10-Q 1 d01-34052.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 -------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number 1-13612 CONGOLEUM CORPORATION (Exact name of Registrant as specified in Its Charter) DELAWARE 02-0398678 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08619-0127 (Address of Principal Executive Offices, including Zip Code) Telephone number: (609) 584-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 27, 2001 ------------------------ ---------------------------------- Class A Common Stock 3,651,190 Class B Common Stock 4,608,945 Page 1 of 17 CONGOLEUM CORPORATION Index Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000..................................3 Statements of Operations for the three and six months ended June 30, 2001 and 2000 (unaudited)...........................4 Statements of Changes in Stockholders' Equity for the year ended December 31, 2000 and the six months ended June 30, 2001 (unaudited)..................................................5 Statements of Cash Flows for the six months ended June 30, 2001 and 2000 (unaudited)..........................6 Notes to Unaudited Condensed Financial Statements ................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15 PART II. OTHER INFORMATION Item 1. Legal Proceedings ...................................................16 Item 2. Changes in Securities................................................16 Item 3. Defaults Upon Senior Securities......................................16 Item 4. Submission of Matters to a Vote of Security Holders..................16 Item 5. Other Information ...................................................16 Item 6. Reports on Form 8-K..................................................16 Signatures ..............................................................17 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONGOLEUM CORPORATION BALANCE SHEETS
June 30, December 31, 2001 2000 ---- ---- (Unaudited) (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents ................................................... $16,028 $12,637 Short-term investments ...................................................... 1,471 12,097 Accounts and notes receivable, net .......................................... 21,266 25,527 Inventories ................................................................. 56,463 53,296 Prepaid expenses and other current assets ................................... 1,620 3,966 Deferred income taxes ....................................................... 5,975 3,637 -------- -------- Total current assets .................................................... 102,823 111,160 Property, plant and equipment, net ............................................... 98,109 99,410 Goodwill, net .................................................................... 10,739 10,955 Deferred income taxes ............................................................ 827 1,530 Other assets ..................................................................... 15,669 15,996 -------- -------- Total assets ............................................................ $228,167 $239,051 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 15,952 $ 19,617 Accrued expenses ............................................................ 36,181 38,844 Accrued taxes ............................................................... 355 440 Deferred income taxes ....................................................... 3,219 3,211 -------- -------- Total current liabilities ............................................... 55,707 62,112 Long-term debt ................................................................... 99,649 99,625 Other liabilities ................................................................ 26,145 26,817 Pension liability ................................................................ 11,723 11,858 Accrued postretirement benefit obligation ........................................ 9,155 9,329 -------- -------- Total liabilities ....................................................... 202,379 209,741 STOCKHOLDERS' EQUITY Class A common stock, par value $0.01 per share; 20,000,000 shares authorized; 4,736,950 shares issued as of June 30, 2001 and December 31, 2000............................................................ 47 47 Class B common stock, par value $0.01 per share; 4,608,945 shares authorized, issued and outstanding as of June 30, 2001 and December 31, 2000 ........................................................... 46 46 Additional paid-in capital ....................................................... 49,105 49,105 Retained deficit ................................................................. (12,103) (8,581) Accumulated minimum pension liability adjustment ................................. (3,494) (3,494) -------- -------- 33,601 37,123 -------- -------- Less common stock held in Treasury, at cost; 1,085,760 shares at June 30, 2001 and December 31, 2000 ......................................... 7,813 7,813 -------- -------- Total stockholders' equity .............................................. 25,788 29,310 -------- -------- Total liabilities and stockholders' equity .............................. $228,167 $239,051 ======== ========
