FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2004 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date covered by this report.
Title of Each Class Outstanding at May 7, 2004
------------------- --------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets-Assets as of
March 31, 2004 (unaudited) and December 31, 2003..............3
Consolidating Condensed Balance Sheets-Liabilities as of
March 31, 2004 (unaudited) and December 31, 2003..............4
Consolidated Condensed Statements of Operations for the
three months ended March 31, 2004 and 2003 (unaudited).......5
Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 (unaudited)........6
Notes to Unaudited Consolidated Condensed Financial
Statements....................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................20
Item 3. Quantitative and Qualitative Disclosures About Market Risk...36
Item 4. Controls and Procedures......................................36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................37
Item 3. Defaults Upon Senior Securities..............................37
Item 6. Exhibits and Reports on Form 8-K.............................37
Signature............................................................40
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
American Biltrite Inc. and Subsidiaries
Consolidating Condensed Balance Sheets - Assets
(In thousands of dollars)
ABI American
Consolidated Eliminations Congoleum Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 11,611 $ 3,959 $ 10,482 $ 2,169 $ 1,129 $ 1,790
Restricted cash 1,358 1,757 1,358 1,757
Accounts receivable, net 44,288 36,010 $ (95) $ (280) 19,092 13,560 25,291 22,730
Inventories 81,798 81,480 44,670 44,995 37,128 36,485
Assets of discontinued
operation 2,682 2,902 2,682 2,902
Deferred income taxes 11,033 11,033 8,752 8,752 2,281 2,281
Prepaid expenses & other
current assets 10,033 12,530 (2) (186) 7,417 9,672 2,618 3,044
-----------------------------------------------------------------------------------------------
Total current assets 162,803 149,671 (97) (466) 91,771 80,905 71,129 69,232
Property, plant & equipment, net 131,184 134,285 85,101 87,035 46,083 47,250
Other assets:
Insurance for asbestos-related
liabilities 10,700 10,700 10,700 10,700
Goodwill, net 11,300 11,300 11,300 11,300
Other assets 11,974 13,440 (186) 7,832 7,959 4,328 5,481
-----------------------------------------------------------------------------------------------
33,974 35,440 (186) 7,832 7,959 26,328 27,481
-----------------------------------------------------------------------------------------------
Total assets $327,961 $319,396 $ (283) $ (466) $184,704 $175,899 $143,540 $143,963
===============================================================================================
See accompanying notes to consolidating condensed financial statements.
3
American Biltrite Inc. and Subsidiaries
Consolidating Condensed Balance Sheets - Liabilities
(In thousands of dollars)
ABI American
Consolidated Eliminations Congoleum Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Liabilities and stockholders' equity
Current Liabilities:
Accounts payable $ 21,501 $ 13,327 $ (47) $ (280) $ 11,962 $ 4,544 $ 9,586 $ 9,063
Accrued expenses 38,410 46,054 (50) 23,168 29,161 15,292 16,893
Asbestos-related liabilities 8,678 9,819 8,678 9,819
Liabilities of discontinued
operation 404 688 404 688
Notes payable 23,223 18,125 11,237 10,232 11,986 7,893
Current portion of
long-term debt 21,272 21,289 21,272 21,289
-----------------------------------------------------------------------------------------------
Total current liabilities 113,488 109,302 (97) (280) 55,045 53,756 58,540 55,826
Long-term debt, less
current portion 3,479 103,626 99,773 3,479 3,853
Asbestos-related liabilities 10,700 10,700 10,700 10,700
Other liabilities 17,700 62,126 (186) (186) 4,376 48,147 13,510 14,165
Noncontrolling interests 399 663 399 663
Liabilities subject
to compromise 151,495 151,495
Stockholders' equity:
Common stock 46 46 (93) (93) 93 93 46 46
Additional paid-in capital 19,548 19,548 (49,105) (49,105) 49,105 49,105 19,548 19,548
Retained earnings 45,548 47,573 35,275 35,275 (47,213) (46,778) 57,486 59,076
Accumulated other
comprehensive loss (19,310) (19,056) 6,110 6,110 (20,384) (20,384) (5,036) (4,782)
Less treasury shares (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
-----------------------------------------------------------------------------------------------
Total stockholders' equity 30,700 32,979 -- -- (26,212) (25,777) 56,912 58,756
-----------------------------------------------------------------------------------------------
Total liabilities and
equity $327,961 $319,396 $ (283) $ (466) $184,704 $175,899 $143,540 $143,963
===============================================================================================
See accompanying notes to consolidating condensed financial statements.
4
American Biltrite Inc. and Subsidiaries
Consolidating Condensed Statements of Operations (Unaudited) For the Three
Months ended March 31, 2004 and 2003
(In thousands of dollars, except per share amounts)
ABI American
Consolidated Eliminations Congoleum Biltrite
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Revenues:
Net sales $ 99,407 $101,946 $ (51) $ (15) $52,000 $53,581 $47,458 $48,380
Interest and other income (24) 559 244 183 (268) 376
--------------------------------------------------------------------------------
99,383 102,505 (51) (15) 52,244 53,764 47,190 48,756
Costs and expenses:
Cost of products sold 71,306 73,239 (51) (15) 38,449 40,914 32,908 32,340
Selling, general & administrative
expenses 27,755 28,616 11,985 13,203 15,770 15,413
Interest 3,018 2,823 2,245 2,235 773 588
--------------------------------------------------------------------------------
102,079 104,678 (51) (15) 52,679 56,352 49,451 48,341
--------------------------------------------------------------------------------
Income (loss) before taxes and
other items (2,696) (2,173) (435) (2,588) (2,261) 415
Provision (credit) for income taxes (797) 156 (797) 156
Noncontrolling interests 36 (77) 36 (77)
--------------------------------------------------------------------------------
Net (loss) income from continuing
operations (1,863) (2,406) (435) (2,588) (1,428) 182
Discontinued operation (162) (719) (162) (719)
--------------------------------------------------------------------------------
Net loss $ (2,025) $ (3,125) $ -- $ -- $ (435) $(2,588) $(1,590) $ (537)
================================================================================
Loss per common share from continuing
operations, basic and diluted $ (0.54) $ (0.70)
Discontinued operation (0.05) (0.21)
--------------------
Net loss per common share, basic
and diluted $ (0.59) $ (0.91)
====================
See accompanying notes to consolidating condensed financial statements.
5
American Biltrite Inc. and Subsidiaries
Consolidating Condensed Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2004 and 2003
(In thousands of dollars)
ABI American
Consolidated Eliminations Congoleum Biltrite
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Operating activities
Net loss $(2,025) $ (3,125) $ -- $ -- $ (435) $ (2,588) $(1,590) $ (537)
Net loss from discontinued operation 162 719 162 719
-----------------------------------------------------------------------------
Net (loss) income from continuing operations (1,863) (2,406) (435) (2,588) (1,428) 182
Adjustments to reconcile net (loss) income to net
cash provided (used) by operating activities:
Depreciation and amortization 4,466 4,449 2,891 2,918 1,575 1,531
Change in operating assets and liabilities:
Accounts and notes receivable (8,393) (9,714) (5,532) (1,729) (2,861) (7,985)
Inventories (553) (808) 325 (3,131) (878) 2,323
Prepaid expenses and other assets 3,770 3,899 2,255 2,304 1,515 1,595
Accounts payable and accrued expenses 8,659 (16,062) 9,471 (15,457) (812) (605)
Asbestos-related expenses (1,141) (4,177) (1,141) (4,177)
Noncontrolling interests (36) 77 (36) 77
Other (911) (702) (28) (382) (883) (320)
-----------------------------------------------------------------------------
Net cash provided (used) by operating activities 3,998 (25,444) 7,806 (22,242) (3,808) (3,202)
Investing activities
Investments in property, plant and equipment (1,435) (1,692) (847) (1,015) (588) (677)
Proceeds from sale of property, plant and equipment 30 30
-----------------------------------------------------------------------------
Net cash used by investing activities (1,405) (1,692) (817) (1,015) (588) (677)
Financing activities
Net short-term borrowings 5,066 20,821 925 14,751 4,141 6,070
Payments on long-term debt (339) (248) (339) (248)
Net change in restricted cash 399 (3,024) 399 (3,024)
Dividends paid (430) (430)
-----------------------------------------------------------------------------
Net cash provided by financing activities 5,126 17,119 1,324 11,727 3,802 5,392
Effect of foreign exchange rate changes on cash 159 (454) 159 (454)
-----------------------------------------------------------------------------
Net cash provided (used) by continuing operations 7,878 (10,471) 8,313 (11,530) (435) 1,059
Net cash used by discontinued operation (226) (2,707) (226) (2,707)
Cash and cash equivalents at beginning of year 3,959 20,160 2,169 18,277 1,790 1,883
-----------------------------------------------------------------------------
Cash and cash equivalents at end of quarter $11,611 $ 6,982 $ -- $ -- $10,482 $ 6,747 $ 1,129 $ 235
=============================================================================
See accompanying notes to consolidating condensed financial statements.
