FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2003 Commission File Number 1-4773
AMERICAN BILTRITE INC.
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
57 River Street
Wellesley Hills, Massachusetts 02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date covered by this report.
Title of Each Class Outstanding at May 9, 2003
------------------- --------------------------
Common 3,441,551 shares
AMERICAN BILTRITE INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002 .......................... 3
Consolidated Condensed Statements of Operations for the
three months ended March 31, 2003 and 2002 (unaudited) ..... 4
Consolidated Condensed Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 (unaudited) ..... 5
Notes to Unaudited Consolidated Condensed Financial
Statements ................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk . 27
Item 4. Controls and Procedures .................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 29
Item 6. Exhibits and Reports on Form 8-K ........................... 29
Signatures ......................................................... 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands of dollars)
March 31, December 31,
2003 2002
-------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,983 $ 20,161
Restricted cash 3,024
Accounts receivable, net 51,549 41,217
Inventories 97,354 94,878
Prepaid expenses and other current assets 17,128 21,108
--------- ---------
TOTAL CURRENT ASSETS 176,038 177,364
Goodwill, net 11,300 11,300
Other assets 26,751 25,440
Property, plant and equipment, net 146,232 147,766
--------- ---------
TOTAL ASSETS $ 360,321 $ 361,870
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 22,058 $ 25,684
Accrued expenses 61,579 77,672
Notes payable 36,552 15,276
Current portion of long-term debt 21,135 21,061
--------- ---------
TOTAL CURRENT LIABILITIES 141,324 139,693
Long-term debt 104,145 104,210
Other liabilities 69,312 69,621
Noncontrolling interests 566 808
STOCKHOLDERS' EQUITY
Common stock, par value $0.01-authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,548 19,548
Retained earnings 58,821 62,376
Accumulated other comprehensive loss (18,309) (19,300)
Less cost of shares in treasury (15,132) (15,132)
--------- ---------
44,974 47,538
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 360,321 $ 361,870
========= =========
See accompanying notes to consolidated condensed financial statements.
3
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands of dollars, except per share amounts)
Three Months Ended
March 31,
2003 2002
------------------------
Net sales $ 103,959 $ 102,738
Interest and other income 564 472
--------- ---------
104,523 103,210
--------- ---------
Costs and expenses:
Cost of products sold 75,474 74,802
Selling, general and administrative expenses 28,937 27,384
Interest 3,004 2,706
--------- ---------
107,415 104,892
--------- ---------
LOSS BEFORE INCOME TAXES AND OTHER ITEMS (2,892) (1,682)
Income tax provision (benefit) 156 (639)
Noncontrolling interests (77) 268
--------- ---------
NET LOSS BEFORE
ACCOUNTING CHANGE (3,125) (775)
Cumulative effect of accounting change (7,742)
--------- ---------
Net loss $ (3,125) $ (8,517)
========= =========
Net loss per common share before cumulative
effect of accounting change, basic and
diluted $ (.91) $ (.22)
Cumulative effect of accounting change (2.25)
--------- ---------
Net loss per common share, basic
and diluted $ (.91) $ (2.47)
========= =========
Weighted average number of common
and equivalent shares outstanding 3,442 3,442
========= =========
Dividends declared per common share $ .125 $ .125
See accompanying notes to consolidated condensed financial statements.
4
AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands of dollars)
Three Months Ended
March 31,
2003 2002
----------------------
OPERATING ACTIVITIES
Net loss $ (3,125) $ (8,517)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 4,577 4,358
Deferred income taxes 76 2,542
Cumulative effect of accounting change 7,742
Changes in operating assets and liabilities:
Accounts and notes receivable (10,045) (6,887)
Inventories (1,281) (1,131)
Prepaid expenses and other current
assets 2,800 1,491
Accounts payable and accrued expenses (20,096) (6,253)
Noncontrolling interests 77 (268)
Other (704) (1,244)
-------- --------
NET CASH USED BY OPERATING ACTIVITIES (27,721) (8,167)
INVESTING ACTIVITIES
Proceeds from sales of short-term investments 1,416
Investments in property, plant and equipment (1,693) (3,322)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,693) (1,906)
FINANCING ACTIVITIES
Net short-term borrowings 20,821 2,189
Payments on long-term debt (248) (245)
Net change in restricted cash (3,024)
Dividends paid (430) (430)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,119 1,514
Effect of foreign exchange rates changes on cash (883) (85)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (13,178) (8,644)
Cash and cash equivalents at beginning of period 20,161 16,804
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,983 $ 8,160
======== ========
See accompanying notes to consolidated condensed financial statements.
5
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements which
include the accounts of American Biltrite Inc. and its wholly-owned subsidiaries
(and including, unless the context otherwise indicates, K&M Associates L.P.,
referred to herein as "ABI", "American Biltrite" or the "Company") as well as
entities over which it has voting control have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments and in 2002 the
cumulative effect of the change in accounting for goodwill) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
As more fully discussed in Note E of Notes to Unaudited Consolidated Condensed
Financial Statements, the Company's majority-owned subsidiary Congoleum
Corporation ("Congoleum) is a party to a significant number of lawsuits stemming
from its manufacture of asbestos-containing products and has announced its
intent to seek confirmation of a pre-packaged plan of reorganization under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") as part
of its strategy to resolve this liability. The plan contemplated by Congoleum
would permit shareholders, including ABI, to retain their existing equity
interests in Congoleum. In connection with Congoleum's expected pre-packaged
plan of reorganization, ABI's goal is to have its current and future asbestos
claims liabilities that relate to its former U.S. tile flooring operations that
ABI contributed to Congoleum in 1993 in exchange for cash and an equity interest
in Congoleum, channeled to a trust established in connection with Congoleum's
expected pre-packaged Chapter 11 plan of reorganization, thereby resolving ABI's
present and future asbestos liability relating to those former operations. If
ABI is to achieve this goal, ABI expects it will contribute to the Congoleum
plan trust certain insurance rights that ABI has relating to insurance policies
that cover asbestos liabilities and under which ABI is a named insured, and a
note in an aggregate principal amount equal to at least 51% of the equity value
of Congoleum, with payment of the note secured by a pledge by ABI of 51% of the
common stock of Congoleum. Because it maintains a controlling interest in
Congoleum, ABI has continued to consolidate Congoleum's results, which included
losses of $18.7 million and $16.1 million in excess of the value of its
investment in Congoleum at March 31, 2003 and December 31, 2002 respectively.
For more information regarding Congoleum's and ABI's asbestos liabilities and
plans for resolving those liabilities, please refer to Notes D and E of Notes to
Unaudited Consolidated Condensed Financial Statements. 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 and its
majority-owned subsidiary have significant asbestos liability and funding
exposure, and the Company's and Congoleum's strategies for resolving this
exposure may not be successful" for factors that could cause actual results to
differ from Congoleum's and ABI's goals for resolving their asbestos
liabilities.