The accompanying notes are an integral part of the condensed financial statements. 3 CONGOLEUM CORPORATION STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ -------------------- 2001 2000 2001 2000 (In thousands, except per share amounts) Net sales .................................................. $55,535 $55,262 $108,718 $112,130 Cost of sales .............................................. 40,663 42,934 83,273 87,139 Selling, general and administrative expenses ............... 12,983 14,475 27,762 29,100 ------- ------- -------- -------- Income (loss) from operations ..................... 1,889 (2,147) (2,317) (4,109) Other income (expense): Interest income ....................................... 155 546 431 911 Interest expense ...................................... (2,060) (1,811) (4,157) (3,623) Other income .......................................... 458 521 828 860 ------- ------- -------- -------- Income (loss) before income taxes ................. 442 (2,891) (5,215) (5,961) Provision (credit) for income taxes ................... 287 (688) (1,693) (1,824) ------- ------- -------- -------- Net income (loss) ................................. $ 155 $(2,203) $ (3,522) $ (4,137) ======= ======= ======== ======== Net income (loss) per common share, basic & diluted............................... $ .02 $ (.27) $ (.43) $ (.50) ======= ======= ======== ======== Weighted average number of common and equivalent shares outstanding ................ 8,260 8,260 8,260 8,273 ======= ======= ======== ========
The accompanying notes are an integral part of the condensed financial statements. 4 CONGOLEUM CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Accumulated Minimum Common Stock Additional Pension par value $0.01 Paid-in Retained Liability Treasury Comprehensive Class A Class B Capital Deficit Adjustment Stock Total Loss ------- ------- ------- ------- ---------- ----- ----- ---- Balance, December 31, 1999 .......... $47 $46 $49,105 $ (452) $(1,000) $(7,616) $40,130 Purchase of treasury stock .......... (197) (197) Minimum pension liability adjustment, net of tax benefit of $1,434 .... (2,494) (2,494) $ (2,494) Net loss ............................ (8,129) (8,129) (8,129) -------- Net comprehensive loss .............. $(10,623) ------ ------ ------- -------- ------- ------- ------- ======== Balance, December 31, 2000 .......... 47 46 49,105 (8,581) (3,494) (7,813) 29,310 Net loss ............................ (3,522) (3,522) $ (3,522) -------- Net comprehensive loss .............. $ (3,522) ------ ------ ------- -------- ------- ------- ------- ======== Balance, June 30, 2001 .............. $47 $46 $49,105 $(12,103) $(3,494) $(7,813) $25,788 ====== ====== ======= ======== ======= ======= =======
The accompanying notes are an integral part of the condensed financial statements. 5 CONGOLEUM CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, --------------------- 2001 2000 (In thousands) Cash flows from operating activities: Net loss .............................................. $(3,522) $(4,137) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation ...................................... 5,933 5,274 Amortization ...................................... 409 409 Deferred income taxes ............................. (1,627) (214) Changes in certain assets and liabilities: Accounts and notes receivable ................ 4,261 (7,403) Inventories .................................. (3,167) (421) Prepaid expenses and other current assets .... 2,504 1,588 Accounts payable ............................. (3,665) (3,238) Accrued expenses ............................. (2,748) 3,683 Other liabilities ............................ (981) (463) ------- ------- Net cash used by operating activities ... (2,603) (4,922) ------- ------- Cash flows from investing activities: Capital expenditures .............................. (4,632) (7,883) Purchase of short-term investments ................ (1,471) (6,453) Maturities of short-term investments .............. 12,097 19,182 ------- ------- Net cash provided by investing activities 5,994 4,846 ------- ------- Cash flows from financing activities: Purchase of treasury stock ........................ -- (197) ------- ------- Net cash used by financing activities ... -- (197) ------- ------- Net increase/(decrease) in cash and cash equivalents ....... 3,391 (273) Cash and cash equivalents: Beginning of period ................................... 12,637 18,768 ------- ------- End of period ......................................... $16,028 $18,495 ======= =======
The accompanying notes are an integral part of the condensed financial statements. 6 CONGOLEUM CORPORATION NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Basis of Presentation The condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Rule 10-01 of Regulation S-X and have not been audited by the Company's independent accountants. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States required for complete financial statements have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The preparation of condensed financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of the Company's financial position have been included. The results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for a full year. These condensed financial statements should be read in conjunction with the Company's audited financial statements which appear in the Company's Annual Report to Stockholders for the year ended December 31, 2000. Based upon the nature of the Company's operations facilities and management structure, the Company considers its business to constitute a single segment for financial reporting purposes. 