10,551 |
|
Deferred
income taxes
|
|
|
7,725 |
|
|
|
7,725 |
|
Accrued
taxes
|
|
|
1,186 |
|
|
|
125 |
|
Liabilities
subject to compromise – current
|
|
|
4,997 |
|
|
|
4,997 |
|
Total
current liabilities
|
|
|
101,892 |
|
|
|
85,937 |
|
Liabilities
subject to compromise - long term
|
|
|
130,043 |
|
|
|
129,731 |
|
Total
liabilities
|
|
|
231,935 |
|
|
|
215,668 |
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Class
A common stock, par value $0.01; 20,000,000 shares authorized;
4,736,950
|
|
|
|
|
|
|
|
|
shares
issued and 3,663,390 shares outstanding as of June 30, 2008
and
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
47 |
|
|
|
47 |
|
Class
B common stock, par value $0.01; 4,608,945 shares authorized, issued
and
|
|
|
|
|
|
|
|
|
outstanding
at June 30, 2008 and December 31, 2007
|
|
|
46 |
|
|
|
46 |
|
Additional
paid-in capital
|
|
|
49,377 |
|
|
|
49,368 |
|
Retained
deficit
|
|
|
(63,526 |
) |
|
|
(65,417 |
) |
Accumulated
other comprehensive loss
|
|
|
(22,687 |
) |
|
|
(22,687 |
) |
|
|
|
(36,743 |
) |
|
|
(38,643 |
) |
Less
Class A common stock held in treasury, at cost; 1,073,560 shares at June
30,
|
|
|
|
|
|
|
|
|
2008
and December 31, 2007
|
|
|
7,813 |
|
|
|
7,813 |
|
Total
stockholders’ equity (deficit)
|
|
|
(44,556 |
) |
|
|
(46,456 |
) |
Total
liabilities and stockholders’ equity (deficit)
|
|
$ |
187,379 |
|
|
$ |
169,212 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CONGOLEUM
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
sales
|
|
$ |
47,166 |
|
|
$ |
57,541 |
|
|
$ |
94,863 |
|
|
$ |
106,856 |
|
Cost
of sales
|
|
|
37,277 |
|
|
|
43,797 |
|
|
|
74,101 |
|
|
|
81,113 |
|
Selling,
general and administrative expenses
|
|
|
9,238 |
|
|
|
9,963 |
|
|
|
18,370 |
|
|
|
19,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
651 |
|
|
|
3,781 |
|
|
|
2,392 |
|
|
|
6,329 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
64 |
|
|
|
130 |
|
|
|
1,192 |
|
|
|
254 |
|
Interest
expense
|
|
|
-- |
|
|
|
(3,077 |
) |
|
|
(197 |
) |
|
|
(6,058 |
) |
Other
(expense) / income
|
|
|
(350 |
) |
|
|
8 |
|
|
|
(414 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
365 |
|
|
|
842 |
|
|
|
2,973 |
|
|
|
491 |
|
Provision
for income taxes
|
|
|
153 |
|
|
|
7 |
|
|
|
1,082 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
212 |
|
|
|
835 |
|
|
|
1,891 |
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.03 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.06 |
|
Diluted
|
|
$ |
0.03 |
|
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
0.06 |
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,272 |
|
|
|
8,272 |
|
|
|
8,272 |
|
|
|
8,272 |
|
Diluted
|
|
|
8,272 |
|
|
|
8,288 |
|
|
|
8,272 |
|
|
|
8,289 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
CONGOLEUM
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,891 |
|
|
$ |
484 |
|
Adjustments
to reconcile net income to net cash provided
by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,106 |
|
|
|
5,201 |
|
Amortization
|
|
|
193 |
|
|
|
192 |
|
Stock
based compensation expense
|
|
|
9 |
|
|
|
10 |
|
Changes
in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(2,958 |
) |
|
|
(504 |
) |
Inventories
|
|
|
(5,797 |
) |
|
|
(1,329 |
) |
Prepaid
expenses and other assets
|
|
|
669 |
|
|
|
1,244 |
|
Proceeds
from legal fee disgorgement
|
|
|
9,168 |
|
|
|
-- |
|
Insurance
recovery (net) for oven replacement
|
|
|
-- |
|
|
|
1,561 |
|
Accounts
payable
|
|
|
(2,141 |
) |
|
|
2,048 |
|
Accrued
liabilities
|
|
|
(4,315 |
) |
|
|
5,635 |
|
Asbestos-related
liabilities
|
|
|
(8,472 |
) |
|
|
(7,783 |
) |
Other
|
|
|
1,373 |
|
|
|
(1,041 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(5,274 |
) |
|
|
5,718 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,504 |
) |
|
|
(1,073 |
) |
Net
cash (used in) investing activities
|
|
|
(1,504 |
) |
|
|
(1,073 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
short-term borrowings
|
|
|
6,885 |
|
|
|
800 |
|
Net
change in restricted cash
|
|
|
40 |
|
|
|
(41 |
) |
Net
cash provided by financing activities
|
|
|
6,925 |
|
|
|
759 |
|
Net
increase in cash and cash equivalents
|
|
|
147 |
|
|
|
5,404 |
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
26,327 |
|
|
|
18,591 |
|
End
of period
|
|
$ |
26,474 |
|
|
$ |
23,995 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements
CONGOLEUM
CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of Congoleum
Corporation’s (the “Company” or “Congoleum”) condensed consolidated financial
position, results of operations and cash flows have been
included. Operating results for the six month period ended June 30,
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008. For further information, refer to the
consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2007.
Based upon the nature of the Company’s
operations, facilities and management structure, the Company considers its
business to constitute a single segment for financial reporting
purposes.
Certain amounts appearing in the prior
period’s condensed consolidated financial statements have been reclassified to
conform to the current period’s presentation.
The
Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more
fully below, there is substantial doubt about the Company's ability to continue
as a going concern unless it obtains relief from its substantial asbestos
liabilities through a successful reorganization under Chapter 11 of the
Bankruptcy Code.
On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy Court for the District of
New Jersey (the “Bankruptcy Court”) (Case No. 03-51524) seeking relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") as a
means to resolve claims asserted against it related to the use of asbestos in
its products decades ago. During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed a modified plan of
reorganization and related documents with the Bankruptcy Court (the "Fourth
Plan") reflecting the result of further negotiations with representatives of the
Asbestos Claimants’ Committee (the “ACC”), the Future Claimants’ Representative
(the “FCR”) and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan. In April 2005,
Congoleum announced that it had reached an agreement
in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the “Plan Trust”) to pay asbestos claims against
Congoleum. In July 2005, Congoleum filed an amended plan of
reorganization (the “Sixth Plan”) and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005. In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn. In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof. In March 2006, Congoleum filed a new
amended plan of reorganization (the “Eighth Plan”). In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, “CNA”), filed a plan of reorganization and the
Official Committee of Bondholders (the “Bondholders’ Committee”), representing
holders of the Company’s 8-5/8% Senior Notes due August
1, 2008 (the “Senior Notes”), also filed a plan of reorganization. In
May 2006, the Bankruptcy Court ordered all parties in interest in Congoleum’s
reorganization proceedings to participate in global mediation
discussions. Numerous mediation sessions took place from June through
September 2006. During the initial mediation negotiations,
Congoleum reached an agreement in principle, subject to mutually agreeable
definitive documentation, with the ACC, the FCR and the Company’s
controlling shareholder, American Biltrite, Inc. (“ABI”), on certain terms of an
amended plan of reorganization (the “Ninth Plan”), which Congoleum filed and
proposed jointly with the ACC in August 2006. CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization. Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’
Committee reached agreement on the terms of a new amended plan (the “Tenth
Plan”), which Congoleum filed jointly with the ACC in September
2006. Following the Bondholders’ Committee’s withdrawal of support
for CNA’s plan, CNA filed an amended plan of reorganization (the “CNA
Plan”). In October 2006, Congoleum and the ACC jointly filed a
revised version of the Tenth Plan (the “Eleventh Plan”) which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan. In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were 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 the Tenth Plan and the CNA Plan were not confirmable as a
matter of law. In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan. In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement. After extensive further mediation sessions, on
February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed a plan of reorganization (the “Joint Plan”). The
Bankruptcy Court approved the disclosure statement for the Joint Plan in
February 2008, and the Joint Plan was solicited in accordance with
court-approved
voting
procedures. Various objections to the Joint Plan were filed, and on
May 12, 2008 the Bankruptcy Court heard oral argument on summary judgment
motions relating to certain of those objections. On June 6, 2008, the
Bankruptcy Court issued a ruling that the Joint Plan was not legally
confirmable, and issued an Order to Show Cause why the case should not be
converted or dismissed pursuant to 11 U.S.C. § 1112. Following a
further hearing on June 26, 2008, the Bankruptcy Court issued an opinion that
vacated the Order to Show Cause and instructed the parties to submit a
confirmable plan by the end of calendar year 2008. The official committee of bondholders,
the asbestos creditors’ committee and the future claimants’ representative have
recently reached an agreement in principle which the Company believes addresses
the issues raised recently by the Bankruptcy Court in the ruling on the Join
Plan and in the court's prior decisions. The Company expects a term sheet
will be filed with the Bankruptcy Court shortly.