6
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments), considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Historical financial results have been restated to reflect the classification of
Janus as a discontinued operation in accordance with the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" (See
Note H).
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") filed for
bankruptcy protection on December 31, 2003. The accompanying consolidated
financial statements include the results for Congoleum for all periods
presented. ABI continues to own a majority of the voting stock of Congoleum. As
a result, the Company expects to continue to control Congoleum while it is in
bankruptcy. Additionally, Congoleum's proposed reorganization plan, which
remains subject to Bankruptcy Court approval, anticipates no changes in the
equity ownership of Congoleum upon emergence from bankruptcy. We understand that
Congoleum believes that its pre-packaged bankruptcy proceeding could be
concluded in a relatively short period of time, possibly by December 31, 2004.
Accordingly, the Company has elected to continue to consolidate the financial
statements of Congoleum in its consolidated results because it believes that is
the appropriate presentation given its anticipated continuing control of
Congoleum. However, the accompanying financial statements also present the
details of consolidation to separately show the financial condition, operating
results and cash flows of ABI (including its non-debtor subsidiaries) and
Congoleum, which may be more meaningful for certain analyses.
7
Note A - Basis of Presentation (continued)
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), provides financial
reporting guidance for entities that are reorganizing under the United States
Bankruptcy Code ("the Bankruptcy Code"). Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Liabilities for asbestos claims are recorded based
upon the minimum amount Congoleum expects to spend for its contribution to, and
costs to settle asbestos liabilities through, a plan trust established under
Section 524(g) of the Bankruptcy Code. Obligations arising post-petition, and
pre-petition obligations that are secured or that the Bankruptcy Court has
authorized Congoleum to pay, are not classified as liabilities subject to
compromise. Other pre-petition claims (which would be classified as liabilities
subject to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases pursuant to the Bankruptcy Code, or as a result of
the allowance of contingent or disputed claims.
The consolidated balance sheet at December 31, 2003 has been derived from the
audited financial statements as of that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
presentations.
Note B - Stock-Based Compensation
During 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which provides alternative methods of
accounting for stock-based compensation and amends SFAS No. 123, "Accounting for
Stock-based Compensation," which provides a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 148 and
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. No stock-based employee compensation
cost related to stock option awards is reflected in net income, as all options
granted under the Company's applicable stock option plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
Had compensation cost for awards granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method set forth under SFAS No. 123, there would have been
no material change to the Company's financial results.
8
Note C - Inventories
Inventories at March 31, 2004 and December 31, 2003 consisted of the following
(in thousands):
March 31, December 31,
2004 2003
------- -------
Finished goods $60,436 $62,072
Work-in-process 10,184 7,953
Raw materials and supplies 11,178 11,455
------- -------
$81,798 $81,480
======= =======
Note D - Accrued Expenses
Accrued Expenses at March 31, 2004 and December 31, 2003 consisted of the
following (in thousands):
March 31, December 31,
2004(1) 2003
------- -------
Accrued advertising and
sales promotions $19,028 $21,771
Employee compensation
and related benefits 9,639 7,018
Interest 214 3,879
Environmental matters 789 1,559
Royalties 843 1,205
Deferred income taxes 4,376 4,376
Other 3,521 6,246
------- -------
$38,410 $46,054
======= =======
(1) Certain amounts included in the above line-item balances at December 31,
2003 have been reclassified as liabilities subject to compromise at March
31, 2004. See Note F.
9
Note E - Other Liabilities
Other Liabilities at March 31, 2004 and December 31, 2003 consisted of the
following (in thousands):
March 31, December 31,
2004(1) 2003
------- -------
Pension benefits $ 2,247 $26,278
Environmental remediation
and product related
liabilities 3,854 9,301
Other postretirement benefits -- 8,517
Deferred income taxes 10,340 10,355
Accrued workers'
compensation claims -- 5,130
Accrued compensation -- 370
Other 1,259 2,175
------- -------
$17,700 $62,126
======= =======
(1) Certain amounts included in the above line-item balances at December 31,
2003 have been reclassified as liabilities subject to compromise at March
31, 2004. See Note F.
Note F - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J to the Unaudited
Condensed Consolidated Financial Statements), pursuant to SOP 90-7, Congoleum is
required to segregate pre-petition liabilities that are subject to compromise
and report them separately on the consolidated balance sheet. Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Substantially all of Congoleum's pre-petition debt is recorded at face value and
is classified within liabilities subject to compromise. In addition, Congoleum's
accrued interest expense on its Senior Notes is also recorded in liabilities
subject to compromise. See Notes A and J to the Unaudited Condensed Consolidated
Financial Statements for further discussion of Congoleum's asbestos liability.
Liabilities subject to compromise at March 31, 2004 are as follows (in
thousands):
Debt (at face value) $100,000
Pre-petition other payables and accrued interest 7,752
Pension liability 23,865
Other post-retirement benefit obligation 8,413
Pre-petition other liabilities 11,465
--------
Total liabilities subject to compromise $151,495
========
10
Note F - Liabilities Subject to Compromise (continued)
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note G - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of the Company's employees. Benefits under the plan
are based on years of service and employee compensation. Amounts funded annually
by the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. The Company and Congoleum also maintain health and
life insurance programs for retirees (reflected in the table below under the
columns entitled "Other Benefits").
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's Pension and other benefit plans during the first
fiscal quarters of 2004 and 2003.
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
--------------------------------------------
Other Other
(In thousands) Pension Benefits Pension Benefits
--------------------------------------------
Components of Net Periodic Benefit Cost:
Service cost $ 554 $ 50 $ 456 $ 47
Interest cost 1,433 140 1,350 137
Expected return on plan assets (1,221) -- (999) --
Recognized net actuarial loss 400 11 399 9
Amortization of transition obligation (35) -- (40) --
Amortization of prior service cost (62) (116) (63) (116)
---------------------------------------------
Net periodic benefit cost $ 1,069 $ 85 $ 1,103 $ 77
=============================================
The weighted average assumptions used to determine net periodic benefit cost
were as follows:
Discount rate 6.25%-6.75% 6.75% 6.25%-6.75% 6.75%
Expected long-term return on
plan assets 7.00%-7.50% -- 7.00%-7.50% --
Rate of compensation increase 4.00%-5.50% -- 4.00%-5.50% --
Note H - Discontinued Operation
During 2003, the Company decided to discontinue the operations of its Janus
subsidiary, a manufacturer of pre-finished hardwood flooring, and sell the
related assets. Results of Janus, including charges resulting from the shutdown,
are being reported as a discontinued operation.
11
Note I - Commitments and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described below. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts, and the matters may remain
unresolved for several years.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's consolidated balance sheet. Due
to the relative magnitude and wide range of estimates of these liabilities and
the fact that recourse related to these liabilities is generally limited to
Congoleum, these matters are discussed separately following matters for which
ABI has actual or potential liability. However, since ABI includes Congoleum in
ABI's consolidated financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidated financial
statements.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,963 pending claims involving
approximately 3,467 individuals as of March 31, 2004. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to ABI's asbestos claims is as follows:
Three Months Ended Year Ended
March 31, 2004 December 31, 2003
--------------------------------------
Beginning claims 1,954 884
New claims 113 1,367
Settlements (8) (14)
Dismissals (96) (283)
--------------------------------------
Ending claims 1,963 1,954
======================================
The total indemnity costs incurred to settle claims during the three months
ended March 31, 2004 and twelve months ended December 31, 2003 were $472.5
thousand and $270 thousand, respectively, all of which were paid by ABI's
insurance carriers pursuant to ABI's relevant insurance policies, as were the
related defense costs. The average indemnity cost per resolved claim was
approximately $4.5 thousand for the three months ended March 31, 2004 and $900
for the year ended December 31, 2003.
