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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0398678
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Class A Common Stock, par value $.01 per share American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
1
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES |_| NO |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
As of June 30, 2003, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $2.6
million based on the closing price ($0.75 per share) on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 15, 2004, an
aggregate of 3,651,190 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.
Part III DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Congoleum Corporation's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 10, 2004, which will be filed with the
Securities and Exchange within 120 days after December 31, 2003, are
incorporated by Reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS Page
----------------- ----
PART 1
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 71
ITEM 9A. CONTROLS AND PROCEDURES 71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 71
ITEM 11. EXECUTIVE COMPENSATION 71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 72
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 72
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 72
INDEX TO EXHIBITS 77
SIGNATURES 76
3
PART I
Item 1. BUSINESS
Factors That May Affect Future Results
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks,
uncertainties and assumptions. These 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. Factors that could cause or
contribute to the Company's actual results differing from its expectations
include those factors discussed elsewhere in this report, including in the
section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," and in the Company's other filings with the Securities and
Exchange Commission.
General
Congoleum Corporation (the "Company" or "Congoleum") was incorporated in
Delaware in 1986, but traces its history in the flooring business back to Nairn
Linoleum Co., which began in 1886.
Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a urethane coating. The Company also produces through-chip-inlaid
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wear layer and, in some cases, a urethane coating. Commercial tile
is manufactured by including colored vinyl chips in the pigmented base stock.
For do-it-yourself tile, an adhesive is applied to the back of the tile. The
differences between products within each of the two product lines consist
primarily of content and thickness of wear layers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases sundries and accessory products for resale.
4
Congoleum's products serve both the residential and commercial
hard-surface flooring markets, and are used in remodeling, manufactured housing,
new construction and commercial applications. These products, together with a
limited quantity of related products purchased for resale, are sold primarily to
wholesale distributors and major retailers in the United States and Canada.
Based upon the nature of the Company's operations, facilities and management
structure, the Company considers its business to constitute a single segment for
financial reporting purposes.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524),
seeking relief under Chapter 11 of the United States 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 asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization and in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the Bankruptcy Court. The
Bankruptcy Court has not yet scheduled a hearing to consider approval of the
proposed plan. See Notes 1 and 16 of the Notes to Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to these reports filed with or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available
free of charge through its Web site (www.congoleum.com), as soon as reasonably
practical after electronically filed with, or otherwise furnished to, the
Securities and Exchange Commission. The Company's code of ethics is also posted
on its website or may be obtained without charge by sending a written request to
Mr. Howard N. Feist III of the Company at its office at 3500 Quakerbridge Road,
P.O. Box 3127, Mercerville, NJ 08619. Amendments to, or waivers of, the code of
ethics, if any, that relate to the Chief Executive Officer, Chief Financial
Officer, Chief Accounting Officer or other persons performing such function,
will also be posted on the website.
As a result of the filing of its Bankruptcy case, the Company is required
to file periodically with the Bankruptcy Court certain financial information on
an unconsolidated basis for itself and two subsidiaries. This information
includes Statements of Financial Affairs, schedules and certain monthly
operating reports (in forms prescribed by the Federal Rules of Bankruptcy
Procedure). The Debtors' informational filings with the Bankruptcy Court,
including the Statements of Financial Affairs, Schedules and monthly operating
reports (collectively, the "Reports"), are available to the public at the office
of the Clerk of the Bankruptcy Court, Clarkson S. Fisher U.S. Courthouse, 402
East State Street, Trenton, NJ, 08608. Certain of the Reports may be viewed at
www.njb.uscourts.gov (Case No. 03-51524).
5
The Company is furnishing the information set forth above for convenience
of reference only. The Company cautions that the information contained in the
Reports is or will be unaudited and subject to change and not prepared in
accordance with generally accepted accounting principles or for the purpose of
providing the basis for an investment decision relating to any of the securities
of the Company. In view of the inherent complexity of the matters that may be
involved in the Bankruptcy case, the Company does not undertake any obligation
to make any further public announcement with respect to any Reports that may be
filed with the Bankruptcy Court or the matters referred to therein.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased from multiple sources. Although the Company has
generally not had difficulty in obtaining its requirements for these materials,
it has occasionally experienced significant price increases for some of these
materials.
The Company believes that alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print film, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of certain products. The Company maintains a raw material inventory
and continually looks to develop new sources, to provide continuity of supply
for its raw material requirements.
Patents and Trademarks
The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, are important to maintaining competitive position.
The Company also believes that patents and know-how play an important role
in furthering and maintaining competitive position. In particular, the Company
utilizes a proprietary transfer printing process for certain tile products that
it believes produces visual effects that only one competitor is presently able
to duplicate.
Distribution
The Company currently sells its products through approximately 17
distributors providing approximately 53 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Net sales to customers in the United States for the years ended December 31,
2003, 2002 and 2001 totaled $211.8 million, $228.5 million and $210.7 million,
respectively, with net sales to customers outside the United States for the
years ended December 31, 2003, 2002, and 2001 totaling $8.9 million, $8.7
million, and $8.1 million, respectively.
6
The sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October. See Note 20 of the Notes
to the Consolidated Financial Statements, which are incorporated herein by
reference, for a comparison of quarterly operating results for the years ended
December 31, 2003 and 2002. Orders are generally shipped as soon as a truckload
quantity has been accumulated, and backorders can be canceled without penalty.
At December 31, 2003, the backlog of unshipped orders was $6.3 million, compared
to $5.5 million at December 31, 2002.
The Company considers its distribution network very important to
maintaining competitive position. Although the Company has more than one
distributor in some of its distribution territories and actively manages its
credit exposure to its customers, the loss of a major customer could have a
materially adverse impact on the Company's sales, at least until a suitable
replacement was in place. For the year ended December 31, 2003, two customers
each accounted for over 10% of the Company's sales. These customers were its
distributor to the manufactured housing market, LaSalle-Bristol Corporation, and
its retail market distributor, Mohawk Industries, Inc. Together, they accounted
for approximately 65% of the Company's net sales in 2003.
Working Capital
The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. The Company's credit terms generally require
payment on invoices within 31 days, with a discount available for earlier
payment. These practices are typical within the industry.
Product Warranties
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of efforts to differentiate mid-
and high-end products through color, design and other attributes, the Company
offers enhanced warranties with respect to wear, moisture discoloration and
other performance characteristics, which increase with the selling price of such
products.
Competition
The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms and living rooms. Hardwood
flooring and melamine laminate are used primarily in family rooms, foyers and
kitchens. Commercial grade resilient flooring faces substantial competition from
carpeting, ceramic tile, rubber tile, hardwood flooring and stone in commercial
applications. The Company believes, based upon its market research, that
purchase decisions are influenced primarily by fashion elements such as
7
design, color and style, durability, ease of maintenance, price and ease of
installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.
The Company encounters competition from three other manufacturers in North
America and, to a lesser extent, foreign manufacturers. In the resilient
category, Armstrong World Industries, Inc. may be considered to have the largest
market share. Some of the Company's competitors have substantially greater
financial and other resources and access to capital than the Company.
Research and Development
The Company's research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process. Expenditures for research and development for the
year ended December 31, 2003 were $3.1 million, compared to $3.5 million and
$3.5 million for the years ended December 31, 2002 and 2001, respectively.
Environmental Regulation
Due to the nature of the Company's business and certain of the substances
which are or have been used, produced or discharged by the Company, the
Company's operations are subject to extensive federal, state and local laws and
regulations relating to the generation, storage, disposal, handling, emission,
transportation and discharge into the environment of hazardous substances. The
Company, pursuant to administrative consent orders signed in 1986 and in
connection with a prior restructuring, is in the process of implementing cleanup
measures at its Trenton sheet facility under New Jersey's Environmental Clean-up
Responsibility Act, as amended by the New Jersey Industrial Site Recovery Act.
