10-K405 1 d02-36710.txt CONGOLEUM CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File Number 1-13612 CONGOLEUM CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 02-0398678 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08619-0127 (Address of Principal Executive Offices) 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 or any amendment to this Form 10-K. |X| As of March 4, 2002, the aggregate market value of all shares of Class A Common Stock held by non-affiliates of the Registrant was approximately $7.1 million based on the closing price ($2.05 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 4, 2002, 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 III. Portions of the Congoleum Corporation's Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 2002 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) the future cost and timing of payments associated with and availability of insurance coverage for asbestos-related personal injury claims, as well as other environmental, product and general liability claims, (ii) increases in raw material prices, (iii) increased competitive activity from companies in the flooring industry, some of which have greater resources and broader distribution channels than the Registrant, (iv) unfavorable developments in the national economy or in the housing industry in general, (v) shipment delays, depletion of inventory and increased production costs resulting from unforeseen disruptions of operations at any of the Registrant's facilities or distributors, and (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. (or "Congoleum") which began in 1886. In 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. In 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 urethane 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 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 3 believes produces visual effects that only one competitor is presently able to duplicate. Distribution The Company currently sells its products through approximately 22 distributors providing approximately 57 distribution points in the United States and Canada, as well as directly to a limited number of mass market retailers. Net sales to customers outside the United States for the years ended December 31, 2001, 2000, and 1999 were $7.6 million, $7.0 million, and $5.6 million, respectively. 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, 2001, the backlog of unshipped orders was $8.4 million, compared to $5.5 million at December 31, 2000. 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, 2001, two customers each accounted for over 10% of the Company's sales. These customers were its distributor to the manufactured housing market, LaSalle-Bristol Corporation, and its distributor, Mohawk Industries, Inc. Together, they accounted for 48% of the Company's net sales in 2001. 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. As of December 31, 2001, the Company and LDBrinkman have satisfied all contractual commitments to each other. 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. The Company's typical credit terms generally require payment on invoices within 31 days, with a discount available for earlier payment. These practices are typical within the industry. 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 three other manufacturers in North America and, to a much less- 4 er extent foreign manufacturers. Certain of the Company's competitors, including Armstrong World Industries, Inc. 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, 2001 were $3.5 million, compared to $4.3 million and $4.2 million for the years ended December 31, 2000 and 1999, respectively. 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 2001, the Company incurred capital expenditures of approximately $80 thousand 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, 2001, the Company employed a total of 1,036 personnel compared to 1,159 employees at December 31, 2000. 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 650 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, 2002. Roger S. Marcus (Age 56) 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. 5 Richard G. Marcus (Age 54) 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 57) 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 prior to that he was Vice President of Manufacturing of the Tile Division of American Biltrite (since 1981). David W. Bushar (Age 55) David W. Bushar has been Senior Vice President - Manufacturing of the Company since 1998. Prior thereto, he was Manager, Technical Services since 1997 and prior to that he was Plant Manager of the Company's Trenton, New Jersey sheet facility since 1993. Michael L. Dumont (Age 47) 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 prior to that he was Regional Manager - Western Territory (since 1991). Howard N. Feist III (Age 45) 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 2000). Dennis P. Jarosz (Age 56) 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). Sidharth Nayar (Age 41) Sidharth Nayar has been Senior Vice President - Finance of the Company since 1999. Prior thereto, he had served as Vice President - Controller since 1994 and prior to that he was Controller since 1990. Thomas A. Sciortino (Age 55) 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 76) 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). 6 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 89% of the hours available on a five-day, three-shift basis in 2001, with the corresponding figure for individual production lines ranging from 37% to 116%. 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. 7 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. The PRP group at this site is made up of 51 companies, substantially all of which are large financially solvent entities. 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, based on engineering and consultant studies conducted, would be approximately $26 million. Congoleum's proportionate share, based on waste disposed at the site, was estimated to be approximately 6.1%. 