There can
be no assurance that any plan of reorganization will subsequently be proposed
or, if proposed, will receive the acceptances necessary for confirmation, that
any plan will not be modified further, that any other plan will receive
necessary court approvals from the Bankruptcy Court and the United States
District Court for the District of New Jersey (the "District Court"), or that
such approvals will be received in a timely fashion, that any plan will be
confirmed, that any plan, if confirmed, will become effective, or that Congoleum
will continue to earn sufficient funds to pay for continued litigation over any
plan of reorganization. It also is unclear whether any other person
might successfully propose and confirm a plan or what any such plan, when
confirmed, would ultimately provide, and whether the Bankruptcy Court would
approve such a plan. Any plan of reorganization pursued by the
Company will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and District Court approvals, and there
can be no assurance that such conditions, approvals and other requirements will
be satisfied or obtained.
For more
information regarding the Company’s asbestos liability and plan for resolving
that liability, please refer to Note 6.
American
Institute of Certified Public Accountant Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7")
provides financial reporting guidance for entities that are reorganizing under
the Bankruptcy Code. The Company implemented this guidance in consolidated
financial statements for periods after December 31, 2003.
Pursuant
to SOP 90-7, companies are required to segregate pre-petition liabilities that
are subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company’s liabilities at December 31, 2003
have been reclassified as liabilities subject to compromise. Obligations arising
post-petition, and pre-petition obligations that are secured, are not classified
as liabilities subject to compromise.
Additional pre-petition claims
(liabilities subject to compromise) may arise due to the rejection of executory
contracts or unexpired leases, or as a result of the allowance of contingent or
disputed claims.
2.
|
Recent
Accounting Principles:
|
Fair Value Measurements
In September 2006, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 157, Fair Value Measurements. SFAS
No. 157 provides a common fair value hierarchy for companies to follow in
determining fair value measurements in the preparation of financial statements
and expands disclosure requirements relating to how such fair value measurements
were developed. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions that the marketplace would use when pricing an asset or
liability, rather than company-specific data. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. However, on February
12, 2008, the FASB issued Staff Position 157-2 which delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. For items within its scope, this Staff Position
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008. The Company does not believe that the adoption of SFAS No.
157 for its non-financial assets and liabilities, effective January 1, 2009,
will have a material impact on the consolidated financial
statements. The Company adopted SFAS No. 157 effective January 1,
2008 for its financial assets and liabilities and this adoption did not have a
material impact on the consolidated financial statements (see Note
6).
3. Inventories:
A summary of the major components of
inventories is as follows (in thousands):
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
33,883 |
|
|
$ |
28,445 |
|
Work-in-process
|
|
|
1,636 |
|
|
|
1,108 |
|
Raw
materials and supplies
|
|
|
5,460 |
|
|
|
5,629 |
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$ |
40,979 |
|
|
$ |
35,182 |
|
4. Income
Per Share
Basic net
income per share is calculated by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net
income per share is calculated by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period, unless their effect is anti-dilutive.
5.
|
Environmental
and Other Liabilities
|
The
Company records a liability for environmental remediation claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at June 30, 2008 and December 31, 2007, are
not reduced by the amount of insurance recoveries. Such estimated
insurance recoveries approximated $2.2 million at June 30, 2008 and December 31,
2007, and are reflected in other non-current assets. Receivables for expected
insurance recoveries are recorded if the related carriers are solvent and paying
claims under a reservation of rights or under an obligation pursuant to coverage
in place or a settlement agreement. Substantially all of Congoleum’s recorded
insurance asset for environmental matters is collectible from a single
carrier.
The
Company is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and similar state laws. In
addition, in four other instances, although not named as a PRP, the Company has
received a request for information. The pending proceedings relate to
eight disposal sites in New Jersey, Pennsylvania, and Maryland in which recovery
from generators of hazardous substances is sought for the cost of cleaning up
the contaminated waste sites. The Company’s ultimate liability and
funding obligations in connection with those sites depends on many factors,
including the volume of material contributed to the site, the number of other
PRPs and their financial viability, the remediation methods and technology to be
used and the extent to which costs may be recoverable from
insurance. However, under CERCLA and certain other laws, the Company,
as a PRP, can be held jointly and severally liable for all environmental costs
associated with a site.
The most significant exposure for which
the Company has been named a PRP relates to a recycling facility site in Elkton,
Maryland (the “Galaxy / Spectron Superfund Site”). The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as
of December 31, 1998 and a groundwater treatment system was installed
thereafter. The Environmental Protection Agency (“EPA”) has selected
a remedy for the soil and shallow groundwater (“Operable Unit 1” or OU-1);
however, the remedial investigation / feasibility study related to the deep
groundwater (OU-2) has not been completed. The PRP group, of which
the Company is a part, has entered into a Consent Decree to perform the remedy
for OU-1 and resolve natural resource damage claims. The Consent Decree also
requires the PRPs to perform the OU-2 remedy, assuming that the estimated cost
of the remedy is not more than $10 million. If the estimated cost of
the OU-2 remedy is more than $10 million, the PRPs may decline to perform it or
they may elect to perform anyway. Cost estimates for the OU-1 and OU-2 work
combined (including natural resource damages) range between $22 million and $34
million, with the Company’s share ranging between approximately $1.0 million and
$1.6 million. This assumes that all parties participate and that none
cash-out and pay a premium; those two factors may account for some fluctuation
in the Company’s share. Fifty percent (50%) of Congoleum’s share of the costs is
presently being paid by one of its insurance carriers, Liberty Mutual Insurance
Company, whose remaining policy limits for this claim are expected to cover
approximately $0.3 million in additional costs. Congoleum expects to
fund the balance to the extent further insurance coverage is not
available.
The
Company filed a motion before the Bankruptcy Court seeking authorization and
approval of the Consent Decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual
Insurance Company and the Company to make certain payments that have been
invoiced to the Company with respect to the Consent Decree and related
settlement agreements. An order authorizing and approving the Consent
Decree and related settlement agreements was issued by the Bankruptcy Court in
August 2006.
The Company also accrues remediation
costs for certain of the Company’s owned facilities on an undiscounted basis.
The Company has entered into an administrative consent order with the New Jersey
Department of Environmental Protection and has established a remediation trust
fund of $100 thousand as financial assurance for certain remediation funding
obligations. Estimated total cleanup costs of $1.3 million, including
capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies. Of this amount,
$0.3 million is included in current liabilities subject to compromise and $1.0
million is included in non-current liabilities subject to
compromise.
The Company anticipates that these
matters will be resolved over a period of years and that after application of
expected insurance recoveries, funding the costs will not have a material
adverse impact on the Company’s liquidity or financial position. However,
unfavorable developments in these matters could result in significant expenses
or judgments that could have a material adverse effect on the financial position
of the Company.
6. Asbestos
Liabilities
Claims
Settlement and Chapter 11 Reorganization
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 as a means to resolve claims asserted
against it related to the use of asbestos in its products decades
ago. During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum. In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005,
Congoleum
learned
that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum’s exclusive right to file
a plan of reorganization and solicit acceptances thereof. In March
2006, Congoleum filed the Eighth Plan. In addition, 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. Numerous mediation sessions took place from
June through September 2006. During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and the Company’s
controlling shareholder, ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC in August 2006. CNA
and the Bondholders’ Committee jointly filed a new, competing plan in August
2006 and each withdrew its prior plan of reorganization. Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders’ Committee reached agreement on the 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 the
Eleventh Plan, a revised version of the Tenth 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 as to whether the Tenth Plan and the CNA Plan were 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 the Tenth Plan and the CNA Plan were not confirmable as a
matter of law. In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan. In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement. After extensive further mediation sessions, on
February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed the Joint Plan. The Bankruptcy Court approved the
disclosure statement for the Joint Plan in February 2008, and the Joint Plan was
solicited in accordance with court-approved voting
procedures. Various objections to the Joint Plan were filed, and on
May 12, 2008 the Bankruptcy Court heard oral argument on summary judgment
motions relating to certain of those objections. On June 6, 2008, the
Bankruptcy Court issued a ruling that the Joint Plan was not legally
confirmable, and issued an Order to Show Cause why the case should not be
converted or dismissed pursuant to 11 U.S.C. § 1112. Following a
further hearing on June 26, 2008, the Bankruptcy Court issued an opinion that
vacated the Order to Show Cause and instructed the parties to submit a
confirmable plan by the end of calendar year 2008. The official committee of
bondholders, the asbestos creditors’ committee and the future claimants’
representative have recently reached an agreement in principle which the Company
believes addresses the issues raised recently by the Bankruptcy Court in the
ruling on the Join Plan and in the court's prior decisions. The Company
expects a term sheet will be filed with the Bankruptcy Court
shortly.
There can
be no assurance that any plan of reorganization will subsequently be proposed
or, if proposed, will receive the acceptances necessary for confirmation, that
any plan will not be modified further, that any 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 any plan will be confirmed,
that any plan, if confirmed, will become effective, or that Congoleum will
continue to earn sufficient funds to pay for continued litigation over any plan
of reorganization. It also is unclear whether any other person might
successfully propose and confirm a plan or what any such plan, when confirmed,
would ultimately provide, and whether the Bankruptcy Court would approve such a
plan. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and District Court approvals, and there can be no assurance
that such conditions, approvals and other requirements will be satisfied or
obtained.