6
Note A - Basis of Presentation (continued)
The consolidated balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
Certain amounts appearing in the prior period's consolidated condensed financial
statements have been reclassified to conform to the current period's
presentations.
Note B - Accounting Principles
Changes in Accounting Principles
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS
No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 applies to all business combinations completed after June
30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141
also establishes new criteria for determining whether intangible assets should
be recognized separately from goodwill. 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. Adoption of SFAS No. 141 did not
have an impact on the consolidated results of operations or financial position
of the Company. SFAS No. 142 was effective for the Company as of January 1,
2002. During the first quarter of 2002, the Company performed an impairment test
of goodwill and concluded that there was impairment of goodwill related to both
its wholly owned subsidiary Janus Flooring Corporation ("Janus Flooring") and
its majority-owned subsidiary Congoleum. The Company compared the implied fair
value of their goodwill to the carrying value of goodwill.
It was determined that based on the fair value of both Congoleum and Janus
Flooring, there should be no goodwill recorded. Congoleum recorded an impairment
loss of $10.5 million during the first quarter of 2002 based on this change in
accounting principle. American Biltrite's share, 55%, in this impairment loss
resulted in a charge of $5.8 million plus a charge of $1.9 million for an
impairment loss related to Janus Flooring goodwill for a total charge of $7.7
million during the first quarter of 2002.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation of Financial Standards (FIN)
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (the Interpretation)
which expands on the accounting guidance of SFAS No. 5, 57 and 107 and
incorporates without change the provisions of FIN No. 34, which is being
superseded. The Interpretation will significantly change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in the Interpretation are to be recognized at fair
value and significant disclosure rules have been
7
Note B - Accounting Principles (continued)
implemented even if the likelihood of the guarantor making payments is remote.
The disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, while the initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 is not expected to have
a material effect on ABI's consolidated results of operations and financial
position.
In January, 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities, to clarify the conditions under which assets, liabilities and
activities of another entity should be consolidated into the financial
statements of a company. FIN 46 requires the consolidation of a variable
interest entity (including a special purpose entity such as that utilized in an
accounts receivable securitization transaction) by a company that bears the
majority of the risk of loss from the variable interest entity's activities, is
entitled to receive a majority of the variable interest entity's residual
returns or both. The Company does not believe the adoption of FIN 46 will have a
material impact on its overall consolidated financial position or results of
operations.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for its stock-based
compensation plan. Accordingly, compensation cost for stock options granted to
employees and directors is measured as the excess, if any, of fair value of
Company stock over exercise price at the measurement date, except when the plan
is determined to be variable in nature. The Company accounts for equity stock
options granted to non-employees at fair value. During the quarters ended March
31, 2003 and 2002, the Company did not incur any pro forma compensation expense
from stock options.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated With
Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force
Issue No. 94-3 ("EITF 94-3"), Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 eliminates the definition and requirements
for recognition of exit costs in EITF 94-3. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted the provisions of SFAS No. 146 in the first quarter of
2003 for all exit activities, if any, initiated after December 31, 2002.
8
Note C - Inventories
Inventories at March 31, 2003 and December 31, 2002 consisted of the following
(in thousands):
March 31, December 31,
2003 2002
------- -------
Finished goods $67,715 $66,341
Work-in-process 14,320 12,155
Raw materials and supplies 15,319 16,382
------- -------
$97,354 $94,878
======= =======
Note D - Commitments and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability and other matters, as
more fully described below. In some of these proceedings, plaintiffs may seek to
recover large and sometimes unspecified amounts, and the matters may remain
unresolved for several years.
The Company records a liability for environmental remediation claims when it
becomes probable that the Company will incur costs relating to a clean-up
program or will have to make claim payments and the costs or payments can be
reasonably estimated. As assessments are revised and clean-up programs progress,
these liabilities are adjusted to reflect such revisions and progress.
Liabilities of Congoleum comprise the substantial majority of the environmental
and other liabilities reported on the Company's balance sheet. Due to the
relative magnitude and wide range of estimates of these liabilities and that
recourse related to these liabilities is generally limited to Congoleum, these
matters are discussed separately following matters for which ABI has actual or
potential liability. However, since ABI includes Congoleum in ABI's consolidated
financial statements, to the extent that Congoleum incurs a liability or
expense, it will impact upon ABI's financial statements. In addition, Congoleum
has announced its intent to file a pre-packaged plan of reorganization under
Chapter 11 of the Bankruptcy Code as part of a plan to resolve its asbestos
related liabilities.
American Biltrite Inc.
ABI is a co-defendant with many other manufacturers and distributors of asbestos
containing products in approximately 1,010 pending claims involving
approximately 2,485 individuals as of March 31, 2003. The claimants allege
personal injury or death from exposure to asbestos or asbestos-containing
products. Activity related to asbestos claims is as follows:
9
Note D - Commitments and Contingencies (continued)
Quarter Ended Year Ended
March 31, 2003 December 31, 2002
----------------------------------
Beginning claims 884 464
New claims 161 528
Settlements (3) (11)
Dismissals (32) (97)
-----------------------------------
Ending claims 1,010 884
===================================
The total indemnity costs incurred to settle claims during the three months
ended March 31, 2003 and twelve months ended December 31, 2002 were $29,000 and
$411,000, respectively, all of which were paid by ABI's insurance carriers, as
were the related defense costs. The average indemnity cost per resolved claim
was approximately $800 in the three months ended March 31, 2003 and $3,800 in
the year ended December 31, 2002. In general, governmental authorities have
determined that asbestos-containing sheet and tile products are nonfriable
(i.e., cannot be crumbled by hand pressure) because the asbestos was
encapsulated in the products during the manufacturing process. Thus,
governmental authorities have concluded that these products do not pose a health
risk when they are properly maintained in place or properly removed so that they
remain nonfriable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable. The Company estimates its liability to defend and
resolve current and reasonably anticipated future asbestos-related claims (not
including claims asserted against Congoleum), based upon a strategy to actively
defend or seek settlement for those claims in the normal course of business.
Factors such as recent and historical settlement and trial results, the
incidence of past and recent claims, the number of cases pending against it and
asbestos litigation developments that may impact the exposure of the Company
were considered in performing these estimates. In 2002, the Company engaged an
outside actuary to assist it in developing estimates of the Company's liability
for resolving asbestos claims at December 31, 2002. The actuary estimated the
range of liability for settlement of current claims pending and claims
anticipated to be filed through 2008 was $8.5 million to $14.9 million. The
Company believes no amount within this range is more likely than any other, and
accordingly has recorded the minimum liability estimate of $8.5 million in its
financial statements. The Company also believes that based on this minimum
liability estimate, the corresponding amount of insurance probable of recovery
is $8.5 million at December 31, 2002 and March 31, 2003, which has been included
in other assets.
