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, 2006 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 9, 2006
----------------- ----------------------------------
Common Stock 3,441,551 shares
FORWARD LOOKING STATEMENTS
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and
other words of similar meaning. In particular, these include statements relating
to intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies such as
bankruptcy and other legal proceedings, and financial conditions. These
statements do not relate strictly to historical or current facts. These
forward-looking statements are based on the Company'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. Any or
all of these statements may turn out to be incorrect. By their nature,
forward-looking statements involve risks and uncertainties because they relate
to events and depend on circumstances that may or may not occur in the future.
Any forward-looking statements made in this report speak only as of the date of
such statement. It is not possible to predict or identify all factors that could
potentially cause actual results to differ materially from expected and
historical results. Factors that could cause or contribute to the Company's
actual results differing from its expectations include those factors discussed
in Item 1A of Part II of this Quarterly Report on Form 10-Q and in the Company's
other filings with the Securities and Exchange Commission.
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidating Condensed Balance Sheets - Assets as of
March 31, 2006 (unaudited) and December 31, 2005............1
Consolidating Condensed Balance Sheets - Liabilities and
Stockholders' Equity as of March 31, 2006 (unaudited)
and December 31, 2005.......................................2
Consolidating Condensed Statements of Operations for the
three months ended March 31, 2006 and 2005 (unaudited)......3
Consolidating Condensed Statements of Cash Flows -
Operating Activities for the three months ended
March 31, 2006 and 2005 (unaudited).........................4
Consolidating Condensed Statements of Cash Flows -
Investing & Financing Activities for the three months
ended March 31, 2006 and 2005 (unaudited)...................5
Notes to Unaudited Consolidating Condensed Financial
Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................47
Item 4. Controls and Procedures....................................48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................49
Item 1A. Risk Factors...............................................49
Item 3. Defaults Upon Senior Securities............................57
Item 6. Exhibits...................................................58
Signature ...........................................................59
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - ASSETS
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2006 2005 2006 2005 2006 2005 2006 2005
--------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Assets
Current Assets:
Cash and cash
equivalents $ 16,581 $ 29,184 $ 14,659 $ 24,511 $ 1,922 $ 4,673
Restricted cash 12,118 11,644 12,118 11,644
Accounts receivable, net 50,569 41,742 $(112) $(455) 22,837 17,092 27,844 25,105
Inventories 81,928 77,127 (143) (166) 38,501 34,607 43,570 42,686
Assets of discontinued
operation 3,200 3,142 3,200 3,142
Deferred income taxes 18,036 18,036 16,735 16,735 1,301 1,301
Prepaid expense & other
current assets 26,217 24,062 22,474 20,139 3,743 3,923
--------------------------------------------------------------------------------------------------------
Total current assets 208,649 204,937 (255) (621) 127,324 124,728 81,580 80,830
Property, plant &
equipment, net 112,363 115,336 71,144 73,207 41,219 42,129
Other assets:
Insurance for
asbestos-related
liabilities 8,950 8,950 8,950 8,950
Goodwill, net 11,726 11,726 11,726 11,726
Other assets 15,732 15,895 (147) (147) 9,328 9,412 6,551 6,630
--------------------------------------------------------------------------------------------------------
36,408 36,571 (147) (147) 9,328 9,412 27,227 27,306
--------------------------------------------------------------------------------------------------------
Total assets $357,420 $356,844 $(402) $(768) $207,796 $207,347 $150,026 $150,265
========================================================================================================
See accompanying notes to consolidating condensed financial statements.
1
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Liabilities
Current liabilities:
Accounts payable $ 23,306 $ 22,144 $ (112) $ (455) $ 11,751 $ 12,245 $ 11,667 $ 10,354
Accrued expenses 39,808 42,976 21,252 22,703 18,557 20,273
Asbestos-related
liabilities 26,387 28,369 26,386 28,369
Liabilities of
discontinued operation 249 200 249 200
Notes payable 20,880 19,062 11,290 9,404 9,590 9,658
Current portion of
long-term debt 20,453 20,451 20,453 20,451
Liabilities subject to
compromise 26,660 23,990 26,660 23,990
-------------------------------------------------------------------------------------------------------
Total current
liabilities 157,743 157,192 (112) (455) 97,339 96,711 60,516 60,936
Long-term debt, less
current portion 1,887 1,963 1,887 1,963
Asbestos-related
liabilities 9,620 9,500 9,620 9,500
Other liabilities 29,664 29,625 16,735 16,735 12,929 12,890
Noncontrolling interests 1,182 1,365 1,182 1,365
Liabilities subject to
compromise 138,269 138,714 (147) (147) 138,416 138,861
-------------------------------------------------------------------------------------------------------
Total liabilities 338,365 338,359 (259) (602) 252,490 252,307 86,134 86,654
Stockholders' equity
Common stock 46 46 (93) (93) 93 93 46 46
Additional paid-in
capital 19,570 19,570 (49,181) (49,126) 49,181 49,126 19,570 19,570
Retained earnings 32,454 31,913 35,207 35,129 (65,194) (65,405) 62,441 62,189
Accumulated other
comprehensive loss (17,883) (17,912) 6,111 6,111 (20,961) (20,961) (3,033) (3,062)
Less treasury shares (15,132) (15,132) 7,813 7,813 (7,813) (7,813) (15,132) (15,132)
-------------------------------------------------------------------------------------------------------
Total stockholders'
equity 19,055 18,485 (143) (166) (44,694) (44,960) 63,892 63,611
-------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $357,420 $356,844 $ (402) $ (768) $207,796 $207,347 $150,026 $150,265
=======================================================================================================
See accompanying notes to consolidating condensed financial statements.
2
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(In thousands of dollars, except per share amounts)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
----------------------------------------------------------------------------------------
Net sales $111,721 $107,424 $ -- $ 52 $57,237 $57,630 $54,484 $49,742
Cost of products sold 83,364 78,856 (127) (44) 43,960 43,969 39,531 34,931
Selling, general & administrative
expenses 24,390 25,524 10,396 11,733 13,994 13,791
----------------------------------------------------------------------------------------
Income from operations 3,967 3,044 127 96 2,881 1,928 959 1,020
Other income (expense)
Interest income 244 143 157 98 87 45
Interest expense (3,414) (3,264) (2,734) (2,500) (680) (764)
Other income (expense) 14 2,202 (104) (52) (42) 122 160 2,132
----------------------------------------------------------------------------------------
(3,156) (919) (104) (52) (2,619) (2,280) (433) 1,413
----------------------------------------------------------------------------------------
Income (loss) before taxes and
other items 811 2,125 23 44 262 (352) 526 2,433
Provision for income taxes 247 971 51 -- 196 971
Noncontrolling interests (16) (474) (16) (474)
----------------------------------------------------------------------------------------
Income (loss) from continuing
operations 548 680 23 44 211 (352) 314 988
Discontinued operation (62) (56) (62) (56)
----------------------------------------------------------------------------------------
Net income (loss) $ 486 $ 624 $ 23 $ 44 $ 211 $ (352) $ 252 $ 932
========================================================================================
Basic Diluted
2006 2005 2006 2005
------------------------ -------------------------
Income per common share from continuing
operations $ 0.16 $ 0.20 $ 0.16 $ 0.19
Discontinued operation (0.02) (0.02) (0.02) (0.02)
------------------------ -------------------------
Net income per common share $ 0.14 $ 0.18 $ 0.14 $ 0.17
======================== =========================
Weighted average number of common and
equivalent shares outstanding 3,441,551 3,441,551 3,468,537 3,492,077
======================== =========================
See accompanying notes to consolidating condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
OPERATING ACTIVITIES (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
-------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $ 486 $ 624 $ 23 $ 44 $ 211 $ (352) $ 252 $ 932
Net loss from discontinued
operation 62 56 62 56
-------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 548 680 23 44 211 (352) 314 988
Adjustments to reconcile net
income (loss) to net cash used
by operating activities:
Depreciation and amortization 4,086 4,376 2,661 2,845 1,425 1,531
Stock compensation expense 55 -- 55 --
Gain on sale of property -- (2,327) -- (2,327)
Change in operating assets and
liabilities:
Accounts and notes receivable (8,818) (8,560) (343) (343) (5,745) (8,634) (2,730) 1,013
Inventories (4,762) (3,492) (23) (44) (3,894) (743) (845) (2,705)
Prepaid expenses and other
assets 1,446 128 1,257 841 189 (713)
Accounts payable and accrued
expenses 852 2,493 343 343 928 1,394 (419) 160
Asbestos-related expenses (5,853) (4,263) (5,853) (4,263)
Noncontrolling interests (183) 651 (183) 651
Other (205) (373) (382) (415) 177 42
-------------------------------------------------------------------------------------------
Net cash used by operating
activities of continuing
operations (12,834) (10,687) -- -- (10,762) (9,327) (2,072) (1,360)
Net cash used by operating
activities of discontinued
operations (59) (50) (59) (50)
-------------------------------------------------------------------------------------------
Net cash used by operating
activities $(12,893) $(10,737) $ -- $ -- $(10,762) $(9,327) $(2,131) $(1,410)
===========================================================================================
See accompanying notes to consolidating condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS -
INVESTING & FINANCING ACTIVITIES (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(In thousands of dollars)
ABI Consolidated Eliminations Congoleum American Biltrite
2006 2005 2006 2005 2006 2005 2006 2005
-----------------------------------------------------------------------------------------
Investing activities
Investments in property, plant
and equipment $ (920) $(1,200) $ -- $ -- $ (502) $ (854) $(418) $ (346)
Proceeds from sale of property -- 2,327 -- -- -- 2,327
-----------------------------------------------------------------------------------------
Net cash (used) provided by
investing activities of
continuing operations (920) 1,127 -- -- (502) (854) (418) 1,981
Financing activities
Net short-term borrowings 1,799 3,878 1,886 2,910 (87) 968
Payments on long-term debt (75) (388) (75) (388)
Net change in restricted cash (474) (877) (474) (877)
-----------------------------------------------------------------------------------------
Net cash provided (used) by
financing activities of
continuing operations 1,250 2,613 -- -- 1,412 2,033 (162) 580
Effect of foreign exchange rate
changes on cash (41) 339 (41) 339
-----------------------------------------------------------------------------------------
Net (decrease) increase in cash (12,603) (6,658) -- -- (9,852) (8,148) (2,751) 1,490
Cash and cash equivalents at
beginning of period 29,184 34,691 24,511 29,710 4,673 4,981
-----------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $16,581 $28,033 $ -- $ -- $14,659 $21,562 $1,922 $6,471
=========================================================================================
See accompanying notes to consolidating condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidating condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates, L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments, provisions for
discontinued operations and provisions to effect the plan of reorganization of
Congoleum Corporation, a majority-owned subsidiary of the Company, to settle
asbestos liability) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for future periods,
including the year ending December 31, 2006. For further information, refer to
the consolidating financial statements and footnotes thereto included in the
American Biltrite Inc.'s Annual Report on Form 10-K for the year ended December
31, 2005.
The consolidating balance sheet at December 31, 2005 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 in 2005 have been reclassified to conform to 2006
classifications. The Company has separately disclosed the operating, investing
and financing portions of the cash flows attributed to its discontinued
operations, which in prior periods were reported on a combined basis as a single
amount.
During 2003, the Company decided to discontinue the operations of its Janus
Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished
hardwood flooring, and sell the related assets. Historical financial results
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. Results of Janus, including charges
resulting from the shutdown, are being reported as a discontinued operation.
6
Note A - Basis of Presentation (continued)
As discussed more fully below and elsewhere in these footnotes, the Company's
majority owned subsidiary Congoleum Corporation ("Congoleum") and two of
Congoleum's subsidiaries filed voluntary petitions commencing cases for
reorganization relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") on December 31, 2003. The accompanying consolidating
condensed financial statements include the results for Congoleum for all periods
presented. ABI continues to own a majority of the voting stock of Congoleum and
expects to continue to control Congoleum while it is in reorganization
proceedings.
In January 2004, Congoleum filed its proposed plan of reorganization and
disclosure statement with the Bankruptcy Court. In November 2004, Congoleum
filed a modified plan of reorganization and related documents with the
Bankruptcy Court (the "Fourth Plan") reflecting the result of further
negotiations with representatives of the Asbestos Claimants' Committee, the
Future Claimants' Representative and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004, and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the Asbestos Claimants' Committee and the
Future Claimants' Representative to make certain modifications to its proposed
plan of reorganization and related documents governing the settlement and
payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the "Plan Trust") to pay asbestos claims against
Congoleum. In July 2005, Congoleum filed an amended plan of reorganization (the
"Sixth Plan") and related documents with the Bankruptcy Court which reflected
the result of these negotiations, as well as other technical modifications. The
Bankruptcy Court approved the disclosure statement and voting procedures, and
Congoleum commenced solicitation of acceptances of the Sixth Plan in August
2005. In September 2005, Congoleum learned that certain asbestos claimants were
unwilling to agree to forbear from exercising their security interest as
contemplated by the Sixth Plan, and the Sixth Plan was subsequently withdrawn.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In February 2006, Congoleum filed a new amended plan of reorganization
(the "Seventh Plan"). On February 27, 2006, Congoleum announced its intention to
make additional changes to its plan of reorganization, and on March 17, 2006, it
filed a new amended plan (the "Eighth Plan"). In addition, an insurance company
has filed a plan of reorganization (the "CNA Plan") and the Official Committee
of Bondholders has also filed a plan (the "Bondholder Plan"). The Bankruptcy
Court has scheduled a hearing to consider the adequacy of the disclosure
statements with respect to these plans for June 8, 2006.
7
Note A - Basis of Presentation (continued)
There can be no assurance that Congoleum will not amend the Eighth Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, or that its plan,
if confirmed, will become effective. It is unclear whether the Bankruptcy Court
will approve the CNA Plan or the Bondholder Plan or whether such plans, if
confirmed, would be feasible. Moreover, it is unclear whether any other person
will attempt to propose a plan or what any such plan would provide or propose,
and whether the Bankruptcy Court would approve a plan other than Congoleum's
proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eighth Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eighth Plan.
