0001005477-01-501130.txt : 20011009
0001005477-01-501130.hdr.sgml : 20011009
ACCESSION NUMBER: 0001005477-01-501130
CONFORMED SUBMISSION TYPE: 10-K/A
PUBLIC DOCUMENT COUNT: 3
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-K/A
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13612
FILM NUMBER: 1743562
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-K/A
1
b01-34642.txt
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 02-0398678
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Class A Common Stock, par value $.01 per share American Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
1
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO
Indicate by check mark 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/A or any amendment to
this Form 10-K/A. |X|
As of March 5, 2001, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $7.3
million based on the closing price ($2.10 per share) on the American Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant, American Biltrite Inc. and
Hillside Capital Incorporated. All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant. As of March 5, 2001, 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, 2000
Part III. Portions of the Congoleum Corporation's Proxy Statement for
the Annual Meeting of Shareholders to be held on May 8, 2001
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, (v) the future cost and timing of payments associated with
environmental, product and general liability claims, and (vi) changes in
distributors of the Company's products.
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 wood laminates, sundries, and accessory
products for resale.
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
3
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.
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 25
distributors providing approximately 88 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, 2000, the backlog of unshipped orders
was $5.5 million, compared to $7.3 million at December 31, 1999.
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, 2000, 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., LDBrinkman & Co. Together, they accounted
for 44% of the Company's net sales in 2000.
4
On September 25, 2000 the Company announced the appointment of Mohawk
Industries, Inc. as a distributor of its products throughout the continental
United States effective November 1, 2000. The Company also announced it would be
phasing out its distribution arrangements with LDBrinkman & Co.
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, 2000 were $4.3 million,
respectively.
5
compared to $4.2 million and $3.8 million for the years ended December 31, 1999
and 1998,
6
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 2000, the Company incurred capital expenditures of
approximately $6,000 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, 2000, the Company employed a total of 1,159 personnel
compared to 1,277 employees at December 31, 1999.
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 640 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 2006. 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, 2001.
7
Roger S. Marcus (Age 55)
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 53)
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 56)
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 54)
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 46)
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 44)
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 55)
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).
8
Sidharth Nayar (Age 40)
Sidharth Nayar has been Senior 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.
Thomas A. Sciortino (Age 54)
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 75)
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).
9
Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, as well as storage space in Trenton, New Jersey, which
are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 47,082
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 64% of the hours available on a
five-day, three-shift basis in 2000, with the corresponding figure for
individual production lines ranging from 2% to 104%.
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.
10
Item 3. LEGAL PROCEEDINGS
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 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,
2000, 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 1,754 pending claims (including workers' compensation cases)
involving approximately 12,079 individuals as of December 31, 2000, alleging
personal injury from exposure to asbestos or asbestos-containing products. There
were 670 claims at December 31, 1999 that involved approximately 6,246
individuals. Activity related to asbestos claims during the years ended December
31, 2000 and 1999 was as follows:
11
2000 1999
----------------------------------------------------------------
Claims at Jan. 1................ 670 657
New Claims...................... 1,302 247
Settlements..................... (76) (48)
Dismissals...................... (142) (186)
----------------------------------------------------------------
Claims at Dec. 31............... 1,754 670
----------------------------------------------------------------
The total indemnity costs incurred to settle claims during 2000 and 1999
were $3.9 million and $2.9 million, respectively, which were paid by the
Company's insurance carriers, as were the related defense costs. Costs per 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 December 31,
2000, the Company has incurred asbestos-related claims of $10.2 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 $310. Over 98% of claims incurred by the Company have settled, on average,
for amounts less than $100 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
12
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. As such, 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 generally accepted accounting principles.
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 costs have
been paid through primary insurance coverage, and the Company anticipates that
primary insurance coverage will continue to cover these costs in the near
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 the financial viability of
some of the insurance companies, 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 highly probable
insurance recovery, as defined by generally accepted accounting principles, 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. 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.
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.
13
The total balances of environmental and asbestos-related liabilities and
the related insurance receivables deemed probable of recovery at December 31 are
as follows:
2000 1999
(in millions) Liability Receivable Liability Receivable
----------------------------------------------------------------------------
Environmental
liabilities............. $ 5.1 $ 2.0 $ 7.5 $ 2.0
Asbestos product
liability............... 15.1 7.1 4.4 .8
Other...................... 1.2 -- .8 --
----------------------------------------------------------------------------
Total...................... $21.4 $ 9.1 $12.7 $ 2.8
----------------------------------------------------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
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 33 of the Company's
Annual Report to Shareholders for the year ended December 31, 2000 (included as
Exhibit 13.1 to this Annual Report on Form 10-K/A).
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 10 of the
Company's Annual Report to Shareholders for the year ended December 31, 2000
(included as Exhibit 13.1 to this Annual Report on Form 10-K/A).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- AS AMENDED
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 11 through 14 of the Company's
Annual Report to Shareholders for the year ended December 31, 2000 (included as
Exhibit 13.1 to this Annual Report on Form 10-K/A).
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, 2000 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/A, as
listed in Item 14(a) of Part IV of this report.
15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
16
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 8, 2001.
17
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, 2000 (included as Exhibit 13.1 to this Annual Report on Form
10-K/A).