Due to the numerous variables and uncertainties, including the effect of
Congoleum's contemplated pre-packaged plan of reorganization on the Company's
liabilities, the Company does not believe that reasonable estimates can be
developed of liabilities for claims beyond a five year horizon. The Company will
continue to evaluate its range of future exposure, and the related insurance
coverage available, and when appropriate, record future adjustments to those
estimates, which could be material.
10
Note D - Commitments and Contingencies (continued)
As more fully described in Note E, the Company's goal is to have its current and
future asbestos claims liabilities channeled to a trust established in
connection with Congoleum's expected pre-packaged Chapter 11 plan of
reorganization, thereby resolving ABI's present and future asbestos liability.
ABI reported in its December 31, 2002 Form 10-K that it has been named as a
Potentially Responsible Party ("PRP") within the meaning of the Federal
Comprehensive Environmental Response Compensation and Liability Act, as amended
("CERCLA"), with respect to three sites located in three separate states. ABI
also reported that it is potentially responsible for response and remediation
costs with respect to three state-supervised sites. There have been no material
developments relating to these sites during the three month period ended March
31, 2003.
A lawsuit was brought by Olin Corporation ("Olin"), the present owner of a
former chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which
alleged that ABI and three defendants were liable for a portion of the site's
soil and groundwater response and remediation costs at the site. A wholly-owned
subsidiary of ABI owned and operated the Wilmington plant from 1959 to 1964 and
for approximately one month during 1964, ABI held title to the property
directly.
In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement
agreement with Olin that resolved all claims and counterclaims among the
parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1
million in settlement of their share of Olin's $18 million of alleged past
response costs incurred through December 31, 1998. ABI and TBC also agreed to
reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site
after January 1, 1999, plus an annual reimbursement of $0.1 million for Olin's
internal costs. Under an agreement between ABI and TBC, TBC is liable for 37.5%
of the costs that may be incurred by ABI in connection with this lawsuit and
37.5% of the amounts due under the settlement agreement with Olin.
Additional expenditures, principally consisting of remediation and oversight
costs, will be required to remediate the Olin Site. Olin has estimated that the
total response costs for 2003 will be approximately $5.5 million. For costs
beyond 2003, ABI has estimated the range to be between $13.3 million to $26.0
million. As of March 31, 2003, ABI has estimated its potential liability to Olin
to be in the range of $2.1 million to $3.7 million before any recoveries from
insurance.
The State of Maine Department of Environmental Protection has put the present
owner of a former ABI plant on notice to clean up a dumpsite where there is
exposed asbestos from sheet vinyl waste along with other hazardous substances.
ABI is reviewing the condition of the site and its potential liability for its
share of any clean-up costs. ABI believes, at this time, that the cost of site
investigation, remediation, maintenance and monitoring at the site will be
approximately $1 million. ABI has not yet entered a final cost sharing agreement
with the current owner. Under an agreement between ABI and TBC, TBC is liable
for 37.5% of the remediation costs, incurred by ABI at this site.
11
Note D - Commitments and Contingencies (continued)
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the CERCLA sites, the Olin Site and the state
supervised sites. An agreement was executed by ABI and it carriers regarding the
payment of the defense costs for the Olin Site. ABI and its carriers continue to
discuss ABI's remaining demands for insurance coverage for these sites. As of
March 31, 2003, the Company has accrued $3.9 million for ABI's estimable and
probable amounts for contingencies described above. Additionally, the Company
has recorded an asset related to insurance recoveries, net of reimbursements to
certain PRP's, for approximately $0.9 million.
Congoleum
Congoleum is a defendant in a large number of asbestos-related lawsuits and has
announced its intent to file a pre-packaged plan of reorganization under Chapter
11 of the Bankruptcy Code. See Note E - "Congoleum Asbestos Liabilities and
Planned Reorganization."
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under CERCLA, and similar state
laws. In addition, in three other instances, although not named as a PRP,
Congoleum 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. Congoleum's
ultimate liability in connection with those sites depends on many factors,
including the volume of material contributed to the site, the number of other
PRP's and their financial viability, the remediation methods and technology to
be used and the extent to which costs may be recoverable from insurance.
However, under CERCLA, and certain other laws, as a PRP, Congoleum can be held
jointly and severally liable for all environmental costs associated with a site.
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities. Two removal actions were substantially complete as of December
31, 1998; however, the groundwater remediation phase has not begun and the
remedial investigation/feasibility study related to the groundwater remediation
has not been approved. The PRP group estimated that future costs of groundwater
remediation, based on engineering and consultant studies conducted, would be
approximately $26 million. Congoleum's proportionate share, based on waste
disposed at the site, is estimated to be approximately 5.8%.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Congoleum has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has self-guaranteed certain remediation funding sources and
financial responsibilities. Estimated total clean-up costs, including capital
outlays and future maintenance costs for soil and groundwater remediation are
primarily based on engineering studies.
12
Note D - Commitments and Contingencies (continued)
Congoleum anticipates that these matters will be resolved over a period of
years, and that after application of expected insurance recoveries, it will have
sufficient resources to fund the costs.
Other
In addition to the matters referenced above and in Note E, in the ordinary
course of their businesses, ABI and Congoleum become involved in lawsuits,
administrative proceedings, product liability and other matters. In some of
these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts, and the matters may remain unresolved for several years.
Note E - Congoleum Asbestos Liabilities and Planned Reorganization
On January 13, 2003, ABI's majority-owned subsidiary Congoleum announced that it
had begun preliminary settlement negotiations with attorneys it believes
represent the majority of plaintiffs with asbestos claims pending against it and
that upon successful completion of these negotiations, it intends to seek
confirmation of a pre-packaged plan of reorganization under Chapter 11 of the
Bankruptcy Code. On March 31, 2003, Congoleum reached an agreement in principle
with attorneys representing more than 75% of the known present claimants with
asbestos claims pending against Congoleum.
The agreement in principle contemplates a Chapter 11 reorganization seeking
confirmation of a pre-packaged plan that would leave trade and other unsecured
creditors unimpaired and would resolve all pending and future asbestos claims
against Congoleum, including personal injury asbestos claims against Congoleum's
affiliates, including ABI, and distributors that derive from claims made against
Congoleum. Furthermore, ABI's goal is to have its current and future asbestos
claims liabilities channeled to a trust established in connection with
Congoleum's expected pre-packaged Chapter 11 plan of reorganization, thereby
resolving ABI's present and future asbestos liability. Approval of such a plan
would require the supporting votes of at least 75% of the asbestos claimants
with claims against Congoleum who vote on the plan. Resolution of Congoleum's
and ABI's asbestos liability through a Congoleum pre-packaged reorganization
plan is subject to various other conditions as well, including approval by the
Bankruptcy Court.
