-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WfGMRFTIUhDqUj/mfZTxZ/TJH6EXrXH1Kcp65yz7t/tFCid6PACXcJjZcjcOBDgA 2YLd8ax6JdVhnW85qCvsNA== 0001005477-00-002575.txt : 20000329 0001005477-00-002575.hdr.sgml : 20000329 ACCESSION NUMBER: 0001005477-00-002575 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONGOLEUM CORP CENTRAL INDEX KEY: 0000023341 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 020398678 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13612 FILM NUMBER: 581451 BUSINESS ADDRESS: STREET 1: 3705 QUAKERBRIDGE RD STE 211 STREET 2: PO BOX 3127 CITY: MERCERVILLE STATE: NJ ZIP: 08619-0127 BUSINESS PHONE: 6095843000 MAIL ADDRESS: STREET 1: 3705 QUAKERBRIDGE RD STE 211 STREET 2: PO BOX 3127 CITY: MERCERVILLE STATE: NJ ZIP: 08619-0127 10-K 1 FORM 10-K 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, 1999 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) 3705 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 New York Stock Exchange, Inc. Securities Registered Pursuant to Section 12(g) of the Act: None 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 1 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 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 March 2, 2000, the aggregate market value of all shares of Class A Common Stock held by non-affiliates of the Registrant was approximately $11.4 million based on the closing price ($3.1875 per share) on the New York 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 2, 2000, 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. DOCUMENTS INCORPORATED BY REFERENCE Part II. Portions of Congoleum Corporation's Annual Report to Shareholders for the year ended December 31, 1999 Part III. Portions of the Congoleum Corporation's Proxy Statement for the Annual Meeting of Shareholders to be held on May 9, 2000 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. Although the Registrant believes that its 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. Factors that could cause actual results to differ from expectations include: (i) increases in raw material prices, (ii) increased competitive activity from companies in the flooring industry, some of which have greater resources and broader distribution channels than the Registrant, (iii) unfavorable developments in the national economy or in the housing industry in general, (iv) shipment delays, depletion of inventory and increased production costs resulting from unforeseen disruptions of operations at any of the Registrant's facilities or distributors and (v) the future cost and timing of payments associated with environmental, product and general liability claims. 2 PART I Item 1. BUSINESS Congoleum Corporation (the "Company") was incorporated in Delaware in 1986, but traces its history in the flooring business back to Nairn Linoleum Co. which began in 1886. On March 11, 1993 (effective on February 28, 1993), the business and assets of the Company and those of the Amtico Tile Division of American Biltrite Inc. (the "Tile Division") were combined (the "Acquisition"). The Acquisition was effected through the organization of a new corporation, Congoleum Holdings Incorporated ("Congoleum Holdings"), to which Hillside Industries Incorporated ("Hillside Industries") contributed all of the outstanding capital stock of Resilient Holdings Incorporated ("Resilient"), the owner of all of the outstanding capital stock of the Company, and to which American Biltrite Inc. ("American Biltrite") contributed the assets and certain liabilities of the Tile Division. Upon consummation of the Acquisition, Congoleum Holdings owned all of the outstanding capital stock of Resilient, which, in turn, owned all of the outstanding capital stock of the Company, and the Company owned the Tile Division. The assets and liabilities comprising the Tile Division which were acquired by the Company in the Acquisition are held directly by the Company. On February 8, 1995, the Company completed a public offering of 4,650,000 shares of Class A Common Stock (the "Offering"). Upon completion of the Offering, the Company implemented a Plan of Repurchase pursuant to which its two-tiered holding company ownership structure was eliminated through the merger of Congoleum Holdings with and into the Company, with the Company as the surviving corporation. 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 wearlayer, heating the gel layer sufficiently to cause it to expand into a cushioned foam and, in some products, adding a high-gloss 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 wearlayer and a urethane coating in some cases. 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 wearlayers and coatings, the use of chemical embossing to impart a texture, the complexity of designs and the number of colors. Congoleum also purchases for resale: wood laminates, sundries, and accessory products. 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. The Company has had no difficulty in obtaining its requirements for these materials, although significant price increases in certain materials have been experienced at times. 3 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 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 certain products. The Company maintains a raw material inventory and has an ongoing program to develop new sources which will 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. In 1993, the Company sold the rights to the Amtico trademark in the United States and began selling tile under the Congoleum brand name. The Company also believes that patents and know-how play an important role in 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 other competitor is presently able to duplicate. Distribution The Company currently sells its products through approximately 23 distributors providing approximately 82 distribution points in the United States and Canada, as well as directly to a limited number of mass market retailers. The sales pattern is seasonal, with peaks in retail sales typically occurring during March/April/May and September/October. Orders are generally shipped as soon as a truckload quantity has been accumulated, and backorders can be canceled without penalty. At December 31, 1999, the backlog of unshipped orders was $7.3 million, compared to $13.9 million at December 31, 1998. The Company considers its distribution network very important to maintaining competitive position. While most of its distributors have marketed the Company's products for many years, replacements are necessary periodically to maintain the strength of the distribution network. 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, 1999, two customers each accounted for over 10% of the Company's sales. These customers were its distributor to the manufactured housing market, LaSalle-Bristol, and its distributor in the Western U.S., LD Brinkman & Co. Together, they accounted for 49% of the Company's net sales in 1999. 4 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. Credit sales are typically subject to a discount if paid within terms. 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 price points 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 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 domestic and, to a much lesser extent foreign manufacturers. Certain of the Company's competitors, including Armstrong in the resilient category, have substantially greater financial and other resources than the Company. Research and Development The Company's research and development efforts concentrate on new product development, trying to increase product durability and expanding technical expertise in the manufacturing process. Expenditures for research and development for the year ended December 31, 1999 were $4.2 million, compared to $3.8 million and $3.7 million for the years ended December 31, 1998 and 1997, respectively. 5 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 material. In connection with the Acquisition of the Tile Division, American Biltrite signed a similar consent order with respect to the Trenton tile facility, and the Company agreed to be financially responsible for any cleanup measures required. In 1999, the Company incurred capital expenditures of approximately $.3 million for environmental compliance and control facilities. 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, due to the nature of historic activities at its facilities, to comply with existing environmental laws, and those amounts may be substantial but should not, in the Company's judgment, have a material adverse effect on the financial position of the Company. Because environmental requirements have grown increasingly strict, however, the Company is unable to determine the ultimate cost of compliance with environmental laws and enforcement policies. Employees At December 31, 1999, the Company employed a total of 1,277 personnel compared to 1,250 employees at December 31, 1998. 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 719 of the Company's employees. The Trenton tile plant has a five-year collective bargaining agreement which expires in May 2003. The Marcus Hook plant has a five-year collective bargaining agreement which expires in November 2003. The Trenton sheet plant has a five-year collective bargaining agreement which expires in February 2001. The Finksburg plant has no union affiliation. In the past five years, there have been no significant strikes by employees at the Company and the Company believes that its employee relations are satisfactory. Executive Officers of the Registrant The following information is furnished with respect to each of the executive officers of the Company, each of whom is elected by and serves at the pleasure of the Board of Directors. The business experience shown for each officer has been his principal occupation for at least the past five years. Ages are shown as of February 1, 2000. 6 Roger S. Marcus (Age 54) Roger S. Marcus has been a Director and President and Chief Executive Officer of the Company since 1993, and Chairman since 1994. Mr. Marcus is also a Director (since 1981), Chairman of the Board (since 1992) and Chief Executive Officer (since 1983) of American Biltrite. From 1983 to 1992, Mr. Marcus served as Vice Chairman of the Board of American Biltrite. Richard G. Marcus (Age 52) Richard G. Marcus has been Vice Chairman of the Company since 1994, and a Director since 1993. Mr. Marcus is also a Director (since 1982) and President (since 1983) and Chief Operating Officer (since 1992) of American Biltrite. Robert N. Agate (Age 55) Robert N. Agate has been Executive Vice President of the Company since 1998. Prior thereto, he was Senior Vice President - Manufacturing of the Company since 1993, and was Vice President of Manufacturing of the Tile Division of American Biltrite (since 1981). David W. Bushar (Age 53) David W. Bushar has been Senior Vice President - Manufacturing of the Company since 1998. Prior thereto, he was Manager, Technical Services since 1997 and as Plant Manager of the Company's Trenton, New Jersey sheet facility since 1993. Michael L. Dumont (Age 45) Michael L. Dumont has been Senior Vice President - Sales of the Company since 1999. Prior thereto, he had served as Regional Sales Manager - Southwest Territory (since 1995) and Regional Manager - Western Territory (since 1991). Howard N. Feist III (Age 43) Howard N. Feist III has been Chief Financial Officer and Secretary of the Company since 1988. Mr. Feist is also Vice President - Finance and Chief Financial Officer of American Biltrite (since January 2000). Dennis P. Jarosz (Age 54) Dennis P. Jarosz has been Senior Vice President - Marketing since 1995. Prior thereto, he had served as Vice President - Marketing since 1993 and Vice President - Sales & Marketing of the Tile Division of American Biltrite (since 1986). 7 Sidharth Nayar (Age 39) Sidharth Nayar has been Sr. Vice President - Finance of the Company since 1999. Prior thereto, he had served as Vice President - Finance since 1998 and Vice President - Controller since 1994. Peter J. Rohrbacher (Age 48) Peter J. Rohrbacher has been Senior Vice President - Research and Engineering of the Company since 1997. Prior thereto, he had served as Senior Vice President - Engineering (since 1993), Vice President - Coatings of the Company (since 1993), and Vice President - Research & Development of the Tile Division of American Biltrite (since 1988). Thomas A. Sciortino (Age 53) Thomas A. Sciortino has been Senior Vice President - Administration of the Company since 1993. Prior thereto, he was Vice President - Finance of the Tile Division of American Biltrite (since 1982). Merrill M. Smith (Age 74) Merrill M. Smith has been Senior Vice President - Technology of the Company since 1993. Prior thereto, he was Vice President - Technology of American Biltrite (since 1985). 8 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, where it has a lease expiring in 2000, 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 33,597 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 segment) occur at the Trenton plant distribution center. 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 69% of the hours available on a five-day, three-shift basis in 1999, with the corresponding figure for individual production lines ranging from 3% to 113%. Although many of the Company's manufacturing facilities have been substantially depreciated, 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. 