12
Note I - Commitments and Contingencies (continued)
In general, governmental authorities have determined that asbestos-containing
sheet and tile products are nonfriable (i.e., cannot be crumbled by hand
pressure) because the asbestos was encapsulated in the products during the
manufacturing process. Thus, governmental authorities have concluded that these
products do not pose a health risk when they are properly maintained in place or
properly removed so that they remain nonfriable. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that may
cause the product to become friable. The Company estimates its liability to
defend and resolve current and reasonably anticipated future asbestos-related
claims (not including claims asserted against Congoleum), based upon a strategy
to actively defend or seek settlement for those claims in the normal course of
business. Factors such as recent and historical settlement and trial results,
the incidence of past and recent claims, the number of cases pending against it
and asbestos litigation developments that may impact the exposure of the Company
were considered in performing these estimates. In 2003, the Company engaged an
outside actuary to assist it in developing estimates of the Company's liability
for resolving asbestos claims at December 31, 2003. The actuary estimated the
range of liability for settlement of current claims pending and claims
anticipated to be filed through 2009 was $10.7 million to $16.0 million. The
Company believes no amount within this range is more likely than any other, and
accordingly has recorded the minimum liability estimate of $10.7 million in its
consolidated financial statements. The Company also believes that based on this
minimum liability estimate, the corresponding amount of insurance probable of
recovery is $10.7 million at December 31, 2003 and March 31, 2004, which has
been included in other assets.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's pre-packaged Chapter 11 case and proposed plan of reorganization on
the Company's liabilities, the Company does not believe that reasonable
estimates can be developed of liabilities for asbestos-related claims against
the Company (not including claims asserted against Congoleum) beyond a five year
horizon. The Company will continue to evaluate its range of future exposure, and
the related insurance coverage available, and when appropriate, record future
adjustments to those estimates, which could be material.
The Company anticipates that resolution of its asbestos related liabilities
resulting from Congoleum's anticipated plan will be limited to liabilities
derivative of claims asserted against Congoleum as may be afforded under Section
524(g)(4) of the Bankruptcy Code.
ABI reported in its December 31, 2003 Form 10-K that it has been named as a
Potentially Responsible Party ("PRP") within the meaning of the Federal
Comprehensive Environmental Response Compensation and Liability Act, as amended
("CERCLA"), with respect to four sites located in three separate states. ABI
also reported that it is potentially responsible for response and remediation
costs with respect to three state-supervised sites. There have been no material
developments relating to these sites during the three month period ended March
31, 2004.
A lawsuit was brought by Olin Corporation ("Olin"), the present owner of a
former chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three other named defendants were liable for a portion of
the site's soil and groundwater response and
13
Note I - Commitments and Contingencies (continued)
remediation costs at the site. A wholly-owned subsidiary of ABI owned and
operated the Wilmington plant from 1959 to 1964 and for approximately one month
during 1964 ABI held title to the property directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus an annual reimbursement of $0.1 million for Olin's
internal costs. Under an agreement between ABI and TBC, TBC is liable for 37.5%
of the costs that may be incurred by ABI in connection with this lawsuit and
37.5% of the amounts due under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2004 will be approximately $6.6 million. For costs
beyond 2004, ABI has estimated the range to be between $14.6 million to $27.3
million. As of March 31, 2004, ABI has estimated its potential liability to Olin
net of expected recoveries from TBC to be in the range of $2.3 million to $4.0
million after allocation for Olin's internal costs but before any recoveries
from insurance.
The State of Maine Department of Environmental Protection has put the present
owner of a former ABI plant on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
approximately $1 million. ABI has not yet entered a final cost sharing agreement
with the current owner. Under an agreement between ABI and TBC, TBC is liable
for 37.5% of costs incurred by ABI at this site.
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the state supervised sites,
the Olin Site and the Maine Site. An agreement was executed by ABI and its
carriers regarding the payment of the defense costs for the Olin Site. ABI has
reached agreements with three of its insurance carriers whereby the carriers
have reimbursed the Company $1.9 million for past and current environmental
claims. One carrier has agreed to reimburse the Company for 2.5% of the
Company's liabilities regarding future environmental expenses related to the
Olin Site, $20 thousand of which was reimbursed through March 31, 2004 and which
reimbursement was shared 37.5% with TBC pursuant to the Company's agreement with
TBC. ABI and its insurance carriers continue to discuss ABI's remaining demands
for insurance coverage for these sites. As of March 31, 2004, the Company has
accrued $4.6 million for ABI's estimable and probable amounts for
environmental-related contingencies described above. Additionally, the Company
has recorded an asset related to insurance recoveries relating to those
contingencies, net of reimbursements to certain PRP's, for approximately $900
thousand.
14
Note I - Commitments and Contingencies (continued)
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order whereby the Company has
provided a self-guarantee in the amount of $750 thousand to the New Jersey
Department of Environmental Protection to assure the funding for any
environmental remediation the state may require at that location. Pursuant to
the merger in 1993 of the Company's former tile division with Congoleum,
Congoleum assumed liability for the cost of cleaning up the site. The Company
remains contingently liable in the event that Congoleum fails to perform or fund
any required remediation relating to this site.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a pre-packaged plan of reorganization under Chapter 11
of the Bankruptcy Code. See Note J - "Congoleum Asbestos Liabilities and Planned
Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA and similar state
laws. In addition, in four other instances, although not named as a PRP,
Congoleum has received a request for information. These pending proceedings in
which Congoleum is a named PRP currently relate to four disposal sites in New
Jersey, Pennsylvania, Maryland, and Connecticut in which recovery from
generators of hazardous substances is sought for the cost of cleaning up the
contaminated waste sites. Congoleum's ultimate liability in connection with
those other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable by Congoleum insurance policies.
However, under CERCLA, and certain other laws, as a PRP, Congoleum can be held
jointly and severally liable for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. 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; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation for this site, based on engineering and consultant studies
conducted, would be approximately $26 million. Congoleum's proportionate share,
based on waste disposed at the site, is estimated to be approximately 5.8%.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total clean-up costs, including capital
outlays and future maintenance costs for soil and groundwater remediation are
primarily based on engineering studies.
15
Note I - Commitments and Contingencies (continued)
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against Congoleum, which could have a material adverse
effect on the financial position of Congoleum.
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, Congoleum becomes involved in lawsuits,
administrative proceedings, product liability and other matters. In some of
these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts, and the matters may remain unresolved for several years.
Note J - Congoleum Asbestos Liabilities and Reorganization
On December 31, 2003, Congoleum and two of its subsidiaries each filed their
respective voluntary petitions commencing cases for reorganization relief under
Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for
the District of New Jersey. These Chapter 11 cases are being jointly
administered as Case No. 03-51524 (KCF), styled In re Congoleum Corporation, et
al., and were commenced in order to resolve Congoleum's asbestos-related
liabilities and any future asbestos-related liability that might be asserted
against Congoleum. During 2003, Congoleum obtained the asbestos personal injury
claimant votes necessary for approval of a proposed pre-packaged Chapter 11 plan
of reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. The
Bankruptcy Court has approved the disclosure statement and a confirmation
hearing is scheduled for July 22, 2004. Congoleum is also involved in litigation
with certain insurance carriers related to disputed insurance coverage for
asbestos related liabilities, and certain insurance carriers have filed various
objections to Congoleum's pre-packaged plan of reorganization and related
matters.
The pre-packaged plan, if confirmed, would leave most of Congoleum's
non-asbestos creditors unimpaired and would resolve all pending and future
asbestos claims against Congoleum. The plan of reorganization would provide for,
among other things, an assignment of, or grant a security interest in, certain
rights in, and proceeds of, Congoleum's applicable insurance to a plan trust
established under Section 524(g) of the Bankruptcy Code that would fund
distributions to pending and future asbestos claimants and provide for the
issuance of an injunction that would protect Congoleum from all future
asbestos-related litigation and liabilities by channeling all current and future
asbestos claims to the plan trust. Congoleum's general unsecured creditors would
be unimpaired under the plan.
As part of Congoleum's plan of reorganization, ABI expects that Congoleum's
indemnification obligations to ABI with respect to current and future asbestos
personal injury claims related to ABI's former tile division operations not
covered by ABI insurance will be channeled to the plan trust established under
Section 524(g) of the Bankruptcy Code. ABI and Congoleum expect to contribute,
among other things, to the plan trust that would be established pursuant to
Congoleum's Chapter 11 reorganization $250 thousand in cash from ABI and a note
from Congoleum in an initial aggregate principal amount of $2.7 million with
payment of such note contribution secured by a pledge by ABI of both the common
stock of Congoleum that it owns as well as certain of its rights to receive
certain indemnity payments from Congoleum. ABI does not expect that Congoleum's
note contribution to the plan trust would have a material adverse effect
16
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
on ABI's liquidity or capital resources. The principal amount of the note that
Congoleum will contribute to the trust under the proposed plan is expected to be
subject to future increase in an amount equal to the amount by which 51% of the
equity value of Congoleum as of the last trading day of the 90 consecutive
trading day period commencing on the first anniversary of the effective date of
Congoleum's confirmed Chapter 11 plan of reorganization exceeds $2.7 million.