Annual Report
Page Number
-----------
Report of Independent Auditors 32
Balance Sheets at December 31, 2000 and December 31, 1999 15
Statements of Operations for each of the three years ended
December 31, 2000, 1999 and 1998 16
Statements of Changes in Stockholders' Equity for each of the
three years ended December 31, 2000, 1999 and 1998 17
Statements of Cash Flows for each of the three years ended
December 31, 2000, 1999 and 1998 18
Notes to Financial Statements 19
Supplementary Data
Quarterly Financial Data (Unaudited) 30
(2) The following financial statement schedule is included in this
report on Form 10-K/A:
Page Number
-----------
Schedule II - Valuation and Qualifying Accounts,
as amended 26
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 23
through 25.
18
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.
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.
19
Exhibit Exhibit
Number -------
------
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.
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 11 through 33 of the Congoleum Annual Report to Shareholders
for the year ended December 31, 2000.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K.
20
During the quarter ended December 31, 2000 the Company filed
no current reports on Form 8-K.
21
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, 2001.
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, March 27, 2001
----------------- Chief Executive Officer and Director
Roger S. Marcus (Principal Executive Officer)
/s/ Chief Financial Officer March 27, 2001
------------------ (Principal Financial and
Howard N. Feist III Accounting Officer)
/s/ Vice Chairman and Director March 27, 2001
------------------
Richard G. Marcus
/s/ Director March 27, 2001
------------------
William M. Marcus
/s/ Director March 27, 2001
------------------
John N. Irwin III
/s/ Director March 27, 2001
------------------
Cyril C. Baldwin, Jr.
/s/ Director March 27, 2001
------------------
Mark S. Newman
/s/ Director March 27, 2001
------------------
Mark N. Kaplan
22
/s/ Director March 27, 2001
------------------
C. Barnwell Straut
23
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.
24
***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 11 through 33 of the Congoleum Annual Report to
Shareholders for the year ended December 31, 2000.
*********21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
25
-------------
** 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.
26
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
-------
Balance at Reversed to Balance
Beginning Income Other at end
of Period Statement Changes Deductions (a) of Period
---------- ----------- ------- -------------- ---------
Year ended December 31, 2000:
Allowance for doubtful
accounts and cash
discounts $(3,283) $1,785 $ (562)(c) $ 126 $(1,934)
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)(c) $ (3) $(3,336)
(a) Balances written-off, net of recoveries.
(b) Represents reduction of the allowance for doubtful accounts and cash
discounts.
(c) Represents increase of the allowance for doubtful accounts and cash
discounts.
27
EX-13
3
ex-13.txt
Exhibit 13.1
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, 2000 as compared to year ended December 31, 1999
Net sales for the year ended December 31, 2000 were $224.6 million as
compared to $246.0 million for the year ended December 31, 1999, a decrease of
$21.4 million or 8.7%. The decrease resulted primarily from declines in sales of
promotional goods and products for the manufactured housing industry. Sales of
running line residential sheet products increased on the strength of new product
sales, but most of this increase was offset by sales declines in the
southwestern United States, where the Company has made a major distributor
change.
Gross profit for the year ended December 31, 2000 was $54.3 million
compared to $69.4 million in 1999, a decrease of $15.1 million or 21.9%. Gross
profit declined primarily due to lower sales and higher raw material costs.
Gross profit margins declined from 28.2% of net sales in 1999 to 24.2% of net
sales in 2000. The decline in gross profit margins was due to having less
production volume over which to spread fixed manufacturing overhead expenses,
coupled with higher costs for raw materials and energy.
Selling, general and administrative expenses were $54.4 million for the
year ended December 31, 2000 as compared to $57.4 million for the year ended
December 31, 1999, a decrease of $3.0 million or 5.3%. As a percent of net
sales, selling, general and administrative expenses increased from 23.3% in 1999
to 24.2% in 2000. The Company initiated expense reductions during the second
quarter in response to weaker sales, resulting in lower spending. The Company
performed a periodic analysis of its allowance for doubtful accounts in the
fourth quarter of 2000. This analysis considered both quantitative and
qualitative criteria of our existing customer base, among which is the relative
financial strength of our distributors. The Company reversed $1.8 million of its
allowance for doubtful accounts upon the completion of its analysis, which also
contributed to the reduction in selling, general and administrative expenses in
2000.
Distributor transition costs include transition expenses of $7.7 million
related to the previously announced distributor change from LDBrinkman & Co. to
Mohawk Industries, Inc. The charge consisted of two components. First was the
Company's share of the costs of establishing Mohawk as a distributor, which
included training, meetings, displays and similar costs. Second were the costs
to be paid pursuant to the settlement agreement with LDBrinkman. Additionally, a
provision for the estimated amount of goods to be returned to the Company in
2001 under the terms of the settlement agreement was recorded. Sales and margin
have been reduced by $4.0 million and $1.3 million, respectively, reflecting
these estimated returns. Of the $7.7 million distributor transition charge, $4.7
million remains accrued as of December 31, 2000 and consists primarily of
termination costs to be paid to LDBrinkman. These costs are expected to be paid
in the first three quarters of fiscal 2001 and are expected to be funded by
operating cash flows.
The loss from operations was $7.8 million for the year ended December 31,
2000, compared to income of $12.0 million for the year ended December 31, 1999,
a decrease of $19.9 million, primarily due to the decline in sales and the
impact of the distributor transition.