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 6,563 pending claims (including workers' compensation cases) involving approximately 23,139 individuals as of December 31, 2001, alleging personal injury or death from exposure to asbestos or asbestos-containing products. There were 1,754 claims at December 31, 2000 that involved approximately 12,079 individuals. Activity related to asbestos claims during the years ended December 31, 2001 and 2000 was as follows: 2001 2000 ----------------------------------------------------- Claims at Jan. 1 1,754 670 New Claims 5,048 1,302 Settlements (40) (76) Dismissals (199) (142) ----------------------------------------------------- Claims at Dec. 31 6,563 1,754 ----------------------------------------------------- The total indemnity costs incurred to settle claims during 2001 and 2000 were $1.1 million and $3.9 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, 2001, the Company has incurred asbestos-related claims of $11.4 million, to resolve claims of over 33,000 claimants, substantially all of which have been paid by the Company's insurance carriers. The average indemnity cost per resolved claimant is $340. Over 99% 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, 8 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 were typically lead defendants in asbestos-related cases, is likely to have a negative impact on 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. The Company periodically updates 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. The Company believes that its range of probable and estimable undiscounted losses for asbestos-related claims through the year 2049 is $53.3 million to $195.6 million before considering the effects of insurance recoveries. 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 $53.3 million in accordance with accounting principles generally accepted in the United States. During the period that Congoleum produced asbestos-containing products, the Company purchased primary and excess insurance policies providing in excess of $1 billion coverage for bodily injury asbestos claims. To date, all claims and defense costs have been paid through primary insurance coverage. At December 31, 2001, the Company had $2.6 million in remaining primary insurance coverage for bodily injury asbestos claims. Once all primary coverage is exhausted, the Company expects its defense and indemnity costs to be covered by its excess insurance policies. However, it is likely that the Company will share in these costs. The first layer of excess insurance policies provides for $135 million in coverage. Of this layer, approximately 16% to 28% (depending on the method used to allocate losses) was underwritten by carriers who are presently insolvent. The Company anticipates that it will have to pay some or all of the portion of costs for resolving asbestos-related claims that are allocable to such insolvent carriers, and that it may in turn be able to recover a portion of such payments from the estates or insurance guaranty funds responsible for the obligations of these carriers. 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, how legal and other loss handling costs will be covered by the insurance policies, and interpretation of the effect on coverage of various policy terms and limits and their interrelationships. Congoleum has filed suit regarding insurance coverage issues against certain of its primary insurance carriers, the carriers comprising its first layer of excess insurance, state guaranty funds representing insolvent carriers, and its insurance brokers and has begun settlement negotiations with several of these parties. The Company has determined, based on its review of its insurance policies and the advice of legal counsel, that approximately $42.5 million of the estimated $53.3 million gross liability is probable of recovery. This determination was made after considering the terms of the available insurance coverage, the financial viability of the insurance companies and the status of negotiations with its carriers. The Company further believes that the criteria, as defined by accounting principles generally accepted in the United States, to offset the estimated gross liability with a portion of the probable insurance recovery, equal to $35.5 million, have been met. Additionally, in 9 2001, the Company recorded an asset of $2.5 million for the probable settlement of disputed insurance coverage. The Company also recognized a liability for asbestos product liability of $2.8 million. The balance of the estimated gross liability of $17.8 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 $9.6 million that represents an estimate of probable insurance recoveries that do not qualify for offsetting against the gross liability and for the probable insurance settlement discussed previously. 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 liability for 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. Additionally, since the Company has recorded an amount representing the low end of the range of exposure for asbestos-related claims, it is possible that over time another amount within the range will be a better estimate of the actual losses. Although resolution of these claims is anticipated to take decades, amounts recorded for the liability are not discounted, and the effect on results of operations in any given year from a revision to these estimates could be material. 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: 2001 2000 ------------------------------------------------------------------------------ (in millions) Liability Receivable Liability Receivable ------------------------------------------------------------------------------ Environmental liabilities $ 5.0 $ 2.0 $ 5.1 $2.0 Asbestos product liability 17.8 9.6 15.3 7.1 Other 1.2 .2 1.3 0.1 ------------------------------------------------------------------------------ Total $24.0 $11.8 $21.7 $9.2 ------------------------------------------------------------------------------ Other: In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, product liability claims, 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. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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-hundredth) based on American and New York Stock Exchange trading over the past two years. 2001 High Low ------------------------------------------------------- First Quarter 3.13 1.75 Second Quarter 3.85 1.75 Third Quarter 3.28 1.75 Fourth Quarter 2.25 1.55 2000 High Low ------------------------------------------------------- First Quarter 4.00 2.94 Second Quarter 4.19 2.81 Third Quarter 5.00 3.75 Fourth Quarter 4.63 2.13 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 Company's Class A common stock on February 10, 2002 was approximately 1,000. 11 Item 6. SELECTED FINANCIAL DATA (in thousands, except per share amounts)