Although
there can be no assurances that any future plan will have the same or similar
terms to the Joint Plan, the following description of the terms of the Joint
Plan may be useful in understanding the agreement that was reached among
creditors in connection with that plan and how it would have been
implemented. If the Joint Plan has been approved by the Bankruptcy
Court and accepted by the requisite creditor constituencies, it would have
permitted Congoleum to exit Chapter 11 free of liability for existing or
future asbestos claims. Under the terms of the Joint Plan, a trust would have been created that would
have assumed the liability for Congoleum’s current and future asbestos
claims. That trust would have received the proceeds of various
settlements Congoleum has reached with a number of insurance carriers, and would
have been assigned Congoleum’s rights under its remaining insurance policies
covering asbestos product liability. The trust also would have
received 50.1% of the newly issued common stock in reorganized Congoleum when
the Joint Plan took effect (the “Trust Shares”).
Holders of Congoleum’s $100 million in
8.625% Senior Notes due in August 2008 would have received on a pro rata basis
$80 million in new 9.75% senior secured notes maturing five years from
issuance. The new senior secured notes would have been subordinated
to the working capital facility providing Congoleum’s financing upon exiting
reorganization. In addition, holders of the $100 million in 8.625%
Senior Notes due in August 2008 would have received 49.9% of the common stock in
reorganized Congoleum. Congoleum’s obligations for the $100 million
in 8.625% senior notes due in August 2008, including accrued interest (which
amounted to $3.6 million at December 31, 2007 and June 30, 2008) would have been
satisfied by the new senior secured notes and the common stock issued when the
Joint Plan took effect.
Under the
terms of the Joint Plan, existing Class A and Class B common shares of Congoleum
would have been cancelled when the plan took effect and holders of those shares
would not have received anything on account of their cancelled
shares.
In
connection with the Joint Plan, Congoleum and certain parties entered into an
agreement (the “Put/Call Agreement”). Pursuant to the Put/Call
Agreement, for the first 60 days after the date the Joint Plan was to become
effective (the “Effective Date”), the Plan Trust would have had the right, at
its sole option, to elect to cause participating holders of Senior Notes (the
“Backstop Participants”) to purchase all, but not less than all, of the Trust
Shares for an aggregate purchase price equal to $5.25 million. Similarly, for
the first 90 days after the Effective Date, the Backstop Participants would have
had the right to cause the Plan Trust to sell all, but not less than all, of the
Trust Shares to the Backstop Participants for an aggregate purchase price equal
to $7.5 million. The Put / Call Agreement expired by its terms as of
June 30, 2008.
In March
2004, the Bankruptcy Court approved the retention of Gilbert, Heintz &
Randolph LLP ("GHR") as special insurance counsel to the Company. An
insurance company appealed the retention order. In October 2005, the
United States Court of Appeals for the Third Circuit issued an opinion
disqualifying GHR from serving as counsel to Congoleum. As a result of the
federal appeals court decision on GHR's retention, in February 2006, the
Bankruptcy Court ordered GHR to disgorge all fees and certain expenses it was
paid by Congoleum. In October 2006, Congoleum and GHR entered into a
settlement agreement (the “GHR Settlement”) under which GHR agreed to pay
Congoleum approximately $9.2 million plus accruing interest in full satisfaction
of the disgorgement order. The obligation was secured by assets of
GHR and was to be made over time according to a formula based on GHR’s
earnings. The Bankruptcy Court approved the GHR Settlement in April
2007. Congoleum received $9.2 million plus $1.0 million of accrued interest in
full satisfaction of the GHR Settlement in March 2008.
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 pre-petition
settlements. Following summary judgment hearings, the Bankruptcy
Court has rendered decisions that the grant of the security interest was not
valid but denying motions to avoid the settlements; certain of these decisions
are under appeal. The terms of the Joint Plan provided for a
settlement of litigation related to the Avoidance Actions, but it is not
possible to determine if any future plan will include such a settlement or how
any such settlement may affect the nominal liability. In connection
with soliciting acceptance of the Joint Plan, the voting agent distributed
ballots to approximately 146 thousand personal injury claimants, which included
holders of claims under the Claimant Agreement and the individual trial listed
settlements discussed above, as well as holders of additional alleged
claims. Approximately 71 thousand valid ballots were returned
indicating claims with a value of $ 1.46 billion based on the settlement values
applicable in the Joint Plan. It is also likely that additional new
claims will be asserted in connection with solicitation of acceptances of any
future plan. Congoleum does not believe it can reasonably estimate
the liability associated with claims that may be pending.
During the first six months of 2008,
the Company paid $8.5 million in fees and expenses related to implementation of
its planned reorganization under Chapter 11 of the Bankruptcy Code and the
Coverage (as hereinafter defined). Action based on the Joint Plan,
Congoleum has made provision in its financial statements for the minimum
estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in years
prior to 2007. Based on the terms of the Joint Plan, in the fourth
quarter of 2007 Congoleum recorded an additional $41.3 million
charge. Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that would not have been collected
under the terms of the Joint Plan and $26.4 million was an additional provision
for estimated costs for the reorganization proceedings and the Coverage
Action. In the fourth quarter of 2007 Congoleum also recorded a $41.0
million interest expense credit to reverse post-petition interest accrued on its
Senior Notes. Terms of previous reorganization plans had provided,
among other things, for the payment of post-petition interest on the Senior
Notes and therefore Congoleum had continued to accrue such
interest. Under the terms of the Joint Plan, the Senior Note holders
would not have received any post-petition interest.
There
were no asbestos related property damage claims asserted against the Company at
the time of its bankruptcy filing. The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company’s bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand. It is
anticipated that any plan of reorganization will provide for payment of those
claims in full from certain insurance proceeds.
Status
of Insurance Coverage
During the period that Congoleum
produced asbestos-containing products, the Company purchased primary and excess
insurance policies providing in excess of $1 billion of coverage for general and
product liability claims. These policies did not contain asbestos exclusions.
Through August 2002, substantially all asbestos-related claims and defense costs
were paid through primary insurance coverage. In August 2002, the Company
received notice that its primary insurance limits had been paid in full. The
payment of limits in full by one of the primary insurance companies was based on
its contention that limits in successive policies were not cumulative for
asbestos claims and that Congoleum was limited to only one policy limit for
multiple years of coverage. Certain excess insurance carriers claimed that the
non-cumulation provisions of the primary policies were not binding on them and
that there remained an additional $13.0 million in primary insurance limits plus
related defense costs before their policies were implicated. There is insurance
coverage litigation currently pending in the New Jersey State Court (the "State
Court") between Congoleum and its excess insurance carriers, and the guaranty
funds and associations for the State of New Jersey. The litigation
was initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”). In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in the Congoleum
primary policies (the "Spaulding Case") that the non-cumulation provisions are
invalid under New Jersey law and that the primary policies provide coverage for
the full amount of their annual limits for all successive
policies. Congoleum has reached a settlement agreement (the “Liberty
Settlement”) with the insurance carrier whose policies
contained
the non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date. Pursuant to the terms of
the Security Agreement, the Company is obligated to pay any insurance proceeds
it receives under the Liberty Settlement, net of any fees and expenses it may be
entitled to deduct, to the Collateral Trust or Plan Trust. Payment of
such fees and expenses are subject to Bankruptcy Court order or
approval. As of December 31, 2002, the Company had already entered
into settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage. Based on these settlements, the Company
contended that, even allowing for annual limits of all primary policies, primary
coverage was exhausted and the excess policies triggered. The excess carriers
have objected to the reasonableness of several of these
settlements, and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in ongoing coverage litigation.
The
excess insurance carriers have objected to the global settlement of the asbestos
claims currently pending against Congoleum as contemplated by the Claimant
Agreement on the grounds that, among other things, the negotiations leading to
the settlement and the Claimant Agreement violate provisions in their insurance
policies, including but not limited to the carriers' right to associate in the
defense of the asbestos cases, the duty of Congoleum to cooperate with the
carriers and the right of the carriers to consent to any
settlement. The excess insurance carriers also contend the settlement
terms in the Claimant Agreement are not fair or reasonable and/or that the
Claimant Agreement was not negotiated at arm’s length or in good
faith. Additionally, certain insurers have argued that Congoleum’s
entering into the Claimant Agreement voids the insurance for the underlying
claims in their entirety. Certain insurers also have claimed that the
Claimant Agreement voids their entire policy obligations. Congoleum has disputed
the allegations and contentions of the excess insurance carriers. In November
2003, the State Court denied a motion for summary judgment by the excess
insurance carriers that the Claimant Agreement was not fair, reasonable or in
good faith, ruling that material facts concerning these issues were in
dispute. In April 2004, the State Court denied motions for summary
judgment by the excess carriers that the Claimant Agreement was not binding on
them because Congoleum had breached the consent and cooperation clauses of their
insurance policies by, among other things, entering into the Claimant Agreement
without their consent. Congoleum has argued, among other things, that
it was entitled to enter into the Claimant Agreement and/or the Claimant
Agreement was binding on the excess insurance carriers because they were in
breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and/or the Claimant
Agreement was fair, reasonable and in good faith and/or there was and is no
prejudice to the excess insurance carriers from the Claimant Agreement and/or
the excess insurance carriers had breached their duties of good faith and fair
dealing.