The Company does not anticipate that the additional costs of these measures will
be significant. The Company also agreed to be financially responsible for any
cleanup measures required at its Trenton tile facility when that facility was
acquired in 1993. In 2003, the Company incurred capital expenditures of
approximately $1.2 million for environmental compliance and control facilities.
The Company has also budgeted $1.0 million in 2004 for planned spending on
environmental compliance and control.
The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites and for ongoing costs to comply with existing environmental laws,
and those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the outcome of these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of the Company.
8
Employees
At December 31, 2003, the Company employed a total of 921 personnel,
compared to 1,064 employees at December 31, 2002.
The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 550 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement, which expires in May 2008. The Marcus Hook plant has a
five-year collective bargaining agreement which expires in November 2008. This
agreement is with the United Steelworkers of America. Marcus Hook also has a
five-year collective bargaining agreement with the Teamsters Union which expires
in January 2009. The Finksburg plant has no union affiliation. In the past five
years, there have been no strikes by employees of the Company and the Company
believes that its employee relations are satisfactory.
Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, as well as storage space in Trenton, New Jersey, which
are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 55,092
The Finksburg facility consists primarily of a 16-foot wide felt
production line.
The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.
The Trenton sheet facility is capable of manufacturing rotogravure printed
and through-chip inlaid sheet products in widths up to 6 feet. Major production
lines, all six-foot wide, include an oven, a rotary laminating line and a press.
The examination, packing and warehousing of all sheet products (except products
for the manufactured housing market) occur at the Trenton plant distribution
center.
9
The Trenton tile facility consists of three major production lines, a
four-foot wide commercial tile line, a two-foot wide residential tile line and a
one-foot wide residential tile line.
Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 88% of the hours available on a
five-day, three-shift basis in 2003, with the corresponding figure for
individual production lines ranging from 36% to 105%.
Although many of the Company's manufacturing facilities have been
substantially depreciated for financial reporting purposes, the Company has
generally maintained and improved the productive capacity of these facilities
over time through a program of regular capital expenditures. The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.
Item 3. LEGAL PROCEEDINGS
Bankruptcy proceedings and Asbestos-Related Liabilities: On December 31,
2003, Congoleum filed a voluntary petition with the United States Bankruptcy
Court for the District of New Jersey (Case No. 03-51524) seeking relief under
Chapter 11 of the United States 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 asbestos personal injury claimant votes
necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization and in January 2004 filed its pre-packaged plan of reorganization
and disclosure statement with the court. The Bankruptcy Court has not yet
scheduled a hearing to consider approval of the proposed plan. Congoleum is also
involved in litigation with certain insurance carriers related to disputed
insurance coverage for asbestos related liabilities, and certain insurance
carriers have filed various objections to Congoleum's plan of reorganization and
related matters. See Notes 1 and 16 of the Notes to Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K.
Environmental Liabilities: The Company is named, together with a large
number (in most cases, hundreds) of other companies, as a potentially
responsible party ("PRP") in pending proceedings under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), as amended,
and similar state laws. In four instances, although not named as a PRP, the
Company has received a request for information. These pending proceedings
currently relate to four disposal sites in New Jersey, Pennsylvania, Maryland
and Connecticut in which recovery from generators of hazardous substances is
sought for the cost of cleaning up the contaminated waste sites. The Company's
ultimate liability and funding exposure in connection with those sites depends
on many factors, including the volume of material contributed to the site, the
number of other PRPs and their financial viability, the remediation methods and
technology to be used and the extent to which costs may be recoverable from
insurance. However, under CERCLA, and certain other laws, as a PRP, the Company
can be held jointly and severally liable for all environmental costs associated
with a site.
10
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. The PRP group at this
site is made up of 81 companies, substantially all of which are large
financially solvent entities. Two removal actions were substantially complete as
of December 31, 1998; however, the groundwater remediation phase has not begun
and the remedial investigation/feasibility study related to the groundwater
remediation has not been approved. The PRP group estimated that future costs of
groundwater remediation, based on engineering and consultant studies conducted,
would be approximately $26 million. Congoleum's proportionate share, based on
waste disposed at the site, is estimated to be approximately 5.8%.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities for clean-up and removal activities arising from
operating manufacturing plants in New Jersey. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, funding
the costs will not have a material adverse impact on the Company's liquidity or
financial position.
Other: In the ordinary course of its business, the Company becomes
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.
The total balances of environmental, asbestos-related, and other
liabilities and the related insurance receivables deemed probable of recovery at
December 31 are as follows:
2003 2002
---- ----
- ----------------------------------------------------------------------------------------------------
(in millions) Liability Receivable Liability Receivable
- ----------------------------------------------------------------------------------------------------
Environmental liabilities $ 5.3 $ 2.7 $ 5.2 $ 2.0
Asbestos product liability(1) 9.8 3.6 21.3 --
Other 1.0 0.1 1.0 0.2
- ----------------------------------------------------------------------------------------------------
Total $16.1 $ 6.4 $27.5 $ 2.2
- ----------------------------------------------------------------------------------------------------
(1) The asbestos product liability at December 31, 2003 and 2002 reflects
the estimated cost to settle asbestos liabilities through a pre-packaged plan of
reorganization under Chapter 11. Actual liability pursuant to settlement
agreements is in excess of $491 million. See Note 16 of Notes to Consolidated
Financial Statements.
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Class A common stock is listed on the American Stock
Exchange under the symbol CGM. The following table reflects the high and low
closing prices (rounded to the nearest one-hundredth) based on American Stock
Exchange trading over the past two years.
2003 High Low
- -------------------------------------------------------------------
First Quarter $0.51 $0.23
Second Quarter 0.80 0.44
Third Quarter 0.80 0.56
Fourth Quarter 0.94 0.50
2002 High Low
- -------------------------------------------------------------------
First Quarter $2.40 $1.80
Second Quarter 3.30 2.08
Third Quarter 2.25 1.42
Fourth Quarter 1.50 0.35
The Company does not anticipate paying any cash dividends prior to
confirmation of a plan of reorganization or in the foreseeable future
thereafter. Any change in the Company's dividend policy after confirmation of a
plan of reorganization will be within the discretion of the Board of Directors,
subject to restrictions contained in the Company's plan of reorganization and
debt or other agreements, and will depend, among other things, on the Company's
solvency, earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant.
The number of registered and beneficial holders of the Company's Class A
common stock on February 25, 2004 was approximately 1,000.
13
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information regarding the Company's equity
compensation plans as of December 31, 2003:
Number of Securities
Number of Remaining
Securities to Available For
be Issued Upon Weighted Average Future Issuance
Exercise of Exercise Price Under Equity
Outstanding Of Outstanding Compensation Plans
Options, Warrants Options, Warrants (excluding securities
Plan Category And Rights and Rights reflected in column A)
------------- ---------- ---------- ----------------------
(A) (B) (C)
Equity compensation plans
approved by security holders 652,500 $1.99 145,500
Equity compensation plans not
approved by security holders 15,500 $2.17 34,500
------- -------
Total 668,000 $1.99 180,000
======= =======
On July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the "1999 Plan"), under which non-employee
directors may be granted non-qualified options (the "Options") to purchase up to
50,000 shares of the Company's Class A common stock. The 1999 Plan did not
require or receive stockholder approval. The Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date. The exercise price
for each Option is the fair market value on the date of the grant. As of
December 31, 2003, an aggregate of 140,300 shares of common stock were issuable
upon the exercise of outstanding Options.