Interest expense (net) decreased from $6.1 million in 1999 to $5.7 million
in 2000, primarily due to higher capitalized interest in 2000 compared to 1999.
Other income (net) decreased from $1.8 million in 1999 to $1.5 million in
2000, due to lower royalty income.
The effective tax rate for 2000 was 32.9% resulting in a tax benefit of
$3,976. The tax benefit includes a reduction of $1,086 for a deferred tax
valuation allowance. For 1999, the effective tax rate
11
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
--------------------------------------------------------------------------------
was 35.6% resulting in tax expense of $2,719, including a valuation allowance of
$469.
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.
Liquidity and Capital Resources
Cash and equivalents, including short-term investments at December 31, 2000,
were $24.7 million, a decrease of $13.3 million from December 31, 1999. Working
capital was $49.0 million at December 31, 2000, down from $59.7 million one year
earlier. The ratio of current assets to current liabilities at December 31, 2000
was 1.8 to one, compared to 2.1 to one a year earlier. The ratio of debt to
total capital at December 31, 2000 was .42 compared to .43 in 1999. Net cash
provided by operations during the year ended December 31, 2000 was $0.9 million,
down from $10.3 million in 1999. Capital expenditures in 2000 totaled $13.9
million. The Company is currently planning capital expenditures of approximately
$8.0 million in 2001 and $12.0 million in 2002.
During 1998, the Company entered into a new five-year revolving credit
facility which provides for borrowings up to $30.0 million. Interest ranges from
0-1% below prime, or 0.75% - 1.5% over LIBOR, 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, 2000, based on the
level of receivables and inventory, the Company had a borrowing base avail-
12
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
--------------------------------------------------------------------------------
able of $30.0 million, of which $3.6 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,
2000, the Company had repurchased 777,665 shares of its common stock for an
aggregate cost of $4.3 million pursuant to this plan.
Collective bargaining agreements with hourly employees at the Company's
facilities expire in 2003 and 2006. 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 one of many defendants in 1,754 pending claims involving
12,079 individuals as of December 31, 2000 alleging personal injury from
exposure to asbestos-containing products. The Company estimates the potential
cost of defense and indemnity for claims of this type could range from $35
million to $161 million over the next fifty years, before insurance. The Company
also believes it has in excess of $1 billion of insurance coverage available for
claims of this type. At December 31, 2000, the Company had recorded a liability
of $15 million for the estimated potential liability without related insurance
coverage that was highly probable of recovery, and a related insurance
receivable of $7 million representing an estimate of the probable amount of
related insurance recovery.
The indemnity cost incurred to settle claims during 2000 was $3.9 million,
all of which was paid by the Company's insurance carriers, and the Company
expects that its insurance carriers will continue to pay the majority, if not
all, of the costs in the foreseeable future. Although the number of new claims
rose significantly in 2000, and although there is a high degree of uncertainty
in estimating both the potential liability and the amount of related insurance
coverage available, the Company does not believe these claims will have a
material adverse effect on its financial position or results of operations.
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,
2000). These actions include possible obligations to remove or mitigate the
effects on the environment of wastes deposited at various sites, including
Superfund sites and certain of the Company's owned and previously owned
facilities. The contingencies also include claims for personal injury and/or
property damage. The exact amount of such future cost and timing of payments are
indeterminable due to such unknown factors as the magnitude of cleanup costs,
the timing and extent of the remedial actions that may be required, the
determination of the Company's liability in proportion to other potentially
responsible parties, and the extent to which costs may be recoverable from
insurance. The Company has recorded provisions in its financial statements for
the estimated probable loss associated with all known general, 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
13
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
--------------------------------------------------------------------------------
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.
14
Congoleum Corporation
Balance Sheets
(dollars in thousands, except share amounts)
--------------------------------------------------------------------------------
December 31, December 31,
2000 1999
-------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 12,637 $ 18,768
Short-term investments ...................................... 12,097 19,232
Accounts receivable, less allowance for doubtful
accounts and cash discounts of $1,934 and $3,283
as of December 31, 2000 and 1999, respectively ............ 25,527 13,745
Inventories ................................................. 53,296 54,599
Prepaid expenses and other current assets ................... 3,966 3,687
Deferred income taxes ....................................... 3,637 3,515
-------------------------------------------------------------------------------------------
Total current assets ...................................... 111,160 113,546
Property, plant, and equipment, net ........................... 99,410 96,404
Goodwill, net ................................................. 10,955 11,387
Deferred income taxes ......................................... 1,530 --
Other noncurrent assets ....................................... 15,996 10,480
-------------------------------------------------------------------------------------------
Total assets .............................................. $239,051 $231,817
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $19,617 $ 19,160
Accrued liabilities ......................................... 38,844 30,597
Accrued taxes ............................................... 440 311
Deferred income taxes ....................................... 3,211 3,757
-------------------------------------------------------------------------------------------
Total current liabilities ................................. 62,112 53,825
Long-term debt ................................................ 99,625 99,575
Other liabilities ............................................. 26,817 18,405
Noncurrent pension liability .................................. 11,858 9,230
Accrued postretirement benefit obligation ..................... 9,329 9,647
Deferred income taxes ......................................... -- 1,005
-------------------------------------------------------------------------------------------
Total liabilities ......................................... 209,741 191,687
-------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01; 20,000,000 shares
authorized; 4,736,950 shares issued as of
December 31, 2000 and 1999 .................................. 47 47
Class B common stock, par value $0.01; 4,608,945 shares
authorized, issued and outstanding at
December 31, 2000 and 1999 .................................. 46 46
Additional paid-in capital .................................... 49,105 49,105
Retained deficit .............................................. (8,581) (452)
Minimum pension liability adjustment .......................... (3,494) (1,000)
-------- --------
37,123 47,746
Less common stock held in treasury, at cost;
1,085,760 and 1,025,760 shares at December 31,
2000 and 1999, respectively ................................. 7,813 7,616
-------------------------------------------------------------------------------------------
Total stockholders' equity ................................ 29,310 40,130
-------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ................ $239,051 $231,817
===========================================================================================
The accompanying notes are an integral part of the financial statements.