In August
2004, the State Court entered a case management order that divided the Coverage
Action trial into three phases. A new judge was assigned to the case
in February 2005 and the schedule was modified as a result.
In
February 2005, the State Court ruled on a series of summary judgment motions
filed by various insurers. The State Court denied a motion for
summary judgment filed by certain insurers, holding that there were disputed
issues of fact regarding whether the Claimant Agreement and other settlement
agreements between Congoleum and the claimants had released Congoleum and the
insurers from any liability for the asbestos bodily injury claims of the
claimants who signed the Claimant Agreement and the other settlement
agreements.
The State
Court also denied another motion for summary judgment filed by various insurers
who argued that they did not have to cover the liability arising from the
Claimant Agreement because they had not consented to it.
The State
Court granted summary judgment regarding Congoleum’s bad faith claims against
excess insurers (other than first-layer excess insurers), holding that the
refusal of these excess insurers to cover the Claimant Agreement was at least
fairly debatable and therefore not in bad faith.
In March
2005, the Company filed a motion in the Bankruptcy Court asking the Bankruptcy
Court to vacate its prior order lifting the automatic stay in bankruptcy to
permit the Coverage Action to proceed. The Company requested that the
Coverage Action proceedings be stayed until the Company had completed its plan
confirmation process in the Bankruptcy Court. A hearing on the
Company’s motion was held in April 2005 and the motion was denied.
The first phase of the Coverage Action
trial began in August 2005. Phase 1 was limited to deciding whether
the insurers are obligated to provide coverage under the policies at issue in
this litigation for the asbestos claims settled under the terms of the global
Claimant Agreement. Three months into the trial, in October 2005, a
federal appeals court ruled that GHR, which had been acting as the Company’s
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum. As a result of
this ruling, with Bankruptcy Court approval, Congoleum retained the firm of
Covington & Burling to represent it as co-counsel with Dughi & Hewit in
the insurance coverage litigation and insurance settlement matters previously
handled by GHR.
In the middle of Congoleum presenting
its case, in or about mid-November 2005 and early December 2005, certain
insurers filed motions for summary judgment on the grounds, inter alia, that the federal
appeals court decision regarding GHR and/or Congoleum’s filing of an Omnibus
Avoidance Action and a Sealed Avoidance Action (collectively, the "Avoidance
Actions") in the Bankruptcy Court, entitled them to judgment as a matter of law
on the Phase 1 issues. Congoleum opposed the motions. The
motions were argued in January 2006, and in March 2006 the State Court denied
the motions for summary judgment. (The Avoidance Actions seek to void
the security interest granted to the Collateral Trust and the pre-petition
settlement.)
Congoleum completed the presentation of
its case in April 2006. Certain insurers moved for a directed verdict
in their favor during the first week of May 2006. Hearings of arguments on the
directed verdict motion took place in June 2006. In July 2006 the
State Court denied the motion for a directed verdict. The trial
resumed in September 2006. Defendant insurers presented their case,
for the most part, through documents and deposition
designations. Post-trial briefs were submitted by the parties in
November 2006.
In May 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 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 any claimant recovered insurance proceeds. Based in
part upon that finding, Congoleum filed an objection (the “Omnibus Objection”)
in the Bankruptcy Court in June 2007 requesting that all
asbestos-related personal injury claims settled and/or liquidated (the "Settled
Claims") pursuant to either a pre-petition settlement agreement or the Claimant
Agreement be disallowed and expunged. The Omnibus Objection also
requested in the event the Bankruptcy Court found that the holders of Settled
Claims retained viable tort claims with recourse against Congoleum, that the
Bankruptcy Court rescind the pre-petition settlement agreements and the Claimant
Agreement and the claims settled thereunder 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 in July 2007 and ruled
that 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. The Company amended the Omnibus Avoidance
Action to seek the same relief requested in the Omnibus Objection.
In September 2007, Congoleum filed the
Third Amended Complaint in the Omnibus Avoidance Action adding new counts that
encompass the subject matter and relief requested in the Omnibus Objection. The
Third Amended Complaint remains pending. In October 2007, Congoleum
filed a motion for summary judgment in the Omnibus Avoidance Action seeking a
ruling that all of the pre-petition settlement agreements, including the
Claimant Agreement, were null and void or should be
rescinded. Argument on the summary judgment motion was heard in
November 2007 and by opinion dated December 28, 2007, the Bankruptcy Court
denied the motion for summary judgment. Congoleum and the
Bondholders' Committee have filed notice of appeal from this decision to the
District Court.
The second phase of the Coverage Action
trial will address all coverage issues, including but not limited to whether
certain other trial listed settlements were fair, reasonable and negotiated in
good faith and covered by insurance as well as trigger and allocation of
asbestos losses to insurance policies. In February 2008, the State
Court expanded the scope of Phase 2 of the Coverage Action trial to include
obligations of insurers with respect to the settlement agreement in the Joint
Plan with respect to the Avoidance Actions. The State Court has entered a new
case management order scheduling further discovery. Congoleum sought to stay
Phase 2 of the Coverage Action trial because of the pendency of the
solicitation and balloting and scheduled confirmation hearing on the Joint Plan,
but the Bankruptcy Court denied the stay motion, which decision is being
appealed to the District Court. Since the Bankruptcy Court has denied
confirmation of the Joint Plan, the scope of Phase 2 is now
unclear.
The third and final phase of the
Coverage Action trial will address bad faith punitive damages, if
appropriate.
Amounts
Recorded in Financial Statements
The table below provides an analysis of
changes in the Company’s asbestos reserves and insurance receivables from
December 31, 2007 to June 30, 2008:
(In
thousands)
|
|
Balance
at
12/31/2007
|
|
|
Additions
(Deletions)
|
|
|
Spending
Against
Reserve
|
|
|
Recoveries
|
|
|
Balance
at
6/30/2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
24,744 |
|
|
|
-- |
|
|
$ |
(8,472 |
) |
|
|
-- |
|
|
$ |
16,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(10,490 |
) |
|
|
-- |
|
|
|
-- |
|
|
$ |
9,168 |
|
|
|
(1,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asbestos Liability
(Asset)
|
|
$ |
14,254 |
|
|
|
-- |
|
|
$ |
(8,472 |
) |
|
$ |
9,168 |
|
|
$ |
14,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Proceeds
|
|
$ |
6,463 |
|
|
$ |
22,912 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
29,375 |
|
The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2006 to June 30, 2007:
(In
thousands)
|
|
Balance
at
12/31/2006
|
|
|
Additions
(Deletions)
|
|
|
Spending
Against
Reserve
|
|
|
Recoveries
From
Insurance
|
|
|
Balance
at
6/30/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
7,800 |
|
|
$ |
-- |
|
|
$ |
(5,545 |
) |
|
$ |
-- |
|
|
$ |
2,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(21,813 |
) |
|
|
-- |
|
|
|
(2,238 |
) |
|
|
-- |
|
|
|
(24,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Asbestos Liability (Asset)
|
|
$ |
(14,013 |
) |
|
$ |
-- |
|
|
$ |
(7,783 |
) |
|
$ |
-- |
|
|
$ |
(21,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Proceeds
|
|
$ |
6,149 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
156 |
|
|
$ |
6,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Product
Warranties
The Company provides product warranties
for specific product lines and accrues for estimated future warranty cost in the
period in which the revenue is recognized. The following table sets
forth activity in the Company’s warranty reserves (in thousands):
|
|
Six
Months Ended
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,806 |
|
|
$ |
1,957 |
|
Accruals
|
|
|
1,762 |
|
|
|
1,633 |
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
(1,848 |
) |
|
|
(1,733 |
) |
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$ |
1,720 |
|
|
$ |
1,857 |
|
8. Liabilities
Subject to Compromise
As a result of the Company’s Chapter 11
filing (see Notes 1 and 6), pursuant to SOP 90-7, the Company is required to
segregate pre-petition liabilities that are subject to compromise and report
them separately on the consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company’s pre-petition debt is
recorded at face value and is classified within liabilities subject to
compromise. Prior to the fourth quarter of 2007, the Company’s
accrued interest expense on its Senior Notes was also recorded in liabilities
subject to compromise. In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes. Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest. Under the terms of the Joint Plan, the
Senior Note holders would not have received any post-petition
interest.
Liabilities
subject to compromise are as follows (in thousands):
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Current
|
|
|
|
|
|
|
Pre-petition
other payables and accrued interest
|
|
$ |
4,997 |
|
|
$ |
4,997 |
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
Debt
(at face value)
|
|
|
100,000 |
|
|
|
100,000 |
|
Pension
liability
|
|
|
11,209 |
|
|
|
10,772 |
|
Other
post-retirement benefit obligation
|
|
|
9,572 |
|
|
|
9,337 |
|
Pre-petition
other liabilities
|
|
|
9,262 |
|
|
|
9,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities subject to compromise
|
|
$ |
135,040 |
|
|
$ |
134,728 |
|
Additional pre-petition claims
(liabilities subject to compromise) may arise due to the rejection of executory
contracts or unexpired leases, or as a result of the allowance of contingent or
disputed claims.