9 Item 3. LEGAL PROCEEDINGS As of December 31, 1999 the Company was named as a defendant, together in most cases with numerous other defendants, in approximately 670 pending lawsuits (including workers' compensation cases) involving approximately 6,246 individuals alleging personal injury from exposure to asbestos or asbestos-containing products. The plaintiffs in these cases seek compensation for injuries sustained in the course of their employment by third parties (or, in the workers' compensation cases, by the Company) as a result of exposure to asbestos in products manufactured by the Company or the Tile Division of American Biltrite. The Company discontinued the manufacture of asbestos-containing sheet vinyl flooring products in 1983 and the Tile Division ceased manufacturing asbestos-containing vinyl tile flooring products in 1984. In general, asbestos-containing products have not been found to pose a health risk unless significant amounts of free asbestos fibers become airborne. All of the asbestos in the asbestos-containing products previously sold by the Company and the Tile Division was fully bonded or encapsulated during the manufacturing process. During 1999 approximately 234 personal injury cases involving the Company were either settled or dismissed and approximately 247 new cases were commenced against the Company. The total indemnity costs incurred during 1999 to settle personal injury claims involving the Company (other than the cost of the partial settlement in the personal injury case described below) was approximately $2.9 million. All of these costs were paid by the Company's insurance carriers. The average indemnity cost per resolved personal injury claim was $12 thousand in 1999. Costs per claim vary depending on a number of factors, including the number of plaintiffs, the nature of their alleged exposure and the forum in which the claim is brought. In 1997 a judgment was entered by the Superior Court of California in Los Angeles following a jury trial holding the Company and another defendant jointly and severally liable for $3.3 million in damages, subject to any applicable setoffs for previous settlements and proportionate liability under California law. The jury found that the Company was only liable for 25% of the non-economic damages sustained by the plaintiff. However, as a result of post-verdict motions the court ruled that California Proposition 51 establishing proportionate liability for non-economic damages did not apply. The Company appealed this decision to the Court of Appeals of the State of California. In August 1999 the appellate court reversed the trial court's decision on the applicability of California Proposition 51 and ordered the trial court to enter a judgment against the Company for $818 thousand. The Company's insurance carrier has paid the Company's defense costs in this matter and has indicated that it would be responsible for paying the ultimate judgment in this case, subject to the insurance carrier's denial of liability with respect to a partial settlement of certain related claims effected by the Company which the Company is contesting. Although there can be no assurance, the Company believes, based upon the nature of the asbestos-containing products formerly manufactured by the Company and the Tile Division and its experience with cases to date, and based upon insurance coverage it believes it has, that any potential liabilities it may have with respect to these personal injury cases will not have a material adverse effect on the results of operations or financial condition of the Company. Together with a large number (in most cases, hundreds) of other companies, the Company is named as a "Potentially Responsible Party" ("PRP") in pending proceedings under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state laws. In two instances, although not named as a PRP, the Company has received a request for information. These pending proceedings currently relate to seven disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which recovery from generators of hazardous 10 substances is sought for the cost of cleaning up the contaminated waste sites. The Company's ultimate liability, if any, in connection with these sites will depend 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 could be held jointly and severally liable for all remediation costs associated with a site. The most significant disposal site environmental matter in which the Company has been named as a PRP relates to a recycling facility in Elkton, Maryland. 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 for this site has estimated that the future costs of groundwater remediation would be approximately $26 million of which, based on waste allocations among members of the PRP group, the Company's share was estimated to be approximately 5.5%. At December 31, 1999, the Company believes its probable liability with respect to this site, based upon present facts and circumstances, will be approximately $.3 million ($1.5 million estimated liability net of anticipated insurance recoveries of $1.2 million). Although there can be no assurance, the Company does not believe, based upon present facts and circumstances, that its probable liability with respect to any of the other pending disposal site environmental remediation matters to which it is a party will be material to the results of operations or financial condition of the Company. The Company is also a party to a pending proceeding relating to the investigation and potential remediation of soil and groundwater contamination at its manufacturing facility located at 1945 East State Street in Trenton, New Jersey. The investigation of the nature and extent of any contamination at this site has not been completed and the Company is therefore unable to estimate the amount, if any, of its probable liability with respect to the potential remediation of this site. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to all information under the caption "Market Information" on page 29 of the Company's Annual Report to Shareholders for the year ended December 31, 1999 (included as Exhibit 13.1 to this Annual Report on Form 10-K). Item 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference to all information under the heading "Selected Financial Data" on page 8 of the Company's Annual Report to Shareholders for the year ended December 31, 1999 (included as Exhibit 13.1 to this Annual Report on Form 10-K). Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference to all information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 12 of the Company's Annual Report to Shareholders for the year ended December 31, 1999 (included as Exhibit 13.1 to this Annual Report on Form 10-K). 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 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. Substantially all of the Company's outstanding long-term debt as of December 31, 1999 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. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are incorporated by reference and the financial statement schedule is included in this report on Form 10-K, as listed in Item 14(a) Part IV of this report. 12 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 13 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Item 11. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by these Items (except for the information regarding executive officers called for by Item 401 of Regulation S-K which is included in Part I hereof in accordance with General Instruction G(3)), is hereby incorporated by reference to the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 9, 2000. 14 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements of the Company and the report of independent auditors are incorporated herein by reference in the Company's Annual Report to Shareholders for the year ended December 31, 1999 (included as Exhibit 13.1 to this Annual Report on Form 10-K). Annual Report Page Number ----------- Report of Independent Auditors 28 Balance Sheets at December 31, 1999 and December 31, 1998 13 Statements of Operations for each of the three years ended December 31, 1999, 1998 and 1997 14 Statements of Changes in Stockholders' Equity for each of the three years ended December 31, 1999, 1998 and 1997 15 Statements of Cash Flows for each of the three years ended December 31, 1999, 1998 and 1997 16 Notes to Financial Statements 17 Supplementary Data Quarterly Financial Data (Unaudited) 27 (2) The following financial statement schedule is included in this report on Form 10-K: Page Number ----------- Schedule II - Valuation and Qualifying Accounts 24 All other schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the financial statements or notes thereto. (3) Exhibits These exhibits, required to be filed by Item 601 of Regulation S-K, are listed in the Exhibit Index included in this report at pages 21 through 23. Exhibit Exhibit Number ------- - ------ 2.1 Plan of Repurchase dated as of February 1, 1995 by and among American Biltrite Inc., Hillside Industries Incorporated ("Hillside"), Congoleum Holdings Incorporated ("Congoleum Holdings"), Resilient Holdings Incorporated ("Resilient Holdings") and the Company. 3.1 Certificate of Incorporation of the Company, as amended. 15 Exhibit Exhibit Number ------- - ------ 3.2 Amended and Restated Bylaws of the Company. 4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing Agreement"), by and among the CIT Group/Business Credit, Inc. ("CIT"), The Bank of New York Commercial Corporation ("BONY/CC"), Chemical Bank ("Chemical") and The Chase Manhattan Bank, N.A. ("Chase") (collectively, the "Senior Lenders") and the Company. 4.2 First Amendment, dated March 11, 1993, to the CIT Financing Agreement by and among the Senior Lenders and the Company. 4.3 Indenture, dated as of February 1, 1994, between the Company and Chemical, as trustee. 4.4 Registration Rights Agreement, dated as of February 8, 1995 by and between the Company and Hillside. 4.5 Indenture, dated as of August 3, 1998 (the "1998 Indenture"), by and between the Company and First Union National Bank, as trustee. 4.6 Loan and Security Agreement, dated December 18, 1998 (the "First Union Loan Agreement"), by and between First Union National Bank (the "Lender") and the Company. 4.6.1 Joinder Amendment, dated December 21, 1998 (the "Joinder Agreement"), by and among the Company, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and the Lender. 10.1 The CIT Financing Agreement (see Exhibit 4.1). 10.2 First Amendment to the CIT Financing Agreement (see Exhibit 4.2). 10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among Resilient Holdings, Hillside, the Company (collectively the "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and American Biltrite. 10.9 Closing Agreement, dated as of March 11, 1993, by and among the Congoleum Group, Hillside Capital and American Biltrite. 10.12 Stockholders Agreement, dated as of March 11, 1993 (the "Stockholders Agreement"), by and among the Congoleum Group, American Biltrite and Congoleum Holdings. 10.12.1 First Amendment, dated February 8, 1995, to the Stockholders Agreement, by and among Hillside, American Biltrite and the Company. 10.13 Personal Services Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), by and between American Biltrite and the Company. 10.13.1 First Amendment, dated February 8, 1995, to Personal Services Agreement, by and between American Biltrite and the Company. 10.13.2 Second Amendment, dated November 15, 1996, to Personal Services Agreement, by and between American Biltrite and the Company. 10.13.3 Third Amendment, dated as of March 15, 1998, to Personal Services Agreement, by and between American Biltrite and the Company. 16 Exhibit Exhibit Number ------- - ------ 10.14 Business Relations Agreement, dated as of March 11, 1993, by and between American Biltrite and the Company. 10.14.1 First Amendment, dated August 19, 1997, to Business Relations Agreement, by and between American Biltrite and the Company. 10.15 Tax Sharing and Indemnification Agreement, dated as of March 11, 1993, by and among Congoleum Holdings, Resilient Holdings, Hillside Capital and the Company. 10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between American Biltrite and the Company. 10.19 Commitment Letter, dated January 19, 1994 regarding Financing Agreement dated April 19, 1991, as amended, by and among CIT, BONYCC and the Company. 10.20 Trademark Purchase Agreement, dated November 29, 1993, by and between the Company and The Amtico Company LTD ("Amtico Company"). 10.21 First Right of Refusal, dated November 29, 1993, by and between American Biltrite (Canada) Limited and Amtico Company. 10.22 Undertaking Concerning Amtico Trademark, dated November 29, 1993, by and between American Biltrite and Amtico Company. 10.23 Form of 1995 Stock Option Plan. 10.23.1 Form of Amendment to 1995 Stock Option Plan. 10.24 License Agreement, dated as of September 20, 1995 between Congoleum Intellectual Properties, Inc. and the Company. 10.25 Registration Rights Agreement, dated as of August 3, 1998, by and among the Company, Goldman, Sachs & Co., Credit Suisse First Boston Corporation and ING Barings Furman Selz LLC. 10.26 The First Union Loan Agreement (see Exhibit 4.6). 10.26.1 The Joinder Agreement (see Exhibit 4.6.1). 10.27 Form of Non-Qualified, Non-Employee Directors Stock Option Plan. 11.1 Statement regarding computation of earnings per common share. 13.1 Pages 8 through 29 of the Congoleum Annual Report to Shareholders for the year ended December 31, 1999. 21.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. 17 (b) Reports on Form 8-K. During the quarter ended December 31, 1999 the Company filed no current reports on Form 8-K. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on the 27th day of March, 2000. CONGOLEUM CORPORATION By: /s/ ---------------------------------------------- Roger S. Marcus President, Chairman & Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ President, Chairman, Chief March 27, 2000 - --------------------------- Executive Officer Roger S. Marcus and Director (Principal Executive Officer) /s/ Chief Financial Officer March 27, 2000 - --------------------------- (Principal Financial and Howard N. Feist III Accounting Officer) /s/ Vice Chairman and Director March 27, 2000 - --------------------------- Richard G. Marcus /s/ Director March 27, 2000 - --------------------------- William M. Marcus /s/ Director March 27, 2000 - --------------------------- John N. Irwin III /s/ Director March 27, 2000 - --------------------------- Cyril C. Baldwin, Jr. /s/ Director March 27, 2000 - --------------------------- David N. Hurwitz /s/ Director March 27, 2000 - --------------------------- Mark N. Kaplan /s/ Director March 27, 2000 - --------------------------- C. Barnwell Straut 19 INDEX TO EXHIBITS Exhibit Number Exhibit - ------ ------- ***2.1 Plan of Repurchase dated as of February 1, 1995 by and among American Biltrite Inc., Hillside Industries Incorporated ("Hillside Industries"), Congoleum Holdings Incorporated ("Congoleum Holdings"), Resilient Holdings Incorporated ("Resilient Holdings") and the Company. *****3.1 Certificate of Incorporation of the Company, as amended. *****3.2 Amended and Restated Bylaws of the Company. **4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing Agreement"), by and among the CIT Group/Business Credit, Inc. ("CIT"), The Bank of New York Commercial Corporation ("BONY/CC"), Chemical Bank ("Chemical") and The Chase Manhattan Bank, N.A. ("Chase") (collectively, the "Senior Lenders") and the Company. **4.2 First Amendment, dated March 11, 1993, to the CIT Financing Agreement by and among the Senior Lenders and the Company. **4.3 Indenture, dated as of February 1, 1994, between the Company and Chemical, as trustee. ***4.4 Registration Rights Agreement, dated as of February 8, 1995 by and between the Company and Hillside. ******4.5 Indenture, dated as of August 3, 1998 (the "1998 Indenture"), by and between the Company and First Union National Bank, as trustee. 