For the years ended December 31, ------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------- Income Statement Data: Net sales ......................... $223,250 $ 224,644 $ 246,006 $ 259,126 $ 252,526 Cost of sales ..................... 165,683 170,373 176,559 181,997 180,093 Selling, general and administrative expenses ....... 53,442 54,395 57,428 56,839 57,094 Distributor transition expenses ... -- 7,717 -- -- -- ------------------------------------------------------------------------------------------------------------- Income (loss) from operations ..... 4,125 (7,841) 12,019 20,290 15,339 Interest expense, net ............. (7,591) (5,714) (6,101) (5,758) (5,258) Other income, net ................. 1,320 1,450 1,729 984 974 ------------------------------------------------------------------------------------------------------------- Income (loss) before taxes and extraordinary item ........ (2,146) (12,105) 7,647 15,516 11,055 Provision (benefit) for income taxes ......................... (506) (3,976) 2,719 5,663 4,035 ------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item ............ (1,640) (8,129) 4,928 9,853 7,020 Extraordinary item ................ -- -- -- (2,413) (279) ------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1,640) $ (8,129) $ 4,928 $ 7,440 $ 6,741 ------------------------------------------------------------------------------------------------------------- Income (loss) per common share before extraordinary item ..... $ (0.20) $ (0.98) $ 0.57 $ 1.09 $ 0.72 Extraordinary item ................ -- -- -- (0.27) (0.03) Net income (loss) per common share, basic and diluted ............. $ (0.20) $ (0.98) $ 0.57 $ 0.82 $ 0.69 ------------------------------------------------------------------------------------------------------------- Average shares outstanding ........ 8,260 8,267 8,699 9,038 9,839 ------------------------------------------------------------------------------------------------------------- Balance Sheet Data (at end of period): Total assets ...................... $229,883 $ 238,662 $ 231,817 $ 231,865 $ 196,581 Total long-term debt .............. 99,674 99,625 99,575 99,526 76,594 Stockholders' equity .............. $ 25,053 $ 29,310 $ 40,130 $ 37,853 $ 31,783
12 Item 7. 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, 2001 as compared to year ended December 31, 2000 Net sales for the year ended December 31, 2001 were $223.3 million as compared to $224.6 million for the year ended December 31, 2000, a decrease of $1.3 million or 0.6%. The decrease resulted primarily from lower sales of products for the manufactured housing industry and lower sales to the southwest and west coast regions as a result of the distributor transition in that area. These declines were largely offset by improved sales in the balance of the U.S. and Canada resulting primarily from sales of the Company's Ultima and new Durastone product lines. Gross profit for the year ended December 31, 2001 was $57.6 million, or 25.8% of sales, compared to $54.3 million in 2000, or 24.2% of sales, an increase of $3.3 million or 6.1%. Gross profit increased primarily due to improved manufacturing efficiencies, reductions in manufacturing overhead costs, and a more profitable mix of sales. Selling, general and administrative expenses were $53.4 million for the year ended December 31, 2001 as compared to $54.4 million for the year ended December 31, 2000, a decrease of $1.0 million or 1.8%. As a percent of net sales, selling, general and administrative expenses remained at approximately 24%. Cost reduction initiatives instituted in the first quarter, including a 13% reduction in the workforce, were partly offset by product launch costs for the new Durastone product line. Income from operations was $4.1 million for the year ended December 31, 2001, compared to a loss of $7.8 million for the year ended December 31, 2000, an increase of $11.9 million. Of this $11.9 million improvement, $7.7 million is attributable to the impact of costs incurred for a distributor transition in 2000. The remainder of the improvement is primarily due to the improvements in margins and reductions in selling, general and administrative costs previously discussed. Interest income declined from $1.8 million in 2000 to $708 thousand in 2001 due to a combination of lower average cash equivalent and short-term investment balances and lower interest rates. Interest expense increased from $7.5 million in 2000 to $8.3 million in 2001, primarily due to lower capitalized interest in 2001 compared to 2000. The effective tax rate for 2001 was 23.6% resulting in a tax benefit of $506 thousand. The tax benefit includes a reduction of $273 thousand for a tax valuation allowance. For 2000, the effective tax rate was 32.9% resulting in a tax benefit of $4.0 million which includes a reduction for a tax valuation allowance of $1.1 million. 