Congoleum expects that the terms of the Eighth Plan may be amended or modified
as a result of further negotiations with various parties. The terms of the CNA
Plan and the Bondholder Plan are materially different from the terms of the
Eighth Plan, and these plans may also be amended or modified or may be
withdrawn. There can be no assurance that the terms of the reorganization plan
that is ultimately confirmed, if any, will not materially differ from the terms
of the Eighth Plan. Congoleum expects that it will take until some time in the
fourth quarter of 2006, at the earliest, to obtain confirmation of any plan of
reorganization.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with various asbestos personal injury
claimants (the "Claimant Agreement"), which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing a
pre-petition trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and granting the Collateral Trust a
security interest in Congoleum's rights under its applicable insurance coverage
and payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced an omnibus avoidance action and a sealed avoidance action
(collectively, the "Avoidance Actions") seeking to void the security interest
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories.
Under the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related agreements. Under the terms of the Eighth Plan, after the
8
Note A - Basis of Presentation (continued)
establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust and any asbestos claims would be paid in
accordance with the terms of the Eighth Plan. Settlement values under the Eighth
Plan may differ from values under the Sixth Plan and the Claimant Agreement,
which, together with the outcome of the Avoidance Actions, may materially affect
the liability associated with the asbestos personal injury claims against
Congoleum. As a result of tabulating ballots on the Fourth Plan, Congoleum is
also aware of claims by claimants whose claims were not determined under the
Claimant Agreement but who have submitted claims with a value of approximately
$512 million based on the settlement values applicable in the Sixth Plan. Based
on the Eighth Plan, Congoleum has made provision in its financial statements for
the minimum amount of the range of estimates for its contribution to effect its
plan to settle asbestos liabilities through the Plan Trust. Congoleum recorded
charges aggregating approximately $51.3 million in prior years, and is not yet
able to determine the amount of the additional cost that will be required to
complete its reorganization. Actual amounts that will be contributed to the Plan
Trust and costs for pursuing and implementing the Eighth Plan or any other plan
of reorganization could be materially higher than currently recorded. Congoleum
may record significant additional charges should the minimum estimated cost
increase. Delays in proposing, filing or obtaining approval of the Eighth Plan
or any new amended plan of reorganization, or the continued pursuit of the CNA
Plan or the Bondholder Plan by the proponents of such plans, or the proposal of
additional plans by other parties could result in a proceeding that takes longer
and is more costly than Congoleum has estimated.
For more information regarding Congoleum's asbestos liability and plan for
resolving that liability, please refer to Note J of the Notes to Unaudited
Consolidating Condensed Financial Statements.
Although there can be no assurances with respect to the terms of any new amended
plan, the Company believes, based on the terms of the Eighth Plan and subsequent
negotiations regarding a new amended plan that have occurred to date, that there
is reasonable basis to expect it will maintain control of Congoleum under the
terms of a new amended plan, subject to Congoleum obtaining the necessary
acceptances and approvals required for confirmation of the plan. 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 (excluding Congoleum and its wholly owned subsidiaries) and
Congoleum and its wholly owned subsidiaries, which may be more meaningful for
certain analyses.
9
Note A - Basis of Presentation (continued)
The financial statements of Congoleum have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should
Congoleum be unable to continue as a going concern. As described in Note J,
there is substantial doubt about Congoleum's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
The American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy
Code ("SOP 90-7"), provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. Congoleum has implemented this guidance
in its consolidated financial statements for periods commencing after December
31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy
Code are required to segregate pre-petition liabilities that are subject to
compromise and report them separately on the balance sheet. Liabilities that may
be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser amounts.
Liabilities for asbestos claims are recorded based upon the minimum amount
Congoleum expects to spend for its contribution to, and costs to settle asbestos
liabilities through, the Plan Trust. Obligations arising post-petition and
pre-petition obligations that are secured or that the Bankruptcy Court has
authorized Congoleum to pay, are not classified as liabilities subject to
compromise. Other pre-petition claims (which would be classified as liabilities
subject to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases pursuant to the Bankruptcy Code or as a result of
the allowance by the Bankruptcy Court of contingent or disputed claims related
to pre-petition matters.
Note B - Stock Based Compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment, and related
interpretations ("SFAS No. 123(R)") using the modified prospective method and,
accordingly, has not restated prior period results. SFAS No. 123(R) establishes
the accounting for equity instruments exchanged for employee services. Under
SFAS No. 123(R), share-based compensation cost is measured at the grant date
based on the calculated fair value of the award. The expense is recognized over
the employees' requisite service period, generally the vesting period of the
award. SFAS No. 123(R) also requires the related excess tax benefit received
upon exercise of stock options or vesting of restricted stock, if any, to be
reflected in the statement of cash flows as a financing activity rather than an
operating activity.
The Company has elected to continue to use the Black-Scholes option pricing
model to estimate the fair value of stock-based awards. The use of a
Black-Scholes option pricing model requires the input of assumptions determined
by management of the company at the measurement date. These assumptions include
the risk-free interest rate, expected dividend yield, volatility factor of the
expected market price of the Company's common stock and the expected life of
stock option grants.
10
Note B - Stock Based Compensation (continued)
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock
options to employees in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company also provided the disclosures required under SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), as amended by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosures. As a result, no expense was reflected in the Company's operating
results for the first quarter of 2005 for stock options, as all options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant.
The table below reflects the pro forma net income and earnings per share for the
first quarter of 2005 had compensation for stock options been determined based
on the fair value at the grant date, consistent with the methodology prescribed
under SFAS No. 123.
Net income for the three months ended March 31, 2005
(in thousands):
As reported $ 624
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net, of related tax effects (97)
--------
Pro forma net income $ 527
========
Net income per share - basic:
As reported $ 0.18
Pro forma compensation expense (0.03)
--------
Pro forma net income $ 0.15
========
Net income per share - diluted:
As reported $ 0.17
Pro forma compensation expense (0.03)
--------
Pro forma net income $ 0.14
========
No stock options were granted by American Biltrite or Congoleum during the three
months ended March 31, 2006 and 2005. The pro forma expense for the first
quarter of 2005 represents the vesting of options previously granted by American
Biltrite and Congoleum.
On November 10, 2005, the Board of Directors of American Biltrite approved the
vesting of all outstanding and unvested options held by directors, officers and
employees under the Company's 1993 Stock Award and Incentive Plan, as amended
and restated as of March 4, 1997, and 1999 Stock Option Plan for Non-Employee
Directors (together, the "ABI Stock Plans"). As a result of the acceleration of
vesting, options to acquire 195,600 shares of the Company's common stock, which
otherwise would have vested from time to time over the next four years, became
immediately exercisable in full. This action was taken to eliminate, to the
extent permitted, the transition expense that the Company otherwise would incur
in connection with the adoption of SFAS No. 123(R). The exercise prices of all
11
Note B - Stock Based Compensation (continued)
of the unvested options were lower than the closing trading price of the
Company's common stock on the modification date. Under the accounting guidance
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, the accelerated vesting resulted in a charge for stock-based
compensation of approximately $22 thousand in 2005.
As a result of the acceleration of vesting of stock options granted under the
ABI Stock Plans, the Company did not have stock compensation expense related to
the ABI Stock Plans during the first quarter of 2006. Congoleum recorded stock
compensation expense of $55 thousand during the first quarter of 2006 for the
vesting of previously granted options under its plans. This expense is included
in the Company's consolidated net income for the three months ended March 31,
2006. The impact of the adoption of SFAS No. 123(R) on net income per share was
approximately $0.01 per share for the first quarter of 2006. At March 31, 2006,
the unrecognized compensation expense related to unvested options previously
granted by Congoleum was approximately $300 thousand. This compensation expense
will be recognized as the options vest over a weighted-average period of 1.6
years.
ABI Stock Plans
During 1999, ABI adopted a stock option plan, which permits the issuance of up
to 50,000 shares of common stock upon exercise of options granted under the plan
to ABI's non-employee directors. Under the terms of the plan, options granted
are nonqualified and have an exercise price per share equal to 100% of the fair
market value per share of the Company's common stock at the date of grant.
Options granted under the plan are exercisable six months after the date of
grant.
ABI maintains a stock award and incentive plan which permits the issuance of
options, stock appreciation rights (SARs), limited SARs, restricted stock,
restricted stock units and other stock-based awards to selected employees and
independent contractors of the Company. Upon adoption of the plan, 400,000
shares of common stock were reserved for issuance upon exercise of options
granted under the plan. The plan provides that the term of each award be
determined by the compensation committee of the Board of Directors (the
"Committee") charged with administering the plan. During 1997, the Board of
Directors approved an amendment to the plan to increase from 400,000 to 550,000
the number of shares reserved for issuance upon exercise of options granted
under the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price per share, determined by the
Committee, may not be less than the fair market value of a share on the date of
grant. SARs and limited SARs granted in tandem with an option shall be
exercisable only to the extent the underlying option is exercisable and the
grant price shall be equal to the exercise price of the underlying option. In
addition, the Committee may grant restricted stock to participants under the
plan at no cost to them. No SARs or restricted stock have been granted under the
plan since its adoption. Other than the restrictions that limit the sale and
transfer of these SARs and restricted stock, participants are entitled to all
the rights of a shareholder.
12
Note B - Stock Based Compensation (continued)
Congoleum Stock Option Plans
Congoleum maintains a stock option plan for its officers and key employees and a
stock option plan for its non-employee directors (together, the "Congoleum Stock
Option Plans"). Under these plans, options to purchase up to 850,000 shares of
Congoleum's Class A common stock may be issued to directors, officers and key
employees. These options may be either incentive stock options or nonqualified
stock options, and the options' exercise price must be at least equal to the
fair market value of Congoleum's Class A common stock on the date of grant.
Shares issued as a result of stock option exercises under the ABI Stock Plans or
the Congoleum Stock Option Plans will be funded through treasury stock of the
respective companies.
Stock Option Information
Stock option information for the ABI Stock Plans and the Congoleum Stock Option
Plans as of and for the three months ended March 31, 2006 was as follows:
Congoleum Stock
ABI Stock Plans Option Plans
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------------- --------------------------
Outstanding at December 31, 2005 483,000 $15.42 693,500 $ 2.04
Granted -- -- -- --
Exercised -- -- -- --
Forfeited (1,000) 9.65 (4,500) 2.05
------- -------
Outstanding at March 31, 2006 482,000 15.44 689,000 2.04
======= =======
Exercisable at March 31, 2006 482,000 $15.44 405,000 $ 2.03
======= =======
Available for grant at:
December 31, 2005 100,020 142,900
March 31, 2006 101,020 147,400
Weighted-Average Remaining Contractual
Life at March 31, 2006 (Years)
Outstanding options 5.14 6.43
Exercisable options 5.14 6.43
The intrinsic value of outstanding and exercisable stock options issued under
the ABI Stock Plans and the Congoleum Stock Option Plans as of March 31, 2006
were as follows (in thousands):
ABI Congoleum
----------- ------------
Outstanding options $484 $171
Exercisable options 484 105
13
Note B - Stock Based Compensation (continued)
Stock option information related to nonvested shares for the Congoleum Stock
Option Plans for the three months ended March 31, 2006 was as follows:
Weighted-
Average
Grant Date
Shares Fair Value
----------------------------
Nonvested at December 31, 2005 292,900 $1.67
Granted --
Vested (7,900) 1.99
Forfeited (1,000) 1.65
-------
Nonvested at March 31, 2006 284,000 $1.66
=======
The intrinsic value of Congoleum's options that vested during the three months
ended March 31, 2006 was $5 thousand.
Note C - Inventories
Inventories at March 31, 2006 and December 31, 2005 consisted of the following
(in thousands):
March 31, December 31,
2006 2005
--------- ------------
Finished goods $55,626 $50,515
Work-in-process 12,110 10,370
Raw materials and supplies 14,192 16,242
------- -------
$81,928 $77,127
======= =======
Note D - Sale of Property
In January 2005, the Company completed the sale of a warehouse building and land
located in Tullahoma, Tennessee. The building and land were owned by Tullahoma
Properties, L.L.C. ("Tullahoma Properties"), a subsidiary in which ABI owns a
62.5% interest. The building was previously leased to a third party, and upon
termination of the lease in 2003, Tullahoma Properties listed the property for
sale. The building and land were sold for $2.5 million in cash and a gain of
approximately $2.3 million was recognized and included in other income in the
first quarter. After taxes and non-controlling interest, the increase in first
quarter 2005 net income as a result of the sale was $887,000 or $0.26 per share.
14
Note E - Accrued Expenses
Accrued Expenses at March 31, 2006 and December 31, 2005 consisted of the
following (in thousands):
March 31, December 31,
2006 2005
--------- ------------
Accrued advertising and sales promotions $22,412 $24,089
Employee compensation and related benefits 9,091 9,499
Interest 143 265
Environmental matters 1,124 1,124
Royalties 646 806
Taxes payable 163 1,330
Other 6,230 5,863
------- -------
$39,809 $42,976
======= =======
See Note G for Liabilities Subject to Compromise.
Note F - Other Liabilities
Other Liabilities at March 31, 2006 and December 31, 2005 consisted of the
following (in thousands):
March 31, December 31,
2006 2005
--------- ------------
Pension benefits (less current portion) $ 2,584 $ 2,557
Environmental remediation and product related
liabilities 4,259 4,259
Deferred income taxes 21,345 21,343
Other 1,476 1,466
-------- -------
$29,664 $29,625
======== =======
See Note G for Liabilities Subject to Compromise.