15
Congoleum Corporation
Statements of Operations
(in thousands, except per share amounts)
--------------------------------------------------------------------------------
For the years ended
December 31,
------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------
Net sales ................................................ $ 224,644 $ 246,006 $ 259,126
Cost of sales ............................................ 170,373 176,559 181,997
Selling, general and administrative expenses ............. 54,395 57,428 56,839
Distributor transition expenses .......................... 7,717 -- --
-------------------------------------------------------------------------------------------------
Income (loss) from operations ....................... (7,841) 12,019 20,290
Other income (expense):
Interest income ........................................ 1,797 1,837 1,607
Interest expense ....................................... (7,511) (7,938) (7,365)
Other income ........................................... 1,459 1,819 1,249
Other expense .......................................... (9) (90) (265)
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item ................................ (12,105) 7,647 15,516
Provision (benefit) for income taxes ..................... (3,976) 2,719 5,663
-------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item ............. (8,129) 4,928 9,853
Extraordinary item-early retirement of debt,
net of income tax benefit .............................. -- -- (2,413)
-------------------------------------------------------------------------------------------------
Net income (loss) ................................... $ (8,129) $ 4,928 $ 7,440
=================================================================================================
Income (loss) per common share before
extraordinary item ................................ $ (0.98) $ .57 $ 1.09
Extraordinary item .................................. -- -- (.27)
-------------------------------------------------------------------------------------------------
Net income (loss) per common share, basic
and diluted ....................................... $ (0.98) $ .57 $ .82
=================================================================================================
Weighted average number of common and
equivalent shares outstanding ..................... 8,267 8,699 9,038
=================================================================================================
The accompanying notes are an integral part of the financial statements.
16
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, 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)
Purchase of treasury stock ...........
Minimum pension liability adjustment,
net of tax benefit of $1,434 .......
Net loss ............................. (8,129)
Net comprehensive loss ...............
--------------------------------------------------------------------------------
Balance, December 31, 2000 ........... $ 47 $ 46 $ 49,105 $ (8,581)
--------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income (Loss) Treasury Comprehensive
Adjustment* Stock Total Income (Loss)
------------------------------------------------------------------------------------ -------------
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
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)
--------
Net comprehensive loss ................. $(10,623)
------------------------------------------------------------------------------------ ========
Balance, December 31, 2000 ............. $ (3,494) $ (7,813) $ 29,310
====================================================================================
* Amounts shown are for minimum pension liability adjustment.
The accompanying notes are an integral part of the financial statements.
17
Congoleum Corporation
Statements of Cash Flows
(dollars in thousands)
--------------------------------------------------------------------------------
For the years ended
December 31,
--------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) ...................................... $ (8,129) $ 4,928 $ 7,440
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation ....................................... 10,919 10,220 9,848
Amortization ....................................... 818 818 893
Loss on early retirement of debt, including
write-off of deferred financing fees ............. -- -- 3,809
Deferred income taxes .............................. (1,769) 2,350 2,074
Changes in certain assets and liabilities:
Accounts and notes receivable ................. (11,782) 2,135 (1,368)
Inventories ................................... 1,303 (9,407) (758)
Prepaid expenses and other current assets ..... 93 (1,147) (2,299)
Accounts payable .............................. 457 4,761 959
Accrued liabilities ........................... 8,753 (2,218) 1,854
Other liabilities ............................. 193 (2,161) 1,515
--------------------------------------------------------------------------------------------
Net cash provided by operating
activities ............................. 856 10,279 23,967
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net .............................. (13,925) (18,670) (9,440)
Purchase of short-term investments ..................... (23,392) (51,044) (15,000)
Maturities of short-term investments ................... 30,527 31,812 22,900
--------------------------------------------------------------------------------------------
Net cash used by investing activities .... (6,790) (37,902) (1,540)
--------------------------------------------------------------------------------------------
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)
Premium payments on early retirement of debt ........... -- -- (2,563)
Purchase of treasury stock ............................. (197) (3,483) (190)
Purchase and retirement of Class B stock ............... -- (470) --
--------------------------------------------------------------------------------------------
Net cash (used) provided by financing
activities ............................. (197) (3,953) 16,848
--------------------------------------------------------------------------------------------
Net (decrease) increase in cash .......................... (6,131) (31,576) 39,275
Cash and cash equivalents:
Beginning of year ...................................... 18,768 50,344 11,069
--------------------------------------------------------------------------------------------
End of year ............................................ $ 12,637 $ 18,768 $ 50,344
============================================================================================
The accompanying notes are an integral part of the financial statements.