14
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
For the years ended December 31,
- ----------------------------------------------------------------------------------------------------------
2003 2002(1) 2001(1) 2000(1) 1999(1)
- ----------------------------------------------------------------------------------------------------------
Consolidated Statement of
Operations Data:
Net sales ............................... $ 220,706 $ 237,206 $ 218,760 $ 219,575 $ 242,654
Cost of sales ........................... 166,864 179,699 165,683 170,373 176,559
Selling, general and
administrative expenses Expenses ...... 56,911 70,119 48,952 49,326 54,076
Distributor transition expenses ......... -- -- -- 7,717 --
- ----------------------------------------------------------------------------------------------------------
Income (loss) from operations ........... (3,069) (12,612) 4,125 (7,841) 12,019
Interest expense, net ................... (8,843) (8,112) (7,591) (5,714) (6,101)
Other income, net ....................... 1,276 1,543 1,320 1,450 1,729
- ----------------------------------------------------------------------------------------------------------
Income (loss) before taxes and
cumulative effect of accounting
change ................................ (10,636) (19,181) (2,146) (12,105) 7,647
Provision (benefit) for income taxes .... (3,874) 92 (506) (3,976) 2,719
- ----------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of accounting change .................. (6,762) (19,273) (1,640) (8,129) 4,928
Cumulative effect of accounting
change ................................ -- (10,523) -- -- --
- ----------------------------------------------------------------------------------------------------------
Net income (loss) ....................... $ (6,762) $ (29,796) $ (1,640) $ (8,129) $ 4,928
- ----------------------------------------------------------------------------------------------------------
Income (loss) per common share before
Cumulative effect of accounting
change .............................. $ (0.82) $ (2.33) $ (0.20) $ (0.98) $ 0.57
Cumulative effect of accounting
change .............................. -- (1.27) -- -- --
Net income (loss) per common
share, basic and diluted .............. $ (0.82) $ (3.60) $ (0.20) $ (0.98) $ 0.57
- ----------------------------------------------------------------------------------------------------------
Average shares outstanding .............. 8,260 8,260 8,260 8,267 8,699
- ----------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
Data (at end of period):
Total assets ............................ $ 175,899 $ 203,991 $ 265,413 $ 238,662 $ 231,817
Total long-term debt .................... 99,773 99,724 99,674 99,625 99,575
Stockholders' equity (deficit) .......... (25,777) (16,078) 25,054 29,310 40,130
15
Note 1: The impact of the adoption of Statement of Financial Accounting
Standards No.142 ("SFAS No. 142"), on the Company's financial statements
resulted in the elimination of $0.4 million of goodwill amortization expense, or
$0.05 per share, for the twelve months ended December 31, 2002. Had SFAS 142
been adopted in 2001, 2000, and 1999, the impact would have been the elimination
of $0.4 million of goodwill amortization expense, or $0.05 per share, for each
of the years.
16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained in Item 8 of this
Annual Report on Form 10-K.
Results of Operations
The Company's business is cyclical and is affected by the same economic
factors that affect the remodeling and housing industries in general, including
the availability of credit, consumer confidence, changes in interest rates,
market demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume and,
consequently, operating results fluctuate disproportionately with changes in
sales volume.
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the United States 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 asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the proposed plan. Congoleum
is also involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan of
reorganization and related matters.
The pre-packaged plan, if confirmed, would leave non-asbestos creditors
unimpaired and would resolve all pending and future asbestos claims against the
Company. The plan of reorganization would provide for, among other things, an
assignment of certain rights in, and proceeds of, Congoleum's applicable
insurance to a trust that would fund the settlement of all pending and future
asbestos claims and protect the Company from future asbestos-related litigation
by channeling all asbestos claims to the trust under Section 524(g) of the
Bankruptcy Code. Other creditors would be unimpaired under the plan. The
Bankruptcy Court has authorized the Company to pay trade creditors in the
ordinary course of business. The Company expects that it will take most of 2004
to obtain confirmation of its plan.
17
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded charges of $17.3 million in the fourth
quarter of 2002 and an additional $3.7 million in the fourth quarter of 2003 to
provide for the estimated minimum costs of completing its reorganization. Actual
amounts that will be contributed to the plan trust and costs for pursuing and
implementing the plan of reorganization could be materially higher if the
Company is not successful in obtaining confirmation of the pre-packaged plan of
reorganization in a timely manner. The maximum amount potentially available to
settle asbestos liabilities is the going concern or liquidation value of the
Company.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 16 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K. In addition, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors that May Affect
Future Results - The Company has significant asbestos liability and funding
exposure, and its proposed pre-packaged plan of reorganization may not be
confirmed" for a discussion of certain factors that could cause actual results
to differ from the Company's goals for resolving its asbestos liability through
the proposed plan of reorganization.
Year ended December 31, 2003 as compared to year ended December 31, 2002
Net sales for the year ended December 31, 2003 were $220.7 million as
compared to $237.2 million for the year ended December 31, 2002, a decrease of
$16.5 million or 7%. The decrease resulted primarily from lower sales in the
do-it-yourself tile category coupled with continued weakness in the Manufactured
Housing market. Improved resilient sheet volume, particularly in base-grade and
trade-up builder products, coupled with a price increase and lower sales
allowances, helped to partially mitigate the sales decline.
Gross profit for the year ended December 31, 2003 totaled $53.8 million,
or 24.4% of sales, compared to $57.5 million, or 24.2% of sales, for the year
ended December 31, 2002. Gross margins improved slightly as improved pricing,
manufacturing efficiencies and cost reduction programs helped offset raw
material cost increases.
Selling, general and administrative expenses were $56.9 million for the
year ended December 31, 2003 as compared to $70.1 million for the year ended
December 31, 2002, a decrease of $13.2 million. Selling, general and
administrative expenses for 2003 and 2002 included $3.7 million and $17.3
million of cost associated with asbestos-related claims, respectively. As a
percent of net sales, selling, general and administrative expenses were 25.8%
and 29.6% for the years ended December 31, 2003 and 2002, respectively. During
2003, cost savings initiatives were implemented that helped offset increases in
pension, medical and other related costs.
18
The Company recorded a charge of $3.7 million during the fourth quarter of
2003, included in selling, general, and administrative expenses, to increase its
recorded liability for resolving asbestos-related claims. The recorded liability
at December 31, 2003 represents the minimum estimated cost that the Company will
incur to resolve its asbestos-related liability through the execution of the
Company's proposed plan of reorganization. If the Company is not successful in
obtaining confirmation of its proposed plan of reorganization in a timely
manner, actual costs could be significantly higher. The proposed plan also would
require the Company to make an additional contribution to the plan trust one
year after confirmation of the plan equal to 51% of any increase in the market
value of the Company's shares at that time over their value on June 6, 2003. No
provision has been made for the cost of this possible additional contribution,
which could be material. The Company will adjust its recorded liability should
its estimates change.
The loss from operations was $3.1 million for the year ended December 31,
2003 compared to a loss of $12.6 million for the year ended December 31, 2002,
an improvement of $9.5 million. This smaller loss from operations was primarily
due to the lower asbestos-related charge, offset by lower gross margin dollars.
Interest income declined from $0.3 million in 2002 to $0.1 million in 2003
due to lower average cash equivalent and short-term investment balances.
Interest expense increased from $8.4 million in 2002 to $8.9 million in 2003,
reflecting increased borrowings under the revolver. The Company recorded a tax
benefit of $3.9 million on a loss before income taxes of $10.6 million in 2003
as a result of utilizing certain loss carry forwards that had previously been
fully reserved.