15
Note G - Liabilities Subject to Compromise
As a result of Congoleum's Chapter 11 filing (see Notes A and J of the Notes to
the Unaudited Consolidating Condensed 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 but unpaid interest expense on its 8 5/8% Senior
Notes Due 2008 is also recorded in liabilities subject to compromise. See Notes
A and J of the Notes to the Unaudited Consolidating Condensed Financial
Statements for further discussion of Congoleum's asbestos liability. Liabilities
subject to compromise were as follows (in thousands):
March 31, December 31,
2006 2005
--------- ------------
Current
Pre-petition other payables and accrued interest $ 26,660 $ 23,990
Non-current
Debt (at face value) 100,000 100,000
Pension liability 16,552 16,871
Other post-retirement benefit obligation 8,330 8,407
Pre-petition other liabilities 13,534 13,583
--------- ---------
138,416 138,861
Elimination - Payable to American Biltrite (147) (147)
--------- ---------
138,269 138,714
--------- ---------
Total liabilities subject to compromise $ 164,929 $ 162,704
========= =========
Additional pre-petition claims (which would be classified as liabilities subject
to compromise) may arise due to the rejection by Congoleum of executory
contracts or unexpired leases, or as a result of the allowance by the Bankruptcy
Court of contingent or disputed claims.
Note H - Pension Plans
The Company and Congoleum sponsor several noncontributory defined benefit
pension plans covering most of their employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company and Congoleum are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations. Congoleum also maintains health and life insurance
programs for retirees (reflected in the table below under the columns entitled
"Other Benefits").
16
Note H - Pension Plans (continued)
The following summarizes the components of the net periodic benefit cost for the
Company's and Congoleum's pension and other benefit plans during the three
months ended March 31, 2006 and 2005 (in thousands):
2006 2005
------------------- -------------------
Other Other
Pension Benefits Pension Benefits
------- --------- ------- --------
Components of Net Periodic
Benefit Cost:
Service cost $ 603 $ 48 $ 586 $ 46
Interest cost 1,493 132 1,445 130
Expected return on plan assets (1,428) -- (1,270) --
Recognized net actuarial loss 359 16 361 15
Amortization of transition
obligation -- -- (18) --
Amortization of prior
service cost (40) 9 (60) (47)
------- ---- ------- -----
Net periodic benefit cost $ 987 $205 $ 1,044 $ 144
======= ==== ======= =====
The weighted average assumptions used to determine net periodic benefit cost for
the three months ended March 31, 2006 and 2005 were as follows:
2006 2005
------------------------ -------------------------
Other Other
Pension Benefits Pension Benefits
------------- -------- ------------- --------
Discount rate 6.00% 6.00% 6.10% - 6.25% 6.25%
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% - 5.00% -
17
Note I - Commitments and Contingencies
The Company and Congoleum are subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company and Congoleum. Among these claims, the
Company and Congoleum are separately a named party in several actions associated
with waste disposal sites. These actions include possible obligations to remove
or mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company's and Congoleum's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future cost and timing
of payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's and Congoleum's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. The Company and Congoleum have recorded
provisions in the financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company and Congoleum believe their estimate of the future amount of these
liabilities is reasonable, and that they will be paid over a period of five to
ten years, the timing and amount of such payments may differ significantly from
the Company's and Congoleum's assumptions. Although the effect of future
government regulation could have a significant effect on the Company's and
Congoleum's costs, the Company and Congoleum are not aware of any pending
legislation that would have such an effect. There can be no assurances that the
costs of any future government regulations could be passed along to their
customers. Estimated insurance recoveries related to these liabilities are
reflected in other non-current assets.
The Company and Congoleum record a liability for environmental remediation
claims when it becomes probable that the Company or Congoleum, as applicable,
will incur costs relating to a clean-up program or will have to make claim
payments, and the costs or payments can be reasonably estimated. As assessments
are revised and clean-up programs progress, these liabilities are adjusted 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 consolidating financial statements, to the extent that Congoleum incurs a
liability or expense, it will be reflected in ABI's consolidating financial
statements.
18
Note I - Commitments and Contingencies (continued)
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,692 pending claims involving
approximately 2,036 individuals as of March 31, 2006. 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, December 31,
2006 2005
------------------ ------------
Beginning claims 1,703 1,838
New claims 117 621
Settlements (14) (24)
Dismissals (114) (732)
------------- -------------
Ending claims 1,692 1,703
============= =============
The total indemnity costs incurred to settle claims during the three months
ended March 31, 2006 and twelve months ended December 31, 2005 were $1.1 million
and $1.3 million, respectively, all of which were paid by ABI's insurance
carriers pursuant to ABI's applicable insurance policies, as were the related
defense costs. The average indemnity cost per resolved claim was approximately
$8.3 thousand for the three months ended March 31, 2006 and $1.7 thousand for
the year ended December 31, 2005.
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 2005, the Company utilized an actuarial study to
assist it in developing estimates of the Company's potential liability for
resolving present and possible future asbestos claims. At December 31, 2005, the
estimated range of liability for settlement of current claims pending and claims
anticipated to be filed through 2011 was $9.5 million to $18.8 million. The
Company believes no amount within this range is
19
Note I - Commitments and Contingencies (continued)
more likely than any other, and accordingly, recorded the minimum liability
estimate of $9.5 million in its consolidated financial statements at December
31, 2005. At March 31, 2006, the Company has recorded $9.6 million for the
estimated minimum liability. The Company also believes that, based on this
minimum liability estimate, the corresponding amount of insurance probable of
recovery is $9.0 million at March 31, 2006 and December 31, 2005, which has been
included in other assets. The same factors that affect developing forecasts of
potential indemnity costs for asbestos-related liabilities also affect estimates
of the total amount of insurance that is probable of recovery, as do a number of
additional factors. These additional factors include the financial viability of
some of the insurance companies, the method in which losses will be allocated to
the various insurance policies and the years covered by those policies, how
legal and other loss handling costs will be covered by the insurance policies,
and interpretation of the effect on coverage of various policy terms and limits
and their interrelationships. These amounts were based on currently known facts
and a number of assumptions. However, projecting future events, such as the
number of new claims to be filed each year, the average cost of disposing of
each such claim, and the continuing solvency of various insurance companies, as
well as numerous uncertainties surrounding asbestos legislation in the United
States, could cause the actual liability and insurance recoveries for the
Company to be higher or lower than those projected or recorded.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's Chapter 11 case and plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for asbestos-related claims against the Company (not
including claims asserted against Congoleum) beyond a 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 reorganization 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, 2005 Annual Report on 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 five sites located in four separate states
(the "CERCLA Sites"). There has been no material developments relating to these
sites during the three month period ended March 31, 2006.
In 1993, 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 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, American
Biltrite Inc. held title to the property directly.
20
Note I - Commitments and Contingencies (continued)
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 pay an annual reimbursement of $100 thousand for
Olin's internal costs as long as Olin is actively working on remediating the
site. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the
aggregate amounts due from ABI and TBC 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 2006 will be approximately $7.2 million. For costs
beyond 2006, ABI has estimated the range of total response costs for the site to
be between $15.7 million and $45.3 million. As of March 31, 2006 ABI has
estimated its potential liability to Olin to be in the range of $3.5 million to
$10.8 million after allocation for the annual reimbursement of $100 thousand for
Olin's internal costs but before any recoveries from insurance and TBC. Costs
are expected to be incurred over the next 10 years. In January 2006, the EPA
assumed the responsibility for the oversight of the Olin Site from the
Massachusetts Department of Environmental Protection.
The State of Maine Department of Environmental Protection has put Miller
Industries, Inc. ("Miller"), the present owner of a former ABI sheet vinyl plant
in Lisbon Falls, Maine, on notice to clean up a dumpsite where there is exposed
asbestos from sheet vinyl waste along with other hazardous substances. In
September 2005, a lawsuit was brought by Miller against ABI, which alleged that
ABI and one other named defendant are liable for costs to clean up the dumpsite
("Parcel A") and a second parcel of land ("Parcel B"), which is alleged to
contain polychlorinated biphenyls ("PCB's") in the soil. The lawsuit, captioned
Miller Industries, Inc. v. American Biltrite Inc. et al, was filed on September
22, 2005 in the Androscoggin Superior Court of Maine. Miller is seeking
indemnification or contribution from ABI for the clean-up of both parcels of
land (together, the "Maine Sites"). The lawsuit was dismissed by the Superior
Court of Maine on February 3, 2006 for lack of subject matter jurisdiction and
failure to state a claim upon which relief can be granted. In January 2006, ABI
was notified by the Maine DEP that it is a responsible party as to both Parcel A
and Parcel B.
Prior to the commencement of the lawsuit by Miller, the Company had been
investigating and reviewing the condition of Parcel A and its potential
liability for its share of any clean-up costs. The Company believes, at this
time, that the cost of site investigation, remediation, maintenance and
monitoring for Parcel A will be between approximately $1.2 million and $1.5
million. Prior to the filing of the lawsuit, the Company was also in the process
of reviewing the condition of Parcel B and its potential liability for its share
of any clean-up costs. The Company cannot determine at this time the cost of
site investigation, remediation, maintenance and monitoring for Parcel B.
Furthermore, at this time, the Company is not able to determine what its
potential liability will be with regard to the Maine Sites. Under an agreement
between ABI and TBC, TBC is liable for 37.5% of costs incurred by ABI for the
Maine Sites.
21
Note I - Commitments and Contingencies (continued)
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at all of the CERCLA and state supervised sites.
An agreement was executed by ABI and its carriers regarding the payment of the
defense costs for the Olin Site. ABI has reached agreements with four of its
insurance carriers whereby the carriers have reimbursed the Company $6.5 million
for past and current environmental claims. One carrier has also agreed to
reimburse the Company for 2.5% of the Company's liabilities regarding future
environmental expenses related to the Olin Site, $57 thousand of which was
reimbursed through March 31, 2006 and 37.5% of the amount of that reimbursement
was shared with TBC pursuant to the Company's agreement with TBC. ABI and one of
its insurance carriers continue to discuss ABI's remaining demands for insurance
coverage for these sites.
In connection with the transfer of ABI's Trenton, NJ tile plant to Congoleum in
1993, the Company signed an administrative consent order from the New Jersey
Department of Environmental Protection for any environmental remediation the
state may require at that location. Pursuant to the contribution in 1993 of the
Company's former tile division to Congoleum, Congoleum assumed liability for the
cost of cleaning up the site. Congoleum has established a remediation trust fund
of $100 thousand as financial assurance for certain remediation funding
obligations. The Company remains contingently liable in the event that Congoleum
fails to perform or fund any required remediation relating to this site.
The outcome of these matters could result in significant expenses incurred by,
or judgments assessed against, the Company, which could have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and on
December 31, 2003, filed a petition commencing a voluntary reorganization case
under Chapter 11 of the Bankruptcy Code. See Note J - "Congoleum Asbestos
Liabilities and 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 eight disposal sites in New
Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum's ultimate liability and funding obligations in connection with those
other sites depends on many factors, including the volume of material
contributed to the site by Congoleum, the number of other PRP's and their
financial viability, the remediation methods and technology to be used and the
extent to which costs may be recoverable by Congoleum from relevant insurance
policies. However, under CERCLA, and certain other laws, as a PRP, Congoleum can
be held jointly and severally liable for all environmental costs associated with
a site.
22
Note I - Commitments and Contingencies (continued)
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, and a groundwater treatment system was installed thereafter. The EPA
has selected a remedy for the soil and shallow groundwater; however, the
remedial investigation/feasibility study related to the deep groundwater has not
been completed. The PRP group estimated that future costs of the remedy recently
selected by the EPA based on engineering estimates would be approximately $11.0
million. Congoleum's proportionate share, based on waste disposed at the site,
is estimated to be approximately 5.7%, or approximately $700 thousand. The
majority of Congoleum's share of costs incurred to date has been paid by one of
its insurance carriers, whose remaining policy limits for this claim will cover
approximately half this amount. Congoleum expects the balance to be funded by
other insurance carriers and Congoleum.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated total
clean-up costs of $1.6 million, including capital outlays and future maintenance
costs for soil and groundwater remediation, are primarily based on engineering
studies. Of this amount, $300 thousand was included in current liabilities
subject to compromise and $1.3 million was included in non-current liabilities
subject to compromise as of March 31, 2006 and December 31, 2005.
At March 31, 2006 and December 31, 2005, Congoleum had recorded a total of $4.3
million for estimated environmental liabilities and $1.9 million for related
insurance recoveries. Receivables for expected insurance recoveries are recorded
if the related carriers are solvent and paying claims under a reservation of
rights or under an obligation pursuant to coverage in place or a settlement
agreement. Substantially all of Congoleum's recorded insurance asset for
environmental matters is collectible from a single carrier.
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, funding of
the costs by Congoleum will not have a material adverse impact on Congoleum's
liquidity or financial position. However, unfavorable developments in these
matters could result in significant expenses or judgments that could have a
material adverse effect on the business, operations and financial position of
Congoleum.
Other
In addition to the matters referenced above and in Note J, in the ordinary
course of their businesses, the Company and Congoleum become involved in
lawsuits, administrative proceedings in connection with product liability claims
and other matters. In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts, and the matters may remain unresolved
for several years.
23
Note J - Congoleum Asbestos Liabilities and Reorganization
In early 2003, Congoleum announced a strategy for resolving current and future
asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, Congoleum
entered into the Claimant Agreement, a settlement agreement with various
asbestos personal injury claimants. As contemplated by the Claimant Agreement,
Congoleum also entered into agreements establishing the Collateral Trust to
distribute funds in accordance with the terms of the Claimant Agreement and
granting the Collateral Trust a security interest in Congoleum's rights under
its applicable insurance coverage and payments from Congoleum's insurers for
asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix (the
"Matrix") and allowed claimants who qualified to participate in the Claimant
Agreement (the "Qualifying Claimants") to settle their claims for the Matrix
value, secured in part (75%) by a security interest in the collateral granted to
the Collateral Trust. The Collateral Trust provides for distribution of trust
assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with
Congoleum and participating claimants who qualified for payment under unfunded
settlement agreements entered into by Congoleum with plaintiffs that had
asbestos claims pending against Congoleum and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of Congoleum's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the
settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories.