2. Pending Adoption of Financial Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142. SFAS No. 141 applies to all business combinations completed after June 30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the statement early. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on an annual basis. SFAS No. 141 is not expected to have a significant impact on the results of operations or financial position of Congoleum Corporation. SFAS 142 will be effective for the Company as of January 1, 2002. While Congoleum has not fully evaluated the impact of adopting SFAS 142, adoption of this standard is expected to result in the elimination of approximately $0.4 million of goodwill amortization expense per year. 7 3. Changes in Accounting Principles In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133, as amended by SFAS 138), which requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company adopted SFAS 133 in the first quarter of fiscal 2001. Adoption of this pronouncement did not have a significant effect on the Company's consolidated financial position or results of operations. 4. Inventories A summary of the major classifications of inventories stated at the lower of LIFO cost or market is as follows: June 30, December 31, 2001 2000 ------- ------- Finished goods .............. $45,094 $42,268 Work-in-process ............. 3,665 3,600 Raw materials and supplies... 7,704 7,428 ------- ------- $56,463 $53,296 ======= ======= 5. Distributor Transition Costs During the third quarter of 2000, the Company announced the appointment of Mohawk Industries, Inc. as a national distributor. At the same time, the Company announced it was terminating its distribution arrangements with LDBrinkman & Co., who had been its exclusive distributor in much of the southwestern United States, accounting for 21% of the Company's sales in 1999. LDBrinkman & Co. contested the Company's right to terminate its distributor agreement and the matter went to arbitration in the fourth quarter of 2000. The parties signed a final settlement agreement in February 2001. The Company recorded a charge of $7,717 in the fourth quarter of 2000 to provide for the nonrecurring costs associated with the transition. Included in this charge were certain costs incurred by the Company for establishing Mohawk as a distributor. The Company also agreed to subsidize a portion of the costs of merchandising materials for Mohawk such as samples and displays. Also, included in the charge are certain termination payments to be made to LDBrinkman pursuant to the terms of the settlement agreement. The Company re-evaluated its allowance for doubtful accounts in light of this agreement and concluded it should be reduced by $1,785, which was recorded as a credit to bad debt expense in the fourth quarter of 2000. The Company has provided right-of-return provisions to LDBrinkman in the termination agreement whereby LDBrinkman may return certain unsold inventory purchased from the Company 8 that meets minimum size and quality requirements. Therefore, the Company has deferred the recognition of revenue for its estimate of returns of inventory under this right-of-return agreement. The Company expects all obligations under this provision to be satisfied by the end of the third quarter of 2001. Of the $7,717 in costs incurred during 2000, $2,180 remains unpaid as of June 30, 2001. These amounts are anticipated to be paid by August 15, 2001. 6. Income (Loss) Per Share Income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. 7. Commitments and Contingencies 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. These actions include possible obligations to remove or mitigate the effects on the environment of wastes deposited at various sites, including Superfund sites and certain of the Company's owned and previously owned facilities. The contingencies also include claims for personal injury and/or property damage. The exact amount of such future costs and timing of payments are indeterminable due to such unknown factors as the magnitude of clean-up 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 records a liability for environmental remediation, asbestos-related claim costs and general liability claims when a clean-up program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and clean-ups 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. The recorded liabilities are not discounted for delays in future payments and are not reduced by the amount of estimated insurance recoveries. Such estimated insurance recoveries 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 cleaning up the contaminated waste sites. The Company's ultimate liability in connection with those sites depends on many factors, including the volume of material contributed to the site, the number of other PRP's and their financial viability, 9 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 is comprised of approximately 50 companies, substantially all of which are financially solvent. This group has estimated that future costs of groundwater remediation would be approximately $26 million. Based on waste allocations amongst members of the PRP group in proportion to waste disposed at the site, Congoleum's share was estimated to be approximately 5.5%. At June 30, 2001, 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 the outcome of these matters could result in significant expenses or judgments, management 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 is one of many defendants in approximately 4,007 pending claims (including workers' compensation cases) involving approximately 18,305 individuals as of June 30, 2001, alleging personal injury from exposure to asbestos or asbestos-containing products. There were 1,754 claims at December 31, 2000 that involved approximately 12,079 individuals. Activity related to asbestos claims was as follows: Six months ended Year ended June 30, December 31, 2001 2000 ---------------------------------------------------- Beginning claims... 