Year ended December 31, 2002 as compared to year ended December 31, 2001
Net sales for the year ended December 31, 2002 were $237.2 million as
compared to $218.8 million for the year ended December 31, 2001, an increase of
$18.4 million or 8.4%. The increase resulted primarily from strong sales of the
DuraStone product line, which was introduced in August 2001, and improved
resilient sheet sales in both the base grade and trade up builder segment,
partially offset by lower luxury and contract tile sales.
Gross profit for the year ended December 31, 2002 was $57.5 million, or
24.2% of sales, compared to $53.1 million in 2001, or 24.3% of sales, an
increase of $4.4 million over the year ended December 31, 2001. Gross profit
margins declined slightly as costs of expanding sales and the product mix impact
of increased base grade builder product sales offset improved manufacturing
efficiencies and cost reduction programs.
Selling, general and administrative expenses were $70.1 million for the
year ended December 31, 2002, which includes asbestos-related costs of $17.3
million, as compared to $49.0 million for the year ended December 31, 2001, an
increase of $21.2 million or 43.2%. As a percent of net sales, selling, general
and administrative expenses were 29.6% and 22.4% for the years ended December
31, 2002 and 2001, respectively. In addition to the asbestos-related charge,
significant investments in additional displays and samples to support the
DuraStone product line and higher promotional support contributed to the
increase.
19
The Company recorded a charge of $17.3 million in the fourth quarter of
2002, included in selling, general and administrative expenses, to adjust its
recorded liability for resolving asbestos-related claims against it. The
recorded liability at December 31, 2002 represented the then-minimum estimated
cost that the Company would incur to resolve its asbestos-related liability
through a plan of reorganization.
Loss from operations was $12.6 million for the year ended December 31,
2002, compared to income of $4.1 million for the year ended December 31, 2001, a
decrease of $16.7 million. This change was primarily due to the asbestos charge.
Interest income declined from $0.7 million in 2001 to $0.3 million in 2002
due to a combination of lower average cash equivalent and short-term investment
balances and lower interest rates. Interest expense increased from $8.3 million
in 2001 to $8.4 million in 2002, due to lower capitalized interest in 2002
compared to 2001.
The Company recorded a tax provision of $92 thousand on a loss before
income taxes and the cumulative effect of accounting change of $19.2 million in
2002. The tax provision included a benefit from the reduction of $529 thousand
for a tax valuation allowance as a result of utilizing certain loss carry
forwards that had previously been fully reserved. This benefit was offset by an
additional provision for valuation allowance. For 2001, the effective tax rate
was 23.6%, resulting in a tax benefit of $506 thousand which included a
reduction for a tax valuation allowance of $273 thousand.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 provides that goodwill and
intangible assets with indefinite lives will not be amortized, but rather will
be tested for impairment on an annual basis. SFAS No. 142 was effective for the
Company as of January 1, 2002. During the first quarter of 2002, the Company
performed a transitional impairment test of goodwill in accordance with SFAS No.
142 and concluded that there was impairment. The Company compared the implied
fair value of goodwill to the carrying value of goodwill and it was determined
that based on the fair value of the Company's assets and liabilities, there
should be no goodwill recorded. Accordingly, the Company recorded an impairment
loss of $10.5 million during the first quarter of 2002, which has been recorded
as the cumulative effect of a change in accounting principle as of January 1,
2002.
During the fourth quarter of 2002, the Company recorded other
comprehensive expense of $11.3 million relating to the recognition of a minimum
pension liability. The Company reduced its assumed long-term rate of return on
pension plan assets from 9% to 7% and its discount rate from 7.25% to 6.75%.
20
Liquidity and Capital Resources
The consolidated financial statements of the Company have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, the
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. As
described more fully in the Notes to the Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
The Company is a defendant in a large number of asbestos-related lawsuits
and on December 31, 2003 filed a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code as part of its strategy to
resolve this liability. See Notes 1 and 16 of the Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report on
Form 10-K. These matters will have a material adverse impact on liquidity and
capital resources. During 2003, the Company paid $5.3 million in defense and
indemnity costs related to asbestos-related claims and $13.5 million in fees and
expenses related to implementation of its planned reorganization under Chapter
11 and litigation with certain insurance companies. Congoleum expects to spend a
further $9.8 million at a minimum in fees, expenses, and trust contributions in
connection with obtaining confirmation of its plan. The Company also expects to
recover $3.6 million from the Collateral Trust or its successor pursuant to
terms of the Claimant Agreement and related documents which provide for the
trust to reimburse certain expenses of the Company. Timing of such recovery will
depend on when the trust receives funds from insurance settlements or other
sources.
Unrestricted cash and cash equivalents, including short-term investments
at December 31, 2003, were $2.2 million, a decrease of $16.1 million from
December 31, 2002. Under the terms of its revolving credit agreement, payments
on the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. Working capital was
$27.1 million at December 31, 2003, down from $28.8 million one year earlier.
The ratio of current assets to current liabilities at December 31, 2003 was 1.5
to one, compared to 1.4 to one a year earlier. The ratio of debt to total
capital at December 31, 2003 was .57 compared to .49 at December 31, 2002. Net
cash used by operations during the year ended December 31, 2003 was $20.0
million, as compared to cash provided by operations of $10.0 million in 2002.
Cash from operations decreased from 2002 to 2003 as funds were used to reduce
accounts payable and accrued expenses offset by lower inventories and accounts
receivables. Expenditures related to asbestos liabilities and the Company's
reorganization plan were $18.8 million in 2003, compared to $ 3.4 million in
2002, accounting for slightly more than half the decrease. The remainder of the
decrease was primarily due to a low level of manufacturing and shipment activity
at the end of 2003, combined with creditors managing their pre-petition credit
exposure, and the Company prepaying certain expenses, prior to its December 31,
2003 Chapter 11 filing. These accounts are not expected to remain at the
unusually low levels experienced at the end of 2003. Capital expenditures in
2003 totaled $4.6 million. The Company is currently planning capital
expenditures of approximately $6 million in 2004 and between $5 and $8 million
in 2005.
21
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing provides a one year revolving credit facility
with borrowings up to $30.0 million. Interest is based on .75% above the prime
rate. This financing agreement contains certain covenants which include the
maintenance of a minimum tangible net worth and EBITDA. It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures. The covenants and conditions under this financial agreement must
be met in order for the Company to borrow from the facility. The Company was in
compliance with these covenants at December 31, 2003. Borrowings under this
facility are collateralized by inventory and receivables. At December 31, 2003,
based on the level of receivables and inventory, $22.4 million, was available
under the facility, of which $4.1 million was utilized for outstanding letters
of credit and $10.2 million was utilized by the revolving loan. The Company
anticipates that its debtor-in-possession financing facility will be replaced
with a revolving credit facility on substantially similar terms upon
confirmation of its plan of reorganization. While the Company 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 the Company will be able to obtain a similar or sufficient
facility upon exit from bankruptcy, or that the debtor-in-possession facility
would be renewed if the Company's plan of reorganization is not confirmed by
that facility's expiration on December 31, 2004.
In addition to the provision for asbestos litigation discussed previously,
the Company has also recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities (other than
asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. The Company is subject to
federal, state and local environmental laws and regulations and certain legal
and administrative claims are pending or have been asserted against the Company.
Among these claims, the Company is a named party in several actions associated
with waste disposal sites (more fully discussed in "Legal Proceedings" in Part
I, Item 3 and "Environmental Regulation" in Part I, Item 1). These actions
include possible obligations to remove or mitigate the effects on the
environment of wastes deposited at various sites, including Superfund sites and
certain of the Company's owned and previously owned facilities. The
contingencies also include claims for personal injury and/or property damage.