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 13 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 of 2000 in response to weaker sales, resulting in lower spending. In addition, as a result of the distributor change, 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 were 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 remained accrued at December 31, 2000 and consisted primarily of termination costs to be paid to LDBrinkman. These costs were paid in 2001 and were 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 $1.7 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 $4.0 million. The tax benefit includes a reduction of $1.1 million for a tax valuation allowance. For 1999, the effective tax rate was 35.6% resulting in tax expense of $2.7 million, including a valuation allowance of $469 thousand. Liquidity and Capital Resources Cash and equivalents, including short-term investments at December 31, 2001, were $16.7 million, a decrease of $8.1 million from December 31, 2000. Working capital was $51.7 million at December 31, 2001, up from $49.2 million one year earlier. The ratio of current assets to current liabilities at December 31, 2001 was 2.0 to one, compared to 1.8 to one a year earlier. The ratio of debt to total capital at December 31, 2001 was .43 compared to .42 in 2000. Net cash used by operations during the year ended December 31, 2001 was $0.2 million, down from cash provided by operations of $0.9 million in 2000. Cash from operations decreased from 2000 to 2001 due to increased inventory to support new product introductions in late 2001 and early 2002, expenditures for marketing materials related to these introductions, and payments made in settlement of distributor termination costs, offset by increased operating income and the collection of extended term receivables outstanding at the start of 2001. Capital expenditures in 2001 totaled $7.9 million. The Company is currently planning capital expenditures of approximately $10.0 million in 2002 and $8.0 million in 2003. 14 In December 2001, the Company entered into a new three-year revolving credit facility which provides for borrowings up to $30.0 million. Interest is based on .25% above prime or 2.75% over LIBOR as applicable. This financial agreement contains certain covenants which include the maintenance of a minimum tangible net worth if borrowing availability falls below a certain level. 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, 2001, based on the level of receivables and inventory, the Company had borrowing availability of $30.0 million, of which $1.8 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, 2001, 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 6,563 pending claims involving 23,139 individuals as of December 31, 2001 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 $53.3 million to $195.6 million through the year 2049, before insurance coverage. During the period that Congoleum produced asbestos-containing products, it purchased primary and excess policies providing in excess of $1 billion for bodily injury asbestos claims. Although certain of its excess carriers are insolvent and there are some disputes among the Company and its carriers with respect to certain coverage issues, the Company expects insurance will cover the majority of cost for resolving these claims. At December 31, 2001, the Company had recorded a liability of $17.8 million for the estimated potential liability, and a related insurance receivable of $9.6 million representing an estimate of the probable amount of related insurance recovery. The indemnity cost incurred to settle claims during 2001 was $1.1 million, all of which was paid by the Company's primary insurance carriers. At December 31, 2001, the Company had $2.6 million in remaining primary insurance coverage. Once all primary coverage is exhausted, the Company expects the defense and indemnity costs to be covered by its excess insurance policies. However, it is likely that the Company will share in these costs due to the insolvency of certain carriers. The Company is presently in negotiation with several of its excess insurance carriers to determine what portion of defense and indemnity costs will be paid by the Company once its primary insurance coverage is exhausted. Although the number of new claims rose significantly in 2001, 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. 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). 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 15 property damage. The exact amount of such future cost and timing of payments are indeterminable due to such unknown factors as the magnitude of cleanup costs, the timing and extent of the remedial actions that may be required, the determination of the Company's liability in proportion to other potentially responsible parties, and the extent to which costs may be recoverable from insurance. The Company has recorded provisions in its financial statements for the estimated probable loss associated with all known general, environmental and asbestos-related contingencies. The Company records a liability for environmental remediation, asbestos-related claim costs, and general liability claims when a cleanup program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and cleanups progress, these liabilities are adjusted based upon progress in determining the timing and extent of remedial actions and the related costs and damages. The extent and amounts of the liabilities can change substantially due to factors such as the nature or extent of contamination, changes in remedial requirements and technological improvements. Estimated insurance recoveries related to these liabilities are reflected in other noncurrent assets (see Note 15 of Notes to Financial Statements). Although the outcome of these matters could result in significant expenses or judgments, the Company does not believe based on present facts and circumstances that their disposition will have a material adverse effect on the financial position of the Company. The Company's principal sources of capital are net cash provided by operating activities and borrowings under its financing agreement. The Company believes these sources will be adequate to fund working capital requirements, debt service payments and planned capital expenditures through the foreseeable future. However, it is possible that certain adverse developments, particularly in the area of asbestos litigation, could have a material adverse effect on the Company's ability to fund its operating and investing requirements. The following table summarizes the Company's obligation for future principal payments on its debt and future minimum rental payments on its noncancelable operating leases at December 31, 2001.