This adjustment amount could result in the principal amount of the note
increasing materially. The adjusted principal amount of the note would be
effective as of the measurement date of the adjustment. The proposed
pre-packaged plan also provides for a possible additional contribution by ABI to
the plan trust in the event ABI sells its interest in Congoleum before the third
anniversary of the date as of which the principal amount of the note contributed
by Congoleum to the plan trust is measured for purposes of determining whether
the principal amount is to be increased. The expected amount of any additional
contribution by ABI would be equal to 50% of any amount by which 51% of the
equity value of Congoleum implied by ABI's sale of its interest in Congoleum
exceeds the aggregate principal amount of the note contributed by Congoleum to
the plan trust outstanding as of the measurement date for determining whether
the principal amount of that note would be increased and after taking into
account any such increase in the principal amount.
While Congoleum believes its plan is feasible and in the best interest of all
Congoleum's constituents, there are sufficient risks and uncertainties such that
no assurances of the outcome of Congoleum's pre-packaged Chapter 11 case can be
given. Congoleum expects that its remaining costs to confirm and effect its
proposed pre-packaged plan, consisting principally of legal and advisory fees
and contributions to the plan trust to be established upon confirmation of the
plan will be approximately $8.7 million at a minimum.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income (loss) for the three
months ended March 31, 2004 and 2003 (in thousands):
Three Months Ended
March 31,
2004 2003
---- ----
Net loss $(2,025) $(3,125)
Foreign currency translation adjustments (254) 991
------- -------
Total comprehensive loss $(2,279) $(2,134)
======== ========
Note L - Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net loss by the weighted
average number of shares of common stock outstanding.
17
Note M - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products. The
flooring products segment consists of Congoleum, a manufacturer of resilient
floor coverings which are sold primarily through floor covering distributors to
retailers and contractors for commercial and residential use. The tape products
segment manufactures paper, film, HVAC, electrical, shoe and other tape products
for use in industrial and automotive markets in two production facilities in the
United States, and in finishing and sales facilities in Belgium and Singapore.
The jewelry segment consists of the Company's majority-owned subsidiary K&M
Associates L.P., a national costume jewelry supplier to mass merchandisers and
department stores. The Company's Canadian division produces flooring, rubber
products, and other industrial products.
Three Months Ended
March 31,
2004 2003
----------------------
(In thousands)
Net sales
Net sales to external customers:
Flooring products $ 51,949 $ 53,566
Tape products 21,018 19,369
Jewelry 15,754 20,274
Canadian division 10,686 8,737
--------- ---------
Total net sales to external
customers 99,407 101,946
--------- ---------
Intersegment net sales:
Flooring products 51 15
Tape products 17 33
Jewelry -- --
Canadian division 1,187 1,982
--------- ---------
Total intersegment net sales 1,255 2,030
--------- ---------
100,662 103,976
Reconciling items
Intersegment net sales (1,255) (2,030)
--------- ---------
Total consolidated net sales $ 99,407 $ 101,946
========= =========
18
Note M - Industry Segments (continued)
Three Months Ended
March 31,
2004 2003
----------------------
(In thousands)
Segment (loss) profit
Flooring products $ (435) $(2,589)
Tape products (198) (435)
Jewelry (714) 1,687
Canadian division (451) (174)
------- -------
Total segment loss (1,798) (1,511)
Reconciling items
Corporate items (1,004) (690)
Intercompany profit (loss) 106 28
------- -------
Total consolidated loss from
continuing operations before
income taxes and other items $(2,696) $(2,173)
======= =======
March 31, December 31,
2004 2003
------------------------
Segment assets
Flooring products $ 184,704 $ 175,899
Tape products 56,340 54,415
Jewelry 35,418 37,272
Canadian division 35,858 35,642
--------- ---------
Total segment assets 312,320 303,228
Reconciling items
Assets of discontinued operation 2,682 2,902
Corporate items 26,812 23,089
Intersegment accounts receivable (13,691) (9,575)
Intersegment profit in inventory (162) (248)
--------- ---------
Total consolidated assets $ 327,961 $ 319,396
========= =========
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's (and
its majority-owned subsidiary Congoleum's) expectations, 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. 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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 and in the Company's other filings with the Securities and
Exchange Commission.
On December 31, 2003 the Company's subsidiary Congoleum and two of its
subsidiaries each filed their respective voluntary petitions commencing cases
for reorganization relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of New Jersey. These Chapter 11 cases
are being jointly administered as Case No. 03-51524 (KCF), styled In re
Congoleum Corporation, et al., to resolve claims that have been or might in the
future be asserted against Congoleum related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. Based on its
pre-packaged bankruptcy strategy, which included Congoleum settling certain
asbestos claims prior to commencing its Chapter 11 case, Congoleum has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. Congoleum recorded charges of $17.3 million in the fourth
quarter of 2002, and an additional charge of $3.7 million in the fourth quarter
of 2003, to increase its recorded liability to the estimated minimum cost to
complete its reorganization. Actual amounts that will be contributed to the plan
trust and costs for obtaining confirmation of and implementing the plan of
reorganization could be materially higher, which could have a material effect on
ABI's and Congoleum's consolidated results of operations as well as Congoleum's
financial position.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Results of Janus, including
charges resulting from the shutdown, are being reported as a discontinued
operation.
20
Due to Congoleum's bankruptcy and separate capital structure, the Company
believes that presenting ABI and its non-debtor subsidiaries separately from
Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as of the date of
our financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. We believe that
our most critical accounting policies, upon which our financial condition
depends and which involve the most complex or subjective decisions or
assessments, are those described in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, filed with the Securities and Exchange
Commission. There have been no material changes of what we consider to be our
critical accounting policies or the disclosure we provided regarding those
policies in that Form 10-K.
Results of Operations
ABI and Non-Debtor Subsidiaries
Net sales in the first quarter of 2004 were $47.5 million compared to $48.4
million in the first quarter of 2003, a decrease of $.9 million or 1.9%. This
decrease was due to lower sales at K&M, partially offset by improved sales at
the Tape and Canadian divisions. Jewelry sales declined due to lower purchases
by a major customer versus the first quarter of 2003 when several large programs
shipped to that customer. Tape division sales improved due to higher demand,
particularly for pre-mask products, while Canadian sales increased due to
foreign exchange.
Cost of products sold as a percentage of net sales was 69.3% in the first
quarter of 2004 compared to 66.8% in the first quarter of 2003. The increase was
primarily due to jewelry sales, which generally have higher gross margins than
the other segments constituting a smaller percentage of our sales in the first
quarter of 2004 compared to 2003, compounded by a slight decline in jewelry
margins. The increase was partly offset by improved margins at the Tape and
Canadian operations. Jewelry margins declined due to higher selling allowances
as a percentage of sales, while Tape margins improved due to increased volumes
and Canadian margins benefited from a more profitable sales mix.
Selling, general and administrative expenses in the first quarter of 2004 were
$15.8 million, an increase of 2.3% or $0.4 million over the first quarter of
2003. This increase was primarily due to higher expenses for freight,
professional fees, and the impact of foreign exchange. Selling, general and
administrative expenses as a percentage of net sales were 33.2% in the first
quarter of 2004 compared to 31.9% in the first quarter of 2003. This increase in
21
percentage was due to the decline in sales at K&M without a commensurate decline
in selling, general and administrative expenses, partly offset by these expenses
declining at the Canadian division and increasing by a lesser percentage than
sales at the Tape division.
Interest income and other income (expense) accounted for a $0.3 million expense
in the first quarter of 2004 compared to a netted $0.4 million income item in
the first quarter of 2003 primarily due to less favorable foreign exchange
results. Interest expense in the first quarter of 2004 was $0.8 million compared
to $0.6 million in the first quarter of 2003 due to a higher interest rate on
the Company's $20 million note and interest incurred for Janus related debt.
The effective tax rate was 35.2% in the first quarter of 2004 compared to 37.6%
in the first quarter of 2003.
The loss from continuing operations in the first quarter of 2004 was $1.4
million compared to income from continuing operations of $0.2 million in the
corresponding prior year period, primarily due to the decline in net sales at
K&M.
Congoleum & Non-Debtor Subsidiaries
Net sales for the quarter ended March 31, 2004 were $52.0 million as compared to
$53.6 million for the quarter ended March 31, 2003, a decrease of $1.6 million
or 3%. The decrease resulted primarily from lower resilient sheet sales to
general line distributors. Congoleum's largest distributor reduced its inventory
of Congoleum products by $2.1 million in the first quarter of 2004 compared with
a $2.5 million increase in the first quarter of 2003. Partially offsetting this
decline was improved sales to manufactured housing distributors.
Gross profit for the quarter ended March 31, 2004 totaled $13.5 million, or
26.1% of net sales, compared to $12.7 million, or 23.6% of net sales for the
same period last year. The improvement in gross margin reflects an improvement
in sales mix, the benefit of cost reduction programs and a price increase
instituted in late 2003, partially offset by the unfavorable impact of lower
production volumes over which to spread fixed manufacturing costs.