In furtherance of the agreement in principle, on April 10, 2003, Congoleum
entered into a settlement agreement with various asbestos claimants (the
"Claimant Agreement"). As contemplated by the Claimant Agreement, Congoleum also
entered into a trust agreement (the "Collateral Trust Agreement") which
established a trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and a security agreement (the "Security
Agreement") pursuant to which Congoleum granted the Collateral Trust a security
interest in Congoleum's rights under its applicable insurance coverage and
payments from its insurers for asbestos claims (the "Collateral").
13
Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
The Claimant Agreement establishes a compensable disease valuation matrix (the
"Matrix") and allows claimants who qualify and participate in the Claimant
Agreement to settle their claim for the Matrix value secured in part (75%) by
the security interest in the Collateral. The Collateral Trust Agreement provides
for distribution of trust assets according to various requirements that give
priority (subject to aggregate distribution limits) to participating claimants
who had pre-existing unfunded settlement agreements ("pre-existing settlement
agreements") with Congoleum and participating claimants who qualify for payment
under unfunded settlement agreements entered into by Congoleum with plaintiffs
that have asbestos claims pending against Congoleum and which claims are
scheduled for trial after the effective date of the Claimant Agreement but prior
to the commencement of Congoleum's anticipated pre-packaged Chapter 11
reorganization case ("trial-listed settlement agreements").
Pursuant to the terms and conditions of the Claimant Agreement, Congoleum will
settle claims pertaining to a pre-existing settlement agreement or trial-listed
settlement agreement, which settled claims will be fully secured by the
Collateral, and all other claims with claimants electing to participate on the
terms and conditions of the Claimant Agreement, which settled claims will be
partially secured by the Collateral in an amount equal to 75% of the settled
value, with the remaining 25% of the settled value being unsecured. Congoleum
expects that, under its pre-packaged Chapter 11 plan, a trust will be
established after Congoleum commences its pre-packaged Chapter 11 reorganization
case (the "Plan Trust"). As contemplated by the Claimant Agreement and the
Collateral Trust Agreement, upon consummation of the plan, and establishment of
the Plan Trust, the assets in the Collateral Trust would be transferred to the
Plan Trust. Congoleum expects that the Plan Trust would fund the settlement of
all pending and future asbestos claims (including any claims contemplated by the
Claimant Agreement that are unsatisfied as of the confirmation of the plan of
reorganization by the Bankruptcy Court) and protect Congoleum from future
asbestos-related litigation by channeling all asbestos claims (including any
claims contemplated by the Claimant Agreement that are unsatisfied as of the
confirmation of the plan of reorganization by the Bankruptcy Court) to the Plan
Trust pursuant to Section 524(g) of the Bankruptcy Code.
As a result of further negotiations between Congoleum and counsel representing a
majority of plaintiffs with known pending asbestos claims against Congoleum, the
unwillingness of the insurance companies that underwrote policies covering
asbestos liabilities under which ABI is a named insured to meaningfully
participate in, or consent to ABI's participation in, Congoleum's proposed
pre-packaged Chapter 11 plan of reorganization, and timing concerns relating to
the Congoleum's expected pre-packaged Chapter 11 case, ABI understands that it
is anticipated that those agreements will be effectively amended or restated.
ABI further understands that it is anticipated that the terms of those
agreements, as so effectively amended or restated, will be materially similar to
the current versions of those agreements.
14
Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued)
Congoleum expects that its trade and other unsecured creditors would be
unimpaired under its pre-packaged Chapter 11 plan and that its trade creditors
would be paid in the ordinary course of business. Congoleum expects that several
months will be needed to negotiate a pre-packaged plan of reorganization and
solicit acceptances of the plan. If the requisite plan acceptances are received,
Congoleum intends to commence its pre-packaged Chapter 11 case as soon as
practicable after confirming that those acceptances have been received, and
request court approval of the plan. After it has commenced its pre-packaged
Chapter 11 case, Congoleum expects it would take another two to six months to
confirm the plan and emerge from the process.
In connection with Congoleum's pre-packaged Chapter 11 plan of reorganization,
ABI's goal is to have its current and future asbestos claims channeled to the
Plan Trust, thereby resolving ABI's present and future asbestos liability. If
ABI is to achieve this goal, ABI expects it will contribute to the Plan Trust
certain insurance rights that ABI has relating to insurance policies that cover
asbestos liabilities and under which ABI is a named insured, and a note in an
aggregate principal amount equal to at least 51% of the equity value of
Congoleum, with payment of the note secured by a pledge by ABI of 51% of the
common stock of Congoleum. There can be no assurance that ABI will be successful
in realizing its goals in this regard. To date, the Company's insurers that
underwrote policies covering asbestos liabilities under which ABI is a named
insured have been unwilling to meaningfully participate in, or consent to ABI's
participation in, Congoleum's proposed pre-packaged plan of reorganization.
Furthermore, those insurers have informed ABI that they believe that any
unauthorized settlement discussions with counsel representing persons with
asbestos claims against ABI would violate the terms of the relevant insurance
policies and that such a violation could result in a loss of coverage under
those policies. If those insurers continue to take this position, the likelihood
that the Company will achieve its goal of having its current and future asbestos
claims liabilities channeled to the Plan Trust under Congoleum's pre-packaged
plan may be substantially reduced. If ABI is not able to receive this channeling
relief, the terms of ABI's participation in Congoleum's expected pre-packaged
Chapter 11 plan of reorganization may change.
While Congoleum believes its contemplated pre-packaged Chapter 11 plan is
feasible and in the best interest of all Congoleum's constituents, there are
sufficient risks and uncertainties such that no assurances of the outcome can be
given. Congoleum expects that its costs to effect this plan, consisting
principally of legal and advisory fees and contributions to the Plan Trust will
be approximately $21.3 million at a minimum, of which Congoleum spent $4.2
million during the first quarter of 2003.
15
Note F - Comprehensive Income
The following table presents total comprehensive loss for the three months ended
March 31, 2003 and 2002 (in thousands):
Three Months Ended
March 31,
2003 2002
---------------------
Net loss $(3,125) $(8,517)
Foreign currency translation adjustments 991 (136)
------- -------
Total comprehensive loss $(2,134) $(8,653)
======= =======
Note G - Loss Per Share
Loss per share is calculated by dividing net loss by the weighted average number
of shares of common stock outstanding.