Payments Due by Period (amounts in thousands) ------------------------------------------------------------------------------------------------- Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years ------------------------------------------------------------------------------------------------- Long-term debt $100,000 $100,000 Operating leases 14,754 2,833 4,104 2,685 5,132 ------------------------------------------------------------------------------------------------- Total $114,754 $2,833 $4,104 $2,685 $105,132 -------------------------------------------------------------------------------------------------
Critical Accounting Policies The Company has identified a number of its accounting policies that it has determined to be critical. These critical accounting policies primarily relate to financial statement assertions that are based on the estimates and assumptions of management and the effect of changing those estimates and assumptions could have a material effect on the Company's financial statements. Following is a summary of those critical accounting policies. Valuation of Deferred Tax Assets - The Company provides for valuation reserves against its deferred tax assets when it becomes more likely than not that the Company will not be able to realize the tax benefit underlying the asset. In evaluating the recovery of deferred tax assets, the Company makes certain assumptions as to future 16 events such as the ability to generate future taxable income. It is possible that the facts underlying these assumptions may not materialize in future periods, which may require the Company to record additional deferred tax valuation allowances. Environmental Contingencies - As discussed previously, the Company has incurred liabilities related to environmental remediation costs at both third-party sites and Company-owned sites. Management has recorded both liabilities and insurance receivables in its financial statements for its estimate of future remediation activities. These estimates are based on certain assumptions such as the extent of cleanup activities to be performed, the methods employed in the cleanup activities, the Company's relative share in costs at sites where other parties are involved, and the ultimate insurance coverage available. These projects tend to be long-term in nature, and these assumptions are subject to refinement as facts change. As such, it is possible that the Company may need to revise its recorded liabilities and receivables for environmental costs in future periods resulting in potentially material adjustments to the Company's earnings in future periods. Asbestos Liabilities - As discussed previously, the Company is a party to a significant number of lawsuits stemming from its manufacture of asbestos-containing products. The Company has recorded in its balance sheet a liability and corresponding insurance receivable based on its estimates of the future costs and related insurance recoveries to settle asbestos litigation and pay for related legal and loss handling costs. These estimates are based on a number of subjective assumptions, including the anticipated costs to settle claims, the cost to litigate claims, the number of claims expected to be received, and the applicability and allocation of insurance coverage to these costs. Due to the highly subjective nature of these assumptions, the Company has estimated a wide range of potential future costs and insurance recoveries, and, because the Company believes that no amount within the range is more likely than any other, has recorded a liability and insurance receivable based on the low end of the range in accordance with accounting principles generally accepted in the United States. As such, the selection of a different amount within the range could have a material effect on the Company's financial statements, as could future developments which differ from the assumptions used in developing the Company's estimates. Pension Plans and Postretirement Benefits - The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, "Employers' Accounting for Pensions," which requires that amounts recognized in financial statements be determined on an actuarial basis. As permitted by SFAS No. 87, the Company uses a calculated value of plan assets (which is further described below). SFAS No. 87 requires that the effects of the performance of the pension plan's assets and changes in pension liability discount rates on the Company's computation of pension income (expense) be amortized over future periods. The most significant element in determining the Company's pension income (expense) in accordance with SFAS No. 87 is the expected return on plan assets. In 2001, the Company has assumed that the expected long-term rate of return on plan assets will be 9%. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a systematic manner over four years. This produces the expected return on plan assets that is included in pension income (expense). The difference between this expected return and the actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the calculated value of plan assets and, ultimately, future pension income (expense). At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities. The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high-quality, fixed-income investments that receive one of the two highest ratings given by a recognized ratings agency. At December 31, 2001, the Company determined this rate to be 7.25%. The Company accounts for its postretirement benefits other than pensions in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which requires that amounts recognized in financial statements be determined on a actuarial basis. These amounts are projected based on the 17 January 1, 2000 SFAS No. 106 valuation and the 2001 year-end disclosure assumptions, including a discount rate of 7.25% and health care cost trend rates of 8% in 2002 reducing to an ultimate rate of 5% in 2007. Pending Adoption of Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 applies to all business combinations completed after June 30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the statement early. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on an annual basis. Adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of Congoleum Corporation. SFAS No. 142 will be effective for the Company as of January 1, 2002. While Congoleum has not fully evaluated the impact of adopting SFAS No. 142, adoption of this standard is expected to result in the elimination of approximately $0.4 million of goodwill amortization expense per year, or $.05 per share. In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was issued. Congoleum will adopt SFAS No. 144 effective January 1, 2002 when adoption is mandatory. Among other things, SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This statement supersedes Statement of Financial Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the provisions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" that relate to reporting the effects of a disposal of a segment of a business. The Company is currently assessing the impact of adopting SFAS No. 144 on its combined financial statements. In November 2001, Emerging Issues Task Force (EITF) issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products ("EITF 01-9"), was issued. Congoleum will adopt EITF 01-9 effective January 1, 2002 when adoption is mandatory. This issue addresses the manner in which companies account for sales incentives to their customers. The Company's current accounting policies for the recognition of costs related to these programs, which is to accrue for costs as benefits are earned by the Company's customers, are already in accordance with the consensus reached in this issue. The Company does record certain costs relating to these programs in selling, general and administrative expenses that will be reclassified to a reduction of sales in its March 31, 2002 10-Q for all periods presented. 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 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, 2001 consisted of indebtedness with a fixed rate of interest which is not subject to change based upon changes in prevailing market interest rates. Under its current policies, the Company does not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates, foreign currency exchange rates, commodity prices or equity prices. 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets (dollars in thousands, except share and per share amounts) December 31, December 31, 2001 2000 -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents........................ $ 15,257 $ 12,637 Short-term investments .......................... 1,416 12,097 Accounts receivable, less allowance for doubtful accounts and cash discounts of $1,859 and $1,934 as of December 31, 2001 and 2000, respectively............................. 17,932 25,527 Inventories...................................... 55,782 52,907 Prepaid expenses and other current assets........ 6,403 3,966 Deferred income taxes............................ 6,375 3,637 -------------------------------------------------------------------------------- Total current assets........................... 103,165 110,771 Property, plant, and equipment, net................ 95,904 99,410 Goodwill, net...................................... 10,523 10,955 Deferred income taxes.............................. 1,334 1,530 Other noncurrent assets............................ 18,957 15,996 -------------------------------------------------------------------------------- Total assets................................... $229,883 $238,662 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................. $17,911 $19,617 Accrued liabilities.............................. 29,585 38,300 Accrued taxes.................................... 353 440 Deferred income taxes............................ 3,597 3,211 -------------------------------------------------------------------------------- Total current liabilities...................... 51,446 61,568 Long-term debt..................................... 99,674 99,625 Other liabilities.................................. 30,080 27,044 Accrued pension liability.......................... 14,658 11,786 Accrued postretirement benefit obligation.......... 8,972 9,329 -------------------------------------------------------------------------------- Total liabilities.............................. 204,830 209,352 -------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950 shares issued as of December 31, 2001 and 2000............................................. 47 47 Class B common stock, par value $0.01; 4,608,945 shares authorized, issued and outstanding at December 31, 2001 and 2000........ 46 46 Additional paid-in capital......................... 49,105 49,105 Retained deficit................................... (10,221) (8,581) Accumulated minimum pension liability adjustment... (6,111) (3,494) ------- ------- 32,866 37,123 Less Class A common stock held in treasury, at cost; 1,085,760 shares at December 31, 2001 and 2000.................................... 