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