18
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
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. 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 estimated
sales value of goods returned, trade discounts and customers' allowances. The
Company defers recognition of revenue for its estimate of potential sales
returns under right-of-return agreements with its distributors until the
right-of-return period lapses.
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, 2000 and 1999 amounted to $2,498 and $2,834,
respectively, net of accumulated amortization of $812 and $476, 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.
Accumulated amortization amounted to $6,137 and $5,705 at December 31, 2000 and
1999, 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, 2000.
Environmental Remediation Liabilities - The Company is subject to federal, state
and local environmental laws and regulations. The Company records a liability
for environmental remediation claims when a
19
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
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," which 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.
Shipping and Handling Costs - Shipping costs at December 31, 2000, 1999 and 1998
were $4,161, $4,177 and $4,591, respectively, and are included in selling,
general and administrative expenses.
Earnings Per Share - The calculation of basic earnings per share is based on the
average number of common shares outstanding during the period. Diluted earnings
per share reflect the effect of all potentially diluted securities which consist
of outstanding common stock options. For all periods presented, basic and
diluted shares outstanding are the same.
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),
which requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those investments at fair value.
In December 1999, the Securities and Exchange Commission (SEC) staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), which summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements.
The Company adopted SAB 101 in the fourth quarter of fiscal 2000 and will
adopt SFAS 133 in the first quarter of fiscal 2001. Adoption of these
pronouncements did not and is not expected to have a significant effect on the
Company's consolidated results of operations or financial position.
2. Inventories:
A summary of the major components of inventories is as follows:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Finished goods ............................ $42,268 $43,719
Work-in-process ........................... 3,600 2,743
Raw materials and supplies ................ 7,428 8,137
--------------------------------------------------------------------------------
Total inventories ......................... $53,296 $54,599
================================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $26 higher and $1,640 lower than reported at December 31, 2000 and
1999, respectively.
3. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Land .................................... $ 2,930 $ 2,930
Buildings and improvements .............. 42,133 37,309
Machinery and equipment ................. 158,829 142,062
Construction-in-progress ................ 10,177 17,912
--------------------------------------------------------------------------------
214,069 200,213
Less accumulated
depreciation ......................... (114,659) (103,809)
--------------------------------------------------------------------------------
Total property, plant,
and equipment, net ................... $ 99,410 $ 96,404
================================================================================
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 $1,113 and $691 for 2000 and 1999,
respectively.
The amount of approved but unexpended capital appropriations at December
31, 2000 was $3,685, substantially all of which is planned to be expended during
2001.
20
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
4. Accrued Liabilities:
Accrued liabilities consists of the following:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Accrued warranty,
marketing and sales
promotion ............................... $19,625 $19,021
Employee
compensation and
related benefits ........................ 3,320 5,115
Interest .................................. 3,595 3,595
Environmental
remediation and
product-related
liabilities ............................. 1,070 1,070
Distributor termination
costs ................................... 4,659 --
Reserve for sales returns ................. 4,034 --
Other ..................................... 2,541 1,796
--------------------------------------------------------------------------------
Total accrued
liabilities ............................. $38,844 $30,597
================================================================================
5. Long-Term Debt:
Long-term debt consists of the following:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
8 5/8% Senior Notes
due 2008 ............................. $ 99,625 $ 99,575
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 and the retirement
of their outstanding debt, 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.
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 $50,000 and $88,000 at December 31, 2000 and
1999, 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, 2000; however, the
facility provides for standby letters of credit which total $3,589 at December
31, 2000.
6. Other Liabilities:
Other liabilities consists of the following:
December 31, December 31,
2000 1999
-------------------------------------------------------------------------------
Environmental
remediation and
product-related
liabilities ............................. $20,398 $11,928
Accrued workers'
compensation
claims .................................. 5,196 5,164
Other ..................................... 1,223 1,313
-------------------------------------------------------------------------------
Total other liabilities ................... $26,817 $18,405
===============================================================================
21
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
7. Research and Development Costs:
Total research and development costs charged to operations amounted to $4,257,
$4,242 and $3,819 for the years ended December 31, 2000, 1999 and 1998,
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 noncancelable operating leases having
initial or remaining lease terms in excess of one year as of December 31, 2000
are as follows:
Years Ending
--------------------------------------------------------------------------------
2001 ....................................................... $ 2,880
2002 ....................................................... 2,650
2003 ....................................................... 1,960
2004 ....................................................... 1,388
2005 ....................................................... 1,270
Thereafter ................................................. 6,351
--------------------------------------------------------------------------------
Total minimum lease payments ............................... $16,499
================================================================================
Rent expense was $2,797, $3,030 and $2,368 for the years ended December
31, 2000, 1999 and 1998, 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, the Company's
actuarial consultants advise to be appropriate.