4.6 Loan and Security Agreement, dated December 18, 1998 (the "First Union Loan Agreement"), by and between First Union National Bank (the "Lender") and the Company. 4.6.1 Joinder Amendment, dated December 21, 1998 (the "Joinder Agreement"), by and among the Company, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and the Lender. **10.1 The CIT Financing Agreement (see Exhibit 4.1). **10.2 First Amendment to the CIT Financing Agreement (see Exhibit 4.2). **10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among Resilient Holdings, Hillside, the Company (collectively, the "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and American Biltrite. **10.9 Closing Agreement, dated as of March 11, 1993, by and among the Congoleum Group, Hillside Capital and American Biltrite. **10.12 Stockholders Agreement, dated as of March 11, 1993 (the "Stockholders Agreement"), by and among the Congoleum Group, American Biltrite and Congoleum Holdings. ***10.12.1 First Amendment, dated February 8, 1995, to the Stockholders Agreement, by and among Hillside, American Biltrite and the Company. **10.13 Personal Services Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), by and between American Biltrite and the Company. 20 Exhibit Number Exhibit - ------ ------- ***10.13.1 First Amendment, dated February 8, 1995, to Personal Services Agreement, by and between American Biltrite and the Company. *******10.13.2 Second Amendment, dated November 15, 1996, to Personal Services Agreement, by and between American Biltrite and the Company. *******10.13.3 Third Amendment, dated as of March 10, 1998, to Personal Services Agreement, by and between American Biltrite and the Company. **10.14 Business Relations Agreement, dated as of March 11, 1993, by and between American Biltrite and the Company. *******10.14.1 First Amendment, dated August 19, 1997, to Business Relations Agreement, by and between American Biltrite and the Company. **10.15 Tax Sharing and Indemnification Agreement, dated as of March 11, 1993, by and among Congoleum Holdings, Resilient Holdings, Hillside Capital and the Company. *******10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between American Biltrite and the Company. **10.19 Commitment Letter, dated January 19, 1994 regarding Financing Agreement dated April 19, 1991, as amended, by and among CIT, BONYCC and the Company. ***10.20 Trademark Purchase Agreement, dated November 29, 1993, by and between the Company and The Amtico Company LTD ("Amtico Company"). ***10.21 First Right of Refusal, dated November 29, 1993, by and between American Biltrite (Canada) Limited and Amtico Company. ***10.22 Undertaking Concerning Amtico Trademark, dated November 29, 1993, by and between American Biltrite and Amtico Company. ***10.23 Form of 1995 Stock Option Plan. ********10.23.1 Form of Amendment to 1995 Stock Option Plan. ****10.24 License Agreement, dated as of September 20, 1995 between Congoleum Intellectual Properties, Inc. and the Company. ******10.25 Registration Rights Agreement, dated as of August 3, 1998, by and among the Company, Goldman, Sachs & Co., Credit Suisse First Boston and ING Barings Furman Selz LLC. *********10.26 The First Union Loan Agreement (see Exhibit 4.6). *********10.26.1 The Joinder Agreement (see Exhibit 4.6.1). 10.27 Form of Non-Qualified, Non-Employee Directors Stock Option Plan. 11.1 Statement regarding computation of earnings per common share. 13.1 Pages 8 through 29 of the Congoleum Annual Report to Shareholders for the year ended December 31, 1999. 21 Exhibit Number Exhibit - ------ ------- *********21.1 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule. - ------------- ** Incorporated by reference to the exhibit bearing the same number filed with the Company's Registration Statement on Form S-1 (File No. 33-71836) declared effective by the Securities and Exchange Commission on January 25, 1994. *** Incorporated by reference to the exhibit bearing the same number filed with the Company's Registration Statement on Form S-1 (File No. 33-87282) declared effective by the Securities and Exchange Commission on February 1, 1995. **** Incorporated by reference to the exhibit bearing the same number filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. ***** Incorporated by reference to the exhibit bearing the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. ****** Incorporated by reference to the exhibit bearing the same number filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998. ******* Incorporated by reference to the exhibit bearing the same number filed with the Company's Annual Report on Form 10-K for the fiscal period ended December 31, 1997. ******** Incorporated by reference to the exhibit bearing the same number filed with the Company's Annual Report on Form 10-K for the fiscal period ended December 31, 1996. ********* Incorporated by reference to the exhibit bearing the same number filed with the Company's Annual Report on Form 10-K for the fiscal period ended December 31, 1998. ********** Incorporated by reference to the exhibit bearing the same number filed with the Company's Registration Statement on Form S-8 (File No. 33-84387) declared effective by the Securities and Exchange Commission on August 3, 1999. 22 SCHEDULE II CONGOLEUM CORPORATION VALUATION AND QUALIFYING ACCOUNTS (in thousands) -------
Balance at Balance Beginning Other at end of Period Changes Deductions (a) of Period --------- ------- -------------- --------- Year ended December 31, 1999: Allowance for doubtful accounts and cash discounts $(3,336) $ (53)(b) $ -- $(3,283) Year ended December 31, 1998: Allowance for doubtful accounts and cash discounts $(3,294) $ (39)(b) $ (3) $(3,336) Year ended December 31, 1997: Allowance for doubtful accounts and cash discounts $(3,406) $ 33 (b) $ 79 $(3,294)
(a) Balances written-off, net of recoveries. (b) Represents reduction of the allowance for doubtful accounts and cash discounts. 23 EX-11.1 2 COMPUTATION OF EARNINGS PER COMMON SHARE Exhibit 11.1 - Computation of Earnings Per Common Share Congoleum Corporation Computation of EARNINGS Per COMMON Share (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ----------------------------------------------------- Basic Earnings Per Common Share: 1999 1998 1997 - -------------------------------- ---- ---- ---- Income before extraordinary item $4,928 $ 9,853 $7,020 Extraordinary item - early retirement of debt, net of income tax benefit -- (2,413) (279) ------ ------ ------ Net income $4,928 $7,440 $6,741 ====== ====== ====== Weighted average common shares outstanding 8,699 9,038 9,837 ====== ====== ====== Income per common share before extraordinary item $0.57 $1.09 $0.72 Extraordinary item -- (0.27) (0.03) ------ ------ ------ Net income per common share $0.57 $0.82 $0.69 ====== ====== ====== Diluted Earnings Per Common Share: Income before extraordinary item $4,928 $9,853 $7,020 Extraordinary item - early retirement of debt, net of income tax benefit -- (2,413) (279) ------ ------ ------ Net income $4,928 $7,440 $6,741 ====== ====== ====== Weighted average common shares outstanding 8,699 9,038 9,837 Effect of assumed exercise of dilutive stock options (1) 0 0 2 ------ ------ ------ Weighted average common and common equivalent shares 8,699 9,038 9,839 ====== ====== ====== Income per common share before extraordinary item $0.57 $1.09 $0.72 Extraordinary item -- (0.27) (0.03) ------ ------ ------ Net income per common share $0.57 $0.82 $0.69 ====== ====== ======
(1) Computed based on the Treasury Stock method. EX-13.1 3 SELECTED FINANCIAL DATA ================================================================================ Congoleum Corporation Selected Financial Data (in thousands, except per share amounts)
For the years ended December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- Income Statement Data: Net sales ............................ $ 246,006 $ 259,126 $ 252,526 $ 269,451 $ 263,147 Cost of sales ........................ 176,559 181,997 180,093 182,585 186,382 Selling, general and administrative expenses .......... 57,428 56,839 57,094 61,597 55,228 - -------------------------------------------------------------------------------------------------------- Income from operations ............... 12,019 20,290 15,339 25,269 21,537 Interest expense, net ................ (6,101) (5,758) (5,258) (6,369) (6,708) Other income, net .................... 1,729 984 974 1,095 1,135 - -------------------------------------------------------------------------------------------------------- Income before taxes and extraordinary item ........... 7,647 15,516 11,055 19,995 15,964 Provision for income taxes ............................ 2,719 5,663 4,035 7,898 6,529 - -------------------------------------------------------------------------------------------------------- Income before extraordinary item ............... 4,928 9,853 7,020 12,097 9,435 Extraordinary item ................... -- (2,413) (279) -- -- - -------------------------------------------------------------------------------------------------------- Net income ........................... $ 4,928 $ 7,440 $ 6,741 $ 12,097 $ 9,435 ======================================================================================================== Income per common share before extraordinary item ............... $ 0.57 $ 1.09 $ 0.72 $ 1.21 $ 0.94 Extraordinary Item ................... -- (0.27) (0.03) -- -- - -------------------------------------------------------------------------------------------------------- Net income per common share, basic and diluted ...................... $ 0.57 $ 0.82 $ 0.69 $ 1.21 $ 0.94 ======================================================================================================== Average shares outstanding ........... 8,699 9,038 9,839 10,007 10,022 ======================================================================================================== Balance Sheet Data (at end of period): Total assets ......................... $ 231,817 $ 231,865 $ 196,581 $ 219,798 $ 206,842 Total debt ........................... 99,575 99,526 76,594 87,750 90,000 Stockholders' equity ................. 40,130 37,853 31,783 33,667 22,602
8 Congoleum Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations ================================================================================ 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. Year ended December 31, 1999 as compared to year ended December 31, 1998 Net sales for the year ended December 31, 1999 were $246.0 million as compared to $259.1 million for the year ended December 31, 1998, a decrease of $13.1 million or 5.1%. This decrease resulted primarily from lower sales of certain residential products, a decline in commercial product sales, and competitive pressures which caused 1999 selling prices to average 2.7% below 1998 levels. The decline in residential product sales resulted from lower sales to two retail buying groups and competition from alternative hard surface products. Gross profit for the year ended December 31, 1999 was $69.4 million compared to $77.1 million in 1998, a decrease of $7.7 million or 10.0%. Gross profit declined due to lower sales and a decrease in gross profit margins. Gross profit margins declined from 29.8% of net sales in 1998 to 28.2% of net sales in 1999 due to lower average selling prices and a less profitable mix of sales. Selling, general and administrative expenses were $57.4 million for the year ended December 31, 1999 as compared to $56.8 million for the year ended December 31, 1998, an increase of $0.6 million or 1.0%. As a percent of net sales, selling, general and administrative expenses increased from 21.9% in 1998 to 23.3% in 1999. The Company introduced a wood laminate flooring product line in mid-1999 and expensed $2.0 million in displays, samples, and other launch-related costs. In addition, research and development spending was increased $0.4 million from 1998 to 1999. These increases offset other expense reductions, including lower sales-related costs. Income from operations was $12.0 million (4.9% of net sales) for the year ended December 31, 1999, compared to $20.3 million (7.8% of net sales) for the year ended December 31, 1998, a decrease of $8.3 million or 40.8%, primarily due to the decline in sales and gross profit margins. Interest expense (net) increased from $5.8 million in 1998 to $6.1 million in 1999 primarily due to higher average levels of long-term debt in 1999 versus 1998. Other income (net) increased from $1.0 million in 1998 to $1.7 million in 1999 due to higher sales of sundry items. Net income in 1999 was $4.9 million as compared to $9.9 million ($7.4 million after an extraordinary charge for debt extinguishment) in 1998. Net income per common share was $.57 in 1999 as compared to $1.09 ($.82 after extraordinary charge) in 1998. The weighted average number of common shares outstanding declined from 9.0 million in 1998 to 8.7 million in 1999 as a result of share repurchases. Year ended December 31, 1998 as compared to year ended December 31, 1997 Net sales for the year ended December 31, 1998 were $259.1 million as compared to $252.5 million for the year ended December 31, 1997, an increase of $6.6 million or 2.6%. Increases in sales to the manufactured housing industry and to home centers from 1997 to 1998 were partly offset by a decline in sales of lower-end products to the specialty retail channel. Price reductions occurred in certain products and markets which resulted in an aggregate decrease in prices of 1.2%. 