Note H - Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division that produces flooring and rubber products.
Congoleum, which represents the majority of the Company's flooring products
segment, manufactures vinyl and vinyl composition floor coverings and sells them
primarily through floor covering distributors to retailers, and to contractors
for commercial and residential use. Effective October 12, 2000, the Company
acquired Janus Flooring, which has been included in the flooring products
segment. The tape products segment consists of two production facilities in the
United States, and finishing and sales facilities in Belgium and Singapore. The
tape products segment manufactures paper, film, HVAC, electrical, shoe and other
tape products for use in industrial and automotive markets. The jewelry segment
consists of K&M Associates L.P., a national costume jewelry supplier to mass
merchandisers and department stores. The Company's Canadian division produces
flooring, rubber products, including materials used by footwear manufacturers,
and other industrial products.
16
Note H - Industry Segments (continued)
Three Months Ended
March 31,
2003 2002
--------------------------
(In thousands)
Net sales
Net sales to external customers:
Flooring products $ 55,579 $ 59,891
Tape products 19,369 19,270
Jewelry 20,274 14,766
Canadian division 8,737 8,811
--------- ---------
Total net sales to external
customers 103,959 102,738
--------- ---------
Intersegment net sales:
Flooring products 20 90
Tape products 33 38
Jewelry
Canadian division 1,982 3,005
--------- ---------
Total intersegment net sales 2,035 3,133
--------- ---------
105,994 105,871
Reconciling items
Intersegment net sales (2,035) (3,133)
--------- ---------
Total consolidated net sales $ 103,959 $ 102,738
========= =========
17
Note H - Industry Segments (continued)
Three Months Ended
March 31,
2003 2002
----------------------------
(In thousands)
Segment (loss) profit
Flooring products $ (3,308) $ (1,528)
Tape products (435) 45
Jewelry 1,687 146
Canadian division (174) 196
--------- ---------
Total segment loss (2,230) (1,141)
Reconciling items
Corporate items (690) (507)
Intercompany profit (loss) 28 (34)
--------- ---------
Total consolidated loss
before income taxes
and other items $ (2,892) $ (1,682)
========= =========
March 31, December 31,
2003 2002
----------------------------
Segment assets
Flooring products $ 220,106 $ 226,339
Tape products 57,994 56,543
Jewelry 43,895 43,123
Canadian division 33,659 30,467
--------- ---------
Total segment assets 355,654 356,472
Reconciling items
Corporate items 26,557 19,420
Intersegment accounts receivable (21,756) (13,860)
Intersegment profit in inventory (134) (162)
--------- ---------
Total consolidated assets $ 360,321 $ 361,870
========= =========
The increase in Corporate items is primarily due to an increase in Intersegment
accounts receivable during the first quarter of 2003.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These forward-looking statements are based on the Company's and its
majority-owned subsidiary Congoleum's expectations, as of the date of this
report, of future events and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Readers are cautioned
not to place undue reliance on any forward-looking statements. Factors that
could cause or contribute to the Company's actual results differing from its
expectations include those factors discussed elsewhere in this report, including
in the section of this report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors That May Affect
Future Results," in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 and in the Company's other filings with the Securities and
Exchange Commission.
The Company's majority-owned subsidiary, Congoleum, is a defendant in a large
number of asbestos-related lawsuits and has announced its intent to file a
pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code as
part of its strategy to resolve this liability. In addition, the Company is a
defendant in a number of asbestos-related lawsuits as well. See Notes D and E of
the Notes to Unaudited Consolidated Condensed Financial Statements, which are
incorporated herein by reference. These matters may have a material adverse
impact on the Company's or Congoleum's financial position and results of
operations.
Based on its pre-packaged bankruptcy strategy, ABI's consolidated subsidiary
Congoleum has made provision in its financial statements for the minimum amount
of the range of estimates for its contribution and costs to effect its plan to
settle asbestos liabilities through a plan trust established pursuant to Section
524(g) of the Bankruptcy Code. Congoleum recorded a charge of $17.3 million in
the fourth quarter of 2002 to increase its recorded liability to the estimated
minimum of $21.3 million, of which Congoleum spent $4.2 million during the first
quarter of 2003. Actual amounts that will be contributed to the plan trust and
costs for pursuing and implementing the plan of reorganization could be
materially higher, which could have a material effect on ABI's consolidated
results of operations.
Results of Operations
Net sales for the first quarter of 2003 were $104.0 million compared to $102.7
million for the first quarter of 2002, an increase of $1.3 million or 1.2%.
Flooring segment revenue of $55.6 million in the first quarter of 2003 decreased
$4.3 million or 7.2% compared to $59.9 million for the first quarter of 2002 as
a result of lower sales to the manufactured housing and home center channels.
Jewelry segment revenue of $20.3 million in the first quarter of 2003 increased
$5.5 million or 37.3% compared to $14.8 million for the first quarter of 2002 as
a result of increased sales to both
19
the department store and mass merchandiser channels. Revenues in the Tape and
Canadian divisions were essentially unchanged from prior year levels.
Cost of products sold as a percentage of sales decreased to 72.6% in the first
quarter of 2003 from 72.8% in the first quarter of 2002. This improvement was
due to a greater proportion of higher margin jewelry sales in the overall mix.
This offset lower margins at the Tape, Canadian, and flooring segments caused by
lower sales volume and cost pressures.
Selling, general and administrative expenses in the first quarter of 2003 were
$28.9 million, or 27.8% of sales, compared with $27.4 million, or 26.7% of
sales, in the same period one year earlier. The increase in selling, general,
and administrative expenses was due primarily to costs related to the jewelry
segment, where these expenses are a higher percentage of sales than in the
Company's other segments.
The net loss before accounting change for the first quarter of 2003 was $3.1
million compared to a net loss of $0.8 million one year earlier. This increased
loss amount was primarily the result of a greater loss in the flooring segment,
partly offset by higher income in the jewelry segment.
The Company's provision for tax expense in the first quarter of 2003 is due to
the fact that most of the loss in the quarter is related to results at
Congoleum, which is not recognizing any tax related benefit on its losses. The
Company anticipates its full year consolidated effective tax rate will be in the
range of 25 - 35%.
Liquidity and Capital Resources
Cash and cash equivalents, including restricted cash, declined $10.2 million in
the first quarter of 2003 to $10.0 million, compared with a decline of $8.6
million in the first quarter of 2002, primarily due to seasonal working capital
requirements. Under the terms of its Revolving Credit Agreement, Congoleum's
accounts receivable payments are deposited in an account assigned to its lender
and the funds are used to pay down any loan balance. Restricted cash represents
funds deposited in this account but not immediately available for reducing the
loan balance. Working capital at March 31, 2003 was $34.7 million, down from
$37.7 million at December 31, 2002. The ratio of current assets to current
liabilities at March 31, 2003 was 1.25, essentially unchanged from December 31,
2002.