Selling, general and administrative expenses were $12.0 million for the quarter
ended March 31, 2004 as compared to $13.2 million for the quarter ended March
31, 2003, a decrease of $1.2 million. The reduction in expenses reflects cost
savings initiatives implemented in 2003, which helped reduce personnel-related
compensation costs by approximately $0.8 million, during the quarter, coupled
with lower sales and marketing support costs of approximately $0.2 million. As a
percent of net sales, selling, general & administrative costs were 23.0% for the
quarter ended March 31, 2004 compared to 24.6% for the same period last year.
Income from operations, before Interest and other income and Interest expense,
was $1.6 million for the quarter ended March 31, 2004 compared to a loss of $0.5
million for the quarter ended March 31, 2003. The improvement in operating
income was a result of the improved gross margins and lower selling, general and
administrative expenses.
22
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including restricted cash and short term investments,
declined $0.7 million in the first three months of 2004 to $1.1 million. Cash
used by operating activities, principally for seasonal working capital
increases, were financed with short term borrowings. Working capital at March
31, 2004 was $12.6 million, down from $13.4 million at December 31, 2003. The
ratio of current assets to current liabilities at March 31, 2004 was 1.22 down
from 1.24 at December 31, 2003.
Capital expenditures in the first three months of 2004 were $0.6 million
compared to $0.7 million for the first three months of 2003. It is anticipated
that capital spending for the full year 2004 will be approximately $4 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos product-related liabilities,
including provisions for testing for potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that most of such amounts will be paid over a
period of three to ten years and that the Company expects to have sufficient
resources to fund such amounts, the actual timing and amount of such payments
may differ significantly from the Company's assumptions. Although the effect of
future government regulation could have a significant effect on the Company's
costs, the Company is not aware of any pending legislation or regulation which
would have a material adverse effect on its consolidated results of operations
or financial position. There can be no assurances that such costs could be
passed along to its customers.
Cash requirements for capital expenditures, working capital, debt service and
any share repurchases are expected to be financed from operating activities and
borrowings under existing bank lines of credit. As of March 31, 2004,
approximately $28.4 million in the aggregate was available for borrowing by the
Company under its bank lines of credit subject to the value from time to time of
the collateral securing outstanding borrowings under those lines of credit. At
March 31, 2004, $12.0 million was outstanding under revolving credit lines and
$0.5 million was outstanding under letters of credit. An additional $12.9
million was available for borrowing as of that date under the Company's
revolving credit lines. The Company believes that its cash flow from operations,
expected proceeds from the sale of the Janus assets and borrowings available
under its existing bank lines of credit will be adequate for its expected
capital expenditure, working capital, and debt service needs, subject to
compliance with the covenants contained in its debt agreements referred to
below.
American Biltrite Inc. has two principal debt agreements that it is party to as
borrower. The first of those agreements is a credit agreement (the "Credit
Facility") with Fleet National Bank ("Fleet"). The Credit Facility provides the
Company with a revolving credit facility of up to $20 million, including up to
$5 million for the issuances of lines of credit. The amounts which the Company
can borrow under the Credit Facility are subject to reduction from time to time
if the borrowing base is less than $20 million. Interest is payable on amounts
borrowed under the Credit Facility at rates which generally vary between a LIBOR
23
based rate plus 1.0% to a LIBOR based rate plus 2.75% depending on the Company's
leverage ratio, as determined under the Credit Facility. Certain domestic
subsidiaries of the Company have agreed to guaranty the Company's obligations
under the Credit Facility. The Credit Facility expires on December 31, 2004.
The second principal debt agreement that American Biltrite Inc. is a party to
(the "Note Agreement") is with The Prudential Insurance Company of America
("Prudential"). Under the Note Agreement, the Company previously issued notes in
an aggregate principal amount of $20 million (the "Series A Notes"). The Series
A Notes generally bear interest at a rate of 7.91% per annum, and the Company is
obligated to pay Prudential an additional fee on each interest payment date if
the Company's and certain of its subsidiaries' ratio of debt to EBITDA, as
defined under the amended Note Agreement, exceeds certain levels. The amount of
those fees that may be payable by the Company varies depending on the extent the
Company's and certain of its subsidiaries' debt exceeds EBITDA, as determined
under the Note Agreement, and is capped at 2% of the outstanding principal
amount of the Series A Notes. Principal on the Senior A Notes is repayable in
five annual installments of $4.0 million beginning on August 28, 2006. In
addition, the Note Agreement provides for possible issuances of additional notes
by the Company for up to an aggregate principal amount of $15 million, which
additional notes will mature not later than 10 years after the date of issuance
and will bear interest at rates to be determined on or about the time of
issuance.
Both the Credit Facility and the Note Agreement contain certain covenants that
the Company must satisfy. The covenants included in the Credit Facility and the
Note Agreement include certain financial tests, restrictions on the ability of
the Company to incur additional indebtedness or to grant liens on its assets and
restrictions on the ability of the Company to pay dividends on its capital
stock. Pursuant to the Credit Facility and the Note Agreement, the Company and
certain of its domestic subsidiaries granted Fleet and Prudential a security
interest in most of the Company's and its domestic subsidiaries' assets. The
security interest granted does not include the shares of capital stock of the
Company's majority-owned subsidiary Congoleum Corporation or the assets of
Congoleum Corporation.
In the past, the Company has had to amend its credit agreements in order to
avoid being in default of those agreements as a result of failing to satisfy
certain financial covenants contained in those agreements. There can be no
assurances that the Company will be able to meet certain of the financial
covenants contained in the Credit Facility and the Note Agreement as of June 30,
2004, the next measurement date for determining compliance with those covenants
or that the Company will be able to obtain any amendments to any covenants that
might be necessary to enable it to achieve compliance. If it fails to satisfy
those covenants it will be in default under the respective debt agreements.
Pursuant to the terms of the Credit Facility and the Note Agreement, a default
by the Company under one of those agreements triggers a cross-default under the
other agreement. If a default occurs, Fleet and Prudential could respectively
require the Company to repay all amounts outstanding under the respective debt
agreements. If a default occurs and the Company is unable to obtain a waiver
from Fleet and Prudential and the Company is required to repay all amounts
outstanding under those agreements, the Company would need to obtain funding
from another source. Otherwise, the Company would likely be unable to repay
24
those outstanding amounts, in which case, Fleet as administrative agent over the
collateral securing the amounts outstanding under the Credit Facility and the
Note Agreement, might exercise Fleet's and Prudential's rights over that
collateral. Any default by the Company under the Credit Facility or the Note
Agreement that results in the Company being required to immediately repay
outstanding amounts under its debt agreements would have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition, under the Note Agreement, the Company must enter into a definitive
commitment by November 14, 2004 to replace or refinance not less than $15
million of the amounts under the Credit Facility on substantially similar terms
and with a maturity of not less than one year. Failure to do so would constitute
an event of default under the Note Agreement.
As noted above, the Credit Facility and the Note Agreement restrict the
Company's ability to obtain additional financing. Moreover, since the Company
and most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited. The Company currently believes that its cash flow from
operations, expected proceeds from the sale of the Janus assets and borrowings
available under its existing credit facilities will be adequate for its expected
capital expenditure, working capital and debt service needs, subject to
compliance with the covenants contained in its debt agreements. However, if
circumstances change, the inability of the Company to obtain any necessary
additional debt financing would likely have a material adverse effect on its
business, operations and financial condition.
Under Congoleum's anticipated plan of reorganization, it is expected that
certain rights that the Company may have to receive indemnification for claims
under the plan of reorganization or the joint venture agreement relating to the
merger in 1993 of the Company's tile division with Congoleum, subject to certain
exceptions, will not be paid to the Company for so long as any obligations owed
to the plan trust established pursuant to Congoleum's plan by Congoleum under
the promissory note expected to be contributed by Congoleum to the plan trust
remain outstanding. Instead, those amounts will be held in escrow by the plan
trust and be pledged by the Company as collateral securing Congoleum's
obligations under that promissory note until released from such escrow and paid
to the Company pursuant to the terms of Congoleum's plan of reorganization, the
promissory note and the pledge agreement expected to be entered by the Company
with regard to the collateral expected to be pledged by the Company to secure
Congoleum's obligations under the promissory note. To the extent the amounts
that are subject to that escrow are material, that could have a material adverse
effect on the Company's liquidity and capital resources since those escrowed
amounts represent amounts that would have already been paid by the Company but
not yet reimbursed to the Company to the extent they remain in escrow.