Net periodic pension cost includes the following components:
For the years ended
December 31,
---------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Service cost ............................... $ 1,079 $ 1,152 $ 1,134
Interest cost .............................. 4,063 3,920 3,898
Expected return on
plan assets ............................. (4,329) (4,100) (4,070)
Amortization of transition
amount .................................. 76 76 76
Amortization of prior
service benefit ......................... (242) (242) (242)
Recognized actuarial
(gain) loss ............................. (44) 186 2
--------------------------------------------------------------------------------
Net periodic
pension cost ............................ $ 603 $ 992 $ 798
================================================================================
Weighted-average assumptions as of
December 31 were as follows:
2000 1999 1998
--------------------------------------------------------------------------------
Discount rate .............................. 7.25% 7.25% 6.75%
Rate of compensation
increase ................................ 5.00% 5.00% 5.00%
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 2000 and 1999 as well as
funded status of the plans at December 31, 2000 and 1999:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Accumulated benefit
obligation at end of year ................... $57,721 $57,314
================================================================================
Change in projected benefit
obligation:
Projected benefit obligation
at beginning of year ....................... $58,281 $60,352
22
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
Service cost ................................ 1,079 1,152
Interest cost ............................... 4,063 3,920
Actuarial gain ........................... (99) (2,713)
Benefits paid ............................... (4,525) (4,430)
-------------------------------------------------------------------------------
Projected benefit obligation
at the end of the year .................... $ 58,799 $ 58,281
===============================================================================
Change in plan assets:
Fair value of plan assets
at beginning of year ...................... $ 49,177 $ 46,926
Actual return on assets ..................... (713) 4,823
Employer contributions ...................... 2,407 1,858
Benefit paid ................................ (4,525) (4,430)
-------------------------------------------------------------------------------
Fair value of plan assets
at end of year .............................. $ 46,346 $ 49,177
===============================================================================
Funded status .................................. $(12,453) $ (9,104)
Unrecognized transition
amount ....................................... (143) (67)
Unrecognized prior
service benefit .............................. (1,493) (1,736)
Unrecognized net
actuarial loss ............................... 8,370 3,383
-------------------------------------------------------------------------------
Net amount
recognized ................................... $ (5,719) $ (7,524)
===============================================================================
Amounts recognized in the financial
statements consist of:
Accrued benefit liability
(including current amount
of $155 and $750,
respectively) ............................ $(11,786) $ (9,754)
Intangible asset ............................ 564 655
Deferred tax asset .......................... 2,009 575
Accumulated other
comprehensive
income ................................... 3,494 1,000
-------------------------------------------------------------------------------
Net amount
recognized ................................... $ (5,719) $ (7,524)
===============================================================================
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, related to this plan.
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 $1,102, $1,356 and $1,529 for the years
ended December 31, 2000, 1999 and 1998, respectively.
10. Postretirement Benefits Other Than Pensions:
Net periodic postretirement benefits cost is as follows:
For the years ended
December 31,
---------------------------------
2000 1999 1998
------------------------------------------------------------------------------
Service cost ......................... $ 134 $ 148 $ 139
Interest cost ........................ 461 480 480
Amortization of
prior service benefit ............. (417) (409) (409)
Amortization of
net (gain) loss ................... (3) 71 60
------------------------------------------------------------------------------
Net periodic benefits cost ........... $ 175 $ 290 $ 270
==============================================================================
Weighted average
discount rate ..................... 7.25% 7.25% 6.75%
==============================================================================
The change in benefit obligation and the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded in
2000 and 1999, were as follows:
December 31, December 31,
2000 1999
--------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at end
of prior year .............................. $ 7,141 $ 7,376
Service cost
(with interest) ............................ 134 148
Interest cost ................................ 461 480
Actuarial gain ............................... (449) (346)
Benefits paid ................................ (487) (517)
--------------------------------------------------------------------------------
Benefit obligation at end
of year .................................... $ 6,800 $ 7,141
================================================================================
23
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
Funded status ............................ $ (6,800) $ (7,141)
Unrecognized net
gain ................................... (959) (513)
Unrecognized prior
service benefit ........................ (1,989) (2,406)
-------------------------------------------------------------------------------
Accrued postretirement
benefit cost ........................... (9,748) (10,060)
Less current portion ..................... 419 413
-------------------------------------------------------------------------------
Noncurrent
postretirement
benefit obligations .................... $ (9,329) $ (9,647)
===============================================================================
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 7.3% in 2000; the rate was assumed to decrease
gradually to 5.0% over the next 6 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 $49 for the year
ended December 31, 2000, and would increase the accumulated postretirement
benefit obligations by $461 at December 31, 2000.