1,754 670 New claims ........ 2,336 1,302 Settlements ....... (23) (76) Dismissals ........ (60) (142) ---------------------------------------------------- Ending claims ..... 4,007 1,754 ===== ===== The total indemnity costs incurred to settle claims during the six months ending June 30, 2001 and twelve months ending December 31, 2000 were $0.8 million and $3.9 million, respectively, which were paid by the Company's insurance carriers, as were the related defense costs. Costs per 10 claim vary depending on a number of factors, including the nature of the alleged exposure and the jurisdiction where the claim was litigated. As of June 30, 2001, the Company has incurred asbestos-related claims of $11.1 million, to resolve claims of over 33,000 claimants, all of which have been paid by the Company's insurance carriers. The average indemnity cost per resolved claimant is $332. Over 99% of claims incurred by the Company have settled, on average, for amounts less than $101 per claimant. Nearly all claims allege that various diseases were caused by exposure to asbestos-containing products, including sheet vinyl and resilient tile manufactured by the Company (or, in the workers' compensation cases, exposure to asbestos in the course of employment with the Company). The Company discontinued the manufacture of asbestos-containing sheet vinyl products in 1983 and asbestos-containing tile products in 1974. In general, governmental authorities have determined that asbestos-containing sheet and tile products are nonfriable (i.e., cannot be crumbled by hand pressure) because the asbestos was encapsulated in the products during the manufacturing process. Thus, governmental authorities have concluded that these products do not pose a health risk when they are properly maintained in place or properly removed so that they remain nonfriable. The Company has issued warnings not to remove asbestos-containing flooring by sanding or other methods that may cause the product to become friable. The Company regularly evaluates its estimated liability to defend and resolve current and reasonably anticipated future asbestos-related claims. It reviews, among other things, recent and historical settlement and trial results, the incidence of past and recent claims, the number of cases pending against it, and asbestos litigation developments that may impact the exposure of the Company. One such development, the declarations of bankruptcy by several companies that are typically lead defendants in asbestos-related cases, may have negatively impacted the Company's claim experience. The estimates developed are highly uncertain due to the limitations of the available data and the difficulty of forecasting the numerous variables that can affect the range of the liability. During the fourth quarter of fiscal 2000, the Company updated its evaluation of the range of potential defense and indemnity costs for asbestos-related liabilities and the insurance coverage in place to cover these costs. As a result of the Company's analysis, the Company has determined that its range of probable and estimable losses for asbestos-related claims through the year 2049 is $35.1 million to $161.3 million before considering the effects of insurance recoveries and before discounting to present value. As discussed previously, it is very difficult to forecast a liability for the Company's ultimate exposure for asbestos-related claims as there are multiple variables that can affect the timing, severity, and quantity of claims. Therefore, the Company has concluded that no amount within that range is more likely than any other, and therefore has determined that the amount of the gross liability it should record for asbestos-related claims is equal to $35.1 million in accordance with accounting principles generally accepted in the United States. For a majority of the period that Congoleum produced asbestos-containing products, the Company purchased primary and excess insurance policies that cover bodily injury asbestos claims. The Company believes that it has in excess of $1 billion primary and excess insurance coverage available as of December 31, 2000 to cover asbestos-related claims. To date, all claims and defense 11 costs have been paid through insurance coverage, and the Company anticipates that insurance coverage will continue to cover these costs in the foreseeable future. The same factors that affect developing forecasts of potential defense and indemnity costs for asbestos-related liabilities also affect estimates of the total amount of insurance that is probable of recovery, as do a number of additional factors. These additional factors include possible uncertainties regarding the legal sufficiency of insurance claims or solvency of insurance carriers, the method in which losses will be allocated to the various insurance policies and the years covered by those