9. Accrued
Liabilities
A summary
of the significant components of accrued liabilities consists of the following
(in thousands):
|
|
June
30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accrued
warranty, marketing and sales promotion
|
|
$ |
11,291 |
|
|
$ |
16,637 |
|
Employee
compensation and related benefits
|
|
|
3,906 |
|
|
|
3,584 |
|
Other
|
|
|
1,446 |
|
|
|
712 |
|
Total
accrued liabilities
|
|
$ |
16,643 |
|
|
$ |
20,933 |
|
As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of June
30, 2008 and December 31, 2007 (see Note 8).
10. Pensions
and Other Postretirement Plans
The
Company sponsors several non-contributory defined benefit pension plans covering
most of the Company’s employees. Benefits under the plans are based
on years of service and employee compensation. Amounts funded
annually by the Company are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. The Company also maintains health and life
insurance programs for retirees (reflected in the table below in “Other
Benefits”).
The
following summarizes the components of the net periodic benefit cost for the
Pension and Other Benefit Plans for the three months and six months ended June
30, 2008 and 2007 (in thousands):
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
June
30, 2008
|
|
|
June 30,
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Benefits
|
|
|
Pension
|
|
|
Benefits
|
|
Components of Net Periodic Benefit
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
381 |
|
|
$ |
56 |
|
|
$ |
366 |
|
|
$ |
53 |
|
Interest
cost
|
|
|
1,207 |
|
|
|
144 |
|
|
|
1,206 |
|
|
|
142 |
|
Expected
return on plan assets
|
|
|
(1,198 |
) |
|
|
-- |
|
|
|
(1,146 |
) |
|
|
-- |
|
Recognized
net actuarial loss
|
|
|
410 |
|
|
|
15 |
|
|
|
349 |
|
|
|
18 |
|
Amortization
of transition obligation
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Amortization
of prior service cost
|
|
|
6 |
|
|
|
-- |
|
|
|
11 |
|
|
|
3 |
|
Net periodic benefit
cost
|
|
$ |
806 |
|
|
$ |
215 |
|
|
$ |
786 |
|
|
$ |
216 |
|
|
|
Six Months
Ended
|
|
|
Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
June 30,
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Benefits
|
|
|
Pension
|
|
|
Benefits
|
|
Components of Net Periodic Benefit
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
762 |
|
|
$ |
112 |
|
|
$ |
732 |
|
|
$ |
106 |
|
Interest
cost
|
|
|
2,414 |
|
|
|
288 |
|
|
|
2,412 |
|
|
|
284 |
|
Expected
return on plan assets
|
|
|
(2,396 |
) |
|
|
-- |
|
|
|
(2,292 |
) |
|
|
-- |
|
Recognized
net actuarial loss
|
|
|
820 |
|
|
|
30 |
|
|
|
698 |
|
|
|
36 |
|
Amortization
of transition obligation
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Amortization
of prior service cost
|
|
|
12 |
|
|
|
-- |
|
|
|
22 |
|
|
|
6 |
|
Net periodic benefit
cost
|
|
$ |
1,612 |
|
|
$ |
430 |
|
|
$ |
1,572 |
|
|
$ |
432 |
|
The weighted average assumptions used to
determine net periodic benefit cost were as follows:
|
June
30, 2008
|
June
30,
2007
|
|
|
Other
|
|
Other
|
|
Pension
|
Benefits
|
Pension
|
Benefits
|
Discount
rate
|
6.00%
|
6.00%
|
6.00%
|
6.00%
|
Expected
long-term return on plan assets
|
7.00%
|
--
|
7.00%
|
--
|
Rate of
compensation increase
|
5.00%
|
--
|
5.00%
|
--
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read
in conjunction with the Unaudited Condensed Consolidated Financial Statements
and notes thereto contained in Item 1 of Part I of this Quarterly Report on Form
10-Q.
Results
of Operations
The Company’s business is cyclical and
is affected by the same economic factors that affect the remodeling and housing
industries in general, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
In addition to external economic
factors, the Company’s results are sensitive to sales and manufacturing volume,
competitors’ pricing, consumer preferences for flooring products, raw material
costs and the mix of products sold. The manufacturing process is
capital intensive and requires substantial investment in facilities and
equipment. The cost of operating these facilities generally does not
vary in direct proportion to production volume and, consequently, operating
results fluctuate disproportionately with changes in sales volume.
On December 31, 2003, Congoleum filed a
voluntary petition with the Bankruptcy Court (Case No. 03-51524) seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted
against it related to the use of asbestos in its products decades
ago. During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum. In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005,
Congoleum learned that certain asbestos claimants were unwilling to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan and the Sixth Plan was subsequently withdrawn. In November 2005,
the Bankruptcy Court denied a request to extend Congoleum’s exclusive right to
file a plan of reorganization and solicit acceptances thereof. In
March 2006, Congoleum filed the Eighth Plan. In addition, 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. Numerous
mediation
sessions took place from June through September 2006. During the
initial mediation negotiations, Congoleum reached an agreement in principle,
subject to mutually agreeable definitive documentation, with the ACC, the FCR
and the Company’s controlling shareholder, ABI, on certain terms of the Ninth
Plan, which Congoleum filed and proposed jointly with the ACC in August
2006. CNA and the Bondholders’ Committee jointly filed a new,
competing plan in August 2006 and each withdrew its prior plan of
reorganization. Following further mediated negotiations, Congoleum,
the ACC, the FCR, ABI and the Bondholders’ Committee reached agreement on the
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 the Eleventh Plan, a revised version of the Tenth 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 as to whether the Tenth Plan and the CNA Plan were
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 the Tenth Plan and the CNA Plan were not confirmable as a
matter of law. In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan. In July
2007, the FCR filed a plan of reorganization and proposed disclosure statement.
After extensive further mediation sessions, on February 5, 2008, the FCR, the
ACC, the Bondholders’ Committee and Congoleum jointly filed the Joint Plan. The
Bankruptcy Court approved the disclosure statement for the Joint Plan in
February 2008, and the Joint Plan was solicited in accordance with
court-approved voting procedures. Various objections to the Joint
Plan were filed, and on May 12, 2008 the Bankruptcy Court heard oral argument on
summary judgment motions relating to certain of those objections. On
June 6, 2008, the Bankruptcy Court issued a ruling that the Joint Plan was not
legally confirmable, and issued an Order to Show Cause why the case should not
be converted or dismissed pursuant to 11 U.S.C. § 1112. Following a
further hearing on June 26, 2008, the Bankruptcy Court issued an opinion that
vacated the Order to Show Cause and instructed the parties to submit a
confirmable plan by the end of calendar year 2008. The official committee of
bondholders, the asbestos creditors’ committee and the future claimants’
representative have recently reached an agreement in principle which the Company
believes addresses the issues raised recently by the Bankruptcy Court in the
ruling on the Join Plan and in the court's prior decisions. The Company
expects a term sheet will be filed with the Bankruptcy Court
shortly.
There can be no assurance that any plan
of reorganization will subsequently be proposed or, if proposed, will receive
the acceptances necessary for confirmation, that any plan will not be modified
further, that any 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 any plan will be confirmed, that any plan,
if confirmed, will become effective, or that Congoleum will continue to earn
sufficient funds to pay for continued litigation over any plan of
reorganization. It also is unclear whether any other person might
successfully propose and confirm a plan or what any such plan, when confirmed,
would ultimately provide, and whether the Bankruptcy Court would approve such a
plan. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and District Court approvals, and there can be no assurance
that such conditions, approvals and other requirements will be satisfied or
obtained.
Congoleum is presently involved in
litigation with certain insurance carriers related to disputed insurance
coverage for asbestos related liabilities, and certain insurance carriers, as
noted above, filed various objections to the Joint Plan and are expected to file
objections to any future plan. Certain other parties also filed
various objections to the Joint Plan and may file objections to any future
plan.
In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum’s rights under its applicable insurance coverage and
payments from Congoleum’s insurers for asbestos claims. In December
2005, Congoleum commenced the Avoidance Actions seeking to void the security
interest granted to the Collateral Trust and such pre-petition
settlements. Following summary judgment hearings, the Bankruptcy
Court has rendered decisions that the grant of the security interest was not
valid but denying motions to avoid the settlements; certain of these decisions
are under appeal. The terms of the Joint Plan provided for a
settlement of litigation related to the Avoidance Actions, but it is not
possible to determine if any future plan will include such a settlement or how
any such settlement may affect the nominal liability. In connection
with soliciting acceptance of the Joint Plan, the voting agent distributed
ballots to approximately [146] thousand personal injury claimants, which
included holders of claims under the Claimant Agreement and the individual trial
listed settlements discussed above, as well as holders of additional alleged
claims. Approximately 71 thousand valid ballots were returned
indicating claims with a value of $1.46 billion based on the settlement values
applicable in the Joint Plan. It is also likely that additional new
claims will be asserted in connection with solicitation of acceptances of any
future plan. Congoleum does not believe it can reasonably estimate
the liability associated with claims that may be pending.