In addition, the terms of the Congoleum plan of reorganization are expected to
provide that the Company will no longer have certain other rights to receive
indemnification under the joint venture agreement or Congoleum's plan of
reorganization for asbestos-related property damage claims. To the extent that
the Company pays material amounts for asbestos-related property damage claims
that the Company would have been entitled to be reimbursed for by Congoleum
absent the provisions of Congoleum's plan of reorganization, that could have a
material adverse effect on the Company's liquidity and capital resources.
25
Furthermore, to the extent that the amount of any of the Company's indemnity
claims against the plan trust established pursuant to Congoleum's plan of
reorganization are reduced to an amount less than the corresponding amount paid
by the Company pursuant to the distribution procedures under the Company's plan
of reorganization, that could have a material adverse effect on the Company's
liquidity and capital resources.
The Company has not declared a dividend subsequent to the third quarter of 2003.
Future dividends, if any, will be determined by the Company's board of directors
based upon the financial performance and capital requirements of the Company,
among other considerations. Under the credit facility, aggregate dividend
payments are generally limited to 50% of cumulative consolidated net income
(computed treating Congoleum under the equity method of accounting), as
determined under the credit facility, earned after June 30, 2003. Under the note
agreement, aggregate dividend payments generally may not exceed the sum of $6
million plus 50% of a cumulative consolidated net income (accounting for
Congoleum under the equity method of accounting), as determined under the note
agreement, earned after December 31, 2000.
In addition, under the terms of the Congoleum plan of reorganization, the
Company expects to contribute $250 thousand in cash to the plan trust to be
established upon confirmation of the Congoleum plan.
Congoleum & Non-Debtor Subsidiaries
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the condensed
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the unaudited condensed Consolidated
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
Congoleum is a defendant in a large number of asbestos-related lawsuits and, on
December 31, 2003, filed a pre-packaged plan of reorganization under Chapter 11
of the United States Bankruptcy Code as part of its strategy to resolve this
liability. For additional information, see Notes 1 and 6 of the Notes to
Consolidated Financial Statements, which are contained in Item 1 of the
Congoleum Corporation Quarterly Report on Form 10-Q. These matters will have a
material adverse impact on liquidity and capital resources. During 2003,
Congoleum paid $5.3 million in defense and indemnity costs related to
asbestos-related claims and $13.5 million in fees and expenses related to
implementation of its planned reorganization under Chapter 11 and litigation
with certain insurance companies. During the first quarter of 2004, Congoleum
spent $1.1 million and during the balance of 2004, expects to spend a further
$8.7 million at a minimum in fees, expenses, and trust contributions in
connection with obtaining confirmation of its plan. Congoleum also expects to
recover $3.6 million from the Collateral Trust or its successor pursuant to
terms of the Claimant Agreement and related documents, which provide for the
Collateral Trust or Plan Trust to reimburse certain expenses of Congoleum.
26
Timing of such recovery will depend on when the trust receives funds from
insurance settlements or other sources.
Unrestricted cash and cash equivalents, including short-term investments at
March 31, 2004, were $10.5 million, an increase of $8.3 million from December
31, 2003. Under the terms of its revolving credit agreement, payments on
Congoleum's accounts receivable are deposited in an account assigned by
Congoleum to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. Working capital was
$36.7 million at March 31, 2004, up from $27.1 million at December 31, 2003. The
ratio of current assets to current liabilities at March 31, 2004 and December
31, 2003, was 1.7 to one, compared to 1.5 to one, respectively. Net cash
provided by operations during the first three months of 2004 was $7.8 million,
as compared to cash used by operations of $22.2 million in 2003. The increase in
cash provided by operations in the first three months of 2004 versus the first
three months of 2003 was primarily due to the unusually low level of accounts
payable and accrued expenses at December 31, 2003. This unusually low level was
due to limited manufacturing activity, coupled with creditors managing their
pre-petition credit exposure and Congoleum prepaying certain expenses prior to
its December 31, 2003, bankruptcy filing. As a result of its bankruptcy filing,
Congoleum was not permitted to make the $4.3 million interest payment on its
Senior Notes that was due February 1, 2004, which also reduced cash usage in the
first quarter of 2004 compared to 2003. Expenditures related to asbestos
liabilities and Congoleum's reorganization plan were $1.1 million in 2004,
compared to $ 4.2 million in 2003, which also contributed to the increase in
cash. Capital expenditures in the first three months of 2004 totaled $0.8
million. Congoleum is currently planning capital expenditures of approximately
$6 million in 2004.
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 provides a one-year revolving credit facility
with borrowings up to $30.0 million. Interest is based on .75% above the prime
rate. This financing agreement contains certain covenants, which include the
maintenance of a minimum tangible net worth and EBITDA. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financial agreement must
be met in order for Congoleum to borrow from the facility. Congoleum was in
compliance with these covenants at March 31, 2004. Borrowings under this
facility are collateralized by inventory and receivables. At March 31, 2004,
based on the level of receivables and inventory, $26.6 million was available
under the facility, of which $4.1 million was utilized for outstanding letters
of credit and $11.2 million was utilized by the revolving loan. Congoleum
anticipates that its debtor-in-possession financing facility will be replaced
with a revolving credit facility on substantially similar terms upon
confirmation of its plan of reorganization. While Congoleum expects the
facilities discussed above will provide it with sufficient liquidity, there can
be no assurances that it will continue to be in compliance with the required
covenants, that Congoleum will be able to obtain a similar or sufficient
facility upon exit from bankruptcy, or that the debtor-in-possession facility
would be renewed if Congoleum's plan of reorganization is not confirmed by that
facility's expiration on December 31, 2004.
27
In addition to the provision for asbestos litigation discussed previously,
Congoleum has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. Congoleum is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against Congoleum.
Among these claims, Congoleum is a named party in several actions associated
with waste disposal sites (more fully discussed in Note 5 to the Unaudited
Condensed Consolidated Financial Statements). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of Congoleum's
owned and previously owned facilities. The contingencies also include claims for
personal injury and/or property damage. The exact amount of such future cost and
timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of Congoleum's liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. Congoleum has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While Congoleum believes its estimate of the future
amount of these liabilities is reasonable, and that they will be paid over a
period of five to ten years, the timing and amount of such payments may differ
significantly from Congoleum's assumptions. Although future government
regulation could have a significant effect on Congoleum's costs, Congoleum is
not aware of any pending legislation, which would reasonably have such an
effect. There can be no assurances that the costs of any future government
regulations could be passed along to customers. Estimated insurance recoveries
related to these liabilities are reflected in other non-current assets.
The outcome of these environmental matters could result in significant expenses
incurred by, or judgments assessed against, Congoleum.
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Although Congoleum did
not generate cash from operations in 2003, Congoleum anticipates that it will
generate cash from operations in 2004. Congoleum believes these sources will be
adequate to fund working capital requirements, debt service payments, and
planned capital expenditures for the foreseeable future, plus its current
estimates for costs to settle and resolve its asbestos liabilities through its
pre-packaged Chapter 11 plan of reorganization. Congoleum's inability to obtain
confirmation of the proposed plan in a timely manner would have a material
adverse effect on Congoleum's ability to fund its operating, investing and
financing requirements. Congoleum also anticipates it will be able to obtain
exit financing upon confirmation of its proposed plan. Such financing will be
required to replace its debtor-in-possession credit facility and permit
Congoleum to pay accrued interest on its Senior Notes and other obligations
needed to be satisfied in connection with the confirmation of the proposed plan
or reorganization.
28
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, I and J of the Notes to Unaudited
Consolidated Condensed Financial Statements, which are included in this report,
the Company and its majority-owned subsidiary Congoleum have significant
liability and funding exposure for asbestos-related personal injury claims, and
in light of Congoleum's asbestos liability, Congoleum has filed a pre-packaged
Chapter 11 plan of reorganization in Bankruptcy Court. In connection with
Congoleum's strategy for resolving its asbestos liability, it previously entered
into settlement agreements with various asbestos claimants, which provided for
an aggregate settlement value of approximately $491 million. Settlement of this
obligation pursuant to the terms of Congoleum's proposed pre-packaged plan is
dependent on Bankruptcy Court confirmation of the plan, including determinations
by the Bankruptcy Court that, among other things, the plan has satisfied certain
criteria under the Bankruptcy Code.