policies, and how legal and other loss handling costs will be covered by the insurance policies. The Company has determined, based on its review of its insurance policies and the advice of legal counsel, that approximately $20 million of the estimated $35 million gross liability is highly probable of recovery. This determination was made after considering the terms of the available insurance coverage and the financial viability of the insurance companies. The Company believes that the criteria to offset the estimated gross liability with this probable insurance recovery, as defined by accounting principles generally accepted in the United States, have been met. The balance of the estimated gross liability of $15 million has been reflected in the balance sheet as a long-term liability as of December 31, 2000 and June 30, 2001. The Company has also recorded in the balance sheet an insurance receivable of $7 million that represents an estimate of probable insurance recoveries that do not qualify for offsetting against the gross liability. This insurance receivable has been recorded in other long-term assets as of December 31, 2000 and June 30, 2001. Since many uncertainties exist surrounding asbestos litigation, the Company will continue to evaluate its asbestos-related estimated liability and corresponding estimated insurance assets as well as the underlying assumptions used to derive these amounts. It is reasonably possible that the Company's total exposure to asbestos-related claims may be greater than the recorded liability and that insurance recoveries may be less than the recorded asset. These uncertainties may result in the Company incurring future charges to income to adjust the carrying value of recorded liabilities and assets. Congoleum does not believe, however, that asbestos-related claims will have a material adverse effect on its financial position or liquidity. 8. Credit Facility The Company has a revolving credit facility which expires in 2003. This financing agreement contains certain covenants which include the maintenance of a minimum net worth, income and fixed charge coverage levels. During the second quarter of 2001, the credit agreement was amended to revise certain covenants and pricing, including the commitment fee. Shortly thereafter, the Company reduced its revolving credit facility from $30 million to $20 million to reduce its cost for commitment fees. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three and six months ended June 30, 2001 as compared to three and six months ended June 30, 2000. Net sales for the second quarter of 2001 were $55.5 million, as compared to $55.3 million in the second quarter of 2000, an increase of $0.2 million. Higher sales of the Company's Ultima product line, which was introduced late in the second quarter of 2000, more than offset declines of sales in the southwestern United States resulting from a major distributor transition and reduced sales to the depressed manufactured housing industry. Year-to-date net sales for the first six months of 2001 were $108.7 million, a decrease of $3.4 million or 3.0% from the first six months of 2000. The decline in 2001 year-to-date sales versus 2000 reflects the even more pronounced decline in first quarter sales to the manufactured housing industry, partially offset by higher sales of the Company's Ultima product. Gross profit for the second quarter of 2001 was $14.9 million, up $2.6 million from $12.3 million in the second quarter of 2000. Gross profit as a percent of net sales increased to 26.8% in the second quarter of 2001 from 22.3% in the second quarter of 2000. The improvement in gross profit was due to improved manufacturing efficiency, reductions in overhead expense, and a more profitable sales mix. Gross profit for the first six months of 2001 was $25.4 million (23.4% of net sales), as compared to $25.0 million (22.3% of net sales) in the first half of 2000. The improvement in year-to-date gross profit margin for the first six months of 2001 was mitigated by the lower sales and production volumes in the first quarter of 2001 versus the first quarter of 2000. Selling, general and administrative expenses were $13.0 million in the second quarter of 2001, down 10.3% from the second quarter of 2000, reflecting expense reductions initiated late in the first quarter of 2001. As a percent of net sales, selling, general and administrative expenses were 23.4% in the second quarter of 2001, as compared to 26.2% in the second quarter of 2000. For the six months ended June 30, 2001, selling, general and administrative expenses were $27.8 million (25.5% of net sales), as compared to $29.1 million (26.0% of net sales) in the same period one year earlier. The Company instituted a number of cost reduction initiatives, including a 13.0% reduction in workforce, late in the first quarter of 2001. Income from operations for the second quarter of 2001 was $1.9 million, as compared to a loss of $2.1 million in the second quarter of 2000. The operating loss for the first six months of 2001 was $2.3 million, compared to a loss of $4.1 million in the first half of 2000. The improved results for the second quarter of 2001 versus 2000 are due to improved gross profit margins and reductions in expenses. These improvements more than offset the weaker year-over-year results in the first quarter of 2001. 