During
the first six months of 2008, Congoleum paid $8.5 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 of the
Bankruptcy Code and the Coverage Action. Based on the Joint Plan, Congoleum has
made provision in its financial statements for the minimum estimated cost to
effect its plan to settle asbestos liabilities through confirmation of a plan
that complies with section 524(g) of the Bankruptcy Code. Congoleum recorded
charges aggregating approximately $51.3 million in years prior to
2007. Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge. Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that would not have been collected under the terms of the Joint
Plan and $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and the Coverage Action. In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes. Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest. Under the terms of the Joint
Plan, the Senior Note holders would not have received any post-petition
interest.
Costs for
pursuing and implementing any plan of reorganization could be materially higher
than currently recorded or previously estimated. Delays in formulating,
proposing, filing or obtaining approval of a plan of reorganization, or the
proposal or solicitation of additional plans by other parties could result in a
proceeding that takes longer and is more costly than the Company has previously
estimated. The Company may experience and therefore record
significant additional charges in connection with its reorganization
proceedings.
For more
information regarding the Company’s asbestos liability and plan for resolving
that liability, please refer to Notes 1 and 17 of the Notes to Consolidated
Financial Statements contained in Item 8 of the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2007 filed with the Securities and
Exchange Commission. In addition, please refer to “Risk Factors – The
Company has significant asbestos liability and funding exposure," contained in
Part II, Item 1A, of this Quarterly Report on Form 10-Q, for a discussion of
certain factors that could cause actual results to differ from the Company’s
goals for resolving its asbestos liability through a plan of
reorganization. .
|
Three
months ended
June
30,
|
|
Six
months ended
June
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
(In thousands of
dollars)
|
|
(In thousands of
dollars)
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$ 47,166
|
|
$ 57,541
|
|
$94,863
|
|
$ 106,856
|
|
Cost of
sales
|
37,277
|
|
43,797
|
|
74,101
|
|
81,113
|
|
Gross
profit
|
9,889
|
21.0%
|
13,744
|
23.9%
|
20,762
|
21.9%
|
25,743
|
24.1%
|
Selling, general
and
|
|
|
|
|
|
|
|
|
administrative
expenses
|
9,238
|
19.6%
|
9,963
|
17.3%
|
18,370
|
19.4%
|
19,414
|
18.2%
|
|
|
|
|
|
|
|
|
|
Operating
income
|
651
|
|
3,781
|
|
2,392
|
|
6,329
|
|
Interest income(expense),
net
|
64
|
|
(2,947)
|
|
995
|
|
(5,804)
|
|
Other income (expense),
net
|
(350)
|
|
8
|
|
(414)
|
|
(34)
|
|
Income before
taxes
|
365
|
|
842
|
|
2,973
|
|
491
|
|
Provision for income
taxes
|
153
|
|
7
|
|
1,082
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$ 212
|
|
$ 835
|
|
$ 1,891
|
|
$ 484
|
|
|
|
|
|
|
|
|
|
|
Net sales for the three months ended
June 30, 2008 were $47.2 million as compared to $57.5 million for the three
months ended June 30, 2007, a decrease of $10.3 million or 18% on net sales. The
decrease is attributable to significant declines in new residential construction
demand, continued weakness in the remodeling activity and a downturn in
manufactured housing and recreational vehicle production.
Net sales
for the six months ended June 30, 2008 total $94.9 million as compared to $106.9
million for the six months ended June 30, 2007, a decrease of $12.0 million or
11.2%. The factors driving the decrease are substantially the same as
those affecting the decrease in second quarter sales, described
above.
Gross profit for the three months ended
June 30, 2008 totaled $9.9 million, or 21.0% of net sales, compared to $13.7
million, or 23.9% of net sales, for the same period last year. The decrease in
gross profit dollars reflects the lower sales levels while the reduced gross
profit margin percentage reflects sharp increases in raw material costs
(negative impact of 2.9%), partially offset by manufacturing cost reductions
instituted in the manufacturing facilities.
Gross
profit for the six months ended June 30, 2008 totaled $20.8 million, or 21.9% of
net sales, compared to $25.7 million, or 24.1% of net sales, for the same period
last year. The decrease in gross profit dollars reflects the lower sales levels,
with the decline in gross profit margins reflecting escalating raw material
costs and lower production volume over which to spread fixed manufacturing
overhead, partially offset by manufacturing cost reductions.
Selling, general and administrative
expenses were $9.2 million for the three months ended June 30, 2008 as compared
to $10.0 million for the three months ended June 30, 2007, a decrease of $0.8
million. The decrease reflects cost reduction measures enacted during the
quarter including headcount and expense reductions. The Company took a one-time
severance charge of $750 thousand during the quarter.
Selling, general and administrative
expenses were $18.4 million for the six months ended June 30, 2008 compared to
$19.4 million for the six months ended June 30, 2007, a decrease of $1.0
million. Cost reduction measures instituted during the second quarter of 2008
substantially accounted for most of the decrease.
Income from operations totaled $0.6
million for the three months ended June 30, 2008 compared to income of $3.8
million for three months ended June 30, 2007, reflecting lower sales and gross
margins, partially offset by lower operating expenses. Income from operations
was $2.4 million for the six months ended June 30, 2008 compared to $6.3 million
for the six months ended June 30, 2007, reflecting lower sales and gross
margins, partially offset by the reduced selling, general and administrative
expenses.
The
provision for income taxes was $1.1 million for the six months ending June 30,
2008. The full year effective tax rate is expected to
approximate 34%. The Company recorded a minimal provision for the six months
ended June 30, 2007.
Liquidity
and Capital Resources
The
Unaudited Condensed Consolidated Financial Statements of the Company have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. Accordingly, the Unaudited Condensed Consolidated Financial
Statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more
fully in the Notes to Unaudited Condensed Consolidated Financial Statements
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, there is
substantial doubt about the Company's ability to continue as a going concern
unless it obtains relief from its substantial asbestos liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.
On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy
Code. See Notes 1 and 6 of the Notes to Unaudited Condensed
Consolidated Financial Statements, contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q, for a discussion of the Company’s bankruptcy proceedings.
These matters continue to have a material adverse impact on liquidity and
capital resources. During the first six months of 2008, the Company
paid $8.5 million in fees and expenses related to reorganization proceedings
under Chapter 11 and The Coverage Action. Furthermore, at June 30,
2008 the Company had incurred but not paid approximately $10.0 million in
additional fees and expenses for services rendered through that
date.
Based on
the Joint Plan, Congoleum has made provision in its financial statements for the
minimum estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in years
prior to 2007. Based on the terms of the Joint Plan, in the fourth
quarter of 2007 Congoleum recorded an additional $41.3 million
charge. Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that would not have been collected
under the terms of the Joint Plan and $26.4 million was an additional provision
for estimated costs for the reorganization proceedings and the Coverage
Action. In the fourth quarter of 2007 Congoleum also recorded a $41.0
million interest expense credit to reverse post-petition interest accrued on its
Senior Notes. Terms of previous reorganization plans had provided,
among other things, for the payment of post-petition interest on the Senior
Notes and therefore Congoleum had continued to accrue such
interest. Under the terms of the Joint Plan, the Senior Note holders
would not have received any post-petition interest.
In
February 2006, the Bankruptcy Court ordered GHR to disgorge all fees and certain
expenses it was paid by Congoleum. In October 2006, Congoleum and GHR
entered into the GHR Settlement under which GHR was to pay Congoleum
approximately $9.2 million plus accruing interest in full satisfaction of the
disgorgement order. The obligation was secured by assets of GHR and
was to be made over time according to a formula based on GHR’s
earnings. The Bankruptcy Court approved the GHR Settlement in April
2007. Congoleum received $9.2 plus $1.0 million of accrued interest
in full satisfaction of the GHR Settlement in March 2008.
Unrestricted cash and cash equivalents,
including short-term investments at June 30, 2008, were $26.5 million, an
increase of $0.1 million from December 31, 2007. Under the terms of
its revolving credit agreement, payments on the Company’s accounts receivable
are deposited in an account assigned by the Company to its lender and the funds
in that account are used by the lender to pay down any loan
balance. There were no funds deposited in this account at June 30,
2008 and December 31, 2007. Additionally, $6.6 million remaining from
a $14.5 million settlement received in August 2004 from an insurance carrier,
which is subject to a court order, is included as restricted cash at June 30,
2008. In the second quarter of 2008 the Company received an additional $22.7
million from other insurance carriers which is also included in restricted
cash. The Company expects to contribute these funds, less any amounts
withheld pursuant to reimbursement arrangements, to the Plan Trust should the
Bankruptcy Court confirm a plan pursuant to Section 524(g) of the Bankruptcy
Code. Working capital was $15.4 million at June 30, 2008, up from
$9.4 million at December 31, 2007. The ratio of current assets to
current liabilities was 1.2 to 1.0 at June 30, 2008 and 1.1 to 1.0 at December
31, 2007, respectively. Net cash used in operations during the six
months ended June 30, 2008 was $5.3 million, as compared to net cash provided
by operations of $5.7 million during the six months ended June 30,
2007.