In October 2003, Congoleum began soliciting acceptances for its proposed
pre-packaged plan of reorganization and Congoleum received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, Congoleum filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
24
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy Court
reflecting the result of further negotiations with representatives of the
Asbestos Claimants' Committee, the Future Claimants' Representative and other
asbestos claimant representatives. The Bankruptcy Court approved the disclosure
statement and plan voting procedures in December 2004 and Congoleum obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in principle
with representatives of the Asbestos Claimants' Committee and the Future
Claimants' Representative to make certain modifications to its proposed plan of
reorganization and related documents governing the settlement and payment of
asbestos-related claims against Congoleum. Under the agreed-upon modifications,
asbestos claimants with claims settled under Congoleum's pre-petition settlement
agreements would agree to forbear from exercising the security interest they
were granted and share on a pari passu basis with all other present and future
asbestos claimants in insurance proceeds and other assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend Congoleum's
exclusive right to file a plan of reorganization and solicit acceptances
thereof. In February 2006, Congoleum filed the Seventh Plan. On February 27,
2006, Congoleum announced its intention to make additional changes to its plan
of reorganization, and on March 17, 2006 it filed the Eighth Plan. In addition,
an insurance company has filed the CNA Plan and the Official Committee of
Bondholders has filed the Bondholder Plan. The Bankruptcy Court has scheduled a
hearing to consider the adequacy of the disclosure statements with respect to
these plans for June 8, 2006.
Under the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related agreements.
Under the terms of the Eighth Plan, after the establishment of the Plan Trust,
the assets in the Collateral Trust would be transferred to the Plan Trust and
any asbestos claims would be channeled to the Plan Trust and paid in accordance
with the terms of the Eighth Plan.
25
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
There can be no assurance that Congoleum will not amend the Eighth Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan, that its plan will not be modified further, that its
plan will receive necessary court approvals from the Bankruptcy Court or the
Federal District Court, or that such approvals will be received in a timely
fashion, that its plan will be confirmed, or that its plan, if confirmed, will
become effective. It is unclear whether the Bankruptcy Court will approve the
CNA Plan or the Bondholder Plan or whether either of such plans, if confirmed,
would be feasible. Moreover, it is unclear whether any other person will attempt
to propose a plan or what any such plan would provide or propose, and whether
the Bankruptcy Court would approve a plan other than Congoleum's proposed plan.
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eighth Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eighth Plan.
During 2005 and 2006 Congoleum has entered into a number of settlement
agreements with excess insurance carriers over coverage for asbestos-related
claims. In May 2005, certain AIG companies agreed to pay approximately $103
million over ten years to the Plan Trust. This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code. An insurer has appealed the
approval order granted by the Bankruptcy Court to the U.S. District Court, where
it is pending. In June 2005, Congoleum entered into a settlement agreement with
certain underwriters at Lloyd's, London, pursuant to which the certain
underwriters paid approximately $20 million into an escrow account in exchange
for a release of insurance coverage obligations. The escrow agent will transfer
the funds to the Plan Trust once a plan of reorganization with the Section
524(g) protection specified in the settlement agreement goes effective and the
Bankruptcy Court approves the transfer of the funds. In August 2005, Congoleum
entered into a settlement agreement with Federal Insurance Company pursuant to
which Federal will pay $4 million to the Plan Trust, subject to certain
adjustments, once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The Future Claimants' Representative has
appealed the approval order granted by the Bankruptcy Court to the U.S. District
Court, where it is pending. In October 2005, Congoleum entered into a settlement
agreement with Mt. McKinley Insurance Company and Everest Reinsurance Company
pursuant to which Mt. McKinley and Everest have paid $21.5 million into an
escrow account. The escrow agent will transfer the funds to the Plan Trust once
a plan of reorganization with the Section 524(g) protection specified in the
settlement agreement goes effective and the Bankruptcy Court
26
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
approves the transfer of the funds. An insurer and the Future Claimants'
Representative have appealed the approval order granted by the Bankruptcy Court
to the U.S. District Court, where it is pending. In March 2006, Congoleum
entered into a settlement agreement with Harper Insurance Limited. Under the
terms of this settlement, Harper will pay $1.4 million to Congoleum or the Plan
Trust once certain conditions are satisfied, including the effectiveness of a
plan of reorganization containing the Section 524(g) protection specified in the
settlement agreement. The Bankruptcy Court approved this settlement on April
2006. In April 2006, Congoleum entered into a settlement agreement with
Travelers Casualty and Surety Company and St. Paul Fire and Marine Insurance
Company (collectively, "Travelers"). Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds.
A motion for Bankruptcy Court approval of this settlement is pending. In April
2006, Congoleum also entered into a settlement agreement with Fireman's Fund
Insurance Company. Under the terms of this settlement, Fireman's Fund will pay
$1 million to the Plan Trust once a plan of reorganization with the Section
524(g) protection specified in the settlement agreement goes effective and the
Bankruptcy Court approves the transfer of the funds. A motion for Bankruptcy
Court approval of this settlement is pending. It is possible that any of the
settling insurers may argue that the Eighth Plan is not substantially similar to
relevant provisions of earlier plans referenced in its respective settlement
agreement and therefore is relieved of its settlement obligation.
Congoleum expects that it will take until some time in the fourth quarter of
2006 at the earliest to obtain confirmation of the Eighth Plan.
Under the Eighth Plan, Congoleum's assignment of insurance recoveries to the
Plan Trust is net of costs incurred by Congoleum in connection with insurance
coverage litigation. Congoleum is entitled to withhold from recoveries, or seek
reimbursement from the Plan Trust, for coverage litigation costs incurred after
January 1, 2003. Congoleum also paid $1.3 million in claims processing fees in
connection with claims settled under the Claimant Agreement. Under the Eighth
Plan, Congoleum is entitled to withhold from recoveries, or seek reimbursement
from the Plan Trust, for the $1.3 million claims processing fee. There can be no
assurance that any future plan will provide for Congoleum to recover any
coverage litigation costs or claims processing fees. The Eighth Plan provides
for the channeling of asbestos property damage claims in addition to asbestos
personal injury claims to the Plan Trust. There were no asbestos related
property damage claims asserted against Congoleum at the time of its bankruptcy
filing. The Bankruptcy Court approved an order establishing a bar date of May 3,
2004 for the filing of asbestos property damage claims. The claims agent
appointed in Congoleum's bankruptcy proceeding advised Congoleum that, as of the
bar date, it received 35 timely filed asbestos property damage claims asserting
liquidated damages in the amount of approximately $0.8 million plus additional
unspecified amounts. Congoleum objected to certain claims on various grounds,
and the Bankruptcy Court ultimately allowed 19 claims valued at $133 thousand.
The Eighth Plan will pay those claims in full from certain insurance proceeds.
27
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
The Eighth Plan provides that on the effective date of the Eighth Plan,
Congoleum will issue a new security (the "New Convertible Security") in the form
of either shares of preferred stock or convertible promissory notes and
contribute it to the Plan Trust on the effective date of its plan of
reorganization in satisfaction of section 524(g) of the Bankruptcy Code. If the
New Convertible Security is to be shares of preferred stock of reorganized
Congoleum, it will have the following terms: (i) an initial liquidation
preference equal to $2,738,234.75 in the aggregate, such amount being subject to
increase in the amount (the "Market Reset Obligation"), if any, by which 36% of
reorganized Congoleum's market capitalization based on average trading prices
for reorganized Congoleum's Class A common stock at the close of trading for the
90 consecutive trading days beginning on the one year anniversary of the
effective date of its plan of reorganization, exceeds such initial liquidation
preference; (ii) an initial dividend rate equal to 9% of the liquidation
preference per annum, payable semi-annually in arrears, with such dividend rate
to reset at the rate of 5% of the liquidation preference per annum on the tenth
anniversary of such effective date and payable at such reset dividend rate per
annum unless and until redeemed; (iii) redeemable for the liquidation preference
at the option of the Plan Trust or reorganized Congoleum following the tenth
anniversary of such effective date; (iv) a mandatory redemption on the fifteenth
anniversary of such effective date if not redeemed earlier; (v) convertible into
5,700,000 shares of Class A Common Stock (or the equivalent thereof on a fully
diluted basis) upon a specified default of the obligation to pay dividends and a
failure to cure such default within any cure period, which, when combined with
the 3.8 million newly issued shares of Class A Common Stock to be contributed to
the Plan Trust, will result in the Plan Trust owning 51% of the voting common
shares of reorganized Congoleum on a fully diluted basis; and (vi) no voting
rights, except upon conversion. If the New Convertible Security is convertible
promissory notes, such notes will be on economic terms substantially equivalent
to provisions (i) and (v) of the preferred stock described herein, with other
terms substantially the same as the Promissory Note described in the Sixth Plan.
Under the Eighth Plan and related documents, ABI has agreed to make a cash
contribution in the amount of $250 thousand to the Plan Trust upon the formation
of the Plan Trust. Under the Eighth Plan, ABI would receive certain relief as
may be afforded under Section 524(g)(4) of the Bankruptcy Code from asbestos
claims that derive from claims made against Congoleum, which claims are expected
to be channeled to the Plan Trust. However, the Eighth Plan does not provide
that any other asbestos claims that may be asserted against ABI would be
channeled to the Plan Trust.
There are sufficient risks and uncertainties related to Congoleum's efforts to
confirm a plan of reorganization such that no assurances of the outcome can be
given. In addition, the remaining costs to effect the reorganization process,
consisting principally of legal and advisory fees and contributions to the Plan
Trust, are expected to be approximately $17.2 million at a minimum, not
including any Market Reset Obligation arising from revaluation of the New
Convertible Security, and could be materially higher.
28
Note J - Congoleum Asbestos Liabilities and Reorganization (continued)
Based on the Eighth Plan, Congoleum has made provision in its financial
statements for the minimum amount of the range of estimates for its contribution
to effect its plan to settle asbestos liabilities through the Plan Trust.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years, and is not yet able to determine the amount of the additional cost that
will be required to complete its reorganization as based on the Eighth Plan.
Congoleum is not yet able to determine the additional costs that may be required
to effect the Eighth Plan or any other plan, and actual amounts that will be
contributed to the Plan Trust and costs for pursuing and implementing any plan
of reorganization could be materially higher than currently recorded. Delays in
proposing, filing or obtaining approval of the Eighth Plan or any new amended
plan of reorganization, or the continued pursuit of the CNA Plan or the
Bondholder Plan by the proponents of such plans, or the proposal of additional
plans by other parties could result in a proceeding that takes longer and is
more costly than Congoleum has estimated. Congoleum may record significant
additional charges should the minimum estimated cost increase.
Note K - Comprehensive Income (Loss)
The following table presents total comprehensive income for the three months
ended March 31, 2006 and 2005 (in thousands):
2006 2005
------ ------
Net income $ 486 $ 624
Foreign currency translation adjustments 29 (192)
------ ------
Total comprehensive income $ 515 $ 432
====== ======
Note L - Earnings (Loss) Per Share
Basic and diluted earnings per share are computed in accordance with FASB
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128 requires both basic
earnings per share, which is based on the weighted-average number of common
shares outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common equivalent shares outstanding. The dilutive effect of options is
determined under the treasury stock method using the average market price for
the period. Common equivalent shares are included in the per share calculations
when the effect of their inclusion would be dilutive.
29
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 and
other industrial products.
Net sales by segment for the three months ended March 31, 2006 and 2005 were as
follows (in thousands):
2006 2005
--------- ---------
Net sales to external customers:
Flooring products $ 57,237 $ 57,682
Tape products 26,123 22,599
Jewelry 15,084 15,888
Canadian division 13,277 11,255
--------- ---------
Total net sales to external customers 111,721 107,424
Intersegment net sales:
Flooring products -- --
Tape products -- 20
Jewelry -- --
Canadian division 1,448 1,184
--------- ---------
Total intersegment net sales 1,448 1,204
Reconciling items -- --
Intersegment net sales (1,448) (1,204)
--------- ---------
Consolidated net sales $ 111,721 $ 107,424
========= =========
30
Note M - Industry Segments (continued)
Segment profit or loss is before income tax expense or benefit. Profit (loss) by
segment for the three months ended March 31, 2006 and 2005 was as follows (in
thousands):
2006 2005
------- -------
Segment profit (loss)
Flooring products $ 262 $ (352)
Tape products 151 31
Jewelry 171 625
Canadian division 260 (249)
------- -------
Total segment profit 844 55
------- -------
Reconciling items
Corporate items (57) 2,026
Intercompany profit 24 44
------- -------
Consolidated income before income
taxes and other items $ 811 $ 2,125
======= =======
Corporate items of $2.0 million for the three months ended March 31, 2005
include a gain of $2.3 million from the sale of the Tullahoma property (see Note
D).
Assets by segment as of the end of the quarter and the end of the prior year
were as follows (in thousands):
March 31, December 31,
2006 2005
--------- ------------
Segment assets
Flooring products $ 207,796 $ 207,347
Tape products 61,491 51,679
Jewelry 38,542 39,421
Canadian division 43,285 43,139
--------- ---------
Total segment assets 351,114 341,586
Reconciling items
Assets of discontinued operation 3,200 3,142
Corporate items 32,752 33,080
Intersegment accounts receivable (29,356) (20,650)
Intersegment profit in inventory (143) (167)
Intersegment other asset (147) (147)
--------- ---------
Consolidated assets $ 357,420 $ 356,844
========= =========
31
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to
resolve claims asserted against it related to the use of asbestos in its
products decades ago. During 2003, Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, Congoleum filed
its proposed plan of reorganization and disclosure statement with the Bankruptcy
Court. In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy
Court reflecting the result of further negotiations with representatives of the
Asbestos Claimants' Committee, the Future Claimants' Representative and other
asbestos claimant representatives. The Bankruptcy Court approved the disclosure
statement and plan voting procedures in December 2004 and Congoleum obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of the Fourth Plan. In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the Asbestos Claimants' Committee
and the Future Claimants' Representative to make certain modifications to its
proposed plan of reorganization and related documents governing the settlement
and payment of asbestos-related claims against Congoleum. Under the agreed-upon
modifications, asbestos claimants with claims settled under Congoleum's
pre-petition settlement agreements would agree to forbear from exercising the
security interest they were granted and share on a pari passu basis with all
other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust. In July 2005, Congoleum filed the Sixth Plan and
related documents with the Bankruptcy Court which reflected the result of these
negotiations as well as other technical modifications. The Bankruptcy Court
approved the disclosure statement and voting procedures and Congoleum commenced
solicitation of acceptances of the Sixth Plan in August 2005. In September 2005,
Congoleum learned that certain asbestos claimants were unwilling to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan and the Sixth Plan was subsequently withdrawn. In November 2005, the
Bankruptcy Court denied a request to extend Congoleum's exclusive right to file
a plan of reorganization and solicit acceptances thereof. In February 2006,
Congoleum filed the Seventh Plan. On February 27, 2006, Congoleum announced its
intention to make additional changes to its plan of reorganization, and on March
17, 2006 it filed the Eighth Plan. In addition, an insurance company has filed
the CNA Plan and the Official Committee of Bondholders has filed the Bondholder
Plan. The Bankruptcy Court has scheduled a hearing to consider the adequacy of
the disclosure statements with respect to these plans for June 8, 2006.