9 Congoleum Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ================================================================================ Gross profit for the year ended December 31, 1998 was $77.1 million compared to $72.4 million in 1997, an increase of $4.7 million or 6.5%, as a result of higher sales and improved gross profit margins. Gross profit margins improved from 28.7% of net sales in 1997 to 29.8% of net sales in 1998 due to declines in raw material costs, an increase in manufacturing productivity and a higher margin mix of sales. Selling, general and administrative expenses were $56.8 million for the year ended December 31, 1998 as compared to $57.1 million for the year ended December 31, 1997, a decrease of $0.3 million or 0.4%. As a percent of net sales, selling, general, and administrative expenses declined from 22.6% in 1997 to 21.9% in 1998. Expense control initiatives have succeeded in reducing these costs on an overall basis despite increased spending related to Year 2000 compliance. In addition, the sales channels where the Company has experienced the most sales growth require relatively less sales and marketing support than the specialty retail channel. Income from operations was $20.3 million (7.8% of net sales) for the year ended December 31, 1998 compared to $15.3 million (6.1% of net sales) for the year ended December 31, 1997, an increase of $5.0 million or 32.3%, primarily due to the increase in sales and gross profit margins. Interest expense increased from $6.8 million in 1997 to $7.4 million in 1998 primarily due to a higher amount of interest being capitalized rather than expensed in connection with capital expenditures in 1997. During 1998, the Company issued $100 million in ten-year 8 5/8 % Senior Notes (priced to yield 8.70%). Most of the proceeds were used to retire the Company's existing 9% Senior Notes due in 2001. In connection with this transaction, the Company recorded an extraordinary charge of $2.4 million (net of tax benefit) for the prepayment premium and write-off of deferred financing costs. In 1997, the Company had recorded an extraordinary charge of $0.3 million for similar costs in connection with open market purchases of $11.2 million of the 9% Senior Notes. Before the extraordinary charges, income in 1998 was $9.9 million as compared to $7.0 million in 1997, an increase of $2.8 million or 40.4%. Income per common share before extraordinary item increased 51.4%, from $.72 in 1997 to $1.09 in 1998. Net income increased from $6.7 million, or $.69 per share, in 1997, to $7.4 million, or $.82 per share, in 1998. Weighted average number of common and equivalent shares outstanding decreased in 1998 to 9.0 million from 9.8 million in 1997, primarily due to repurchases of its stock in the fourth quarter of 1997. Liquidity and Capital Resources Cash and equivalents, including short-term investments at December 31, 1999, were $38.0 million, a decrease of $12.3 million from December 31, 1998. Working capital was $59.7 million, down from $68.5 million one year earlier. The ratio of current assets to current liabilities at December 31, 1999 was 2.1 to one, compared to 2.4 to one a year earlier. The ratio of debt to total capital at both December 31, 1999 and 1998 was .43. Net cash provided by operations during the year ended December 31, 1999 was $10.3 million, down from $24.0 million in 1998. Capital expenditures in 1999 totaled $18.7 million, which included a large expenditure for a new coating mix facility. The Company increased inventories $9.4 million in 1999 to support sales of its wood laminate product and to accommodate larger, more economical production runs of sheet flooring. The Company is currently planning capital expenditures of approximately $15 million in both 2000 and 2001. During 1998, the Company issued $100 million of 8 5/8 % Senior Notes maturing August 1, 2008 priced at 99.505 to yield 8.70%. Proceeds of the offering were used to redeem all $76.6 million of its 9% Senior Notes, plus accrued interest and prepayment premium, to pay certain fees and expenses in connection with the offering, and for working capital and general corporate purposes. In connection with this offering, the Company recorded an extraordinary after-tax charge of $2.4 million in the third quarter of 1998. During 1998, the Company entered into a new five-year revolving credit facility which provides for borrowings up to $30 million. Interest ranges from 0-1% below prime, or 0.75% to 1.5% over LIBOR, 10 Congoleum Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ================================================================================ depending on the Company's ratio of debt to EBITDA. This financing agreement contains certain covenants which include the maintenance of minimum net worth, income, and fixed charge coverage levels. It also includes restrictions on the incurrence of additional debt and limitations on capital expenditures. Borrowings under this facility are collateralized by inventory and receivables. At December 31, 1999, based on the level of receivables and inventory, the Company had a borrowing base available of $27.8 million, of which $3.7 million was utilized for outstanding letters of credit. In 1998, the Company's Board of Directors approved a new plan to repurchase up to $5.0 million of the Company's common stock. As of December 31, 1999, the Company had repurchased 717,665 shares of its common stock for an aggregate cost of $4.1 million pursuant to this plan. From 1997 to 1999, the Company made modifications and replacements to its systems and equipment necessary for handling dates in the Year 2000. Costs directly associated with achieving Year 2000 compliance, including modifying computer software or converting to new programs, consisted of payments to third parties as well as an allocation of the payroll and benefits of its employees based on the amount of their time devoted to this activity. These costs were expensed as incurred. Costs for new hardware were capitalized in accordance with the Company's fixed asset policy, and any equipment retired was written off. The following table summarizes the Company's direct Year 2000 compliance expenditures by year: (In thousands) 1997 1998 1999 ---- ---- ---- Expenses paid to third parties $52 $330 $127 Allocated payroll costs 174 386 59 Capital expenditures 5 206 -- In addition to work undertaken explicitly to achieve Year 2000 compliance, the Company replaced or upgraded a number of systems in the ordinary course of business where the replacement or upgrade, in addition to its primary benefits, also provided Year 2000 compliance. The nature of these costs, and their accounting treatment, was the same as described above. The following table summarizes the Company's expenditures on systems improvements undertaken for reasons unrelated to the Year 2000, which also served to achieve Year 2000 compliance: (In thousands) 1997 1998 1999 ---- ---- ---- Expenses paid to third parties $13 $76 $95 Allocated payroll costs 48 37 -- Capital expenditures 92 144 126 The Company is not aware of any significant adverse effects of Year 2000 on our systems and operations. Collective bargaining agreements with hourly employees at the Company's facilities expire in 2001 and 2003. In the past five years, there have been no strikes by employees at the Company, and the Company believes that its employee relations are satisfactory. The Company has recorded what it believes are adequate provisions for environmental remediation and 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 not have a material adverse impact on the Company's financial position, 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 could have a material adverse effect on its financial position. There can be no assurances that the costs of any future government regulations could be passed along to its customers. 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, asbestos-related claims, and general liability claims (more fully discussed in "Legal Proceedings" in Part I Item 3. and "Environmental Regulation" in Part I Item 1. of the Company's Annual Report on Form 10-K for the year ended December 31, 1999). These actions include possible obligations to remove or mitigate the effects on the environment of wastes deposited 11 Congoleum Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ================================================================================ 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, environmental and asbestos-related contingencies. The Company records a liability for environmental remediation, asbestos-related claim costs, and general liability claims when a cleanup program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and cleanups progress, these liabilities are adjusted based upon progress in determining the timing and extent of remedial actions and the related costs and damages. The extent and amounts of the liabilities can change substantially due to factors such as the nature or extent of contamination, changes in remedial requirements and technological improvements. Estimated insurance recoveries related to these liabilities are reflected in other noncurrent assets (see Note 15 of Notes to Financial Statements). Although the outcome of these matters could result in significant expenses or judgments, the Company does not believe based on present facts and circumstances that their disposition will have a material adverse effect on the financial position of the Company. The Company's principal sources of capital are net cash provided by operating activities and borrowings under its financing agreement. The Company believes these sources will be adequate to fund working capital requirements, debt service payments and planned capital expenditures through the foreseeable future. 12 Congoleum Corporation Balance Sheets (dollars in thousands, except share amounts) ================================================================================
December 31, December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 18,768 $ 50,344 Short-term investments .......................................................... 19,232 -- Accounts and notes receivable, less allowance for doubtful accounts and cash discounts of $3,283 and $3,336 as of December 31, 1999 and 1998, respectively . 13,745 15,880 Inventories ..................................................................... 54,599 45,192 Prepaid expenses and other current assets ....................................... 3,687 3,022 Deferred income taxes ........................................................... 3,515 3,046 - ------------------------------------------------------------------------------------------------------------------- Total current assets .......................................................... 113,546 117,484 Property, plant, and equipment, net ................................................ 96,404 87,954 Goodwill, net ...................................................................... 11,387 11,819 Deferred income taxes .............................................................. -- 1,863 Other noncurrent assets ............................................................ 10,480 12,745 - ------------------------------------------------------------------------------------------------------------------- Total assets.................................................................. $ 231,817 $ 231,865 =================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................ $ 19,160 $ 14,399 Accrued liabilities ............................................................. 30,597 31,209 Accrued taxes ................................................................... 311 317 Deferred income taxes ........................................................... 3,757 3,058 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities ..................................................... 53,825 48,983 Long-term debt ..................................................................... 99,575 99,526 Other liabilities .................................................................. 18,405 23,501 Noncurrent pension liability ....................................................... 9,230 12,130 Accrued postretirement benefit obligation .......................................... 9,647 9,872 Deferred income taxes .............................................................. 1,005 -- - ------------------------------------------------------------------------------------------------------------------- Total liabilities ............................................................. 191,687 194,012 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950 shares issued; 3,711,190 and 4,258,610 shares outstanding as of December 31, 1999 and 1998, respectively ...................... 47 47 Class B common stock, par value $0.01; 4,608,945 and 4,755,000 shares authorized, issued and outstanding as of December 31, 1999 and 1998, respectively ........... 46 47 Additional paid-in capital ......................................................... 49,105 49,574 Retained deficit ................................................................... (452) (5,380) Minimum pension liability adjustment ............................................... (1,000) (2,302) Common stock held in treasury, at cost; 1,025,760 shares and 399,390 shares at December 31, 1999 and 1998, respectively ....................................... (7,616) (4,133) - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity .................................................... 40,130 37,853 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.................................... $ 231,817 $ 231,865 ===================================================================================================================