Capital expenditures for the six months
ended June 30, 2008 totaled $1.5 million. The Company is currently
planning capital expenditures of approximately $6.0 million in 2008 and between
$5.0 million and $7.0 million in 2009, primarily for maintenance and improvement
of plants and equipment, which it expects to fund with cash from operations and
credit facilities.
In January 2004, the Bankruptcy Court
authorized entry of a final order approving Congoleum’s debtor-in-possession
financing, which replaced its pre-petition credit facility on substantially
similar terms. The debtor-in-possession financing agreement (as amended and
approved by the Bankruptcy Court to date) provides a revolving credit facility
expiring on the earlier of (i) December 31, 2008 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 $30.0 million. Interest is based on 0.25% above the prime
rate. This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization (“EBITDA”). It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
the Company to borrow from the facility. The Company was in compliance with
these covenants at June 30, 2008. Borrowings under this facility are
collateralized by inventory and receivables. At June 30, 2008, based
on the level of receivables and inventory, $25.0 million was available under the
facility, of which $2.2 million was utilized for outstanding letters of credit
and $17.4 million was utilized by the revolving loan. The Company
anticipates that its debtor-in-possession financing facility (including
anticipated extensions thereof) together with cash from operations will provide
it with sufficient liquidity to operate during 2008 while under Chapter 11
protection. There can be no assurances that the Company will continue to
be in compliance with the required covenants under this facility or that the
debtor-in-possession facility (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time.
For a plan of reorganization to be confirmed, the Company will need to
obtain and demonstrate the sufficiency of exit financing. The Company
cannot presently determine the terms of such financing, nor can there be any
assurances of its success obtaining it.
In addition to the provision for
asbestos litigation discussed previously, the Company has also recorded what it
believes are adequate provisions for environmental remediation and
product-related liabilities (other than asbestos-related claims), including
provisions for testing for potential remediation of conditions at its own
facilities. The Company is subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company. Among these claims, the
Company is a named party in several actions associated with waste disposal sites
(more fully discussed in Note 5 of the Notes to Unaudited Condensed Consolidated
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q). These actions include possible obligations to remove or
mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company’s owned and previously
owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future 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 liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company believes its
estimate of the future amount of these liabilities is reasonable, and that they
will be paid over a period of five to ten years, the timing and amount of such
payments may differ significantly from the Company’s
assumptions. Although the effect of future government regulation
could have a significant effect on the Company’s costs, the Company is not aware
of any pending legislation which would reasonably have such an
effect. There can be no assurances that the costs of any future
government regulations could be passed along to its
customers. Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.
The outcome of these environmental
matters could result in significant expenses incurred by or judgments assessed
against the Company.
The Company's principal sources of
capital are net cash provided by operating activities and borrowings under its
financing agreement. The Company believes that its existing cash (excluding
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2008. Congoleum’s ability to emerge from Chapter 11
will depend on obtaining sufficient exit financing to settle administrative
expenses of the reorganization and any other related obligations, and to provide
adequate future liquidity.
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not applicable.
Item
4T. CONTROLS AND
PROCEDURES
(a)
|
Evaluation of Disclosure
Controls and Procedures. The Company’s management, with
the participation of the Company’s Chief Executive Officer, or CEO, and
Chief Financial Officer, or CFO, evaluated the effectiveness of the
Company’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of June 30, 2008. Based on this evaluation, the
Company’s CEO and CFO concluded that, as of June 30, 2008 the Company’s
disclosure controls and procedures were effective, in that they provide
reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and is accumulated and communicated to the
Company’s management, including the Company’s CEO and CFO, as appropriate
to allow timely decisions regarding required
disclosure.
|
(b)
|
Changes in Internal Control
Over Financial Reporting. There have not been any changes in the
Company’s internal control over financial reporting during the last
quarter covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, the Company’s
internal control over financial
reporting.
|
PART
II. OTHER
INFORMATION
Item
1. Legal
Proceedings:
The information contained in Note 5,
“Environmental and Other Liabilities”, and Note 6, “Asbestos Liabilities”, of
the Notes to Unaudited Condensed Consolidated Financial Statements is
incorporated herein by reference.
Item
1A. Risk
Factors:
The Company has significant asbestos
liability and funding exposure.
As more fully set forth in Notes 1 and
17 of the Notes to Consolidated Financial Statements, which are included in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed
with the Securities and Exchange Commission, the Company has significant
liability and funding exposure for asbestos claims. The Company has entered into
settlement agreements with various asbestos claimants totaling in excess of $491
million. In connection with soliciting acceptance of the Joint Plan, the voting
agent distributed ballots to approximately 146 thousand personal injury
claimants, which included holders of claims under the Claimant Agreement and the
individual trial listed settlements discussed above, as well as holders of
additional alleged claims. Approximately 71 thousand valid ballots were returned
indicating claims with a value of $ 1.46 billion based on the settlement values
applicable in the Joint Plan.
The
Bankruptcy Court has ruled that the Joint Plan is not confirmable and has
directed the Company
to submit a confirmable plan by the end of calendar year 2008 to avoid having
the case dismissed or converted. There can be no assurance that any plan of
reorganization will subsequently be proposed or, if proposed, will receive the
acceptances necessary for confirmation, that any plan will not be modified
further, that any 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 any plan will be confirmed, that any plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued litigation over any plan of reorganization. It also is unclear
whether any other person might successfully propose and confirm a plan or what
any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan. Any plan of reorganization pursued
by the Company will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and District Court approvals, and there
can be no assurance that such conditions, approvals and other requirements will
be satisfied or obtained.
Confirmation of any plan of
reorganization will depend on the Company obtaining exit financing to provide it
with sufficient liquidity to fund obligations upon the plan becoming effective.
If the Company’s cash flow from operations is materially less than anticipated,
and/or if the costs in connection with seeking confirmation of any plan of
reorganization or in connection with the Coverage Action discussed elsewhere in
this Quarterly Report on Form 10-Q are materially more than anticipated, the
Company may be unable to obtain exit financing which, when combined with net
cash provided from operating activities, would provide it with sufficient funds.
Such a circumstance would likely result in the Company not being able to confirm
a plan of reorganization or have such plan become effective.
Some additional factors that could
cause actual results to differ from the Company's goals for resolving its
asbestos liability through an amended plan of reorganization include: (i) the
future cost and timing of estimated asbestos liabilities and payments, (ii) the
availability of insurance coverage and reimbursement from insurance companies
that underwrote the applicable insurance policies for the Company for
asbestos-related claims, (iii) the costs relating to the execution and
implementation of any plan of reorganization pursued by the Company, (iv) timely
agreement with other creditors, or classes of creditors, that exist or may
emerge, (v) satisfaction of the conditions and obligations under the Company's
outstanding debt instruments, (vi) the response from time to time of the
lenders, customers, suppliers and other constituencies of the Company and ABI to
the ongoing process arising from the Company's strategy to settle its asbestos
liability, (vii) the Company's ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms, (viii) timely
creditor and court approval (including the results of any relevant appeals) of
any reorganization plan pursued by the Company and the court overruling any
objections to the Company's reorganization plan that may be filed, (ix) costs
of, developments in and the outcome of the Coverage Action, (x) compliance with
the Bankruptcy Code, including Section 524(g), and (xi) the possible adoption of
another party's plan of reorganization which may prove to be unfeasible. In any
event, if the Company is not successful in obtaining sufficient creditor and
court approval of a plan of reorganization, such failure could have a material
adverse effect upon its business, results of operations and financial
condition.
For further information regarding the
Company’s asbestos liability, insurance coverage and strategy to resolve its
asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated
Financial Statements, which are included in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2007 filed with the Securities and Exchange
Commission.
Under
the Joint Plan, if it had become effective, holders of existing equity
securities would have received nothing on account of their interests and will
likely receive nothing under any future plan.
Under the
terms of the Joint Plan, existing Class A and Class B common shares of Congoleum
would have been cancelled when the plan took effect and holders of those shares
would not have received anything on account of their cancelled shares. Treatment
of existing equity holders in any future plan is likely to be the
same.
The
Company’s common stock is thinly traded, which will affect a stockholder’s
ability to sell the Company’s stock or the price for which it can be
sold.
There has been and may continue to be,
at least for the immediate future, a limited public market for the Company’s
common stock. The Company’s Class A common stock was delisted by the American
Stock Exchange ("Amex") on February 19, 2008 because it did not meet Amex
listing standards for share value, share price and aggregate market
capitalization. From February 19, 2008, the Company’s common stock has not been
listed on any securities exchange or on an automated dealer quotation system.
Accordingly, there is a limited trading market for its shares. Under the terms
of any new plan of reorganization, if confirmed and effective, the Company's
common stock is likely to be cancelled.
The
Company may incur substantial liability for environmental, product and general
liability claims in addition to asbestos-related claims, and its insurance
coverage and its likely recoverable insurance proceeds may be substantially less
than the liability incurred by the Company for these claims.