There can be no assurance that Congoleum will not amend the Eighth Plan, that
Congoleum will obtain approval to solicit acceptances of its plan of
reorganization, that Congoleum will receive the acceptances necessary for
confirmation of its plan of reorganization, that its plan will not be modified
further, that its plan will receive necessary court approvals from the
Bankruptcy Court or the Federal District Court, or that such approvals will be
received in a timely fashion, that its plan will be confirmed, or that its plan,
if confirmed, will become effective. It is unclear whether the Bankruptcy Court
will approve the CNA Plan or the Bondholder Plan or whether either of such
plans, if confirmed, would be feasible. Moreover, it is unclear whether any
other person will attempt to propose a plan or what any such plan would provide
or propose, and whether the Bankruptcy Court would approve a plan other than
Congoleum's proposed plan.
32
Congoleum is presently involved in litigation with certain insurance carriers
related to disputed insurance coverage for asbestos related liabilities, and
certain insurance carriers filed various objections to Congoleum's previously
proposed plans of reorganization and related matters and are expected to file
objections to the Eighth Plan. Certain other parties have also filed various
objections to Congoleum's previously proposed plans of reorganization and may
file objections to the Eighth Plan.
Congoleum expects that the terms of the Eighth Plan may be amended or modified
as a result of further negotiations with various parties. The terms of the CNA
Plan and the Bondholder Plan are materially different from the terms of the
Eighth Plan, and these plans may also be amended or modified or may be
withdrawn. There can be no assurance that the terms of the reorganization plan
that is ultimately confirmed, if any, will not materially differ from the terms
of the Eighth Plan. Congoleum expects that it will take until some time in the
fourth quarter of 2006 at the earliest to obtain confirmation of any plan of
reorganization.
In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million. As contemplated by the
Claimant Agreement, Congoleum also entered into agreements establishing the
Collateral Trust to distribute funds in accordance with the terms of the
Claimant Agreement and granting the Collateral Trust a security interest in
Congoleum's rights under its applicable insurance coverage and payments from
Congoleum's insurers for asbestos claims. In December 2005, Congoleum commenced
the Avoidance Actions seeking to void the security interest granted to the
Collateral Trust and such settlements. In March 2006, Congoleum filed a motion
for summary judgment in the Avoidance Actions seeking to avoid the Claimant
Agreement settlements and liens under various bankruptcy theories. Under the
terms of the Eighth Plan, asbestos personal injury claimants voting to accept
the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under the Claimant
Agreement and related agreements. Under the terms of the Eighth Plan, after the
establishment of the Plan Trust, the assets in the Collateral Trust would be
transferred to the Plan Trust and any claims subject to the Claimant Agreement
would be channeled to the Plan Trust and paid in accordance with the terms of
the Eighth Plan. Settlement values under the Eighth Plan may differ from values
under the Sixth Plan and the Claimant Agreement, which, together with the
outcome of the Avoidance Actions, may materially affect the liability associated
with the asbestos personal injury claims against Congoleum. As a result of
tabulating ballots on the Fourth Plan, Congoleum is also aware of claims by
claimants whose claims were not determined under the Claimant Agreement but who
have submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan. Based on the Eighth Plan,
Congoleum has made provision in its financial statements for the minimum amount
of the range of estimates for its contribution to effect its plan to settle
asbestos liabilities through the Plan Trust. Congoleum recorded charges
aggregating approximately $51.3 million in prior years and is not yet able to
determine the amount of the additional cost that will be required to complete
its reorganization. Actual amounts that will be contributed to the Plan Trust
and costs for pursuing and implementing the Eighth Plan or any other plan of
reorganization could be materially higher than currently recorded. Congoleum may
33
record significant additional charges should the minimum estimated cost
increase. Delays in proposing, filing or obtaining approval of the Eighth Plan
or any new amended plan of reorganization, or the continued pursuit of the CNA
Plan or the Bondholder Plan by the proponents of such plans, or the proposal of
additional plans by other parties could result in a proceeding that takes longer
and is more costly than Congoleum has estimated.
Please refer to "Risk Factors - The Company and its majority-owned subsidiary
Congoleum have significant asbestos liability and funding exposure, and the
Company's and Congoleum's strategies for resolving this exposure may not be
successful" included in Part II, Item 1A. for a discussion of certain factors
that could cause actual results to differ from the Congoleum's goals for
resolving its asbestos liability through a plan of reorganization.
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.
Due to Congoleum's Chapter 11 proceedings and separate capital structure, the
Company believes that presenting ABI and its non-debtor subsidiaries separately
from Congoleum is the most meaningful way to discuss and analyze its financial
condition and results of operations. ABI and its non-debtor subsidiaries are
comprised of the Tape, Jewelry (comprised of the Company's majority-owned
subsidiary, K&M Associates L.P.) and Canadian division segments as well as
Corporate items and Janus. Congoleum is the flooring products segment.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidating financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities as of the date of the Company's financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that reflect significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes that its most critical accounting policies, upon which its financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005, filed with the Securities and Exchange
Commission. There have been no material changes in what the Company considers to
be its critical accounting policies or the applicability of the disclosure the
Company provided regarding those policies in that Form 10-K.
34
Results of Operations
ABI and Non-Debtor Subsidiaries
Three Months Ended March 31
2006 2005
-------- --------
(In thousands of dollars)
Net sales $ 54,484 $ 49,742
Cost of sales 39,531 34,931
-------- --------
Gross profit 14,953 27.4% 14,811 29.8%
Selling, general & administrative expenses 13,994 25.7% 13,791 27.7%
-------- --------
Operating income 959 1,020
Interest expense, net (593) (719)
Other income, net 160 2,132
-------- --------
Income before taxes and other items 526 2,433
Provision for income taxes 196 971
Noncontrolling interests (16) (474)
-------- --------
Income from continuing operations $ 314 $ 988
======== ========
Net sales in the first quarter of 2006 were $54.5 million compared to $49.7
million in the first quarter of 2005, an increase of $4.8 million or 9.7%. Tape
division sales increased $3.5 million, or 15.6%, as a result of higher sales
volume in automotive and other films, coupled with price increases on most
product lines. Canadian division sales increased $2.0 million, or 18%, on higher
volume and pricing of flooring and industrial products. Jewelry sales declined
$0.8 million, or 5.1%, as sales were negatively affected by the merger and store
consolidation by two major department store customers.
Gross profit decreased from 29.8% for the first quarter of 2005 to 27.4% for the
first quarter of 2006. Gross margins declined in the Tape business due to higher
costs for raw materials and energy, of which only a portion was recovered
through selling price increases. Jewelry margins also declined, as the cost of
goods (primarily sourced from China) has increased while mass merchandisers have
resisted efforts to pass along those increases. A lower proportion of Jewelry
sales in the first quarter of 2006 versus 2005 also contributed to the overall
gross margin decrease, because Jewelry has higher gross margins as a percent of
sales than the other segments. Canadian margins improved due to increased sales
volume, higher selling prices to offset cost increases, and manufacturing cost
reductions.
The Company includes the cost of purchasing and finished goods inspection in
selling, general and administrative expenses. Some companies also record such
costs in operating expenses while others record them in cost of goods sold.
Consequently, the Company's gross profit margins may not be comparable to other
companies. Had the Company recorded these expenses in cost of sales, the gross
profit margins for the quarter ended March 31, 2006 and 2005 would have been
26.9% and 29.3%, respectively.
35
Selling, general and administrative ("SG&A") expenses in the first quarter of
2006 increased by $203 thousand or 1.5% compared to the first quarter of 2005.
This increase was primarily due to higher freight and sales commissions. As a
percentage of net sales, SG&A decreased from 27.7% to 25.7%, as programs to
contain or reduce SG&A costs kept the growth rate of these expenses well below
the sales growth rate.
Net interest expense for the first quarter of 2006 was lower than the first
quarter of 2005 primarily due to a 150 basis point reduction in the leverage fee
charged on the Company's $20 million notes.
Other income for the first quarter of 2005 includes a gain of $2.3 million
recognized on the sale of a warehouse. The impact of this sale on the Company's
net income after taxes and non-controlling interest was $887 thousand, or $0.26
per share.
The effective tax rate was 37% in the first quarter of 2006 compared to 40% in
the first quarter of 2005. The lower rate is attributed to the effect of the
Canadian division's lower effective rate and projected income for the year.
Income from continuing operations in the first quarter of 2006 was $314 thousand
compared to $988 thousand for the corresponding prior year period. Excluding the
net impact of the warehouse sale, income from continuing operations for the
first quarter of 2005 was approximately $101 thousand.
Congoleum
Three Months Ended March 31
2006 2005
-------- --------
(In thousands of dollars)
Net sales $ 57,237 $ 57,630
Cost of sales 43,960 43,969
-------- --------
Gross profit 13,277 23.2% 13,661 23.7%
Selling, general & administrative expenses 10,396 18.2% 11,733 20.4%
-------- --------
Operating income 2,881 1,928
Interest expense, net (2,577) (2,402)
Other (expense) income, net (42) 122
-------- --------
Income (loss) before taxes 262 (352)
Provision for income taxes 51 --
-------- --------
Net income (loss) $ 211 $ (352)
======== ========
36
Net sales for the three months ended March 31, 2006 were $57.2 million as
compared to $57.6 million for the three months ended March 31, 2005, a decrease
of $0.4 million or 0.7%. The decrease reflected weaker sales in high-end
resilient sheet products and the impact of a promotional roll sales program in
the first quarter of 2005 which was not repeated in 2006. Offsetting these
declines were the impact of price increases instituted in the second half of
2005 (5.7%) and higher sales in the manufactured housing category.
Gross profit for the three months ended March 31, 2006 totaled $13.3 million, or
23.2% of net sales, compared to $13.7 million, or 23.7% of net sales, for the
same period last year. The major factors leading to the deterioration in gross
margin were the increase in raw material costs and utility costs experienced
during the second half of 2005, which reduced margins by approximately 4.0%
points of net sales, and the poorer sales mix which reduced margin by 2% points
of net sales. This was partially mitigated by the 5.7% increase in selling
prices.
Selling, general and administrative expenses were $10.4 million for the three
months ended March 31, 2006 as compared to $11.7 million for the three months
ended March 31, 2005, a decrease of $1.3 million. The reduction in expenses
reflects lower merchandising and sales support related costs (down $0.6
million), lower compensation and related benefit costs reflecting workforce
reductions in late 2005 ($0.4 million) and lower depreciation expense ($0.2
million). As a percent of net sales, selling, general and administrative costs
were 18.2% for the three months ended March 31, 2006 compared to 20.4% for the
same period last year.
Income from operations was $2.9 million for the quarter ended March 31, 2006
compared to income of $1.9 million for the quarter ended March 31, 2005. The
improvement in operating income was a result of lower selling, general and
administrative expenses which offset the impact of lower sales and gross
margins.
Liquidity and Capital Resources
ABI & Non-Debtor Subsidiaries
Cash and cash equivalents, including short term investments, decreased $2.8
million in the first three months of 2006 to $1.9 million. Cash used by
operating activities, principally for seasonal working capital increases, was
funded from existing balances. Working capital at March 31, 2006 was $21.1
million, up from $19.8 million at December 31, 2005. The ratio of current assets
to current liabilities at March 31, 2006 was 1.35 compared to 1.33 at December
31, 2005.
Capital expenditures in the first three months of 2006 were $418 thousand
compared to $346 thousand for the first three months of 2005. It is anticipated
that capital spending for the full year 2006 will be approximately $4 million.
During the first quarter of 2005, the Company sold a warehouse for $2.5 million,
resulting in net cash proceeds of $2.3 million. The warehouse was owned by
Tullahoma Properties L.L.C., a subsidiary in which the Company owns a 62.5%
interest.
37
The Company has recorded provisions which it believes are adequate for
environmental remediation, including provisions for testing and potential
remediation of conditions at its own facilities, and non-asbestos
product-related liabilities. While the Company believes its estimate of the
future amount of these liabilities is reasonable, that most of such amounts will
be paid over a period of one to ten years and that the Company expects to have
sufficient resources to fund such amounts, the actual timing and amount of such
payments may differ significantly from the Company's assumptions. Although the
effect of future government regulation could have a significant effect on the
Company's costs, the Company is not aware of any pending legislation or
regulation relating to these matters that would have a material adverse effect
on its consolidated results of operations or financial position. There can be no
assurances that any such costs could be passed along to its customers.
American Biltrite Inc. 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, a Bank of America company ("BofA"), and
Bank of America National Association acting through its Canada branch (the
"Canadian Lender"). The Credit Facility provides American Biltrite Inc. and its
subsidiary K&M Associates L.P. with a revolving credit facility of up to $20
million and a $12 million borrowing sublimit for American Biltrite Inc.'s
subsidiary American Biltrite (Canada) Ltd. ("AB Canada"). The amount of domestic
borrowings available from time to time under the Credit Facility for the Company
may not exceed the lesser of (a) $20 million less the then outstanding amount of
borrowings by AB Canada under the Canadian sublimit facility and (b) the
applicable borrowing base. The formula used for determining the borrowing base
is based upon inventory, receivables and fixed assets of the Company and certain
of its subsidiaries (not including, among others, AB Canada and Congoleum),
reduced by amounts outstanding under the Note Agreement (as defined below).