The accompanying notes are an integral part of the financial statements. 13 Congoleum Corporation Statements of Operations (in thousands, except per share amounts) ================================================================================
For the years ended December 31, -------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Net sales ................................................. $ 246,006 $ 259,126 $ 252,526 Cost of sales ............................................. 176,559 181,997 180,093 Selling, general and administrative expenses .............. 57,428 56,839 57,094 - ---------------------------------------------------------------------------------------------------- Income from operations ............................. 12,019 20,290 15,339 Other income (expense): Interest income ........................................ 1,837 1,607 1,539 Interest expense ....................................... (7,938) (7,365) (6,797) Other income ........................................... 1,819 1,249 1,287 Other expense .......................................... (90) (265) (313) - ---------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item .. 7,647 15,516 11,055 Provision for income taxes ................................ 2,719 5,663 4,035 - ---------------------------------------------------------------------------------------------------- Income before extraordinary item ................... 4,928 9,853 7,020 Extraordinary item-early retirement of debt, net of income tax benefit .............................. -- (2,413) (279) - ---------------------------------------------------------------------------------------------------- Net income ......................................... $ 4,928 $ 7,440 $ 6,741 ==================================================================================================== Income per common share before extraordinary item .. $ .57 $ 1.09 $ .72 Extraordinary item ................................. -- (.27) (.03) - ---------------------------------------------------------------------------------------------------- Net income per common share, basic and diluted ..... $ .57 $ .82 $ .69 ==================================================================================================== Weighted average number of common and equivalent shares outstanding ................ 8,699 9,038 9,839 ====================================================================================================
The accompanying notes are an integral part of the financial statements. 14 Congoleum Corporation Statements of Changes in Stockholders' Equity (dollars in thousands, except per share amounts) ================================================================================
Common Stock par value $0.01 Additional ------------------ Paid-in Retained Class A Class B Capital Deficit - ------------------------------------------------------------------------------------------ Balance, December 31, 1996 .............. $ 47 $ 53 $ 55,172 $ (19,561) Purchase of treasury stock .............. Purchase and retirement of Class B stock ......................... (6) (5,624) Exercise of stock options ............... 26 Minimum pension liability adjustment, net of tax of $658 .................... Net income .............................. 6,741 Net comprehensive income ................ - ------------------------------------------------------------------------------------------ Balance, December 31, 1997 .............. 47 47 49,574 (12,820) Purchase of treasury stock .............. Minimum pension liability adjustment, net of tax benefit of $678 ............ Net income .............................. 7,440 Net comprehensive income ................ - ------------------------------------------------------------------------------------------ Balance, December 31, 1998 .............. 47 47 49,574 (5,380) Purchase of treasury stock .............. Purchase and retirement of Class B stock ......................... (1) (469) Minimum pension liability adjustment, net of tax of $748 .................... Net income .............................. 4,928 Net comprehensive income ................ - ------------------------------------------------------------------------------------------ Balance, December 31, 1999 .............. $ 47 $ 46 $ 49,105 $ (452) ==========================================================================================
Accumulated Other Comprehensive Income (Loss) Treasury Comprehensive Adjustment* Stock Total Income - -------------------------------------------------------------------------------------- ------------- Balance, December 31, 1996 .............. $ (1,995) $ (49) $ 33,667 Purchase of treasury stock .............. (3,894) (3,894) Purchase and retirement of Class B stock ......................... (5,630) Exercise of stock options ............... 26 Minimum pension liability adjustment, net of tax of $658 .................... 873 873 $ 873 Net income .............................. 6,741 6,741 ----------- Net comprehensive income ................ $ 7,614 - -------------------------------------------------------------------------------------- =========== Balance, December 31, 1997 .............. (1,122) (3,943) 31,783 Purchase of treasury stock .............. (190) (190) Minimum pension liability adjustment, net of tax benefit of $678 ............ (1,180) (1,180) $ (1,180) Net income .............................. 7,440 7,440 ----------- Net comprehensive income ................ $ 6,260 - -------------------------------------------------------------------------------------- =========== Balance, December 31, 1998 .............. (2,302) (4,133) 37,853 Purchase of treasury stock .............. (3,483) (3,483) Purchase and retirement of Class B stock ......................... (470) Minimum pension liability adjustment, net of tax of $748 .................... 1,302 1,302 $ 1,302 Net income .............................. 4,928 4,928 ----------- Net comprehensive income ................ $ 6,230 - -------------------------------------------------------------------------------------- =========== Balance, December 31, 1999 .............. $ (1,000) $ (7,616) $ 40,130 ======================================================================================
* Entire amount relates to minimum pension liability adjustment. The accompanying notes are an integral part of the financial statements. 15 Congoleum Corporation Statements of Cash Flows (dollars in thousands) ================================================================================
For the years ended December 31, -------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ............................................................. $ 4,928 $ 7,440 $ 6,741 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ..................................................... 10,220 9,848 9,102 Amortization ..................................................... 818 893 992 Loss on early retirement of debt, including write-off of deferred financing fees .................................. -- 3,809 252 Deferred income taxes ............................................ 2,350 2,074 93 Loss on disposition of assets .................................... -- -- 331 Changes in certain assets and liabilities: Accounts and notes receivable ............................... 2,135 (1,368) 3,216 Inventories ................................................. (9,407) (758) 3,016 Prepaid expenses and other current assets ................... (1,147) (2,299) (1,294) Accounts payable ............................................ 4,761 959 (6,495) Accrued liabilities ......................................... (2,218) 1,854 (4,781) Other liabilities ........................................... (2,161) 1,515 (156) - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities .............. 10,279 23,967 11,017 - -------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures, net .............................................. (18,670) (9,440) (19,523) Purchase of short-term investments ..................................... (51,044) (15,000) (40,200) Maturities of short-term investments ................................... 31,812 22,900 49,800 - -------------------------------------------------------------------------------------------------------------- Net cash used by investing activities .................. (37,902) (1,540) (9,923) - -------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Issuance of long-term debt ............................................. -- 99,505 -- Debt issuance costs .................................................... -- (3,310) -- Payments to reduce long-term debt ...................................... -- (76,594) (11,156) Premium payments on early retirement of debt ........................... -- (2,563) -- Purchase of treasury stock ............................................. (3,483) (190) (3,894) Purchase and retirement of Class B stock ............................... (470) -- (5,630) Exercise of stock options .............................................. -- -- 26 - -------------------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities ........ (3,953) 16,848 (20,654) - -------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash ........................................... (31,576) 39,275 (19,560) Cash and cash equivalents: Beginning of year ...................................................... 50,344 11,069 30,629 - -------------------------------------------------------------------------------------------------------------- End of year ............................................................ $ 18,768 $ 50,344 $ 11,069 ==============================================================================================================
The accompanying notes are an integral part of the financial statements. 16 Congoleum Corporation Notes to Financial Statements (dollars in thousands, except per share amounts) ================================================================================ 1. Summary of Significant Accounting Policies: Nature of Business and Basis of Presentation - Congoleum Corporation (the "Company" or "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. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. Revenue Recognition - Revenue is recognized when products are shipped. Net sales are comprised of the total sales billed during the period less the 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. The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value. 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 carrying amount of the investments approximates fair value due to their short maturity. 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. 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 long-term debt have been capitalized and are being amortized over the life of the related debt. Such costs at December 31, 1999 and 1998 amounted to $2,834 and $3,170, respectively, net of accumulated amortization of $476 and $140, respectively, and are included in other noncurrent assets. Goodwill - The excess of purchase cost over the fair value of net assets acquired (goodwill) is being amortized on a straight-line basis over 40 years. At each balance sheet date, the Company evaluates the recoverability of its goodwill using certain financial indicators, such as historical and future ability to generate income from operations. Accumulated amortization amounted to $5,705 and $5,273 at December 31, 1999 and 1998, respectively. The Company periodically evaluates goodwill to ensure it is fully recoverable from projected undiscounted cash flows of the related business operations. There have been no impairment adjustments to goodwill through December 31, 1999. Environmental Remediation Liabilities - The Company is subject to federal, state and local environmental laws and regulations. The Company records a lia- 17 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ bility 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). Income Taxes - The provision for income taxes is based on earnings reported in the financial statements under an asset and liability approach in accordance with SFAS No. 109, "Accounting for Income Taxes," that requires the recognition of deferred tax assets and liabilities for the difference between the tax basis of assets and liabilities and their reported amounts for financial statement purposes. Changes in Accounting Principles - During 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires certain costs of internally developed software to be capitalized for years beginning after December 15, 1998. The Company adopted SOP 98-1 effective January 1, 1999. The adoption of this SOP did not have a material impact in 1999. 2. Inventories: A summary of the major components of inventories is as follows: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Finished goods ............... $43,719 $36,018 Work-in-process .............. 2,743 3,106 Raw materials and supplies ... 8,137 6,068 - -------------------------------------------------------------------------------- Total inventories ............ $54,599 $45,192 ================================================================================ If the FIFO (first-in, first-out) method of inventory accounting (which approximates current cost) had been used, inventories would have been approximately $1,640 and $1,251 lower than reported at December 31, 1999 and 1998, respectively. The carrying value of certain LIFO inventories was reduced by market valuation reserves of $100 and $300 at December 31, 1999 and 1998, respectively. 3. Property, Plant, and Equipment: A summary of the major components of property, plant, and equipment is as follows: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Land ............................................ $ 2,930 $ 2,930 Buildings and improvements ...................... 37,309 35,759 Machinery and equipment ......................... 142,062 138,782 Construction-in-progress ........................ 