11. Income Taxes:
The provision (benefit) for income taxes is comprised of the following:
For the years ended
December 31,
-------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Current:
Federal .......................... $(2,297) $ 259 $ 2,866
State ............................ 88 113 45
Deferred:
Federal .......................... (1,633) 2,123 2,353
State ............................ (1,220) (245) 399
Valuation allowance .............. 1,086 469 --
--------------------------------------------------------------------------------
Provision (benefit) for
income taxes ..................... $(3,976) $ 2,719 $ 5,663
================================================================================
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,
--------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Statutory federal
income tax rate ................ 34.0% 34.0% 34.0%
State income taxes,
net of federal
benefit ........................ 5.5 2.7 1.9
Goodwill .......................... (1.2) 1.9 1.0
Other ............................. (5.4) (3.0) (0.4)
--------------------------------------------------------------------------------
Effective tax rate ................ 32.9% 35.6% 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,
2000 1999
--------------------------------------------------------------------------------
Deferred tax asset:
Accounts receivable ....................... $ 198 $ 941
Unfunded pension
liability ............................... 2,655 3,303
Environmental
remediation and
product-related
reserves ................................ 9,743 6,399
Postretirement
benefit obligations ..................... 3,862 3,926
Tax credit and other
carryovers .............................. 2,788 469
Other accruals ............................ 4,458 2,958
--------------------------------------------------------------------------------
24
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
Deferred tax asset ....................... 23,704 17,996
Valuation allowance ...................... (1,555) (469)
-------------------------------------------------------------------------------
Net deferred tax asset ................... 22,149 17,527
-------------------------------------------------------------------------------
Deferred tax liability:
Depreciation and
amortization ........................ (11,987) (12,403)
Inventory ............................. (3,211) (3,756)
Other ................................. (4,995) (2,615)
-------------------------------------------------------------------------------
Total deferred tax
liability ............................. (20,193) (18,774)
-------------------------------------------------------------------------------
Net deferred tax
asset (liability) ..................... $ 1,956 $ (1,247)
===============================================================================
12. Supplemental Cash Flow Information:
Cash payments for interest were $8,625, $8,577 and $7,580 for the years ended
December 31, 2000, 1999 and 1998, respectively. Net cash payments (refunds) for
income taxes were $(3,490), $903 and $3,490 for the years ended December 31,
2000, 1999 and 1998, 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,
------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Sales to ABI ...................... $ 361 $ 568 $ 868
Raw material
transfers to ABI ................ 3,384 4,637 3,493
Computer service
income from ABI ................. 20 17 134
Material purchases
from ABI ........................ 6,762 7,306 7,079
Management fees
to ABI .......................... 562 900 1,291
================================================================================
Amounts as of December 31, 2000 and 1999 due from ABI totaled $820 and
$310, respectively, and are included in accounts receivable. Amounts as of
December 31, 2000 and 1999 due to ABI totaled $1,421 and $1,315, 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 26% and 18% of the Company's net sales for the
year ended December 31, 2000, 28% and 21% for the year ended December 31, 1999,
and 25% and 22% for the year ended December 31, 1998 and accounted for 42% of
accounts receivable at December 31, 1999. Another unrelated customer accounted
for 42% of accounts receivable at December 31, 2000.
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
25
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
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 Comprehen-sive 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 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,
2000, 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 1,754 pending claims (including workers' compensation cases)
involving approximately 12,079 individuals as of December 31, 2000, alleging
personal injury from exposure to asbestos or asbestos-containing products. There
were 670 claims at December 31, 1999 that involved approximately 6,246
individuals. Activity related to asbestos claims during the years ended December
31, 2000 and 1999 was as follows:
2000 1999
-------------------------------------------------------------------------------
Claims at Jan. 1 ........................... 670 657
New Claims ................................. 1,302 247
Settlements ................................ (76) (48)
Dismissals ................................. (142) (186)
-------------------------------------------------------------------------------
Claims at Dec. 31 .......................... 1,754 670
===============================================================================
The total indemnity costs incurred to settle claims during 2000 and 1999
were $3.9 million and $2.9 million, respectively, which were paid by the
Company's insurance carriers, as were the related defense costs. Costs per 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 December 31,
2000, the Company has incurred asbestos-related claims of $10.2 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 $310. Over 98% of claims incurred by the Company have settled, on average,
for amounts less than $100 per claimant.
26
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
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. As such, 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 generally accepted accounting principles.
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 costs have
been paid through primary insurance coverage, and the Company anticipates that
primary insurance coverage will continue to cover these costs in the near
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 the financial viability of
some of the insurance companies, 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 highly probable
insurance recovery, as defined by generally accepted accounting principles, 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. The Company has also
recorded in the
27
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
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.
Since many uncertainties exist surrounding asbestos litigation, theCompany
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.
The total balances of environmental and asbestos-related liabilities and
the related insurance receivables deemed probable of recovery at December 31 are
as follows:
2000 1999
(in millions) Liability Receivable Liability Receivable
--------------------------------------------------------------------------------
Environmental
liabilities ................. $ 5.1 $ 2.0 $ 7.5 $ 2.0
Asbestos product
liability ................... 15.1 7.1 4.4 .8
Other ......................... 1.2 -- .8 --
--------------------------------------------------------------------------------
Total ......................... $21.4 $ 9.1 $12.7 $ 2.8
================================================================================
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 2000, 1999, and 1998,
respectively: option forfeiture of 15%; risk-free interest rates of 5.08%,
6.61%, and 4.80%; no dividends; volatility factors of the expected market price
of the Company's common stock of .597 for 2000, .576 for 1999, and .365 for
1998; and a weighted-average expected life of the options of 7 years. The
exercise prices of options outstanding at December 31, 2000 are as follows: 99.5
shares @ $3.50 to $3.63; 293.5 shares @ $7.19 to $9.00; and 300 shares @ $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, 2000, 1999, and
1998, respectively, was $388, $684, and $648. The Company's pro forma net (loss)
income for the years ended December 31, 2000, 1999, and 1998, respectively, is
as follows: 2000, $(8,517) or $(1.03) per share; 1999, $4,244, or $0.49 per
share; and 1998, $6,792, or $0.75 per share.
28
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
A summary of the Company's 1995 Stock Option Plan activity, and related
information, is as follows:
December 31, 2000:
--------------------------------------------------------------------------------
Shares Weighted average
exercise price
--------------------------------------------------------------------------------
Options outstanding
beginning of year .................... 617,000 $10.93
Options granted ........................ 99,500 3.54
Options exercised ...................... -- --
Options forfeited ...................... (23,500) 9.00
-------
Options outstanding
end of year .......................... 693,000 $ 9.93
================================================================================
Exercisable at end of year ............. 416,400 $11.87
Weighted average remaining
contractual life ..................... 6 years --
Stock options available
for future issuance .................. 105,000 --
================================================================================
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 --
================================================================================
* Includes 208,500 options repriced in 1998.