American Biltrite Inc. and K&M Associates L.P. may also obtain letters of credit
in an aggregate amount at any time outstanding of up to $4 million, subject to
the Credit Facility's maximum borrowing availability limit discussed above.
Interest is payable quarterly on domestic revolving loans borrowed by American
Biltrite Inc. and K&M Associates L.P. under the Credit Facility at rates which
vary depending on the applicable interest rate in effect and are generally
determined based upon: (a) if a LIBOR based rate is in effect, at a rate between
a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%, depending on the
Company's leverage ratio, as determined under the Credit Facility, (b) if a
fixed rate is in effect, at a rate between the fixed rate plus 1.0% to a fixed
rate plus 2.75%, depending on the Company's leverage ratio, as determined under
the Credit Facility, and (c) for loans not based on a LIBOR or fixed rate, the
higher of BofA's applicable prime rate and 0.50% plus the federal funds rate, as
determined under the Credit Facility. Under the Credit Facility, the Company may
generally determine whether interest on domestic revolving loans will be
calculated based on a LIBOR based rate, and if BofA elects to make a fixed rate
option available, whether interest on revolving loans will be calculated based
on a fixed rate.
The amount of borrowings available from time to time for AB Canada under the
Canadian sublimit facility under the Credit Facility is limited to the lesser of
(a) $12 million, (b) AB Canada's borrowing base amount, which is based upon AB
Canada's accounts receivable, inventory and fixed assets, and (c) $20 million
less the amount of domestic borrowings outstanding under the Credit Facility on
behalf the Company and K&M Associates L.P. The Canadian sublimit facility also
38
allows AB Canada to obtain letters of credit in an aggregate amount at any time
outstanding of up to $1 million, subject to the Canadian sublimit facility's
maximum borrowing availability limit discussed above. AB Canada may borrow
amounts under the Canadian sublimit facility in United States or Canadian dollar
denominations; however, solely for purposes of determining amounts outstanding
and borrowing availability under the Credit Facility, all Canadian dollar
denominated amounts will be converted into United States dollars in the manner
provided in the Credit Facility.
Interest is payable quarterly on revolving loans under the Canadian sublimit
facility at rates which vary depending on the applicable interest rate in effect
and are generally determined based upon: (a) if a LIBOR based rate is in effect,
at a rate between a LIBOR based rate plus 1.0% to a LIBOR based rate plus 2.75%,
depending on the Company's leverage ratio, as determined under the Credit
Agreement, and (b) if a LIBOR based rate is not in effect, for outstanding
revolving loans denominated in Canadian dollars, the higher of 0.50% plus the
applicable 30-day average bankers' acceptance rate as quoted on Reuters CDOR
page and the Canadian Lender's applicable prime rate for loans made in Canadian
dollars to Canadian customers, and for outstanding revolving loans denominated
in United States dollars, the higher of 0.50% plus the federal funds rate as
calculated under the Credit Agreement and the applicable rate announced by the
Canadian Lender as its reference rate for commercial loans denominated in United
States dollars made to a person in Canada. Under the Credit Agreement, AB Canada
may generally determine whether interest on revolving loans will be calculated
based on a LIBOR based rate.
The Credit Facility expires on September 30, 2006. The Company expects that it
will be able to extend the maturity or obtain a replacement facility on
substantially similar terms before the expiration date of the current facility,
although there can be no assurances in this regard.
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 "Notes"). The 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 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.
During 2004 and for the first quarter of 2005, the Company was obligated to pay
the full 2% of that fee. For the second quarter of 2005, the fee was 1%, and for
the third and fourth quarter of 2005 and the first quarter of 2006, it was 0.5%.
Principal on the Notes is repayable in five annual installments of $4.0 million
beginning on August 28, 2006.
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. In addition, the Credit Facility includes a financial covenant that
39
requires the Company's consolidated adjusted EBITDA for the four consecutive
fiscal quarters ending June 30, 2006 to exceed 150% of the Company's
consolidated pro forma fixed charges for the 12-month period beginning
immediately after June 30, 2006, as determined under the Credit Facility (the
"Pro Forma Financial Covenant"). The financial tests are required to be
calculated based on the Company accounting for its majority-owned subsidiary
Congoleum Corporation on the equity method and include a maximum ratio of total
liabilities to tangible net worth, a minimum ratio of earnings before interest,
taxes, depreciation and amortization ("EBITDA") less certain cash payments for
taxes, debt service, and dividends to interest expense, a minimum level of
tangible net worth, a requirement that there be no consecutive quarterly losses
from continuing operations, and a maximum level of capital spending. In
addition, beginning on September 30, 2006, the Note Agreement requires the
Company to satisfy a different set of financial covenants, including a minimum
ratio of current assets to current liabilities, a minimum ratio of adjusted
EBITDA to fixed charges, a cap on the amount of debt as a percentage (45%) of
tangible net worth, a cap on the amount of priority debt (generally, debt of a
Company subsidiary (not including Congoleum) that is not a guarantor under the
Note Agreement plus secured debt of the Company) as a percentage (15%) of
tangible net worth, a minimum leverage ratio, and a minimum amount of tangible
net worth. The Company does not presently expect to meet all of the different
set of financial covenants which take effect on September 30, 2006 and expects
it will need to negotiate amendments to or waivers of certain covenants,
although there can be no assurance it will be successful in that regard.
Pursuant to the Credit Facility and the Note Agreement, the Company and certain
of its subsidiaries granted BofA, the Canadian Lenders and Prudential a security
interest in most of the Company's and its subsidiaries' assets. The security
interest granted does not include the shares of capital stock of the Company's
majority-owned subsidiary Congoleum Corporation or the assets of Congoleum
Corporation. In addition, pursuant to the Credit Facility and the Note
Agreement, certain of the Company's subsidiaries have agreed to guarantee the
Company's obligations (excluding AB Canada's obligations) under the Credit
Facility and the Note Agreement.
In the past, the Company has had to amend its debt agreements in order to avoid
being in default of those agreements as a result of failing to satisfy certain
financial covenants contained in those agreements. In January 2004, the Credit
Facility and the Note Agreement were amended to remove a former lender under the
Credit Facility, reduce the credit line to $20 million, and to modify the
tangible net worth, adjusted EBITDA to interest expense and consecutive
quarterly loss covenants. Fees of $83 thousand were paid to the lenders in
connection with those amendments. In April 2004, the Credit Facility and the
Note Agreement were amended to permit AB Canada the ability to grant a security
interest in certain assets under a credit agreement that AB Canada was a party
to. In November 2004, the Credit Facility was amended to extend the term of the
Credit Facility to January 1, 2006, to modify the treatment of tax refunds in
covenant calculations, and to modify the measurement levels for the adjusted
EBITDA to interest expense and current assets to current liabilities covenants
for the remainder of the extended term of the Credit Facility. A fee of $50
thousand was paid in connection with that amendment.
40
On May 20, 2005, the Company entered into amendments and restatements of its
Credit Facility and Note Agreement. The amendment to the Credit Facility
extended the maturity date of the Credit Facility to September 30, 2006, added
the Pro Forma Financial Covenant and added the $12 million Canadian sublimit
facility for AB Canada. Pursuant to the amended Credit Facility, AB Canada
granted a security interest in all of its personal property to the Canadian
Lender. During the second quarter of 2005, AB Canada repaid all amounts
outstanding under its previous credit agreement with another lender from the
proceeds of borrowings under the Credit Facility.
The amendment to the Note Agreement in May 2005 generally removed the
application of the financial covenants under the Note Agreement for any
measurement period prior to March 31, 2005, which effectively cured the
Company's preexisting failure to satisfy the adjusted EBITDA to interest expense
covenant (as determined under the Note Agreement) as of December 31, 2004. In
addition, the amendments modified the financial covenants for 2005 under the
Note Agreement to make them comparable to the financial covenants for 2005 under
the Credit Facility. The amendment also requires the Company to enter into a
definitive commitment to replace or refinance the $20 million borrowing limit
under the Credit Facility by June 30, 2006 and to consummate the replacement or
refinancing by September 30, 2006.
Fees and expenses incurred for the amendments to the Credit Facility and Note
Agreement in May 2005 were approximately $425 thousand.
As indicated above, the Company will need to extend or replace the Credit
Facility and expects that it will need to obtain additional amendments or
waivers of covenants under the Note Agreement during 2006. There can be no
assurance that the Company will be successful in doing so.
Certain defaults under the Note Agreement, such as defaults resulting from
certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum), automatically cause all
amounts owing with respect to the Notes then outstanding under the Note
Agreement to become immediately due and payable. A default in the payment of
principal or interest under the Notes would allow each individual noteholder to
cause all amounts owed with respect to the Notes held by such holder to become
immediately due and payable. In addition, with respect to all other defaults
under the Note Agreement, holders of at least 51% of the aggregate principal
amount of the Notes then outstanding could cause all amounts then owing with
respect to the Notes to become immediately due and payable. The Company
understands that Prudential is the only holder of the Notes and, as such, any
decision to cause the acceleration of amounts owed with respect to the Notes
would be made at Prudential's discretion.
Certain events of default under the Credit Facility, such as defaults resulting
from certain bankruptcy, insolvency and receivership matters of the Company or
certain of its subsidiaries (not including Congoleum) automatically terminate
BofA's and the Canadian Lender's obligations to make borrowings available under
the Credit Facility and causes all amounts outstanding under the Credit Facility
to become immediately due and payable. With respect to all other events of
default under the Credit Facility, BofA and the Canadian Lender may terminate
their obligations to make borrowings available under the Credit Facility and
cause all amounts outstanding under the Credit Facility to become immediately
due and payable.
41
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, BofA and the Canadian Lender 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 the applicable lender 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 those outstanding amounts, in which case, BofA as
administrative agent over the collateral securing the amounts outstanding under
the Credit Facility and the Note Agreement, might exercise BofA's and the
Canadian Lender'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, and for which suitable replacement financing is not timely obtained,
would have a material adverse effect on the Company's business, results of
operations and financial condition.
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 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 Flooring 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 and the ability
of the Company to replace or refinance its existing credit facility that is
scheduled to expire on September 30, 2006 on satisfactory terms. 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 the terms of the Eighth Plan, ABI expects to contribute $250 thousand in
cash to the Plan Trust on the effective date of the plan. Under the terms of the
Eighth Plan, unlike under the Sixth Plan, ABI would not pledge any of its
assets, including shares of Congoleum stock it owns or certain rights it has to
receive indemnification payments from Congoleum pursuant to a joint venture
agreement that ABI and Congoleum are party to, as security for Congoleum's
obligations under the new convertible security (as was contemplated, under the
Sixth Plan with respect to Congoleum's obligations under the Promissory Note
described in the Sixth Plan). In addition, the Eighth Plan does not, unlike the
Sixth Plan, contemplate that ABI would be required to make any additional
contributions to the Plan Trust if ABI were to sell its Congoleum stock under
the circumstances provided under the Sixth Plan, a description of which ABI
provided in previous periodic reports it filed with the Securities and Exchange
Commission.
Under the Eighth Plan, ABI would receive certain relief as may be afforded under
Section 524(g)(4) of the Bankruptcy Code from asbestos personal injury claims
that derive from claims made against Congoleum, which claims are expected to be
channeled to the Plan Trust. However, the Eighth Plan does not provide that any
other asbestos claims that may be asserted against ABI would be channeled to the
Plan Trust. To the extent that the Company pays material amounts for
asbestos-related property damage claims that the Company would have been
42
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. Furthermore, to the extent that the
amount of any of the Company's indemnity claims against the Plan Trust are
reduced pursuant to the distribution procedures under Congoleum's plan of
reorganization to an amount less than the corresponding amount paid by the
Company, 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 (since June 30, 2003) are generally limited to 50% of cumulative
consolidated net income (computed treating Congoleum under the equity method of
accounting), as determined under the Credit Facility, earned from June 30, 2003.
Under the Note Agreement, aggregate dividend payments (since December 31, 2000)
generally may not exceed the sum of $6 million plus 50% of cumulative
consolidated net income (accounting for Congoleum under the equity method of
accounting), as determined under the Note Agreement, earned after December 31,
2000.
Congoleum
The consolidated financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, Congoleum's
consolidated financial statements do not include any adjustments that might be
necessary should Congoleum be unable to continue as a going concern. As
described more fully in the Notes to the Unaudited Consolidating Condensed
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q, there is substantial doubt about Congoleum's ability to continue as a
going concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes A
and J of the Notes to the Unaudited Consolidating Financial Statements. These
matters will have a material adverse impact on Congoleum's liquidity and capital
resources. During the first quarter of 2006, Congoleum paid $5.9 million in fees
and expenses related to implementation of its planned reorganization under
Chapter 11 and litigation with certain insurance companies. Pursuant to terms of
the Eighth Plan and related documents, Congoleum is entitled to reimbursement
for certain expenses it incurs for claims processing costs and expenses in
connection with pursuit of insurance coverage. At March 31, 2006, Congoleum
recorded $18.4 million as a receivable for such reimbursements. The amount and
timing of reimbursements that will be received will depend on when Congoleum or
the Plan Trust receives funds from insurance settlements or other sources. There
can be no assurances that these reimbursements will be received, or that the
terms providing for such reimbursements will not be modified. Congoleum expects
to spend a further $17.2 million at a minimum in fees, expenses, and trust
contributions in connection with obtaining confirmation of its plan of
reorganization, which amount is recorded in its reserve for asbestos-related
liabilities in addition to the $9.4 million insurance settlement being held as
43
restricted cash. It also expects to spend a further $7.9 million at a minimum in
connection with insurance coverage litigation costs, for which it expects to be
reimbursed as discussed above. Required expenditures could be materially higher
than these estimates. Congoleum currently holds $3.8 million in restricted cash
that may be available to offset future costs incurred pursuing insurance
coverage, subject to approval by the Bankruptcy Court.