17,912 4,072 - -------------------------------------------------------------------------------- 200,213 181,543 Less accumulated depreciation ................................. (103,809) (93,589) - -------------------------------------------------------------------------------- Total property, plant, and equipment, net ........................... $ 96,404 $ 87,954 ================================================================================ Interest is capitalized in connection with the construction of major facilities and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. Capitalized interest cost was $691 and $325 for 1999 and 1998, respectively. The amount of approved but unexpended capital appropriations at December 31, 1999 was $5,800, substantially all of which is planned to be expended during 2000. 4. Accrued Liabilities: Accrued liabilities consists of the following: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Accrued warranty, marketing and sales promotion ....................................... $19,021 $18,174 Employee compensation and related benefits ................................ 5,115 6,377 Interest ........................................... 3,595 3,599 Environmental remediation and product-related liabilities ..................................... 1,070 1,040 Other .............................................. 1,796 2,019 - -------------------------------------------------------------------------------- Total accrued liabilities ..................................... $30,597 $31,209 ================================================================================ 18 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ 5. Long-Term Debt: Long-term debt consists of the following: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- 8 5/8% Senior Notes due 2008 ......................................$ 99,575 $ 99,526 On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes maturing August 1, 2008 priced at 99.505 to yield 8.70%. The Senior Notes are redeemable at the option of the Company, in whole or in part, at any time on or after August 1, 2003 at predetermined redemption prices (ranging from 104% to 100%), plus accrued and unpaid interest to date of redemption. The Indenture under which the notes were issued includes certain restrictions on additional indebtedness and uses of cash, including dividend payments. Proceeds of the offering were used to redeem all of the outstanding 9% Senior Notes, including accrued interest and prepayment premium, to pay certain fees and expenses in connection with the offering, and for working capital and general corporate purposes. In connection with this offering, the Company recorded an extraordinary charge of $2.4 million, net of $1.4 million of income tax benefits, to write off debt issuance costs and premiums associated with the repurchase of the 9% Senior Notes. During 1997, the Company repurchased $11,156 of its 9% Senior Notes. In connection with the repurchase in 1997, the Company recorded an extraordinary charge of $279, net of $160 of income tax benefits, to write off the portion of the debt issuance cost and premiums associated with the repurchased 9% Senior Notes. The fair value of the Company's long-term debt is based on the quoted market prices for publicly traded issues. The estimated fair value of the 8 5/8% Senior Notes was approximately $88,000 and $98,500 at December 31, 1999 and 1998, respectively. The Company has a revolving credit facility which expires in 2003 that provides for borrowings up to $30,000 with interest varying based on the Company's ratio of debt to EBITDA, as defined. This agreement provides for a commitment fee based on the average daily unused portion of the commitment equal to one-fifth of one percent per annum. This financing agreement contains certain covenants which include the maintenance of minimum net worth, income, and fixed charge coverage levels. It also includes restrictions on the incurrence of additional debt and limitations on capital expenditures. Borrowings under this facility are collateralized by inventory and receivables. There were no borrowings outstanding under this facility at December 31, 1999; however, the facility provides for standby letters of credit which total $3,689 at December 31, 1999. 6. Other Liabilities: Other liabilities consists of the following: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Environmental remediation and product-related liabilities .................................... $11,928 $16,198 Accrued workers' compensation claims ......................................... 5,164 4,987 Other ............................................. 1,313 2,316 - -------------------------------------------------------------------------------- Total other liabilities ........................... $18,405 $23,501 ================================================================================ 7. Research and Development Costs: Total research and development costs charged to operations amounted to $4,242, $3,819 and $3,718 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. Operating Lease Commitments and Rent Expense: The Company leases certain office facilities and equipment under leases with varying terms. Future minimum lease payments of significant, 19 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ noncancelable operating leases having initial or remaining lease terms in excess of one year as of December 31, 1999 are as follows: Years Ending - -------------------------------------------------------------------------------- 2000 ....................................................... $ 1,942 2001 ....................................................... 2,480 2002 ....................................................... 2,231 2003 ....................................................... 2,056 2004 ....................................................... 1,626 Thereafter ................................................. 9,227 - -------------------------------------------------------------------------------- Total minimum lease payments ............................... $19,562 ================================================================================ Rent expense was $3,030, $2,368 and $1,902 for the years ended December 31, 1999, 1998 and 1997, respectively. 9. Retirement Plans: Retirement benefits are provided for substantially all employees under Company-sponsored defined benefit pension plans. The plans are noncontributory and generally provide monthly lifetime payments, normally commencing at age 65. Benefits under the plans are based upon the provisions of negotiated labor contracts and years of service. It is the Company's policy to make contributions to these plans sufficient to meet the minimum funding requirements of applicable laws and regulations plus such additional amounts, if any, as the Company's actuarial consultants advise to be appropriate. Net periodic pension cost includes the following components: For the years ended December 31, ------------------------------ 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost .................................. $ 1,152 $ 1,134 $ 1,144 Interest cost ................................. 3,920 3,898 3,863 Expected return on plan assets ............................... (4,100) (4,070) (3,614) Amortization of transition amount .................................... 76 76 76 Amortization of prior service benefit ........................... (242) (242) (242) Recognized actuarial loss ...................................... 186 2 290 - -------------------------------------------------------------------------------- Net periodic pension cost .............................. $ 992 $ 798 $ 1,517 ================================================================================ Weighted average rate assumptions as of December 31 were as follows: 1999 1998 1997 - -------------------------------------------------------------------------------- Discount rate .............................. 7.25% 6.75% 7.00% Rate of compensation increase ............................... 5.00% 5.00% 5.50% Expected long-term rate of return on assets .............................. 9.00% 9.00% 9.00% The following table sets forth the components of the change in projected benefit obligation and fair value of plan assets during 1999 and 1998 as well as funded status of the plans at December 31, 1999 and 1998: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Accumulated benefit obligation at end of year ...................... $ 57,314 $ 59,451 ================================================================================ Change in projected benefit obligation: Projected benefit obligation at beginning of year ....................... $ 60,352 $ 58,000 Service cost ................................. 1,152 1,134 Interest cost ................................ 3,920 3,898 Actuarial (gain) loss ....................... (2,713) 1,629 Benefits paid ................................ (4,430) (4,309) - -------------------------------------------------------------------------------- Projected benefit obligation at the end of the year ..................... $ 58,281 $ 60,352 ================================================================================ Change in plan assets: Fair value of plan assets at beginning of year ....................... $ 46,926 $ 46,405 Actual return on assets ...................... 4,823 3,100 Employer contributions ....................... 1,858 1,730 Benefit paid ................................. (4,430) (4,309) - -------------------------------------------------------------------------------- 20 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ Fair value of plan assets at end of year .................................... $ 49,177 $ 46,926 ================================================================================ Funded status........................................... $ (9,104) $(13,426) Unrecognized transition amount ............................................... (67) 9 Unrecognized prior service benefit ...................................... (1,736) (1,978) Unrecognized net actuarial loss ....................................... 3,383 7,006 - -------------------------------------------------------------------------------- Net amount recognized ........................................... $ (7,524) $ (8,389) ================================================================================ Amounts recognized in the financial statements consist of: Accrued benefit liability (including current amount of $730 and $864, respectively) .................................. $ (9,754) $(12,759) Intangible asset .................................. 655 746 Deferred tax asset ................................ 575 1,322 Accumulated other comprehensive income ......................................... 1,000 2,302 - -------------------------------------------------------------------------------- Net amount recognized ........................................... $ (7,524) $ (8,389) ================================================================================ For the year ended December 31, 1999, one of the plan's assets exceeded the projected benefit obligation. At December 31, 1999 the projected benefit obligation, accumulated benefit obligation, and assets were $31,276, $30,309 and $31,695, respectively. The Company also has two 401(k) defined contribution retirement plans that cover substantially all employees. Eligible employees may contribute up to 15% of compensation with partially matching Company contributions. The charge to income relating to the Company match was $1,356, $1,529 and $1,316 for the years ended December 31, 1999, 1998 and 1997, respectively. 10. Postretirement Benefits Other Than Pensions: Net periodic postretirement benefits cost is as follows: For the years ended December 31, ----------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost .................................. $ 148 $ 139 $ 139 Interest cost ................................. 480 480 505 Amortization of prior service benefit ..................... (409) (409) (409) Amortization of net loss .................................. 71 60 99 - -------------------------------------------------------------------------------- Net periodic benefits cost .................... $ 290 $ 270 $ 334 ================================================================================ Weighted average discount rate ............................. 7.25% 6.75% 7.00% ================================================================================ The change in benefit obligation and the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded in 1999 and 1998, were as follows: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at end of prior year ............................... $ 7,376 $ 7,552 Service cost (with interest) ........................... 148 139 Interest cost ................................ 480 480 Actuarial gain ............................... (346) (256) Benefits paid ................................ (517) (539) - -------------------------------------------------------------------------------- Benefit obligation at end of year ......................................... $ 7,141 $ 7,376 ================================================================================ Funded status ..................................... $ (7,141) $ (7,376) Unrecognized net gain ............................................ (513) (96) Unrecognized prior service benefit ................................. (2,406) (2,815) - -------------------------------------------------------------------------------- Accrued postretirement benefit cost .................................... (10,060) (10,287) Less current portion ............................ 413 415 - -------------------------------------------------------------------------------- Noncurrent postretirement benefit obligations .......................... $ (9,647) $ (9,872) ================================================================================ 21 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ The annual rate of increase in the per capita cost of covered health care benefits was assumed to be 7.4% in 1999; the rate was assumed to decrease gradually to 5.0% over the next 7 years and remain level thereafter. An increase of one percentage point in the assumed health care cost trend rates for each future year would increase the aggregate of the service and interest cost components of net periodic postretirement benefits cost by $56 for the year ended December 31, 1999, and would increase the accumulated postretirement benefit obligations by $506 at December 31, 1999. 