There can be no assurance that Congoleum will be successful in obtaining
confirmation of Congoleum's pre-packaged plan in a timely manner or at all. Any
alternative plan of reorganization pursued by Congoleum or confirmed by the
Bankruptcy Court could vary significantly from the description in this report
(including descriptions incorporated by reference in this report). Furthermore,
the estimated costs and contributions required to confirm and to effect the
proposed pre-packaged plan of reorganization or an alternative plan could be
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained. As discussed elsewhere in this report, as part of
Congoleum's plan, Congoleum would contribute to the plan trust certain of
Congoleum's rights to receive insurance proceeds for asbestos liabilities under
its applicable insurance policies. Congoleum is currently involved in litigation
with certain of its insurance carriers related to disputed insurance coverage
for asbestos related liabilities, and certain insurance carriers have filed
various objections to Congoleum's plan of reorganization and related matters. It
is expected that these insurers will continue to vigorously contest any
obligation to provide Congoleum with insurance coverage for Congoleum's asbestos
liabilities and seek to prevent any contribution by Congoleum of its rights to
receive insurance for asbestos matters to the plan trust. There can be no
assurance that these insurers will not be successful in these regards. If the
insurers are able to successfully refuse an obligation to provide Congoleum with
insurance coverage for Congoleum's asbestos liabilities or prevent Congoleum's
proposed contribution of its rights to receive insurance proceeds for asbestos
matters to the plan trust as part of Congoleum's plan of reorganization, that
would have a material adverse effect on Congoleum's ability to obtain approval
of its pre-packaged plan of reorganization.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
29
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects to be able to receive insurance proceeds for its asbestos
liabilities for the foreseeable future. If, however, it were not able to receive
reimbursement from its insurers for the Company's asbestos liabilities and
expenses, that would likely have a material adverse effect on the Company's
financial position.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's goals for resolving asbestos liability by
Congoleum pursuing a pre-packaged plan of reorganization bankruptcy filing
include: (i) the future cost and timing of estimated asbestos liabilities and
payments and availability of insurance coverage and reimbursement from insurance
companies, which underwrote the applicable insurance policies for Congoleum and
the Company, for asbestos-related claims, (ii) costs relating to the execution
and implementation of any plan of reorganization pursued by Congoleum, (iii)
timely reaching an agreement with other creditors, or classes of creditors, that
exist or may emerge, (iv) the Company's and Congoleum's satisfaction of the
conditions and obligations under their respective outstanding debt instruments,
and amendment of those outstanding debt instruments, as necessary, to permit the
contemplated note contribution by Congoleum to the plan trust and pledge by the
Company of certain of its assets including the shares of Congoleum stock owned
by the Company and certain amounts the Company would otherwise be entitled to
receive from Congoleum as indemnification for certain liabilities and expenses
relating to the Company's former tile division, in connection with Congoleum's
pre-packaged plan of reorganization and to make certain financial covenants in
those debt instruments less restrictive, (v) the response from time-to-time of
the Company's and Congoleum's lenders, customers, suppliers and other
constituencies to the ongoing process arising from the strategy to settle
asbestos liability, (vi) Congoleum's ability to obtain debtor-in-possession
financing to provide it with sufficient funding during the pendency of its
Chapter 11 case and exit financing to provide it with sufficient funding for its
operations after emerging from the bankruptcy process, in each case on
reasonable terms (vii) timely obtaining sufficient creditor and court approval
of any reorganization plan (viii) developments in and the outcome of the
insurance coverage litigation pending in New Jersey State Court involving
Congoleum, the Company and certain insurers and (ix) compliance with the
Bankruptcy Code, including section 524(g). In addition, in view of American
Biltrite's relationships with Congoleum, American Biltrite could be affected by
Congoleum's negotiations, and there can be no assurance as to what that impact,
positive or negative, might be. In any event, the failure of Congoleum to obtain
confirmation of its anticipated pre-packaged plan of reorganization would have a
material adverse effect on Congoleum's business, results of operations or
financial condition and could have a material adverse effect on American
Biltrite's business, results of operations or financial condition.
In addition, there has been federal legislation proposed that, if adopted, would
establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its or Congoleum's businesses, results of
operations or financial conditions, or upon any plan of reorganization Congoleum
may decide to pursue. To date, Congoleum has expended significant amounts
pursuant to resolving its asbestos liability relating to its proposed
30
prepackaged Chapter 11 plan of reorganization. To the extent any federal
legislation is enacted which does not credit Congoleum for amounts paid by
Congoleum pursuant to its plan of reorganization or requires the Company or
Congoleum to pay significant amounts to any national trust or otherwise, such
legislation could have a material adverse effect on the Company or Congoleum's
businesses, results of operations and financial conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A, I and J of the Notes to Unaudited Consolidated Condensed
Financial Statements, which are included in this report.
The Company relies on debt financing to help fund its operations and other
general corporate purposes and any default by it under its credit facilities or
inability to obtain any necessary debt financing would likely have a material
adverse effect on its business, operations and financial condition.
The Company relies on borrowings under its existing credit facilities to help
finance, among other things, its operations, working capital and capital
expenditures. The Company and most of its domestic subsidiaries have granted a
security interest to the lenders under the Company's primary credit facilities
in most of the Company's and its domestic subsidiaries' assets. The collateral
that is subject to this security interest does not include the shares of capital
stock of Congoleum or assets of Congoleum.
The Company's credit facility (the "Credit Facility") with Fleet National Bank
("Fleet") has a final maturity date of December 31, 2004. In addition, under the
Company's debt agreement (the "Note Agreement") with The Prudential Insurance
Company of America ("Prudential"), the Company is obligated to enter into a
definitive commitment by November 14, 2004 to replace or refinance not less than
$15 million of the amounts under the Credit Facility on substantially similar
terms and with a maturity of not less than one year. Failure to do so would
constitute an event of default under the Note Agreement.
If the Company defaults under the Credit Facility or Note Agreement
(collectively, the "Facilities"), the respective lenders under those Facilities
have certain rights and remedies under those Facilities, and Fleet, in its
capacity as collateral agent, has obligations to such lenders and associated
rights with respect to the collateral, including the right to accelerate payment
of all amounts outstanding under the facilities and certain rights to
administration, assembly and sale of collateral in connection with certain
defaults.
31
There can be no assurances that the Company will be able to meet certain of the
financial covenants contained in the Credit Facility and the Note Agreement as
of June 30, 2004, the next measurement date for determining compliance with
those covenants or that the Company will be able to obtain any amendments to any
covenants that might be necessary to enable it to achieve compliance. Any
default by the Company under the Facilities which is not waived would likely
have a material adverse effect on its business, operations and financial
condition.
Under the terms of the Facilities, the Company's ability to obtain additional
debt financing is limited. Moreover, since the Company and most of its domestic
subsidiaries have already granted security interests in most of their assets,
the Company's ability to obtain any additional debt financing may be limited.
The inability of the Company to obtain any necessary additional debt financing
would likely have a material adverse effect on its business, operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their facilities, to comply with
existing environmental laws, and those amounts may be substantial. Although the
Company and Congoleum expect that they would have sufficient resources to fund
any such liabilities, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws or regulations may require or cause the Company or Congoleum
to modify or curtail their operations, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims (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
32
years. These matters could have a material adverse effect on the Company's
business, results of operations and financial condition if the Company or
Congoleum, as applicable, is unable to successfully defend against or settle
these matters and its insurance coverage is insufficient to satisfy any
judgments against it or settlements relating to these matters or the Company or
Congoleum, as applicable, is unable to collect insurance proceeds relating to
these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third-party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. In addition, the Company is dependent on foreign suppliers for
economical sourcing of its jewelry and certain other goods. Any significant
delay in or disruption of the supply of goods (including disruptions resulting
from political risks or shipping disruptions) could substantially increase the
Company's cost of materials, require product reformulation or require
qualification of new suppliers, any one or more of which could materially
adversely affect the Company's business, results of operations or financial
condition. The Company's majority-owned subsidiary Congoleum, does not have
readily available alternative sources of supply for specific designs of transfer
print paper, which are produced utilizing print cylinders engraved to
Congoleum's specifications. Although Congoleum does not anticipate any loss of
this source of supply, replacement could take a considerable period of time and
interrupt production of certain products, which could have a material adverse
affect on the Company's business, results of operations or financial condition.
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the Bankruptcy Code and emerge from bankruptcy as a
continuing operating company that has shed much of their pre-filing liabilities,
those competitors could have a cost competitive advantage over the Company or
Congoleum. In addition, in order to maintain their competitive positions, the
Company and Congoleum may need to make substantial investments in their
businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
33
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
34
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape and flooring divisions principally sell their products
through distributors. Sales to five unaffiliated customers accounted for
approximately 22% of the Company's tape division's net sales for the year ended
December 31, 2003 and 25% of its net sales for the year ended December 31, 2002.