Due to the Chapter 11 proceedings, Congoleum has been precluded from making
interest payments on its outstanding Senior Notes since January 1, 2004. The
amount of accrued interest that is due but has not been paid on the Senior Notes
during this period is approximately $21.6 million, including interest on the
unpaid interest due. In February 2006, the Bankruptcy Court ordered Gilbert,
Heintz & Randolph, a law firm formerly representing Congoleum, to disgorge all
fees and certain expenses it was paid by Congoleum. The law firm has appealed
this ruling. The amount of the disgorgement is approximately $9.6 million.
Pursuant to the terms of the Eighth Plan, holders of the Senior Notes would
forego $10 million in interest accrued during the post-petition period and would
receive the right to any funds (net of related expenses) from the fee
disgorgement and other causes of action against the law firm and one of its
service providers, subject to a maximum of $10 million plus interest at 8.625%
from the effective date of the plan until the time such payment is made (the
"Maximum Additional Bondholder Recovery"). There can be no assurance that the
Plan, which is ultimately confirmed, will provide for such interest forgiveness.
Any net recoveries in excess of the Maximum Additional Bondholder Recovery would
be paid to the Plan Trust.
Pursuant to the terms of the Eighth Plan, Congoleum is to make a cash
contribution of approximately $7.7 million to the Plan Trust when the plan goes
effective. The Eighth Plan also provides that the maturity of the Senior Notes
will be extended by three years from August 2008 to August 2011. There can be no
assurance that the plan which is ultimately confirmed will provide for such
maturity extension.
As part of the Eighth Plan, Congoleum expects that it will issue a convertible
security (the "New Convertible Security") to the Plan Trust. Under the terms of
the Eighth Plan, the New Convertible Security means either shares of preferred
stock or convertible promissory notes to be issued by reorganized Congoleum and
contributed to the Plan Trust on the effective date of the Eighth Plan in
satisfaction of section 524(g) of the Bankruptcy Code. If the New Convertible
Security is to be shares of preferred stock of reorganized Congoleum, it will
have the following terms: (i) an initial liquidation preference equal to
$2,738,234.75 in the aggregate, such amount being subject to increase in the
amount, if any, by which 36% of reorganized Congoleum's market capitalization
based on average trading prices for reorganized Congoleum's Class A common stock
at the close of trading for the 90 consecutive trading days beginning on the one
year anniversary of the effective date of the plan of reorganization, exceeds
such initial liquidation preference; (ii) an initial dividend rate equal to 9%
of the liquidation preference per annum, payable semi-annually in arrears, with
such dividend rate to reset at the rate of 5% of the liquidation preference per
annum on the tenth anniversary of the effective date of the plan of
reorganization and payable at such reset dividend rate per annum unless and
until redeemed; (iii) redeemable for the liquidation preference at the option of
the Plan Trust or reorganized Congoleum following the tenth anniversary of the
effective date of the plan of reorganization; (iv) a mandatory redemption on the
fifteenth anniversary of the effective date of the plan of reorganization if not
redeemed earlier; (v) convertible into 5,700,000 shares of Class A Common Stock
(or the equivalent thereof on a fully diluted basis) upon a specified default of
44
the obligation to pay dividends and a failure to cure such default within any
cure period, which, when combined with the 3.8 million newly issued shares of
Class A Common Stock to be contributed to the Plan Trust, will result in the
Plan Trust owning 51% of the voting common shares of reorganized Congoleum on a
fully diluted basis; and (vi) no voting rights, except upon conversion. If the
New Convertible Security is convertible promissory notes, such notes will be on
economic terms substantially equivalent to provisions (i) and (v) of the
preferred stock described herein, with other terms substantially the same as the
Promissory Note described in the Sixth Plan. Although the earliest redemption or
repayment date for the New Convertible Security does not occur until its tenth
anniversary of issuance, this obligation may affect Congoleum's ability to
obtain other sources of financing or refinance existing obligations. In
addition, it is expected that the terms of the New Convertible Security will
require Congoleum to make regularly scheduled dividend or interest payments
prior to such instrument's redemption or maturity date.
Unrestricted cash and cash equivalents, including short-term investments at
March 31, 2006, were $14.7 million, a decrease of $9.9 million from December 31,
2005. Under the terms of its revolving credit agreement, payments on Congoleum's
accounts receivable are deposited in an account assigned by Congoleum to its
lender and the funds in that account are used by the lender to pay down any loan
balance. Funds deposited in this account but not yet applied to the loan
balance, which amounted to $2.7 million and $2.0 million at March 31, 2006 and
December 31, 2005, respectively, are recorded as restricted cash. Additionally,
$9.4 million remaining from a $14.5 million settlement received in August 2004
from an insurance carrier, which is subject to the lien of the Collateral Trust,
is included as restricted cash at March 31, 2006. Congoleum expects to
contribute these funds, less any amounts withheld pursuant to reimbursement
arrangements, to the Plan Trust. Working capital was $30.0 million at March 31,
2006, up from $28.0 million at December 31, 2005. The ratio of current assets to
current liabilities at March 31, 2006 was 1.3 to 1.0, which is unchanged from
December 31, 2005. The ratio of debt to total capital at March 31, 2006 was 0.48
to 1.0 which is also unchanged since December 31, 2005. Net cash used by
operations during the first three months of 2006 was $10.8 million, as compared
to net cash used by operations of $9.3 million in the first three months of
2005. The increase in cash used by operations in the first three months of 2006
versus the first three months of 2005 was primarily due to higher working
capital requirements and increased reorganization expenditures in 2006.
Capital expenditures for the three months ended March 31, 2006 totaled $0.5
million. Congoleum is currently planning capital expenditures of approximately
$5 million in 2006 and between $5 million and $7 million in 2007, primarily for
maintenance and improvement of plants and equipment, which it expects to fund
with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on
December 31, 2006 with borrowings up to $30 million. Interest is based on 0.75%
above the prime rate. This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization ("EBITDA"). It also includes restrictions on the incurrence of
additional debt and limitations on capital expenditures. The covenants and
45
conditions under this financing agreement must be met in order for Congoleum to
borrow from the facility. Congoleum was in compliance with these covenants at
March 31, 2006. Borrowings under this facility are collateralized by inventory
and receivables. At March 31, 2006, based on the level of receivables and
inventory, $17.6 million was available under the facility, of which $4.7 million
was utilized for outstanding letters of credit and $11.5 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 and effectiveness 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 (as extended) will be renewed prior to
its expiration if Congoleum's plan of reorganization is not confirmed before
that time.
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 I to the Unaudited
Consolidating Condensed Financial Statements contained in Item 1 of this
Quarterly Report on Form 10-Q). These actions include possible obligations to
remove or mitigate the effects on the environment of wastes deposited at various
sites, including Superfund sites and certain of Congoleum's owned and previously
owned facilities. The contingencies also include claims for personal injury
and/or property damage. The exact amount of such future 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 the effect of future
government regulation could have a significant effect on Congoleum's costs,
Congoleum is not aware of any pending legislation which would reasonably have
such an effect. There can be no assurances that the costs of any future
government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against Congoleum.
46
Congoleum's principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. Congoleum has used
$10.8 million in cash from operations in the first quarter of 2006 (as more
fully discussed above), which includes the benefit of $2.2 million of accrued
but unpaid interest on long-term debt. Congoleum believes these sources will be
adequate to fund working capital requirements, debt service payments, and
planned capital expenditures for the foreseeable future. To meet the funding
obligations under the Eighth Plan, Congoleum anticipates it will need to obtain
the contemplated forgiveness of $10 million of interest on the Senior Notes and
obtain reimbursement for any unreimbursed coverage litigation costs. Actual
sources and uses of funds to consummate the effectiveness of the Eighth Plan or
any other plan may differ from this description, but confirmation of any plan is
dependent on such plan demonstrating it leaves Congoleum with sufficient
liquidity that further reorganization will not be needed. Congoleum's inability
to obtain confirmation of the Eighth Plan in a timely manner would have a
material adverse effect on Congoleum's ability to fund its operating, investing
and financing requirements.
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. The Company invests primarily in highly liquid
debt instruments with strong credit ratings and short-term (less than one year)
maturities. The carrying amount of these investments approximates fair value due
to the short-term maturities. If market interest rates were to increase by 10%
from levels at March 31, 2006, the fair value of our investments would decline
by an immaterial amount. In addition, substantially all of the Company's
outstanding long-term debt as of March 31, 2006 consisted of indebtedness with a
fixed rate of interest, which is not subject to change based upon changes in
prevailing market interest rates.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Canada, Belgium and Singapore and sells those products in
those markets as well as in other countries in Europe and Asia. As a result, the
Company's financial results could be significantly affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the Company distributes its products. The Company's
operating results are exposed to changes in exchange rates between the U.S.
dollar and the Canadian dollar and the U.S. dollar and the Euro. When the U.S.
dollar strengthens against the Canadian dollar or Euro, the U.S. dollar value of
the applicable foreign currency sales decreases. When the U.S. dollar weakens
against those currencies, the U.S. dollar value of the applicable foreign
currency sales increases.
Under its current policies, the Company does not use derivative financial
instruments, derivative commodity instruments or other financial instruments to
manage its exposure to changes in interest rates, foreign currency exchange
rates, commodity prices or equity prices and does not hold any instruments for
trading purposes.
47
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's
management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company's disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, amended (the "Exchange Act")), as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of
such period, the Company's disclosure controls and procedures were (1)
designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to the Company's
Chief Executive Officer and Chief Financial Officer by others within those
entities, particularly during the period in which this report was being
prepared, and (2) effective, in that they provide reasonable assurance
that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have not been
any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note I "Commitments and Contingencies" and Note J
"Congoleum Asbestos Liabilities and Reorganization" of the Notes to Unaudited
Consolidating Condensed Financial Statements included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, in "management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and in "Risk
Factors - The Company and its majority-owned subsidiary Congoleum have
significant asbestos liability and funding exposure, and the Company's and
Congoleum's strategies for resolving this exposure may not be successful,"
included in Part II, Item 1A of this Quarterly Report on Form 10-Q, are
incorporated herein by reference.
Item 1A. Risk Factors
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
The Company and Congoleum have significant liability and funding exposure for
asbestos personal injury claims. In connection with Congoleum's strategy for
resolving its asbestos liability, in 2003, Congoleum entered into settlement
agreements with various asbestos claimants totaling in excess of $491 million.
Under the terms of the Eighth Plan, asbestos personal injury claimants voting to
accept the plan would irrevocably consent or would be deemed to have irrevocably
consented to the forbearance of any claim and lien rights under such settlement
agreements. The outcome of the Avoidance Actions could affect the outcome of
plan voting and, therefore, confirmation of the Eighth Plan or any modified
version of that plan or any other plan pursued by Congoleum.
There can be no assurance that Congoleum will not amend the Eight Plan, that
Congoleum will obtain approval to solicit acceptances for its plan, that
Congoleum will receive the acceptances necessary for confirmation of its plan,
that its plan will not be modified further, that its plan will receive necessary
court approvals from the Bankruptcy Court or the Federal District Court, or that
such approvals will be received in a timely fashion, that its plan will be
confirmed, or that its plan, if confirmed, will become effective. In November
2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive
right to file a plan of reorganization and solicit acceptances thereof, and
plans have been filed by an insurance company and the Official Committee of
Bondholders. It is unclear whether any other person will attempt to propose a
plan or what any such plan would provide or propose, and whether the Bankruptcy
Court would approve a plan other than Congoleum's proposed plan.
The Eighth Plan and any alternative plan of reorganization pursued by Congoleum
or another plan proponent or confirmed by the Bankruptcy Court and the Federal
District Court could materially differ from the description of the Eighth Plan
contained in the Annual Report on Form 10-K. Furthermore, the estimated costs
and contributions to effect the Eighth Plan or an alternative plan could be
49
significantly greater than currently estimated. Any plan of reorganization
pursued by Congoleum will be subject to numerous conditions, approvals and other
requirements, including Bankruptcy Court and Federal District Court approvals,
and there can be no assurance that such conditions, approvals and other
requirements will be satisfied or obtained.
Confirmation of a plan of reorganization will depend on Congoleum obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective. If Congoleum's cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of the Eighth Plan or in connection with Congoleum's New Jersey
state court insurance coverage litigation are materially more than anticipated,
or if sufficient funds from insurance proceeds or other sources are not
available at confirmation to reimburse coverage litigation costs as expected,
Congoleum may be unable to obtain exit financing that, when combined with net
cash provided from operating activities, would provide it with sufficient funds,
which would likely result in Congoleum not being able to confirm its plan of
reorganization or have such plan become effective.
The Company has its own direct asbestos liability as well. The Company's
strategy remains to vigorously defend and strategically settle its asbestos
claims on a case-by-case basis. To date, the Company's insurers have funded
substantially all of the Company's liabilities and expenses related to its
asbestos liability under the Company's applicable insurance policies. The
Company expects its insurance carriers will continue to defend and indemnify it
for its asbestos liabilities for the foreseeable future. If, however, it were
not able to receive such coverage from its insurers for the Company's asbestos
liabilities and expenses, that would likely have a material adverse effect on
the Company's financial position. In addition, certain of the excess liability
insurance policies that the Company purchased were underwritten by companies
that are now insolvent, which may limit the amount of funds available to pay for
any future claims covered by these policies.