13 Interest expense for the three and six month periods ended June 30, 2001 is above the comparable period a year earlier due to less interest being capitalized in connection with capital projects in 2001. The provision for income taxes for the three months ended June 30, 2001 represents an effective tax rate of 65%. This is due to the impact of certain permanent differences between book and tax income, which have a significant impact on the annualized effective tax rate at low levels of book income. The 32.5% effective tax rate for the six months ended June 30, 2001 is indicative of the Company estimate of its full year effective tax rate. Liquidity and Capital Resources Cash, cash equivalents and short-term investments declined $7.2 million for the six months ended June 30, 2001 to $17.5 million. Working capital at June 30, 2001 was $47.1 million, down from $49.0 million at December 31, 2000. The ratio of current assets to current liabilities at June 30, 2001 was 1.8 compared to 1.8 at December 31, 2000. The ratio of debt to total capital at June 30, 2001 was .44 compared to .42 at December 31, 2000. Cash used by operations was $2.6 million for the first six months of 2001, compared to cash used by operations of $4.9 million in the first six months of 2000. The decrease in cash used by operations in the first half of 2001 versus the first half of 2000 was due to collection of $10.5 million in receivables which were beyond normal terms at December 31, 2000. These receipts more than offset increases in other uses of working capital. Capital expenditures were $4.6 million for the first six months of 2001. Total 2001 capital spending is expected to be approximately $8.0 million. 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 effect on the financial position of the Company 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 results of operations or financial position. There can be no assurances that such costs could be passed along to its customers. 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 June 30, 2001, the Company had repurchased 777,665 shares of its common stock for an aggregate cost of $4.3 million pursuant to this plan. The Company's principal sources of liquidity are net cash provided by operating activities and borrowings under its Amended and Restated Financing Agreement. The Company believes that these sources will be adequate to fund working capital requirements, debt service payments, stock and note repurchases and planned capital expenditures through the foreseeable future. 14 Pending Adoption of Financial Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142. SFAS No. 141 applies to all business combinations completed after June 30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the statement early. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on an annual basis. SFAS No. 141 is not expected to have a significant impact on the results of operations or financial position of Congoleum Corporation. SFAS 142 will be effective for the Company as of January 1, 2002. While Congoleum has not fully evaluated the impact of adopting SFAS 142, adoption of this standard is expected to result in the elimination of approximately $0.4 million of goodwill amortization expense per year. Some of the information presented in this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company 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 Company, (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 Company's facilities or distributors, (v) the future cost and timing of payments associated with environmental, product and general liability claims, and (vi) availability of insurance coverage for resolving asbestos-related claims. Item 3: Quantitative and Qualitative Disclosure 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 June 30, 2001 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. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings: None Item 2. Changes in Securities and Use of Proceeds: None Item 3. Defaults Upon Senior Securities: None Item 4. Submission of Matters to a Vote of Security Holders: At the Annual Meeting of Stockholders held on May 8, 2001, the following actions were taken: Three nominees were elected as Class B Directors who will hold office until the Annual Meeting of Stockholders in 2004 and until their successors are duly elected and qualify. Name Votes For Votes Withheld ---- --------- -------------- Mark N. Kaplan 11,255,873 385,264 Richard G. Marcus 11,255,512 385,625 Mark S. Newman 11,255,936 385,201 The following persons are the other directors of the Company whose term of office as a director continued after the meeting: William M. Marcus C. Barnwell Straut Roger S. Marcus Cyril C. Baldwin, Jr. John N. Irwin III Item 5. Other Information: None Item 6. Exhibits and Reports on Form 8-K: a) Exhibits: 4.6.2 Amendment One: Amendment to Loan and Security Agreement dated June 28, 2000 by and between Congoleum Corporation, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and First Union National Bank. 4.6.3 Amendment Two: Second Amendment to Loan and Security Agreement dated May 30, 2001 by and between Congoleum Corporation, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and First Union National Bank. 16 CONGOLEUM CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONGOLEUM CORPORATION (Registrant) Date: August 10, 2001 By: /s/ H. N. Feist III ------------------------------------------ (signature) Howard N. Feist III Chief Financial Officer (Principal Financial & Accounting Officer) 17