Capital expenditures in the first quarter of 2003 were $1.7 million compared to
$3.3 million for the first quarter of 2002. It is anticipated that capital
spending for the full year 2003 will be in the range of $10 - $12 million.
The Company has recorded provisions which it believes are adequate for
environmental remediation and non-asbestos product-related liabilities,
including provisions for testing for potential remediation of conditions at its
own facilities. While the Company believes its estimate of the future amount of
these liabilities is reasonable, that such amounts will be paid over a period of
three to ten years and that the Company expects to have sufficient resources to
fund such amounts, the actual timing and amount of such payments may differ
significantly from the Company's
20
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 have a material adverse effect on its
consolidated results of operations or financial position. There can be no
assurances that such costs could be passed along to its customers.
Cash requirements for capital expenditures, working capital, debt service and
any share repurchases are expected to be financed from operating activities and
borrowings under existing bank lines of credit, which are presently $67.6
million in the aggregate. At March 31, 2003, $36.6 million was outstanding under
these lines and $1.8 million secured outstanding letters of credit. Effective as
of March 31, 2003, two of the Company's debt agreements were amended to revise
certain financial covenants measured as of March 31, 2003 to allow the Company
to satisfy those covenants as of that date. The Company expects to further amend
these agreements before June 30, 2003, and failure to do so would result in an
event of default under those agreements, which could result in the acceleration
of payment by the Company of any amounts outstanding under those agreements.
On May 14, 2003, the Company declared a dividend of $.0625 per share of its
common stock, payable on July 9, 2003 to stockholders of record as of June 13,
2003. This dividend represents half the amount of the quarterly dividend that
the Company has regularly declared and paid since August 1998.
As previously discussed, ABI and Congoleum have significant liability exposure
regarding asbestos-related claims. ABI expects that its insurance recoveries
will fully cover its asbestos-related liability based on its current claims
experience. To the extent ABI incurs liability for asbestos-related claims which
turn out not to be recoverable from its insurance carriers (whether because the
insurance carriers become insolvent or otherwise) or other persons, ABI's
funding obligations with respect to those liabilities would increase. This
increased funding obligation could have a material adverse effect upon ABI's
liquidity and capital resources.
Risk Factors That May Affect Future Results
The Company and its majority-owned subsidiary Congoleum have significant
asbestos liability and funding exposure, and the Company's and Congoleum's
strategies for resolving this exposure may not be successful.
As more fully set forth in Notes A, D and E of Notes to Unaudited Consolidated
Condensed Financial Statements, which are included in this report, the Company
and its majority-owned subsidiary Congoleum have significant liability and
funding exposure for asbestos personal injury claims. Congoleum has reached an
agreement in principle with attorneys representing more than 75% of the known
present claimants with asbestos claims pending against Congoleum. In furtherance
of the agreement in principle, Congoleum entered into a settlement agreement
with various asbestos claimants, which provides for a global settlement of more
than 75% of the known asbestos personal injury claims pending against Congoleum.
The agreement in principle also contemplates Congoleum pursuing a Chapter 11
reorganization seeking confirmation of a pre-packaged plan that would leave
trade and other unsecured creditors unimpaired and would resolve all pending and
future personal injury asbestos claims against Congoleum, including
21
personal injury asbestos claims against Congoleum's affiliates, including ABI
and distributors, that derive from claims made against Congoleum. Confirmation
of such a plan will require, among other things, the supporting votes of at
least 75% of the asbestos claimants with claims against Congoleum who vote on
the plan, as well as a determination by the Bankruptcy Court that the plan has
satisfied certain criteria under the Bankruptcy Code.
There can be no assurance that the Company or Congoleum will be successful in
realizing these goals in this regard or in obtaining the necessary votes,
consents and approvals, or in implementing the desired plan terms. As a result,
any settlement reached by Congoleum or the Company with their asbestos
plaintiffs or plan of reorganization pursued by the Company or confirmed by a
bankruptcy court could vary significantly from the description in this report
(including descriptions incorporated by reference in this report), including 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 Congoleum will be subject to numerous conditions,
approvals and other requirements, including bankruptcy court approvals, and
there can be no assurance that such conditions, approvals and other requirements
will be satisfied or obtained or that there may not be delays, which could be
significant in satisfying or obtaining them.
In connection with Congoleum's plan of reorganization, ABI's goal is to have its
current and future asbestos claims liabilities related to its former U.S. tile
flooring operations that it contributed to Congoleum in 1993 in exchange for
cash and an equity interest in Congoleum, channeled to the trust established in
connection with Congoleum's Chapter 11 pre-packaged plan of reorganization,
thereby resolving ABI's present and future asbestos liability relating to those
former operations. If ABI is to achieve this goal, ABI expects it will
contribute to the Congoleum plan trust certain insurance rights that ABI has
relating to insurance policies that cover asbestos liabilities and under which
ABI is a named insured, and a note in an aggregate principal amount equal to at
least 51% of the equity value of Congoleum, with payment of the note secured by
a pledge by ABI of 51% of the common stock of Congoleum. There can be no
assurance that ABI will be successful in realizing its goals in this regard. To
date, the Company's insurers that underwrote policies covering asbestos
liabilities under which ABI is a named insured have been unwilling to
meaningfully participate in, or consent to ABI's participation in, Congoleum's
proposed pre-packaged plan of reorganization. Furthermore, those insurers have
informed ABI that they believe any unauthorized settlement discussions with
counsel representing persons with asbestos claims against ABI would violate the
terms of the relevant insurance policies and that such a violation could result
in a loss of coverage under those policies. If those insurers continue to take
this position, the likelihood that the Company will achieve its goal of having
its current and future asbestos claims liabilities channeled to the Plan Trust
under Congoleum's pre-packaged plan may be substantially reduced. If ABI is not
able to receive this channeling relief, the terms of ABI's participation in
Congoleum's expected pre-packaged Chapter 11 plan of reorganization may change.
