0001005477-01-501129.txt : 20011009
0001005477-01-501129.hdr.sgml : 20011009
ACCESSION NUMBER: 0001005477-01-501129
CONFORMED SUBMISSION TYPE: 10-Q/A
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010924
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-Q/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13612
FILM NUMBER: 1743556
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
FORMER COMPANY:
FORMER CONFORMED NAME: BATH INDUSTRIES INC
DATE OF NAME CHANGE: 19750528
FORMER COMPANY:
FORMER CONFORMED NAME: BATH IRON WORKS CORP
DATE OF NAME CHANGE: 19670907
10-Q/A
1
d01-0008.txt
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------
FORM 10-Q/A
[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. Gross profit margin improvements contributed $2.5
million to the increase in income. Of this, $1.5 million was due to lower
manufacturing costs resulting from improved efficiency and $1.0 million was due
to the higher margin sales mix resulting from the Ultima product line sales
coupled with lower sales of less profitable tile products. The remaining $1.5
million in improved operating results was primarily due to $0.7 million in
savings from census reductions in the first quarter of 2001 and a $0.7 million
severance charge in the second quarter of 2000.
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. Significant other uses of working capital included reductions
in accounts payable, which are paid more slowly at year end, and increases in
inventory, which are necessary to maintain service to customers during the
scheduled plant summer shutdown periods.
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