The exact amount of such future cost and timing of payments are indeterminable
due to such unknown factors as the magnitude of cleanup costs, the timing and
extent of the remedial actions that may be required, the determination of the
Company's liability in proportion to other potentially responsible parties, and
the extent to which costs may be recoverable from insurance. The Company has
recorded provisions in its financial statements for the estimated probable loss
associated with all known general and environmental contingencies. While the
Company believes its estimate of the future amount of these liabilities is
reasonable, and that they will be paid over a period of five to ten years, the
timing and amount of such payments may differ significantly from the Company's
assumptions. Although the effect of future government regulation could have a
significant effect on the Company's costs, the Company is not aware of any
pending legislation which would reasonably have such an effect. There can be no
assurances that the costs of any future government regulations could be passed
along to its customers. Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.
22
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. Although the
Company did not generate cash from operations in 2003 (as more fully discussed
above), the Company anticipates that it will generate cash from operations in
2004. The Company believes these sources will be adequate to fund working
capital requirements, debt service payments, planned capital expenditures for
the foreseeable future, and its current estimates for costs to settle and
resolve its asbestos liabilities through its pre-packaged Chapter 11 plan of
reorganization. The Company's inability to obtain confirmation of the proposed
plan in a timely manner would have a material adverse effect on the Company's
ability to fund its operating, investing and financing requirements.
The following table summarizes the Company's contractual obligations for
future principal payments on its debt and future minimum rental payments on its
non-cancelable operating leases at December 31, 2003. The Company does not have
payment obligations under capital leases or long term purchase contracts.
Payments Due by Period
(amounts in thousands)
- ---------------------------------------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Long-term debt $100,000 $ -- $ -- $100,000 $ --
Operating leases 11,644 2,762 4,091 3,158 1,633
- ---------------------------------------------------------------------------------------------------------
Total $111,644 $2,762 $4,091 $103,158 $1,633
=========================================================================================================
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires making estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from these estimates under different assumptions or conditions.
23
Critical accounting policies are defined as those that entail significant
judgments and uncertainties, and could potentially result in materially
different results under different assumptions and conditions. The Company
believes 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 below. For a discussion on the application of
these and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K.
Asbestos Liabilities - As discussed in Notes 1 and 16 of the Notes to
Consolidated Financial Statements, the Company is a party to a significant
number of lawsuits stemming from its manufacture of asbestos-containing
products. During 2003, Congoleum obtained the asbestos personal injury claimant
votes necessary for approval of a proposed pre-packaged Chapter 11 plan of
reorganization, and, in January 2004, filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the proposed plan. Congoleum
is also involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan of
reorganization and related matters. The Company's estimated minimum gross
liability to cover settlements of current asbestos claims is $491 million, which
is substantially in excess of both the total assets of the Company as well as
the Company's previous estimates made in prior periods of the maximum liability
for both known and unasserted claims. While the Company purchased insurance
coverage it believes applies to these claims, some of the insurance carriers are
presently insolvent and the remaining solvent insurance carriers have disputed
their coverage obligations. The Company believes the ultimate amount of its
liability, and the amount of recoverable insurance, will be determined through
some combination of negotiation, litigation, and bankruptcy court order, but
that these amounts can no longer be reasonably estimated given all the
uncertainties that presently exist.
The Company expects that insurance will provide the vast majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of the Company
itself. The Company believes that it does not have the necessary financial
resources to litigate and/or settle asbestos claims in the ordinary course of
business.
In light of its bankruptcy filing and proposed plan of reorganization, the
Company believes the most meaningful measure of its probable loss due to
asbestos litigation is the amount it will have to contribute to the plan trust
plus the costs to effect the reorganization. The Company estimates the minimum
remaining costs to complete the reorganization process to be $9.8 million, which
it has recorded as a current liability. The Company also expects to recover $3.6
million from the Collateral Trust or its successor pursuant to terms of the
Claimant Agreement and related documents which provide for the trust to
reimburse certain expenses of the Company. Timing of such recovery will depend
on when the trust receives funds from insurance settlements or other sources.
The maximum amount of the range of possible asbestos loss is limited to the
going concern or liquidation value of the Company, an amount which the Company
believes is substantially less than the minimum estimated liability for the
known claims against it.
24
The Company will update its estimates, if appropriate, as additional
information becomes available during the reorganization process, resulting in
potentially material adjustments to the Company's earnings in future periods.
Inventories - Inventories are stated at the lower of cost or market. The
LIFO (last-in, first-out) method of determining cost is used for substantially
all inventories. The Company records as a charge to cost of goods sold any
amount required to reduce the carrying value of inventories to the net
realizable sales value.
Valuation of Deferred Tax Assets - The Company provides for valuation
reserves against its deferred tax assets in accordance with the requirements of
Statement of Financial Accounting Standards No.109. In evaluating the recovery
of deferred tax assets, the Company makes certain assumptions as to future
events such as the ability to generate future taxable income. At December 31,
2003, the Company has provided a 100% valuation allowance for its net deferred
tax assets.
Environmental Contingencies - As discussed previously, the Company has
incurred liabilities related to environmental remediation costs at both
third-party sites and Company-owned sites. Management has recorded both
liabilities and insurance receivables in its financial statements for its
estimate of costs and insurance recoveries for future remediation activities.
These estimates are based on certain assumptions such as the extent of cleanup
activities to be performed, the methods employed in the cleanup activities, the
Company's relative share in costs at sites where other parties are involved, and
the ultimate insurance coverage available. These projects tend to be long-term
in nature, and these assumptions are subject to refinement as facts change. As
such, it is possible that the Company may need to revise its recorded
liabilities and receivables for environmental costs in future periods resulting
in potentially material adjustments to the Company's earnings in future periods.
Pension Plans and Post-Retirement Benefits - The Company accounts for its
defined benefit pension plans in accordance with SFAS No. 87, "Employers'
Accounting for Pensions," which requires that amounts recognized in financial
statements be determined on an actuarial basis. As permitted by SFAS No. 87, the
Company uses a calculated value of the expected return on plan assets (which is
further described below). Under SFAS No. 87, the effects of the actual
performance of the pension plan's assets and changes in pension liability
discount rates on the Company's computation of pension income or expense are
amortized over future periods.
The most significant element in determining the Company's pension income
or expense in accordance with SFAS No. 87 is the expected return on plan assets.
For 2004, the Company has assumed that the expected long-term rate of return on
plan assets will be 7.0%. The assumed long-term rate of return on assets is
applied to the value of plan assets. This produces the expected return on plan
assets that is included in determining pension expense. The difference between
this expected return and the actual return on plan assets is deferred. The net
deferral of past asset gains or losses ($26.0 million at 12/31/03) will
ultimately be recognized as an adjustment to future pension expense.
25
At the end of each year, the Company determines the discount rate to be
used to calculate the present value of plan liabilities. The discount rate is an
estimate of the current interest rate at which the pension liabilities could be
effectively settled at the end of the year. In estimating this rate, the Company
looks to rates of return on high-quality, fixed-income investments that receive
one of the two highest ratings given by a recognized ratings agency. At December
31, 2003, the Company determined this rate to be 6.25%.
The Company accounts for its post-retirement benefits other than pensions
in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions," which requires that amounts recognized in
financial statements be determined on a actuarial basis. These amounts are
projected based on the January 1, 2003 SFAS No. 106 valuation and the 2003
year-end disclosure assumptions, including a discount rate of 6.75% and health
care cost trend rates of 9% in 2004 reducing to an ultimate rate of 5% in 2009.