22
Some additional factors that could cause actual results to differ from
Congoleum's and the Company's goals for resolving asbestos liability by
Congoleum pursuing a global settlement of its and its affiliates', including the
Company's, pending asbestos claims and soliciting consents for and filing a
pre-packaged plan of reorganization bankruptcy filing include: (i) the future
cost and timing of estimated asbestos liabilities and payments and availability
of insurance coverage and reimbursement from insurance companies, which
underwrote the applicable insurance policies for Congoleum and the Company, for
asbestos-related claims and other costs relating to the execution and
implementation of any plan of reorganization pursued by Congoleum, (ii) timely
negotiating and entering into settlement agreements on satisfactory terms with a
sufficient majority of asbestos claimants, (iii) timely reaching agreement with
other creditors, or classes of creditors, that exist or may emerge, (iv) the
Company's and Congoleum's satisfaction of the conditions and obligations under
their respective outstanding debt instruments, and amendment of those
outstanding debt instruments, as necessary, to permit the contemplated note
contribution(s) in connection with Congoleum's pre-packaged plan of
reorganization and to make certain financial covenants in those debt instruments
less restrictive, (v) the response from time-to-time of the Company's and
Congoleum's lenders, customers, suppliers and other constituencies to the
ongoing process arising from the strategy to settle asbestos liability, (vi)
timely obtaining sufficient creditor and court approval of any reorganization
plan and (vii) compliance with the Bankruptcy Code, including section 524(g).
As a result of Congoleum's significant liability and funding exposure for
asbestos claims, there can be no assurance that if Congoleum were to incur any
unforecasted or unexpected liability or disruption to its business or operations
it would be able to withstand that liability or disruption and continue as an
operating company. Absent the timely passage of federal legislation that
provides proper relief to ABI from its asbestos-related liabilities on a
cost-effective basis, if the Company is not able to have all of its pending and
future asbestos claims resolved pursuant to Congoleum's anticipated plan of
reorganization, the Company's asbestos liability and funding exposure would
likely increase significantly, which increase could have a material adverse
effect on the Company's business, operations and financial condition and
possibly its ability to continue as a going concern.
For further information regarding the Company's and Congoleum's asbestos
liability, insurance coverage and strategies to resolve that asbestos liability,
please see Notes D and E of Notes to Unaudited Consolidated Condensed Financial
Statements, which are included in this report.
The Company and its majority-owned subsidiary Congoleum may incur substantial
liability for environmental claims and compliance matters.
Due to the nature of the Company's and its majority-owned subsidiary Congoleum's
businesses and certain of the substances which are or have been used, produced
or discharged by them, the Company's and Congoleum's operations and facilities
are subject to a broad range of federal, state, local and foreign legal and
regulatory provisions relating to the environment, including those regulating
the discharge of materials into the environment, the handling and disposal of
solid and hazardous substances and wastes and the remediation of contamination
associated with releases of hazardous substances at Company and Congoleum
facilities and off-site disposal locations. The Company and Congoleum have
historically expended substantial amounts for
23
compliance with existing environmental laws or regulations, including
environmental remediation costs at both third-party sites and Company and
Congoleum-owned sites. The Company and Congoleum will continue to be required to
expend amounts in the future because of the nature of their prior activities at
their facilities, to comply with existing environmental laws, and those amounts
may be substantial. Although the Company and Congoleum expect that they would
have sufficient resources to fund any such liabilities, there is no certainty
that these amounts will not have a material adverse effect on their respective
financial positions because, as a result of environmental requirements becoming
increasingly strict, neither the Company nor Congoleum is able to determine the
ultimate cost of compliance with environmental laws and enforcement policies.
Moreover, in addition to potentially having to pay substantial amounts for
compliance, future environmental laws or regulations may require or cause the
Company or Congoleum to modify or curtail their operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company and its majority-owned subsidiary Congoleum, may incur substantial
liability for other product and general liability claims.
In the ordinary course of their businesses, the Company and its majority-owned
subsidiary Congoleum become involved in lawsuits, administrative proceedings,
product liability claims 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 or Congoleum, as applicable, is unable to
successfully defend against or settle these matters and its insurance coverage
is insufficient to satisfy any judgments against it or settlements relating to
these matters or the Company or Congoleum, as applicable, is unable to collect
insurance proceeds relating to these matters.
The Company and its majority-owned subsidiary Congoleum are dependent upon a
continuous supply of raw materials from third party suppliers and would be
harmed if there were a significant, prolonged disruption in supply or increase
in its raw material costs.
The Company and its majority-owned subsidiary Congoleum generally design and
engineer their own products. Most of the raw materials required by the Company
for its manufacturing operations are available from multiple sources; however,
the Company does purchase some of its raw materials from a single source or
supplier. Any significant delay in or disruption of the supply of raw materials
could substantially increase the Company's cost of materials, require product
reformulation or require qualification of new suppliers, any one or more of
which could materially adversely affect the Company's business, results of
operations or financial condition. The Company's majority-owned subsidiary
Congoleum, does not have readily available alternative sources of supply for
specific designs of transfer print paper, which are produced utilizing print
cylinders engraved to Congoleum's specifications. Although Congoleum does not
anticipate any loss of this source of supply, replacement could take a
considerable period of time and interrupt production of certain products, which
could have a material adverse affect on the Company's business, results of
operations or financial condition.
24
The Company and its majority-owned subsidiary Congoleum operate in highly
competitive markets and some of their competitors have greater resources, and in
order to be successful, the Company and Congoleum must keep pace with and
anticipate changing customer preferences.
The market for the Company's and its majority-owned subsidiary Congoleum's
products and services is highly competitive. Some of their respective
competitors have greater financial and other resources and access to capital.
Furthermore, to the extent any of the Company's or Congoleum's competitors make
a filing under Chapter 11 of the Bankruptcy Code and emerge from bankruptcy as a
continuing operating company that has shed much of their pre-filing liabilities,
those competitors could have a cost competitive advantage over Congoleum. In
addition, in order to maintain their competitive positions, the Company and
Congoleum may need to make substantial investments in their businesses,
including, as applicable, product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive pressures
may also result in decreased demand for their products and in the loss of market
share for their products. Moreover, due to the competitive nature of their
industries, they may be commercially restricted from raising or even maintaining
the sales prices of their products, which could result in the incurrence of
significant operating losses if their expenses were to increase or otherwise
represent an increased percentage of sales.
The markets in which the Company and Congoleum compete are characterized by
frequent new product introductions and changing customer preferences. There can
be no assurance that the Company's and Congoleum's existing products and
services will be properly positioned in the market or that the Company and
Congoleum will be able to introduce new or enhanced products or services into
their respective markets on a timely basis, or at all, or that those new or
enhanced products or services will receive customer acceptance. The Company's
and Congoleum's failure to introduce new or enhanced products or services on a
timely basis, keep pace with industry or market changes or effectively manage
the transitions to new products, technologies or services could have a material
adverse effect on the Company's business, results of operations or financial
condition.
The Company and its majority-owned subsidiary Congoleum are subject to general
economic conditions and conditions specific to their respective industries.
The Company and its majority-owned subsidiary Congoleum are subject to the
effects of general economic conditions. A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition. Moreover, their businesses are affected by
the economic factors that affect their respective industries.