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's objectives for resolving asbestos liability
include: (i) the future cost and timing of estimated asbestos liabilities and
payments; (ii) the availability of insurance coverage and reimbursement from
insurance companies that underwrote the applicable insurance policies for
asbestos-related claims, including insurance coverage and reimbursement for
asbestos claimants under Congoleum's proposed modified plan, which certain
insurers have objected to in Bankruptcy Court and are litigating in New Jersey
State Court, or any other plan of reorganization; (iii) costs relating to the
execution and implementation of any plan of reorganization pursued by Congoleum
or relating to any other plan of reorganization proposed by any other party in
interest; (iv) timely reaching an agreement with other creditors, or classes of
creditors, that exist or may emerge; (v) satisfaction of the conditions and
obligations under the Company's and Congoleum's respective outstanding debt
instruments, and amendment of those outstanding debt instruments, as necessary,
to permit Congoleum and the Company to satisfy their obligations under any plan
of reorganization; (vi) the response from time-to-time of the Company's and
Congoleum's lenders, customers, suppliers and other constituencies to the
Chapter 11 process and related developments arising from the strategy to settle
50
asbestos liability; (vii) Congoleum's ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms; (viii) timely
obtaining sufficient creditor and court approval of a reorganization plan and
the court overruling any objections to such plan that may be filed; (ix)
developments in costs, associated with, and the outcome of insurance coverage
litigation pending in New Jersey State Court involving Congoleum and certain
insurers; (x) the extent to which Congoleum is able to obtain reimbursement for
costs it incurs in connection with the insurance coverage litigation; (xi)
compliance with the Bankruptcy Code, including section 524(g); and (xii) the
possible progress of another party in interest's proposed plan of reorganization
which may prove to be unfeasible. In addition, in view of American Biltrite's
relationships with Congoleum, American Biltrite could be affected by Congoleum's
negotiations regarding its pursuit of a plan of reorganization, and there can be
no assurance as to what that impact, positive or negative, might be. In any
event, the failure of Congoleum to obtain confirmation and consummation of a
Chapter 11 plan of reorganization would have a material adverse effect on
Congoleum's business, results of operations or financial condition and could
have a material adverse effect on 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 of this
legislation, the Company does not know what effects any such legislation, if
adopted, may have upon its or Congoleum's businesses, results of operations or
financial conditions, or upon any plan of reorganization Congoleum may decide to
pursue. To date, Congoleum has expended significant amounts to resolve its
asbestos liability pursuant to a Chapter 11 plan of reorganization. To the
extent any federal legislation is enacted which does not credit Congoleum for
amounts paid by Congoleum pursuant to its plan of reorganization strategy or
requires the Company or Congoleum to pay significant amounts to any national
trust or otherwise, such legislation could have a material adverse effect on the
Company or Congoleum's businesses, results of operations or financial
conditions.
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Any significant increase of the Company's asbestos liability
and funding exposure would likely have a material adverse effect on the
Company's business, operations and financial condition and possibly its ability
to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes A and J of the Notes to Unaudited Consolidating Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," which are included in
Part I, Item 1 and Part I, Item 2, respectively, in this report.
51
Any plan of reorganization for Congoleum will likely result in substantial
dilution of Congoleum's equity holders, including the Company.
Under the terms of the Eighth Plan, on the effective date of that plan,
reorganized Congoleum would issue 3.8 million shares of its Class A common
stock, which based on the number of shares of Congoleum Class A and Class B
common stock outstanding as of March 17, 2006, would represent 31.5% of
Congoleum's outstanding common stock and 22.8% of the aggregate general voting
power of Congoleum's outstanding common stock, and would reduce the Company's
equity ownership in Congoleum to 37.7% and its general equity voting interest in
Congoleum to 53.6%, in each case, after giving effect to the stock issuance. On
a fully diluted basis, the Company's equity ownership would be reduced to 35.2%
with a general equity voting interest of 51.0%, giving effect to such stock
issuance as if it occurred on such date.
In addition, under the Eighth Plan, Congoleum would issue a new convertible
security to the Plan Trust on the effective date of the plan. The liquidation
preference or principal amount of that convertible security, as applicable, is
expected to be approximately $2.7 million and subject to possible future
increase. Under the terms of the Eighth Plan, the convertible security would be
convertible into 5.7 million shares of reorganized Congoleum Class A common
stock (or the equivalent thereof on a fully diluted basis) upon a specified
default of the obligation to pay dividends or interest, as applicable, on the
convertible security and a failure to cure such default within any cure period,
which, when combined with the 3.8 million newly issued shares of reorganized
Congoleum Class A common stock to be contributed to the Plan Trust on the
effective date of the plan, would result in the Plan Trust owning 51% of the
voting common stock on a fully diluted basis. If this further additional
issuance were to occur, based on the number of shares of Congoleum Class A and
Class B common stock outstanding as of March 17, 2006, the Company's equity
ownership and voting equity interest in Congoleum would be reduced to 24.4%,
resulting in a loss of voting control of Congoleum by ABI.
In addition, any proposed plans of reorganization proposed for Congoleum by
other parties in interest may provide for even greater dilution of the Congoleum
equity interests than that contemplated by the Eighth Plan. There can be no
assurance as to how the equity interests in Congoleum, including ABI's Congoleum
equity interests, will be treated under any plan of reorganization for Congoleum
that may ultimately be confirmed by the Bankruptcy Court and consummated.
A substantial portion of the Company's debt must be amended or refinanced and
the Company's ability to obtain additional financing may be limited.
The credit agreement governing the Company's credit facility with Bank of
America ("BofA") includes a covenant that takes effect for periods after June
30, 2006 that the Company does not anticipate it will meet, and the Company also
does not anticipate it will meet certain covenants under the note agreement
governing its outstanding $20 million aggregate principal amount notes that take
effect September 30, 2006. In addition, pursuant to the terms of those
agreements, a default by the Company under one of those agreements triggers a
cross-default under the other agreement. If such a default occurs, the lenders
under those agreements could respectively require the Company to repay all
amounts outstanding under the respective debt agreements. If a default occurs
52
and the Company is unable to obtain a waiver from the lenders under those
agreements 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 those outstanding
amounts, in which case, the administrative agent over the collateral securing
the amounts outstanding under those agreements might exercise the lenders'
rights over that collateral. Any default by the Company under those agreements
that results in the Company being required to immediately repay outstanding
amounts under its debt agreements, and for which suitable replacement financing
is not timely obtained, would have a material adverse effect on the Company's
business, results of operations and financial condition.
The credit facility expires on September 30, 2006. Under the Note Agreement, the
Company must enter into a definitive commitment to replace or refinance the $20
million borrowing limit under the Credit Facility by June 30, 2006 and
consummate the replacement or refinancing by September 30, 2006. Although the
Company expects that it will be able to satisfy that requirement under the Note
Agreement, and that it will obtain a modification or waiver of covenants as
needed prior to any extension or replacement of its credit facility, as well as
a modification of the covenants under the note agreement governing its
outstanding $20 million aggregate principal amount notes, there can be no
assurances in this regard. If the Company is unable to timely satisfy these
requirements or obtain waivers for or amendments of these requirements, such
failure would result in a breach of the note agreement governing its outstanding
$20 million aggregate principal amount notes, which for the reasons discussed in
the preceding paragraph, could have a material adverse effect on the Company's
business, results of operations or financial condition. In addition, even if the
Company were to obtain appropriate waivers or amendments of these obligations
under the note agreement, the Company would be required to repay (without
replenishment) all amounts outstanding under its credit facility if it were to
fail to extend or replace that facility by the expiration date, which would have
a material adverse effect on the Company's financial condition and liquidity.
Under the terms of the Company's debt agreements, the Company's ability to
obtain additional debt financing is limited. Moreover, since the Company and
most of its domestic subsidiaries have already granted security interests in
most of their assets, the Company's ability to obtain any additional debt
financing may be limited.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for compliance with existing
53
environmental laws or regulations, including environmental remediation costs at
both third-party sites and Company and Congoleum-owned sites. The Company and
Congoleum will continue to be required to expend amounts in the future because
of the nature of their prior activities at their current and previously owned
facilities, in order to comply with existing environmental laws, and those
amounts may be substantial. Although the Company and Congoleum believe that
those amounts should not have a material adverse effect on their respective
financial positions, there is no certainty that these amounts will not have a
material adverse effect on their respective financial positions because, as a
result of environmental requirements becoming increasingly strict, neither the
Company nor Congoleum is able to determine the ultimate cost of compliance with
environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims and other matters. In some of these proceedings,
plaintiffs may seek to recover large and sometimes unspecified amounts and the
matters may remain unresolved for several years. These matters could have a
material adverse effect on the Company's business, results of operations or
financial condition if the Company or Congoleum, as applicable, is unable to
successfully defend against or settle these matters, and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters, or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
54
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition. The Company and Congoleum have occasionally
experienced significant price increases for some of its raw materials. In
particular, industry supply conditions for specialty resins used in flooring
have been very tight, despite significant price increases, due to several
factors, including an explosion at a large resin plant in 2004 that destroyed
the plant, the decision by another major supplier to exit the business, and the
effect of hurricanes in 2005. Although the Company has been able to obtain
sufficient supplies of specialty resin and other raw materials, there can be no
assurances that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material adverse effect
on profit margins. Raw material prices in 2005 increased significantly and may
remain high in 2006 and until additional capacity becomes available.
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the United States Bankruptcy Code and emerge from
bankruptcy as continuing operating companies that have shed much of their
pre-filing liabilities, those competitors could have a cost competitive
advantage over Congoleum. In addition, in order to maintain their competitive
positions, the Company and Congoleum may need to make substantial investments in
their businesses, including, as applicable, product development, manufacturing
facilities, distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for their products and in the loss
of market share for their products. Moreover, due to the competitive nature of
their industries, they may be commercially restricted from raising or even
maintaining the sales prices of their products, which could result in the
incurrence of significant operating losses if their expenses were to increase or
otherwise represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
55
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
or financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's Tape division principally sells its products through distributors.
Sales to five unaffiliated customers accounted for approximately 23% of the
Company's Tape division's net sales for the year ended December 31, 2005 and 21%
of its net sales for the year ended December 31, 2004. The loss of the largest
unaffiliated customer and/or two or more of the other three unaffiliated
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
56
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. Although Congoleum has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations, or financial condition.
Congoleum derives a significant percentage of its sales from two of its
distributors. These two distributors accounted for approximately 67% of
Congoleum's net sales for the year ended December 31, 2005 and 70% of
Congoleum's net sales for the year ended December 31, 2004.
The Company's majority-owned subsidiary K&M Associates L.P. ("K&M") sells its
products through its own direct sales force and, indirectly, through a wholly
owned subsidiary and through third-party sales representatives. Three of K&M's
customers accounted for approximately 58% of its net sales for the year ended
December 31, 2005 and 59% of its net sales for the year ended December 31, 2004.
The loss of the largest of these customers would have a material adverse effect
on K&M's business, results of operations and financial condition and would
likely have a material adverse effect on the Company's business, results of
operations or financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, three of the persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, all of whom have no employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in his current position, could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Item 3. Defaults Upon Senior Securities
The commencement of the Chapter 11 proceedings by Congoleum constituted an event
of default under the indenture governing Congoleum's 8 5/8% Senior Notes Due
2008. In addition, due to the Chapter 11 proceedings, Congoleum was not
permitted to make the interest payments due on the Senior Notes on the following
dates: February 1, 2004, 2005 and 2006 and August 1, 2004 and 2005. The
aggregate amount of the interest payments that was not paid on the Senior Notes
with respect to those interest payment due dates is approximately $21.6 million.
As of March 31, 2006, the aggregate outstanding principal amount of the Senior
Notes is approximately $100 million. These amounts, plus $2.2 million of
aggregate accrued interest on the unpaid interest that was due on February 1,
2004, 2005 and 2006 and August 1, 2004 and 2005 with respect to the Senior
Notes, are included in the line item "Liabilities Subject to Compromise" in the
Company's consolidated balance sheet included in this report.
57
Item 6. Exhibits
Exhibit No. Description
----------- -----------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1 III Eighth Modified Joint Plan of Reorganization Under Chapter 11
of the Bankruptcy Code of Congoleum Corporation, et al., dated
as of March 17, 2006
99.2 III Proposed Disclosure Statement with respect to the Eighth
Modified Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al., dated as of
March 17, 2006
99.3 Settlement Agreement and Release by and between Congoleum
Corporation and Harper Insurance Limited, formerly known as
Turegum Insurance Company
99.4 Settlement and Policy Buyback Agreement and Release by and
among Congoleum Corporation, the Plan Trust, American Biltrite
Inc. and Travelers Casualty and Surety Co., formerly known as
The Aetna Casualty and Surety Company, and St. Paul Fire and
Marine Insurance Company
99.5 Settlement Agreement, made as of April 27, 2006, by and
between Congoleum Corporation and Fireman's Fund Insurance
Company
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(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, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K filed on March 22, 2006
58
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 15, 2006 BY: /s/ Howard N. Feist III
------------------------------
Howard N. Feist III
Vice President-Finance
(Duly Authorized Officer and
Principal Financial and Chief
Accounting Officer)
59
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
3.1 I Restated Certificate of Incorporation
3.2 II By-Laws, amended and restated as of September 11, 2004
31.1 Certification of the Principal Executive Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Principal Financial Officer of the
Registrant Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended
32 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1 III Eighth Modified Joint Plan of Reorganization Under Chapter 11
of the Bankruptcy Code of Congoleum Corporation, et al., dated
as of March 17, 2006
99.2 III Proposed Disclosure Statement with respect to the Eighth
Modified Joint Plan of Reorganization Under Chapter 11 of the
Bankruptcy Code of Congoleum Corporation, et al., dated as of
March 17, 2006
99.3 Settlement Agreement and Release by and between Congoleum
Corporation and Harper Insurance Limited, formerly known as
Turegum Insurance Company
99.4 Settlement and Policy Buyback Agreement and Release by and
among Congoleum Corporation, the Plan Trust, American Biltrite
Inc. and Travelers Casualty and Surety Co., formerly known as
The Aetna Casualty and Surety Company, and St. Paul Fire and
Marine Insurance Company
99.5 Settlement Agreement, made as of April 27, 2006, by and
between Congoleum Corporation and Fireman's Fund Insurance
Company
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 and filed
with the Securities and Exchange Commission on March 27, 1997
(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, 2004 and filed
with the Securities and Exchange Commission on March 30, 2005
III Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K filed on March 22, 2006