Risk Factors That May Affect Future Results
The Company has significant asbestos liability and funding exposure, and its
proposed pre-packaged plan of reorganization may not be confirmed.
As more fully set forth in Notes 1 and 16 of the Notes to the Consolidated
Financial Statements, which are included in this report, the Company has
significant liability and funding exposure for asbestos claims. The Company has
entered into settlement agreements with various asbestos claimants totaling $491
million. Satisfaction of this obligation pursuant to the terms of the
pre-packaged plan is dependent on a determination by the Bankruptcy Court that
the plan has satisfied certain criteria under the Bankruptcy Code, among other
things.
There can be no assurance that the Company will be successful in obtaining
confirmation of its pre-packaged plan in a timely manner or at all, and any
alternative plan of reorganization pursued by the Company or confirmed by the
Bankruptcy Court could vary significantly from the description in this report
(including descriptions incorporated by reference in this report). Furthermore,
the estimated costs and contributions to effect the contemplated plan of
reorganization or an alternative plan could be significantly greater than
currently estimated. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court approvals, and there can be no assurance that such conditions,
approvals and other requirements will be satisfied or obtained.
Some additional factors that could cause actual results to differ from the
Company's goals for resolving its asbestos liability through the prepackaged
plan of reorganization bankruptcy filing include: (i) the future cost and timing
of estimated asbestos liabilities and payments and availability of insurance
coverage and reimbursement from insurance companies, which underwrote the
applicable insurance policies for the Company for asbestos-related claims and
other costs relating to the execution and implementation of any plan of
reorganization pursued by the Company, (ii) timely reaching agreement with other
creditors, or classes of creditors, that exist or may emerge, (iii) satisfaction
of the conditions and obligations under the Company's outstanding debt
instruments, (iv) the response from time-to-time of the Company's and its
26
controlling shareholder's, American Biltrite Inc.'s, lenders, customers,
suppliers and other constituencies to the ongoing process arising from the
Company's strategy to settle its asbestos liability, (v) the Company's ability
to maintain debtor-in-possession financing sufficient to provide it with funding
that may be needed during the pendency of its Chapter 11 case and to obtain exit
financing sufficient to provide it with funding that may be needed for its
operations after emerging from the bankruptcy process, in each case, on
reasonable terms, (vi) timely obtaining sufficient creditor and court approval
of any reorganization plan pursued by it, (vii) developments in and the outcome
of insurance coverage litigation pending in New Jersey State Court involving
Congoleum, ABI, and certain insurers, and (viii) compliance with the Bankruptcy
Code, including section 524(g). In any event, if the Company is not successful
in obtaining sufficient creditor and court approval of its pre-packaged plan of
reorganization, such failure would have a material adverse effect upon its
business, results of operations and financial condition.
In addition, there has been federal legislation proposed that, if adopted,
would establish a national trust to provide compensation to victims of
asbestos-related injuries and channel all current and future asbestos-related
personal injury claims to that trust. Due to the uncertainties involved with the
pending legislation, the Company does not know what effects any such
legislation, if adopted, may have upon its business, results of operations or
financial condition, or upon any plan of reorganization it may decide to pursue.
To date, the Company has expended significant amounts pursuant to resolving its
asbestos liability relating to its proposed prepackaged Chapter 11 plan of
reorganization. To the extent any federal legislation is enacted, which does not
credit the Company for amounts paid by the Company pursuant to its plan of
reorganization or requires the Company to pay significant amounts to any
national trust or otherwise, such legislation could have a material adverse
effect on the Company's business, results of operations and financial condition.
As a result of the Company's significant liability and funding exposure for
asbestos claims, there can be no assurance that if it were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability, please see
Notes 1 and 16 of Notes to Consolidated Financial Statements, which are included
in this report.
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related claims, and its
insurance coverage and its likely recoverable insurance proceeds may be
substantially less than the liability incurred by the Company for these claims.
Environmental Liabilities. Due to the nature of the Company's business and
certain of the substances which are or have been used, produced or discharged by
the Company, the Company's operations are subject to extensive federal, state
and local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites. The Company will continue to be required to expend amounts in the future
for costs related to prior activities at its facilities and third party sites,
and for ongoing costs to comply with existing
27
environmental laws; such amounts may be substantial. There is no certainty that
these amounts will not have a material adverse effect on its business, results
of operations and financial condition because, as a result of environmental
requirements becoming increasingly strict, the Company is unable to determine
the ultimate cost of compliance with environmental laws and enforcement
policies. Moreover, in addition to potentially having to pay substantial amounts
for compliance, future environmental laws or regulations may require or cause
the Company to modify or curtail its operations, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Product and General Liabilities. In the ordinary course of its business,
the Company becomes involved in lawsuits, administrative proceedings, product
liability claims (in addition to asbestos-related claims) and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years.
These matters could have a material adverse effect on the Company's business,
results of operations and financial condition if the Company is unable to
successfully defend against or settle these matters; its insurance coverage is
insufficient to satisfy unfavorable judgments or settlements relating to these
matters; or the Company is unable to collect insurance proceeds relating to
these matters.
The Company is dependent upon a continuous supply of raw materials from third
party suppliers and would be harmed if there were a significant, prolonged
disruption in supply or increase in its raw material costs.
The Company's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials used by the
Company in its manufacture of sheet and tile flooring are vinyl resins,
plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane
and transfer print paper. The Company purchases most of these raw materials from
multiple sources. Although the Company has generally not had difficulty in
obtaining its requirements for these materials, it has occasionally experienced
significant price increases for some of these materials.
The Company believes that suitable alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products. In an attempt to protect against
this risk of loss of supply, the Company maintains a raw material inventory and
continually seeks to develop new sources which will provide continuity of supply
for its raw material requirements. However, there is no certainty that the
Company's maintenance of its raw material inventory or its ongoing efforts to
develop new sources of supply would be successful in avoiding a material adverse
effect on its business, results of operations and financial condition if it were
to realize an extended interruption in the supply of its raw materials.
In addition, the Company could incur significant increases in the costs of
its raw materials. Although the Company generally attempts to pass on increases
in the costs of its raw
28
materials to its customers, the Company's ability to do so is, to a large
extent, dependent upon the rate and magnitude of any increase, competitive
pressures and market conditions for its products. There have been in the past,
and may be in the future, periods of time during which increases in these costs
cannot be recovered. During those periods of time, there could be a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company operates in a highly competitive flooring industry and some of its
competitors have greater resources and broader distribution channels than the
Company.
The market for the Company's products is highly competitive. The Company
encounters competition from three other manufacturers in North America and, to a
much lesser extent, foreign manufacturers. Some of the Company's competitors
have greater financial and other resources and access to capital than the
Company. Furthermore, like the Company, one of the Company's major competitors
has sought protection under Chapter 11 of the Bankruptcy Code. When such
competitor emerges from bankruptcy as a continuing operating company it may have
shed much of its pre-filing liabilities and have a competitive cost advantage
over the Company as a result of having shed those liabilities. In addition, in
order to maintain its competitive position, the Company may need to make
substantial investments in its business, including its product development,
manufacturing facilities, distribution network and sales and marketing
activities. Competitive pressures may also result in decreased demand for the
Company's products and in the loss of the Company's market share for its
products. Moreover, due to the competitive nature of the Company's industry, the
Company may be commercially restricted from raising or even maintaining the
sales prices of its products, which could result in the Company incurring
significant operating losses if its expenses were to increase or otherwise
represent an increased percentage of the Company's sales.