25
The Company and its majority-owned subsidiary Congoleum could realize shipment
delays, depletion of inventory and increased production costs resulting from
unexpected disruptions of operations at any of the Company's or Congoleum's
facilities.
The Company's and its majority-owned subsidiary Congoleum's businesses depend
upon their ability to timely manufacture and deliver products that meet the
needs of their customers and the end users of their products. If the Company or
Congoleum were to realize an unexpected, significant and prolonged disruption of
its operations at any of its facilities, including disruptions in its
manufacturing operations, it could result in shipment delays of its products,
depletion of its inventory as a result of reduced production and increased
production costs as a result of taking actions in an attempt to cure the
disruption or carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in increased costs,
lower revenues and damaged customer and product end user relations, which could
have a material adverse effect on the Company's business, results of operations
and financial condition.
The Company and its majority-owned subsidiary Congoleum offer limited warranties
on their products which could result in the Company or Congoleum incurring
significant costs as a result of warranty claims.
The Company and its majority-owned subsidiary Congoleum offer a limited warranty
on many of their products against manufacturing defects. In addition, as a part
of its efforts to differentiate mid- and high-end products through color, design
and other attributes, Congoleum offers enhanced warranties with respect to wear,
moisture discoloration and other performance characteristics which generally
increase with the price of such products. If the Company or Congoleum were to
incur a significant number of warranty claims, the resulting warranty costs
could be substantial.
The Company and its majority-owned subsidiary Congoleum rely on a small number
of customers and distributors for a significant portion of their sales or to
sell their products.
The Company's tape and flooring divisions principally sell their products
through distributors. Sales to five unaffiliated customers accounted for
approximately 25% of the Company's tape division's net sales for the year ended
December 31, 2002 and 27% of its net sales for the year ended December 31, 2001.
The loss of two or more of those customers could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's majority-owned subsidiary Congoleum principally sells its products
through distributors. While most of Congoleum's distributors have marketed
Congoleum's products for many years, replacements are necessary periodically to
maintain the strength of Congoleum's distribution network. Although Congoleum
has more than one distributor in some of its distribution territories and
actively manages its credit exposure to its distributors, the loss of a major
distributor could have a materially adverse impact on the Company's business,
results of operations, and financial condition. Congoleum derives a significant
percentage of its sales from two of its distributors. These two distributors
accounted for approximately 59% of Congoleum's net sales for the year ended
December 31, 2002 and 48% of Congoleum's net sales for the year ended December
31, 2001.
The Company's subsidiary K&M Associates L.P. sells its products through its own
direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. Three of K&M Associates L.P.'s
customers accounted for approximately 75% of its net sales for the year ended
December 31, 2002 and 74% of its net sales for the year ended
26
December 31, 2001. The loss of K&M Associates L.P.'s largest customer would
likely have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses, and the loss of any of these executives would likely
harm the Company's business.
The Company and its majority-owned subsidiary Congoleum depend on key executives
to run their businesses. In particular, the same persons that serve as key
executives at the Company also serve as key executives at Congoleum. The
Company's future success will depend largely upon the continued service of these
key executives, none of whom have an employment contract with the Company or
Congoleum, as applicable, and may terminate their employment at any time without
notice. Although certain key executives of the Company and Congoleum are,
directly or indirectly, large shareholders of the Company or Congoleum, and thus
are less likely to terminate their employment, the loss of any key executive, or
the failure by the key executive to perform in their current position, could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in prevailing market interest rates affecting
the return on its investments but does not consider this interest rate market
risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in highly liquid debt instruments with
strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities. The substantial majority of the Company's outstanding
long-term debt as of March 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.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. Foreign currency exchange rate movements also affect the Company's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors. For foreign currency
exposures existing at March 31, 2003, a 10% unfavorable movement in currency
exchange rates in the near term would not materially affect ABI's consolidated
operating results, financial position or cash flows.
The Company does not currently use derivative financial instruments, derivative
commodity instruments or other financial instruments to manage its exposure to
changes in interest rates, foreign currency exchange rates, commodity prices or
equity prices and does not hold any instruments for trading purposes.
27
Item 4: Controls and Procedures
a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries) required
to be included in the Company's reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in
other factors that could significantly affect such controls.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information contained in Note D "Commitments and Contingencies" and Note E
"Congoleum Asbestos Liabilities and Planned Reorganization" of the Notes to the
Consolidated Condensed Financial Statements are incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
-----------------------------------------------------------------------
3 (1) II Restated Certificate of Incorporation
By-Laws, amended and restated as of
3 (2) I March 13, 1991
4 (1) Any instrument defining the rights of
holders of unregistered long-term debt
of American Biltrite Inc. that does not
authorize the issuance of debt
securities in excess of 10 percent of
the total assets of American Biltrite
Inc. and its subsidiaries on a
consolidated basis is not filed as an
exhibit to this Report. American
Biltrite Inc. agrees to furnish a copy
of each such instrument to the
Securities and Exchange Commission upon
request.
99 (1) Certification of the Chief Executive
Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991. (1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
29
(b) Reports on Form 8-K
On January 14, 2003, the Registrant filed a Current Report on Form 8-K
dated the same date disclosing that it had issued a press release on
January 13, 2003 relating to its majority-owned subsidiary Congoleum
Corporation's strategy for resolving current and future asbestos claims
liability.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BILTRITE INC.
----------------------
(Registrant)
Date: May 15, 2003 BY: /s/ Roger S. Marcus
-------------------------
Roger S. Marcus
Chief Executive Officer
BY: /s/ Howard N. Feist III
-------------------------
Howard N. Feist III
Vice President Finance and
Chief Financial Officer
31
CERTIFICATION
I, Roger S. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Biltrite
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
32
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 /s/ Roger S. Marcus
--------------------------
Roger S. Marcus
Chief Executive Officer
33
CERTIFICATION
I, Howard N. Feist III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Biltrite
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
34
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003 s/ Howard N. Feist III
--------------------------
Howard N. Feist III
Chief Financial Officer
35
INDEX OF EXHIBITS
Exhibit No. Description
-----------------------------------------------------------------------
3 (1) II Restated Certificate of Incorporation
By-Laws, amended and restated as of
3 (2) I March 13, 1991
4 (1) Any instrument defining the rights of
holders of unregistered long-term debt
of American Biltrite Inc. that does not
authorize the issuance of debt
securities in excess of 10 percent of
the total assets of American Biltrite
Inc. and its subsidiaries on a
consolidated basis is not filed as an
exhibit to this Report. American
Biltrite Inc. agrees to furnish a copy
of each such instrument to the
Securities and Exchange Commission upon
request.
99 (1) Certification of the Chief Executive
Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
I Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991. (1-4773)
II Incorporated by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
36