11. Income Taxes: The provision for income taxes is comprised of the following: For the years ended December 31, ------------------------------ 1999 1998 1997 - -------------------------------------------------------------------------------- Current: Federal .................................. $ 259 $2,866 $ 3,980 State .................................... 113 45 246 Deferred: Federal .................................. 2,123 2,353 (213) State .................................... 224 399 22 - -------------------------------------------------------------------------------- Provision for income taxes ............................. $2,719 $5,663 $ 4,035 ================================================================================ The following is a reconciliation of the statutory federal income tax rate to the Company's effective tax rate expressed as a percentage of income before income taxes: For the years ended December 31, -------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory federal income tax rate ........................ 34.0% 34.0% 34.0% State income taxes, net of federal benefit ................................ 2.7 1.9 1.6 Goodwill ................................... 1.9 1.0 1.4 Other ...................................... (3.0) (0.4) (0.5) - -------------------------------------------------------------------------------- Effective tax rate ......................... 35.6% 36.5% 36.5% ================================================================================ Deferred taxes are recorded using enacted tax rates based upon differences between financial statement and tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The components of the deferred tax asset and liability relate to the following temporary differences: December 31, December 31, 1999 1998 - -------------------------------------------------------------------------------- Deferred tax asset: Accounts receivable .......................... $ 941 $ 949 Unfunded pension liability ................................. 3,303 3,895 Environmental remediation and product-related reserves .................................. 6,399 8,416 Postretirement benefit obligations ....................... 3,926 4,053 Other accruals ............................... 2,958 3,313 - -------------------------------------------------------------------------------- Total deferred tax asset ......................... 17,527 20,626 - -------------------------------------------------------------------------------- Deferred tax liability: Depreciation and amortization .............................. (12,403) (12,279) Inventory .................................... (3,756) (3,058) Other ........................................ (2,615) (3,438) - -------------------------------------------------------------------------------- Total deferred tax liability .................................... (18,774) (18,775) - -------------------------------------------------------------------------------- Net deferred tax (liability) asset ............................ $ (1,247) $ 1,851 ================================================================================ 22 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ 12. Supplemental Cash Flow Information: Cash payments for interest were $8,577, $7,580 and $7,710 for the years ended December 31, 1999, 1998 and 1997, respectively. Cash payments for income taxes were $2,494, $3,494 and $4,964 for the years ended December 31, 1999, 1998 and 1997, respectively. 13. Related Party Transactions: The Company and its controlling shareholder, American Biltrite Inc. ("ABI"- see Note 17) provide certain goods and services to each other pursuant to agreements negotiated at arm's length. The Company had the following transactions with ABI: For the years ended December 31, -------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Sales ...................................... $ 568 $ 868 $ 964 Raw material transfers to ABI ........................ 4,637 3,493 2,942 Computer service income .................................. 17 134 145 Material purchases from ABI ................................ 7,306 7,079 5,269 Management fees ............................ 900 1,291 1,221 ================================================================================ Amounts as of December 31, 1999 and 1998 due from an affiliate of ABI totaled $310 and $243, respectively, and are included in accounts receivable. Amounts as of December 31, 1999 and 1998 due to ABI and its affiliates totaled $1,315 and $1,425, respectively, and are included in accounts payable. 14. Major Customers: Substantially all the Company's sales are to select flooring distributors and retailers located in the United States. Economic and market conditions, as well as the individual financial condition of each customer, are considered when establishing allowances for losses from doubtful accounts. Two customers accounted for 28% and 21% of the Company's net sales for the year ended December 31, 1999, 25% and 22% for the year ended December 31, 1998, and 23% and 19% for the year ended December 31, 1997 and accounted for 42% of accounts receivable at December 31, 1999 and 1998. 15. Environmental and Other Liabilities: The Company records a liability for environmental remediation claims when a cleanup program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and cleanup programs progress, these liabilities are adjusted based upon the progress in determining the timing and extent of remedial actions and the related costs and damages. The recorded liabilities are not reduced by the amount of insurance recoveries. Such estimated insurance recoveries are reflected in other noncurrent assets and are considered probable of recovery. 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 two instances, although not named as a PRP, the Company has received a request for information. These pending proceedings currently relate to seven disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which recovery from generators of hazardous substances is sought for the cost of 23 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ cleaning up the contaminated waste sites. The Company's ultimate liability in connection with those sites may depend 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. The most significant exposure to which the Company has been named a PRP relates to a recycling facility site in Elkton, Maryland. 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 would be approximately $26 million of which, based on waste allocations amongst members of the PRP group, Congoleum's share was estimated to be approximately 5.5%. At December 31, 1999, the Company believes its probable liability, which has been recorded in other liabilities, based on present facts and circumstances, to be approximately $1.5 million. A corresponding insurance receivable of $1.2 million has been recorded in other noncurrent assets. No other PRP sites are material on an individual basis. The Company also accrues remediation costs for certain of the Company's owned facilities on an undiscounted basis. Estimated total cleanup costs, including capital outlays and future maintenance costs for soil and groundwater remediation are primarily based on engineering studies. Although there can be no assurance, the Company anticipates that these matters will be resolved over a period of years for amounts (including legal fees and other defense costs) which the Company believes based on current estimates of liability and, in part, on insurance coverage, and based on advice from counsel, will not have a material adverse effect on the financial position of the Company. Asbestos-Related Liabilities: The Company is one of many defendants in approximately 670 pending claims (including workers' compensation cases) involving approximately 6,246 individuals as of December 31, 1999, alleging personal injury from exposure to asbestos or asbestos-containing products. There were 657 claims at December 31, 1998 which involved approximately 1,984 individuals. Activity related to asbestos claims during the years ended December 31, 1999 and 1998 was as follows: 1999 1998 - -------------------------------------------------------------------------------- Claims at Jan. 1 ......................................... 657 654 New Claims ............................................... 247 203 Settlements .............................................. (48) (63) Dismissals ............................................... (186) (137) - -------------------------------------------------------------------------------- Claims at Dec. 31 ........................................ 670 657 ================================================================================ The total indemnity costs incurred, excluding the case noted below, to settle claims during 1999 and 1998 were $2,924 and $2,160, respectively, which were paid by the Company's insurance carriers, as were the related defense costs. The average indemnity cost per resolved claim was $12 in 1999 and $11 in 1998, all of which costs were covered by the Company's insurance carriers. Costs per claim vary depending on a number of factors, including the number of plaintiffs, the nature of their alleged exposure, and the location of the claim. Nearly all claims allege that various diseases or health issues were contracted as a result of exposure to asbestos in the course of activities either as independent contractors or as employees of shipyards or other industries utilizing asbestos-containing products (or, in the workers' compen sation cases, as employees of the Company) and that included among such products which allegedly caused their diseases were sheet products provided by the Company or resilient tile provided by the Amtico Tile Division of ABI (the "Tile Division"), or both. The Company discontinued the manufacture of asbestos-containing sheet products in 1983, and the Tile Division ceased manufacturing asbestos-containing tile products in 1984. In general, asbestos-containing products have not been found to pose a health risk unless significant amounts of free asbestos fibers become airborne. All of the asbestos in asbestos-containing sheet and tile prod- 24 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ ucts sold by the Company or the Tile Division was fully bonded or encapsulated during the manufacturing process. The Company has issued warnings not to remove asbestos-containing flooring by sanding or other methods that do not comply with governmental asbestos handling standards. In one of the cases tried before a jury in Superior Court of California in Los Angeles held in May and June 1997, the Company and another defendant were found liable for $3.3 million in damages, subject to proportional liability under California law. The Company had previously settled one count for an immaterial amount and had gone to trial for the remaining counts. The jury found that the Company was liable for only 25% of the plaintiff's non-economic damages but as a result of post-verdict motions the trial judge granted plaintiff's motion for judgment notwithstanding the verdict and held that California Proposition 51 (establishing proportionate liability for non-economic damages) did not apply in this case. The Company and the other defendant appealed this decision and in August 1999 the appeal court reversed the judgment notwithstanding the verdict and ordered the trial court to enter a judgment against Congoleum for $818. The Company's insurance carrier has paid for the defense costs incurred and has indicated that it would be responsible for paying the ultimate judgment in the case, subject to certain limitations. At December 31, 1999, the Company has accrued approximately $4.4 million for costs related to asbestos product liability. Estimated insurance coverage of $0.8 million has been recorded in other noncurrent assets at December 31, 1999 and is considered probable of recovery. Although there can be no assurance, the Company believes, based upon the nature of its asbestos-containing products and its experience with cases to date, that any potential liability from pending personal injury claims relating to the Company's asbestos-containing products will not have a material adverse effect on the financial position of the Company. The total balances of environmental and asbestos-related liabilities and the related insurance receiv ables deemed probable of recovery at December 31 are as follows: 1999 1998 (in millions) Liability Receivable Liability Receivable - -------------------------------------------------------------------------------- Environmental liabilities...... $ 7.5 $ 2.0 $ 9.2 $ 2.9 Asbestos product liability........ 4.4 .8 6.9 3.3 Other............... .8 -- 1.1 -- - -------------------------------------------------------------------------------- Total............... $12.7 $ 2.8 $17.2 $ 6.2 ================================================================================ Other: In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, product liability, and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. On the basis of information furnished by counsel and others, the Company does not believe that these matters, individually or in the aggregate, will have a material adverse effect on its business or financial condition. 16. Stock Option Plans: Under the Company's 1995 Stock Option Plan, options to purchase up to 800,000 shares of the Company's Class A common stock may be issued to officers and key employees. Such options may be either incentive stock options or nonqualified stock options, and the options' exercise price must be at least equal to the fair value of the Company's Class A common stock on the date of grant. All options granted have ten-year terms and vest over five years at the rate of 20% per year beginning on the first anniversary of the date of grant. Pro forma disclosure regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998, and 1997, respectively: option forfeiture of 15%; risk-free interest rates of 6.61%, 4.80%, and 5.76%; no dividends; volatility fac- 25 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ tors of the expected market price of the Company's common stock of .576 for 1999, .365 for 1998, and .356 for 1997; and a weighted-average expected life of the options of 7 years. The exercise price of options outstanding at December 31, 1999 range from $7.18 to $13.00 per share. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Certain options repriced in 1998 were not fully vested and, accordingly, were subject to a new vesting schedule. The additional pro forma compensation (along with any existing unamortized pro forma compensation) will be amortized over the new vesting period beginning in 1998. The Company's estimated pro forma compensation expense from stock options for the years ended December 31, 1999, 1998, and 1997, respectively, was $684, $648, and $631. The Company's pro forma net income for the years ended December 31, 1999, 1998, and 1997, respectively, is as follows: 1999, $4,244 or $0.49 per share; 1998, $6,792, or $0.75 per share; and 1997, $6,110, or $0.62 per share. The initial impact on pro forma net income may not be representative of compensation expense in future years, when the effect of the amortization of multiple awards would be reflected in the pro forma disclosures. A summary of the Company's 1995 Stock Option Plan activity, and related information, is as follows: December 31, 1999: - -------------------------------------------------------------------------------- Shares Weighted average exercise price - -------------------------------------------------------------------------------- Options outstanding beginning of year ............................. 626,000 $ 10.91 Options granted ................................. 5,000 7.19 Options exercised ............................... -- -- Options forfeited ............................... (14,000) 9.00 -------- Options outstanding end of year ................................... 617,000 $ 10.93 ================================================================================ Exercisable at end of year ...................... 306,200 $ 12.12 Weighted average remaining contractual life .............................. 7 years -- Stock options available for future issuance ........................... 181,000 -- ================================================================================ December 31, 1998: - -------------------------------------------------------------------------------- Shares Weighted average exercise price - -------------------------------------------------------------------------------- Options outstanding beginning of year ............................ 511,900 $ 13.01 Options granted* ............................... 345,000 9.00 Options exercised .............................. -- -- Options forfeited .............................. (22,400) 11.82 Options exchanged* ............................. (208,500) 12.82 -------- Options outstanding end of year .................................. 626,000 $ 10.91 ================================================================================ Exercisable at end of year ..................... 180,000 $ 13.00 Weighted average remaining contractual life ............................. 8 years -- Stock options available for future issuance .......................... 172,000 -- ================================================================================ December 31, 1997: - -------------------------------------------------------------------------------- Shares Weighted average exercise price - -------------------------------------------------------------------------------- Options outstanding beginning of year ............................ 484,500 $ 12.89 Options granted ................................ 56,000 14.25 Options exercised .............................. (2,000) 13.00 Options forfeited .............................. (26,600) 13.53 -------- Options outstanding end of year .................................. 511,900 $ 13.01 ================================================================================ Exercisable at end of year ..................... 185,200 $ 12.95 Weighted average remaining contractual life ............................. 7 years -- Stock options available for future issuance .......................... 286,100 -- ================================================================================ * Includes 208,500 options repriced in 1998. The weighted average grant date fair value of options granted for the 1995 Plan in 1999, 1998 and 1997 was $4.67, $4.31 and $6.97, respectively. On July 1, 1999, a Directors Stock Option Plan was established, under which non-employee directors may be granted options to purchase up to 50,000 shares of Class A common stock. Options granted have ten-year terms and vest 6 months from the grant date. During 1999, options to purchase 5,000 shares were granted under the plan. 26 Congoleum Corporation Notes to Financial Statements (continued) (dollars in thousands, except per share amounts) ================================================================================ A summary of the Directors Stock Option Plan activity, and related information, is as follows: December 31, 1999: - -------------------------------------------------------------------------------- Shares Weighted average exercise price - -------------------------------------------------------------------------------- Options outstanding beginning of year ............................. -- -- Options granted ................................. 5,000 $ 7.19 Options exercised ............................... -- -- Options forfeited ............................... -- -- ----- Options outstanding end of year ................................... 5,000 $ 7.19 ================================================================================ The weighted average grant date fair value of options granted for the Directors Stock Option Plan in 1999 was $3.15. 17. Stockholders' Equity: Holders of the Class B shares are entitled to two votes per share on all matters submitted to a vote of stockholders other than certain extraordinary matters. The holders of the Class A shares are entitled to one vote per share on all matters submitted to a vote of stockholders. In November 1998, the Board of Directors authorized the Company to repurchase an additional $5,000 of the Company's common stock (Class A and Class B shares) through the open market or through privately negotiated transactions, bringing the total authorized common share repurchases to $15,000. Under the total plan, Congoleum has repurchased $13,716 of common stock through December 31, 1999. Shares of Class B stock repurchased (totaling 741,055) have been retired. As of December 31, 1999, ABI owned 4,395,605 Class B shares that represented 68.0% of the voting control of the Company. 18. Quarterly Financial Data (Unaudited): The following table sets forth certain unaudited quarterly financial information. Year ended December 31, 1999 ------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Net sales .............................. $65,387 $64,306 $62,495 $53,818 Gross profit ........................... 18,193 18,688 19,160 13,406 Net income ............................. 737 1,191 1,506 1,494 Net income per common share ......................... $ .08 $ .14 $ .17 $ .18 ================================================================================ Year ended December 31, 1998 --------------------------------------- First Second Third Fourth Quarter Quarter Quarter(a) Quarter - -------------------------------------------------------------------------------- Net sales .............................. $63,875 $69,750 $68,644 $56,857 Gross profit ........................... 17,357 21,001 21,930 16,841 Net income ............................. 427 2,645 1,493 2,875 Net income per common share ......................... $ .05 $ .29 $ .17 $ .32 ================================================================================ (a) Third quarter 1998 includes a $2.4 million (after tax) charge ($0.26 per share for the quarter ended) for an extraordinary item (see Note 5). 27 Congoleum Corporation Report of Independent Auditors ================================================================================ To the Board of Directors and Stockholders of Congoleum Corporation: We have audited the accompanying balance sheets of Congoleum Corporation as of December 31, 1999 and 1998, and the related statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Congoleum Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Congoleum Corporation at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young, LLP Ernst & Young, LLP Philadelphia, Pennsylvania February 11, 2000 28 Directors and Officers ================================================================================ Board of Directors Roger S. Marcus Chairman of the Board, President and Chief Executive Officer of Congoleum Corporation and Chairman of the Board and Chief Executive Officer of American Biltrite Inc. Cyril C. Baldwin, Jr. Chairman Emeritus of the Board of Cambrex Corporation David N. Hurwitz Former President and Chief Executive Officer of Goodson Newspaper Group John N. Irwin III Managing Director of Hillside Capital Incorporated Mark N. Kaplan Of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP (Attorneys) Richard G. Marcus Vice Chairman of Congoleum Corporation and President and Chief Operating Officer of American Biltrite Inc. William M. Marcus Executive Vice President and Treasurer of American Biltrite Inc. C. Barnwell Straut Managing Director of Hillside Capital Incorporated Corporate Officers Roger S. Marcus Chairman of the Board, President and Chief Executive Officer Richard G. Marcus Vice Chairman Robert N. Agate Executive Vice President David W. Bushar Senior Vice President - Manufacturing Michael L. Dumont Senior Vice President - Sales Howard N. Feist III Chief Financial Officer and Secretary Dennis P. Jarosz Senior Vice President - Marketing Sidharth Nayar Senior Vice President - Finance Peter J. Rohrbacher Senior Vice President - Engineering Thomas A. Sciortino Senior Vice President - Administration Merrill M. Smith Senior Vice President - Technology Corporate Information ================================================================================ Corporate Headquarters Congoleum Corporation 3705 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08619-0127 (609) 584-3000 Internet: www.Congoleum.com General Counsel Patterson, Belknap, Webb & Tyler LLP 1133 Avenue of the Americas New York, NY 10036-6710 Independent Auditors Ernst & Young LLP Two Commerce Square Suite 4000 2001 Market Street Philadelphia, PA 19103 Registrar and Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 (908) 497-2300 Market Information The Company's Class A common stock is listed on the New York Stock Exchange. The following table reflects the high and low prices (rounded to the nearest one-sixteenth) based on New York Stock Exchange trading over the past two years. 1999 High Low - -------------------------------------------------------------------------------- First Quarter ........................................ 8 15/16 6 1/2 Second Quarter ....................................... 9 3/8 6 5/8 Third Quarter ........................................ 7 7/8 5 Fourth Quarter ....................................... 4 15/16 2 3/4 1998 High Low - -------------------------------------------------------------------------------- First Quarter ........................................ 11 1/4 9 1/16 Second Quarter ....................................... 10 1/2 9 1/16 Third Quarter ........................................ 9 3/4 6 Fourth Quarter ....................................... 9 7/16 6 The Company does not anticipate paying any cash dividends in the foreseeable future. Any future change in the Company's dividend policy is within the discretion of the Board of Directors and will depend, among other things, on the Company's earnings, debt service and capital requirements, restrictions in financing agreements, business conditions and other factors that the Board of Directors deem relevant. The payment of cash dividends is limited under the terms of the Indenture relating to the Company's Senior Notes and the terms of the Company's existing revolving credit facility, subject to the Company's cumulative earnings and other factors. The number of registered and beneficial holders of the Class A common stock on February 10, 2000 was approximately 1,000. Annual Meeting The 2000 Annual Meeting of the Stockholders of Congoleum Corporation will be held on Tuesday, May 9, 2000 in the Long Lane Room, 2nd Floor, FleetBoston Financial Corporation, 100 Federal Street, Boston, Massachusetts at 8:30 a.m. local time. Stockholder Information The Company will supply any owner of common stock, upon written request to Mr. Howard N. Feist III of the Company at the address set forth herein, and without charge, a copy of the Annual Report on Form 10-K for the year ended December 31, 1999, which has been filed with the Securities and Exchange Commission. Exhibit 23.1 - Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Congoleum Corporation of our report dated February 11, 2000 included in the 1999 Annual Report to Shareholders of Congoleum Corporation. Our audits also included the financial statement schedule of Congoleum Corporation for the years ended December 31, 1999, 1998 and 1997 listed in Item 14(a). This schedule is the responsibility of Congoleum Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-97220, 333-34653 and 33-84387) pertaining to the Congoleum Corporation 1995 Stock Option Plan and Non-Qualified, Non-Employee Directors Stock Option Plan of this report on the financial statement schedule and our report dated February 11, 2000, with respect to the 1999 financial statements of Congoleum Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1999. Ernst & Young LLP Philadelphia, Pennsylvania March 24, 2000 EX-27 4 FDS --
5 This schedule contains summary financial information extracted from the financial statements included in the Company's Form 10-K for the fiscal year ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 18,768 19,232 17,028 3,283 54,599 113,546 200,213 103,809 231,817 53,825 99,575 0 0 93 40,130 231,817 246,006 249,662 176,559 176,559 57,428 0 7,938 7,647 2,719 4,928 0 0 0 4,928 .57 .57
-----END PRIVACY-ENHANCED MESSAGE-----