The Company's business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.
The Company is subject to the effects of general economic conditions. A
sustained general economic slowdown could have serious negative consequences for
the Company's business, results of operations and financial condition. Moreover,
the Company's business is cyclical and is affected by the economic factors that
affect the remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
The Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
The Company's business depends upon its ability to timely manufacture and
deliver products that meet the needs of its customers and the end users of the
Company's products. If the
29
Company were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of its efforts to differentiate
mid and high-end products through color, design and other attributes, the
Company offers enhanced warranties with respect to wear, moisture discoloration
and other performance characteristics which generally increase with the price of
such products. If the Company were to incur a significant number of warranty
claims, the resulting warranty costs could be substantial.
The Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor of the Company could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company currently sells its products through approximately 17
distributors providing approximately 53 distribution points in the United States
and Canada, as well as directly to a limited number of mass market retailers.
The Company considers its distribution network very important to maintaining its
competitive position. Although the Company has more than one distributor in some
of its distribution territories and actively manages its credit exposure to its
distributors, the loss of a major distributor could have a materially adverse
impact on the Company's business, results of operations and financial condition.
The Company derives a significant percentage of its sales from two of its
distributors, LaSalle-Bristol Corporation and Mohawk Industries, Inc.
LaSalle-Bristol Corporation serves as the Company's distributor in the
manufactured housing market, and Mohawk Industries, Inc. serves as a retail
market distributor of the Company. These two distributors accounted for 65% of
the Company's net sales for the twelve months ended December 31, 2003 and 59% of
the Company's net sales for the year ended December 31, 2002.
30
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this risk exposure
to be material to its financial condition or results of operations. The Company
invests primarily in highly liquid debt instruments with strong credit ratings
and short-term (less than one year) maturities. The carrying amount of these
investments approximates fair value due to the short-term maturities. Over 90%
of the Company's outstanding long-term debt as of December 31, 2003 consisted of
indebtedness with a fixed rate of interest which is not subject to change based
upon changes in prevailing market interest rates. Under its current policies,
the Company does not use derivative financial instruments, derivative commodity
instruments or other financial instruments to manage its exposure to changes in
interest rates, foreign currency exchange rates, commodity prices or equity
prices and does not hold any instruments for trading purposes.
31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
December 31, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,169 $ 18,277
Restricted cash 1,757 --
Accounts receivable, less allowances
of $1,049 and $1,204 as of December 31, 2003 and 2002, respectively 13,560 17,034
Inventories 44,995 50,725
Prepaid expenses and other current assets 9,672 7,868
Deferred income taxes 8,752 7,901
- ----------------------------------------------------------------------------------------------------------
Total current assets 80,905 101,805
Property, plant, and equipment, net 87,035 93,556
Other assets, net 7,959 8,630
- ----------------------------------------------------------------------------------------------------------
Total assets $ 175,899 $ 203,991
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,544 $ 14,647
Accrued liabilities 24,655 33,021
Asbestos-related liabilities 9,819 21,295
Revolving Credit Loan 10,232 --
Accrued taxes 130 59
Deferred income taxes 4,376 3,954
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 53,756 72,976
Long-term debt 99,773 99,724
Accrued pension liability 24,032 22,932
Other liabilities 11,222 11,782
Deferred income taxes 4,376 3,947
Accrued postretirement benefit obligation 8,517 8,708
- ----------------------------------------------------------------------------------------------------------
Total liabilities 201,676 220,069
- ----------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
shares issued and 3,651,190 outstanding as of December 31, 2003 and
2002, respectively 47 47
Class B common stock, par value $0.01; 4,608,945 shares authorized
Issued and outstanding at December 31, 2003 and 2002, respectively 46 46
Additional paid-in capital 49,105 49,105
Retained deficit (46,778) (40,016)
Accumulated other comprehensive loss (20,384) (17,447)
--------- ---------
(17,964) (8,265)
Less Class A common stock held in treasury, at cost; 1,085,760 shares at
December 31, 2003 and 2002, respectively 7,813 7,813
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (25,777) (16,078)
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 175,899 $ 203,991
==========================================================================================================
The accompanying notes are an integral part of the financial statements.
32
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the years ended
December 31,
2003 2002 2001
---- ---- ----
- -----------------------------------------------------------------------------------------------------------
Net sales ........................................................... $ 220,706 $ 237,206 $ 218,760
Cost of sales ....................................................... 166,864 179,699 165,683
Selling, general and administrative expenses ........................ 56,911 70,119 48,952
- -----------------------------------------------------------------------------------------------------------
(Loss) income from operations .............................. (3,069) (12,612) 4,125
Other income (expense):
Interest income ................................................ 63 263 708
Interest expense ............................................... (8,906) (8,375) (8,299)
Other income ................................................... 1,343 1,647 1,350
Other expense .................................................. (67) (104) (30)
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes and cumulative
effect of accounting change ............................ (10,636) (19,181) (2,146)
Provision (benefit) for income taxes ................................ (3,874) 92 (506)
- -----------------------------------------------------------------------------------------------------------
Net loss before accounting change .......................... (6,762) (19,273) (1,640)
Cumulative effect of accounting change ................ -- (10,523) --
- -----------------------------------------------------------------------------------------------------------
Net loss .............................................. $ (6,762) $ (29,796) $ (1,640)
- -----------------------------------------------------------------------------------------------------------
Net loss per common share, before cumulative
effect of accounting change, basic and diluted ........ $ (0.82) $ (2.33) $ (0.20)
Cumulative effect of accounting change ................ -- (1.27) --
- -----------------------------------------------------------------------------------------------------------
Net loss per common share, basic and diluted ............... $ (0.82) $ (3.60) $ (0.20)
- -----------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding ....... 8,260 8,260 8,260
===========================================================================================================
The accompanying notes are an integral part of the financial statements.
33
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
Accumulated
Additional Other Total Comprehensive
Common Stock Paid-in Retained Comprehensive Treasury Stockholders' Income
Class A Class B Capital Deficit Loss Stock Equity (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000............. $ 47 $ 46 $ 49,105 $ (8,580) $ (3,494) $(7,813) $ 29,311
Minimum pension liability adjustment,
net of tax benefit of $1,504......... (2,617) (2,617) $ (2,617)
Net loss............................... (1,640) (1,640) (1,640)
---------
Net comprehensive loss................. $ (4,257)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001............. 47 46 49,105 (10,220) (6,111) (7,813) 25,054
Minimum pension liability adjustment... (11,336) (11,336) $(11,336)
Net loss............................... (29,796) (29,796) (29,796)
---------
Net comprehensive loss................. $(41,132)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002............. 47 46 49,105 (40,016) (17,447) (7,813) (16,078)
Minimum pension liability adjustment... (2,937) (2,937) (2,937)
Net loss............................... (6,762) (6,762) (6,762)
---------
Net comprehensive loss................. $ (9,699)
=========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003............. $ 47 $ 46 $ 49,105 $(46,778) $(20,384) ($7,813) $(25,777)
==================================================================================================================
The accompanying notes are an integral part of the financial statements.