The weighted average grant date fair value of options granted for the 1995
Plan in 2000, 1999 and 1998 was $2.28, $4.67 and $4.31, 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.
The exercise price of options outstanding at December 31, 2000 range from
$3.88 to $7.19 per share.
A summary of the Directors Stock Option Plan activity, and related information,
is as follows:
December 31, 2000:
--------------------------------------------------------------------------------
Shares Weighted average
exercise price
--------------------------------------------------------------------------------
Options outstanding
beginning of year ................... 5,000 $7.19
Options granted ....................... 3,000 4.08
Options exercised ..................... -- --
Options forfeited ..................... -- --
-----
Options outstanding
end of year ......................... 8,000 $6.02
================================================================================
29
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
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 2000 and 1999 was $1.79 and $3.15, respectively.
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 $13,913 of common stock through December
31, 2000. Shares of Class B stock repurchased (totaling 741,055) have been
retired. As of December 31, 2000, ABI owned 151,100 Class A and 4,395,605 Class
B shares that represented 69.5% of the voting control of the Company.
18. Quarterly Financial Data (Unaudited):
The following table summarizes unaudited quarterly financial information.
Year ended December 31, 2000
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
Net sales .................... $56,868 $55,262 $60,979 $51,535
Gross profit ................. 12,663 12,328 15,509 13,771
Net income (loss) ............ (1,934) (2,203) 1,725 (5,717)(1)
Net income (loss) per
share ...................... $ (.23) $ (.27) $ .21 $ (.69)
================================================================================
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
share ................ $ .08 $ .14 $ .17 $ .18
================================================================================
(1) The loss in 2000 includes $6,049 or $.73 per share for the after-tax cost of
a major distributor change referred to in Note 19 of the Financial Statements.
19. 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 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
30
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
--------------------------------------------------------------------------------
to LDBrinkman pursuant to the terms of the settlement agreement. These costs
will be paid in the first three quarters of fiscal 2001 and are not contingent
upon future performance of either of the parties under the agreement.
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 that meets minimum size and quality requirements. As
such, the Company has deferred the recognition of revenue for its estimate of
returns of inventory under this right-of-return agreement. The Company has
reduced revenues by $4.0 million and cost of sales by $2.7 million to account
for this estimate of returns of inventory sold during 2000.
A summary of the distributor transition costs appears below:
================================================================================
Costs of establishing Mohawk
as a distributor ......................................... $3,076
LDBrinkman termination costs ................................ 4,641
--------------------------------------------------------------------------------
7,717
--------------------------------------------------------------------------------
Impact on gross margin of
estimated sales returns .................................. 1,291
--------------------------------------------------------------------------------
Total reduction in pre-tax
income ................................................... 9,008
--------------------------------------------------------------------------------
Tax effect .................................................. 2,959
--------------------------------------------------------------------------------
Total reduction in net income ............................... $6,049
================================================================================
Of the $7,717 in costs, $4,659 remains unpaid as of December 31, 2000 and
is included in accrued expenses. Accrued expenses and inventory have been
increased by the provision for returned goods.
31
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Philadelphia, Pennsylvania
February 9, 2001
32
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
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.
Mark S. Newman
Chairman of the Board, President & Chief Executive Officer of DRS Technologies,
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
Thomas A. Sciortino
Senior Vice President - Administration
Merrill M. Smith
Senior Vice President - Technology
Corporate Information
--------------------------------------------------------------------------------
Corporate Headquarters
Congoleum Corporation
3500 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 American Stock Exchange. The
following table reflects the high and low prices (rounded to the nearest
one-sixteenth) based on American and New York Stock Exchange trading over the
past two years.
2000 High Low
--------------------------------------------------------------------------------
First Quarter ...................................... 4 2 15/16
Second Quarter ..................................... 4 3/16 2 13/16
Third Quarter ...................................... 5 3 3/4
Fourth Quarter ..................................... 4 5/8 2 1/8
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
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, 2001 was approximately 1,000.
Annual Meeting
The 2001 Annual Meeting of the Stockholders of Congoleum Corporation will be
held on Tuesday, May 8, 2001 at FleetBoston Financial Corporation, 35th Floor,
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,
2000, which has been filed with the Securities and Exchange Commission.
Printed on Recycled Paper
EX-23.1
4
ex23-1.txt
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K/A)
of Congoleum Corporation, as amended, of our report dated February 9, 2001
included in the 2000 Annual Report to Shareholders of Congoleum Corporation.
Our audits also included the financial statement schedule of Congoleum
Corporation, as amended, for the years ended December 31, 2000, 1999 and 1998
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 Statement
(Form S-8 Nos. 333-34653 and 333-84387) pertaining to the Congoleum Corporation
1995 Stock Option Plan and the Non-Qualified, Non-Employee Directors Stock
Option Plan of this report on the financial statement schedule and our report
dated February 9, 2001, with respect to the 2000 financial statements of
Congoleum Corporation incorporated by reference in the Annual Report (Form
10-K/A) for the year ended December 31, 2000.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
September 17, 2001