Environmental Liabilities. Due to the
nature of the Company's business and certain of the substances which are or have
been used, produced or discharged by the Company, the Company's operations are
subject to extensive federal, state and local laws and regulations relating to
the generation, storage, disposal, handling, emission, transportation and
discharge into the environment of hazardous substances. The Company has
historically expended substantial amounts for compliance with existing
environmental laws and regulations, including environmental remediation costs at
both third-party sites and Company-owned sites. The Company will continue to be
required to expend amounts in the future for costs related to prior activities
at its facilities and third party sites, and for ongoing costs to comply with
existing environmental laws and such amounts may be substantial. There is no
certainty that these amounts will not have a material adverse effect on its
business, results of operations and financial condition because, as a result of
environmental requirements becoming increasingly strict, the Company is unable
to determine the ultimate cost of compliance with environmental laws and
enforcement policies. Moreover, in addition to potentially having to pay
substantial amounts for compliance, future environmental laws and regulations
may require or cause the Company to modify or curtail its operations, which
could have a material adverse
effect on the Company's business, results of operations and financial
condition.
Product and General Liabilities. In the
ordinary course of its business, the Company becomes involved in lawsuits,
administrative proceedings, product liability claims (in addition to
asbestos-related claims) and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations and
financial condition if the Company is unable to successfully defend against or
settle these matters, its insurance coverage is insufficient to satisfy
unfavorable judgments or settlements relating to these matters, or the Company
is unable to collect insurance proceeds relating to these matters.
The
Company is dependent upon a continuous supply of raw materials from third party
suppliers and would be harmed if there were a significant, prolonged disruption
in supply or increase in its raw material costs.
The Company’s business is dependent upon
a continuous supply of raw materials from third party suppliers. The principal raw materials
used by the Company in its manufacture of sheet and tile flooring are vinyl
resins, plasticizers, latex, limestone, stabilizers, cellulose paper fibers,
urethane and transfer print film. The Company purchases most of these raw
materials from multiple sources. Although the Company has generally not had
difficulty in obtaining its requirements for these materials, it has
periodically experienced significant price increases for some of these
materials. 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.
The Company believes that suitable
alternative suppliers are generally available for substantially all of its raw
material requirements, although quantities of certain materials available from
alternative suppliers may be in limited supply and production trials may be
required to qualify new materials for use. The Company does not have readily
available alternative sources of supply for specific designs of transfer print
film, which are produced utilizing print cylinders engraved to the Company's
specifications. Although no loss of this source of supply is anticipated,
replacement could take a considerable period of time and interrupt production of
some of the Company's products. In an attempt to protect against this risk of
loss of supply, the Company maintains a raw material inventory and continually
seeks to develop new sources which will provide continuity of supply for its raw
material requirements.
In addition, the Company could incur
significant increases in the costs of its raw materials due to market
conditions, energy costs, and other factors. Although the Company generally
attempts to pass on increases in the costs of its raw materials to its
customers, the Company’s ability to do so is, to a large extent, dependent upon
the rate and magnitude of any increase, competitive pressures and market
conditions for its products. There have been in the past, and may be in the
future, periods of time during which increases in these costs cannot be
recovered.
The
Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products
is highly competitive. The Company encounters competition from three other
manufacturers in North America and, to a lesser extent, foreign manufacturers.
Some of the Company's competitors
have greater financial and other resources and access to capital than the
Company. Furthermore, one of the Company's major competitors has
successfully confirmed a plan of reorganization under Chapter 11 of the
Bankruptcy Code. Having shed much of its pre-filing asbestos and other
liabilities, that competitor may have a competitive cost advantage over the
Company. In addition, in order to
maintain its competitive position, the Company may need to make substantial
investments in its business, including its product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for the Company's products and in
the loss of the Company's market share for its products. Moreover, due to the
competitive nature of the Company's industry, the Company may be commercially
restricted from raising or even maintaining the sales prices of its products,
which could result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increased percentage of the
Company's sales.
The
Company’s business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.
The Company is subject to the effects
of general economic conditions. A sustained general economic slowdown could have
serious negative consequences for the Company's business, results of operations
and financial condition. Moreover, the Company's business is cyclical and is
affected by the economic factors that affect the remodeling and housing
industries in general and the manufactured housing industry specifically,
including the availability of credit, consumer confidence, changes in interest
rates, market demand and general economic conditions. The Company has
experienced a significant decline in sales as a result of weakness in the
housing market and general economy. The Company may experience further sales
declines resulting from continued deterioration in the housing
market.
The
Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
The Company's business depends upon its
ability to timely manufacture and deliver products that meet the needs of its
customers and the end users of the Company's products. If the Company were to
realize an unexpected, significant and prolonged disruption of its operations at
any of its facilities, including disruptions in its manufacturing operations, it
could result in shipment delays of its products, depletion of its inventory as a
result of reduced production and increased production costs as a result of
taking actions in an attempt to cure the disruption or carry on its business
while the disruption remains. Any resulting delay, depletion or increased
production cost could result in increased costs, lower revenues and damaged
customer and product end user relations, which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
The
Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty
on all of its products against manufacturing defects. In addition, as a part of
its efforts to differentiate mid- and high-end products through color, design
and other attributes, the Company offers enhanced warranties with respect to
wear, moisture discoloration and other performance characteristics, which
generally increase with the price of such products. If the Company were to incur
a significant number of warranty claims, the resulting warranty costs could be
substantial.
The
Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor could have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company currently sells its
products through approximately 13 distributors providing approximately 51
distribution points in the United States and Canada, as well as directly to a
limited number of mass market retailers. The Company considers its distribution
network very important to maintaining its competitive position. Although the
Company has more than one distributor in some of its distribution territories
and actively manages its credit exposure to its distributors, the loss of a
major distributor could have a material adverse impact on the Company's
business, results of operations and financial condition. The Company derives a
significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc. LaSalle-Bristol
Corporation serves as the Company's manufactured housing market distributor, and
Mohawk Industries, Inc. serves as its retail market distributor. These two
distributors accounted for approximately 65% of the Company's net sales for the
six months ended June 30, 2008 and 2007, respectively.
Stockholder votes are
controlled by ABI; Congoleum’s interests may not
be the same as ABI’s interests.
ABI owns a majority (approximately 55%
as of June 30, 2008) of the outstanding shares of the Company’s common stock,
representing a 69.4% voting interest. As a result, ABI can elect all of the
Company’s directors and can control the vote on all matters that require
shareholder or Board of Director approval. In addition, certain officers of
Congoleum are officers of ABI and members of the family group that owns a
controlling interest in ABI.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds:
|
Item 3.
|
Defaults Upon Senior
Securities:
|
On August
3, 1998, the Company issued $100 million of the Senior Notes priced at 99.505%
to yield 8.70%. The Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after August 1, 2003 at predetermined
redemption prices (ranging from 104% to 100%), plus accrued and unpaid interest
to the date of redemption. The indenture governing the Senior Notes includes
certain restrictions on additional indebtedness and uses of cash, including
dividend payments. The commencement of the Chapter 11 proceedings
constituted an event of default under the indenture governing the Senior
Notes. During 2003, the Company and the trustee under the indenture
governing the Senior Notes amended the indenture, and sufficient note holders
consented, to explicitly permit the Company to take steps in connection with
preparing and filing its prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code. The amount of accrued interest on the Senior
Notes that was not paid as of the bankruptcy filing on December 31, 2003 was
approximately $3.6 million. The accrued pre-petition interest and the principal
amount of the Senior Notes are included in “Liabilities Subject to Compromise”
(see Note 8 of the Notes to Consolidated Financial Statements contained in Part
I, Item 1, of this Quarterly Report on Form 10-Q) as of June 30,
2008. During 2007, the Company reversed all accrued post-petition
interest on the Senior Notes to reflect the terms of the Joint
Plan.
Item 4.
|
Submission of Matters to a Vote
of Security Holders:
|
At the
annual meeting of the Company's Stockholders held on May 6, 2008, all director
nominees were elected.
The two
nominees who were elected as Class C Directors will hold office until the
meeting of stockholders to be held in 2011 and until their successors are duly
elected and qualify. The results of the vote for the election of those directors
are set forth below.
Name
|
Number of
Votes
For
|
Number of
Votes
Withheld
|
Roger
S. Marcus
|
11,382,446
|
380,904
|
Adam
H. Slutsky
|
11,667,078
|
86,272
|
The
Directors whose terms of office continued and the years their terms expire are
as follows:
Class B Directors - Term
Expires in 2010
Mark N.
Kaplan
Richard
G. Marcus
Mark S.
Newman
Class A Directors - Term
Expires in 2009
William
M. Marcus
C.
Barnwell Straut
Jeffrey
H. Coats
Item
5. Other
Information:
None.
Item
6. Exhibits:
Exhibit
Number
|
Exhibits
|
|
|
31.1
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of the Chief Executive Officer.
|
32.2
|
Section
1350 Certification of the Chief Financial
Officer.
|
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: August
13,
2008 By:
/s/Howard N. Feist
III
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer
and
Principal Financial & Accounting
Officer)
Exhibit
Index
Exhibit
Number
|
Exhibits
|
|
|
31.1
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer
|
32.1
|
Section
1350 Certification of the Chief Executive Officer.
|
32.2
|
Section
1350 Certification of the Chief Financial
Officer.
|