34
Consolidated Statements of Cash Flows
(dollars in thousands)
For the years ended
December 31,
2003 2002 2001
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ................................................ $ (6,762) $(29,796) $ (1,640)
Adjustments to reconcile net loss to net
Cash provided by (used in) operating activities:
Depreciation ................................... 11,149 10,714 11,363
Amortization ................................... 612 559 818
Deferred income taxes .......................... (882) 4,112 (652)
Cumulative effect of accounting change ......... -- 10,523 --
Changes in certain assets and liabilities:
Accounts and notes receivable .............. 3,474 898 7,595
Inventories ................................ 5,730 5,057 (2,875)
Prepaid expenses and other current assets .. (1,667) 602 (4,870)
Accounts payable ........................... (10,103) (4,047) (1,706)
Accrued liabilities ........................ (19,842) 15,373 (8,802)
Other liabilities .......................... (1,664) (4,025) 566
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities ........................... (19,955) 9,970 (203)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net ............................... (4,628) (8,366) (7,858)
Purchase of short-term investments ...................... -- -- (4,175)
Maturities of short-term investments .................... -- 1,416 14,856
- -------------------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities ........................... (4,628) (6,950) 2,823
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings ............................... 10,232 -- --
Net change in restricted cash ........................... (1,757)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities ...... 8,475 -- --
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ......... (16,108) 3,020 2,620
Cash and cash equivalents:
Beginning of year ....................................... 18,277 15,257 12,637
- -------------------------------------------------------------------------------------------------
End of year ............................................. $ 2,169 $ 18,277 $ 15,257
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
35
Notes to Consolidated Financial Statements
1. Basis of Presentation
The Consolidated Financial Statements of Congoleum Corporation (the
"Company" or "Congoleum") have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. Accordingly, the financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. As described more fully below, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
On December 31, 2003 Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (Case No. 03-51524)
seeking relief under Chapter 11 of the United States 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 asbestos personal
injury claimant votes necessary for approval of a proposed pre-packaged Chapter
11 plan of reorganization and in January 2004 filed its pre-packaged plan of
reorganization and disclosure statement with the court. The Bankruptcy Court has
not yet scheduled a hearing to consider approval of the plan of reorganization.
Congoleum is also involved in litigation with certain insurance carriers related
to disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers have filed various objections to Congoleum's plan or
reorganization and related matters.
The pre-packaged plan, if confirmed, would leave non-asbestos creditors
unimpaired and would resolve all pending and future asbestos claims against the
Company. The plan of reorganization would provide, among other things, for an
assignment of certain rights in, and proceeds of, Congoleum's applicable
insurance to a trust that would fund the settlement of all pending and future
asbestos claims and protect the Company from future asbestos-related litigation
by channeling all asbestos claims to the trust under Section 524(g) of the
Bankruptcy Code. Other creditors would be unimpaired under the plan. The
Bankruptcy Court has authorized the Company to pay trade creditors in the
ordinary course of business. The Company expects that it will take most of 2004
to obtain confirmation of its plan.
Based on its pre-packaged bankruptcy strategy, the Company has made
provision in its financial statements for the minimum amount of the range of
estimates for its contribution and costs to effect its plan to settle asbestos
liabilities through a plan trust established under Section 524(g) of the
Bankruptcy Code. The Company recorded a charge of $17.3 million in the fourth
quarter of 2002 and an additional $3.7 million in the fourth quarter of 2003 to
provide for the estimated minimum costs of completing its reorganization. Actual
amounts that will be contributed to the plan trust and costs for pursuing and
implementing the plan of reorganization could be materially higher.
36
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 16 of the Notes to
Consolidated Financial Statements. There can be no assurance that the Company
will be successful in realizing its goals in this regard or in obtaining
confirmation of its proposed plan. As a result, any alternative plan of
reorganization pursued by the Company or confirmed by a bankruptcy court could
vary significantly from the description in this report and the estimated costs
and contributions to effect the contemplated plan of reorganization could be
significantly greater than currently estimated. Any plan of reorganization
pursued by the Company will be subject to numerous conditions, approvals and
other requirements, including bankruptcy court approvals, and there can be no
assurance that such conditions, approvals and other requirements will be
satisfied or obtained. Delays in getting the Company's plan of reorganization
approved by the Bankruptcy Court could result in a proceeding that takes longer
and is more costly than the Company has estimated.
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
The Company will implement this guidance in consolidated financial statements
for periods after December 31, 2003.
Pursuant to SOP 90-7, companies are required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
balance sheet. Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts. Substantially all of the Company's liabilities at
December 31, 2003 will be reclassified as liabilities subject to compromise.
Obligations arising post petition, and pre-petition obligations that are secured
or that the Bankruptcy Court authorizes the Company to pay, will not be
classified as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
2. Summary of Significant Accounting Policies:
Nature of Business - Congoleum manufactures resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada. Based upon the nature of the
Company's operations, facilities and management structure, the Company considers
its business to constitute a single segment for financial reporting purposes.
Basis of Consolidation - The accompanying consolidated financial statements
reflect the operations, financial position and cash flows of Congoleum
Corporation and include the accounts of the Company and its subsidiaries after
elimination of all significant intercompany transactions in consolidation.
37
Use of Estimates and Critical Accounting Policies - The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Critical
accounting policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results under
different assumptions and conditions. The Company believes that the most
critical accounting policies upon which its financial condition depends, and
which involve the most complex or subjective decisions or assessments, concern
asbestos liabilities, environmental contingencies, valuation of deferred tax
assets, and pension plan and post-retirement benefits. A discussion on the
application of these and other accounting policies is provided in "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations-Critical Accounting Policies".
Although the Company makes every effort to ensure the accuracy of the
estimates and assumptions used in the preparation of its financial statements or
in the application of accounting policies, if business conditions are different
than the Company has assumed they will be, or if the Company used different
estimates and assumptions, it is possible that materially different amounts
could be reported in the Company's financial statements.
Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the estimated
sales value of goods returned, trade discounts and customers' allowances.
Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.
Restricted Cash - Under the terms of its revolving credit agreement, payments on
the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Restricted cash represents funds deposited in this
account but not immediately applied to the loan balance. At December 31, 2003,
cash of approximately $1.8 million was restricted. There was no restricted cash
at December 31, 2002 as there were no borrowings under the Company's revolving
credit agreement.
Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial paper investments with a maturity greater
than three months, but less than one year at the time of purchase, are
considered to be short-term investments. The Company maintains cash and cash
equivalents and short-term investments with certain financial institutions. The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company's investment strategy.
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories. The Company records as a charge to cost of goods sold any amount
required to reduce the carrying value of inventories to the net realizable sales
value.
38
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of debt have
been capitalized and are being amortized over the life of the related debt. Such
costs at December 31, 2003 and 2002 amounted to $1.6 million and $2.2 million,
net of accumulated amortization of $2.2 million and $1.7 million, respectively,
and are included in other noncurrent assets.
Environmental Remediation - The Company is subject to federal, state and local
environmental laws and regulations. The Company records a liability for
environmental remediation claims when a cleanup program or claim payment becomes
probable and the costs can be reasonably estimated. The recorded liabilities are
not discounted for delays in future payments (see Notes 4, 6, and 15).
Asbestos Liabilities and Plan of Reorganization - The Company is a defendant in
a large number of asbestos-related lawsuits and has filed a pre-packaged plan of
reorganization under Chapter 11 of the United States Bankruptcy Code as part of
its strategy to resolve this liability (See Note 16). Accounting for
asbestos-related and reorganization costs includes significant assumptions and
estimates, and actual results could differ materially from those estimates.
Income Taxes - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. SFAS No. 109 requires current recognition
of net deferred tax assets to the extent that it is more likely than not that
such net assets will be realized. To the extent that the Company believes that
its net deferred tax assets will not be realized, a valuation allowance must be
recorded against those assets.
Allowance for Doubtful Accounts and Cash Discounts - The Company provides an
allowance for doubtful accounts and cash discounts based on estimates of
historical collection experience and a review of the current status of trade
accounts receivable, revising its estimates when circumstances dictate.
39
Product Warranties - The Company pr