The loss of the largest unaffiliated customer and/or two or more of the other
affiliated customers could have a material adverse effect on the Company's
business, results of operations and financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. While most of Congoleum's distributors have marketed
Congoleum's products for many years, replacements are necessary periodically to
maintain the strength of Congoleum's distribution network. Although Congoleum
has more than one distributor in some of its distribution territories and
actively manages its credit exposure to its distributors, the loss of a major
distributor could have a materially adverse impact on the Company's business,
results of operations and financial condition. Congoleum derives a significant
percentage of its sales from two of its distributors. These two distributors
accounted for approximately 65% of Congoleum's net sales for the year ended
December 31, 2003 and 59% of Congoleum's net sales for the year ended December
31, 2002.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 70% of its net sales for the year ended
December 31, 2003 and 75% of its net sales for the year ended December 31, 2002.
The loss of K&M Associates L.P.'s largest customer would likely have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, none of whom have an employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations and
financial condition.
35
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments but does not consider this interest rate market
risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in highly liquid debt instruments with
strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities. The substantial majority of the Company's outstanding
consolidated long-term debt as of March 31, 2004 consisted of indebtedness with
a fixed rate of interest, which is not subject to change based upon changes in
prevailing market interest rates.
The Company operates internationally, principally in Canada, Europe and Asia,
giving rise to exposure to market risks from changes in foreign exchange rates.
Foreign currency exchange rate movements also affect the Company's competitive
position, as exchange rate changes may affect business practices and/or pricing
strategies of non-U.S. based competitors. For foreign currency exposures
existing at March 31, 2004, a 10% unfavorable movement in currency exchange
rates in the near term would not materially affect ABI's consolidated operating
results, financial position or cash flows.
The Company does not currently use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in interest rates, foreign currency exchange rates, commodity prices or
equity prices and does not hold any instruments for trading purposes.
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to our Chief Executive Officer
and Chief Financial Officer by others within those entities, particularly
during the period in which this report was being prepared, and (2)
effective, in that they provide reasonable assurance that information
required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Commission's
rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Planned Reorganization" of the Notes to
Unaudited Consolidated Condensed Financial Statements are incorporated herein by
reference.
Item 3. Defaults Upon Senior Securites
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoluem's 8 5/8% Senior Notes. In
addition, due to the Chapter 11 proceedings, Conogluem was not permitted to make
the interest payment due February 1, 2004 on the Senior Notes. The amount of
accrued interest that was not paid on the Senior Notes on that date is
approximately $4.3 million. As of March 31, 2004, the principal amount of the
Senior Notes is approximately $100 million. These amounts, plus $61,000 of
accrued interest on the interest due on February 1, 2004 are included in
"Liabilities Subject to Compromise."
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 II Restated Certificate of Incorporation
3.2 I By-Laws, amended and restated as of
March 13, 1991
4 (1) Any instrument defining the rights of holders of
unregistered long-term debt of American Biltrite
Inc. that does not authorize the issuance of
debt securities in excess of 10 percent of the
total assets of American Biltrite Inc. and its
subsidiaries on a consolidated basis is not
filed as an exhibit to this Report. American
Biltrite Inc. agrees to furnish a copy of each
such instrument to the Securities and Exchange
Commission upon request.
4 (2) III Note Purchase and Private Shelf Agreement and
Facility Guarantee, dated as of August 28, 2001,
among American Biltrite Inc., K&M Associates
L.P. and The Prudential Insurance Company of
America
37
4 (3) III Amendment No. 1 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of December 31, 2002, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (4) III Amendment No. 2 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of March 31, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (5) III Amendment No. 3 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of June 30, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (6) III Amendment No. 4 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of October 14, 2003, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (7) III Security Agreement, dated as of October 14,
2003, among American Biltrite Inc., K&M
Associates L.P., Fleet National Bank and the
subsidiaries of American Biltrite Inc. from time
to time party thereto
4 (8) III Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts,
The Prudential Insurance Company of America and
the other banks from time to time party thereto
and the Acknowledgment of and Consent and
Agreement to Intercreditor and Collateral Agency
Agreement by American Biltrite Inc., K&M
Associates L.P. and the other American Biltrite
Inc. guarantor subsidiaries
38
4 (9) III Guarantor Joinder Agreement, dated as of October
14, 2003, made by ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual Properties, Inc.,
Ideal Tape Co., Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425 Dexter
Associates, L.P. in favor of The Prudential
Insurance Company
4 (10) IV Amendment No. 5 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of January 29, 2004, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (11) V Amendment No. 5 to the Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of January 29, 2004, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America.
10.1 V Amendment No. 1 to Credit Agreement, dated as of
January 29, 2004, among American Biltrite Inc.,
K&M Associates L.P. and Fleet National Bank.
31.1 Certification of the Principal Executive Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities and Exchange
Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of
the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities and Exchange
Act of 1934, as amended.
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991. (1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
39
III Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on October 17, 2003
IV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on February 2, 2004
V Incorporated by reference to the exhibits 4.1 and 10.1 to the
Company's Report on Form 8-K filed on February 2, 2004
(b) Reports on Form 8-K
On January 5, 2004, the Registrant filed a Current Report on Form 8-K reporting
under Item 5 that its majority-owned subsidiary Congoleum Corporation had issued
a press release on December 31, 2003 announcing it had obtained the asbestos
claimant votes necessary for approval of its pre-packaged Chapter 11 plan of
reorganization and that it had proceeded with its bankruptcy filing in Trenton,
New Jersey.
On February 2, 2004, the Registrant filed a Current Report on Form 8-K reporting
under Item 5 that the Registrant and K&M Associates L.P. had entered into an
amendment to the Company's existing credit agreement.
On March 12, 2004, the Registrant furnished a Current Report on Form 8-K under
Item 12 relating to the Company's press release dated March 11, 2004 announcing
its financial results for the three and twelve months ended December 31, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: May 14, 2004 BY: /s/ Howard N. Feist III
-------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)
40
INDEX OF EXHIBITS
Exhibit No. Description
--------------------------------------------------------------------------------
3.1 II Restated Certificate of Incorporation
3.2 I By-Laws, amended and restated as of
March 13, 1991
4 (1) Any instrument defining the rights of holders of
unregistered long-term debt of American Biltrite
Inc. that does not authorize the issuance of
debt securities in excess of 10 percent of the
total assets of American Biltrite Inc. and its
subsidiaries on a consolidated basis is not
filed as an exhibit to this Report. American
Biltrite Inc. agrees to furnish a copy of each
such instrument to the Securities and Exchange
Commission upon request.
4 (2) III Note Purchase and Private Shelf Agreement and
Facility Guarantee, dated as of August 28, 2001,
among American Biltrite Inc., K&M Associates
L.P. and The Prudential Insurance Company of
America
4 (3) III Amendment No. 1 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of December 31, 2002, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (4) III Amendment No. 2 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of March 31, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
4 (5) III Amendment No. 3 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of June 30, 2003, among American Biltrite Inc.,
K&M Associates L.P. and The Prudential Insurance
Company of America
41
4 (6) III Amendment No. 4 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of October 14, 2003, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (7) III Security Agreement, dated as of October 14,
2003, among American Biltrite Inc., K&M
Associates L.P., Fleet National Bank and the
subsidiaries of American Biltrite Inc. from time
to time party thereto
4 (8) III Intercreditor and Collateral Agency Agreement,
dated as of October 14, 2003, by and among Fleet
National Bank, Citizens Bank of Massachusetts,
The Prudential Insurance Company of America and
the other banks from time to time party thereto
and the Acknowledgment of and Consent and
Agreement to Intercreditor and Collateral Agency
Agreement by American Biltrite Inc., K&M
Associates L.P. and the other American Biltrite
Inc. guarantor subsidiaries
4 (9) III Guarantor Joinder Agreement, dated as of October
14, 2003, made by ABTRE, Inc., AIMPAR, Inc.,
American Biltrite Intellectual Properties, Inc.,
Ideal Tape Co., Inc., Majestic Jewelry, Inc.,
Ocean State Jewelry, Inc. and 425 Dexter
Associates, L.P. in favor of The Prudential
Insurance Company
4 (10) IV Amendment No. 5 to Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of January 29, 2004, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America
4 (11) V Amendment No. 5 to the Note Purchase and Private
Shelf Agreement and Facility Guarantee, dated as
of January 29, 2004, among American Biltrite
Inc., K&M Associates L.P. and The Prudential
Insurance Company of America.
10.1 V Amendment No. 1 to Credit Agreement, dated as of
January 29, 2004, among American Biltrite Inc.,
K&M Associates L.P. and Fleet National Bank.
42
31.1 Certification of the Principal Executive Officer
of the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities and Exchange
Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of
the Registrant Pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities and Exchange
Act of 1934, as amended.
32 Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991. (1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
III Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on October 17, 2003
IV Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on February 2, 2004
V Incorporated by reference to the exhibits 4.1 and 10.1 to the
Company's Report on Form 8-K filed on February 2, 2004
43