7,813 7,813 -------------------------------------------------------------------------------- Total stockholders' equity.................... 25,053 29,310 -------------------------------------------------------------------------------- Total liabilities and stockholders' equity.... $229,883 $238,662 ================================================================================ The accompanying notes are an integral part of the financial statements. 19 Consolidated Statements of Operations (in thousands, except per share amounts) For the years ended December 31, 2001 2000 1999 -------------------------------------------------------------------------------- Net sales................................... $223,250 $224,644 $246,006 Cost of sales............................... 165,683 170,373 176,559 Selling, general and administrative expenses 53,442 54,395 57,428 Distributor transition expenses............. -- 7,717 -- -------------------------------------------------------------------------------- Income (loss) from operations.......... 4,125 (7,841) 12,019 Other income (expense): Interest income.......................... 708 1,797 1,837 Interest expense......................... (8,299) (7,511) (7,938) Other income............................. 1,350 1,459 1,819 Other expense............................ (30) (9) (90) -------------------------------------------------------------------------------- (Loss) income before income taxes...... (2,146) (12,105) 7,647 (Benefit) provision for income taxes........ (506) (3,976) 2,719 -------------------------------------------------------------------------------- Net (loss) income...................... $ (1,640) $ (8,129) $ 4,928 ================================================================================ Net (loss) income per common share, basic and diluted.................... $ (0.20) $ (0.98) $ 0.57 -------------------------------------------------------------------------------- Weighted average number of common shares outstanding..................... 8,260 8,267 8,699 ================================================================================ The accompanying notes are an integral part of the financial statements. 20 Consolidated Statements of Changes in Stockholders' Equity (dollars in thousands, except per share amounts)
Common Stock Accumulated par value $0.01 Additional Minimum Pension ---------------- Paid-in Retained Liability Treasury Comprehensive Class A Class B Capital Deficit Adjustment Stock Total Income (Loss) ------------------------------------------------------------------------------------------------------------------ ------------- Balance, December 31, 1998..... $47 $47 $49,574 $(5,380) $(2,302) $(4,133) $37,853 Purchase of treasury stock..... (3,483) (3,483) Purchase and retirement of Class B stock................ (1) (469) (470) Minimum pension liability adjustment, net of tax of $748......................... 1,302 1,302 $ 1,302 Net income..................... 4,928 4,928 4,928 -------- Net comprehensive income....... $ 6,230 ------------------------------------------------------------------------------------------------------------------ ======== Balance, December 31, 1999..... 47 46 49,105 (452) (1,000) (7,616) 40,130 Purchase of treasury stock..... (197) (197) Minimum pension liability adjustment, net of tax benefit of $1,434.................... (2,494) (2,494) $ (2,494) Net loss....................... (8,129) (8,129) (8,129) -------- Net comprehensive loss $(10,623) ------------------------------------------------------------------------------------------------------------------ ======== Balance, December 31, 2000..... 47 46 49,105 (8,581) (3,494) (7,813) 29,310 Purchase of treasury stock..... Minimum pension liability adjustment, net of tax benefit of $1,504.................... (2,617) (2,617) $ (2,617) Net loss....................... (1,640) (1,640) (1,640) -------- Net comprehensive loss......... $ (4,257) ------------------------------------------------------------------------------------------------------------------ ======== Balance, December 31, 2001..... $47 $46 $49,105 $(10,221) $(6,111) $(7,813) $25,053 ==================================================================================================================
The accompanying notes are an integral part of the financial statements. 21 Consolidated Statements of Cash Flows (dollars in thousands)
For the years ended December 31, 2001 2000 1999 -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net (loss) income........................................... $ (1,640) $ (8,129) $ 4,928 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation........................................... 11,363 10,919 10,220 Amortization........................................... 818 818 818 Deferred income taxes.................................. (652) (1,769) 2,350 Changes in certain assets and liabilities: Accounts and notes receivable....................... 7,595 (11,782) 2,135 Inventories......................................... (2,875) 1,692 (9,407) Prepaid expenses and other current assets........... (4,870) 93 (1,147) Accounts payable.................................... (1,706) 457 4,761 Accrued liabilities................................. (8,802) 8,364 (2,218) Other liabilities................................... 566 193 (2,161) -------------------------------------------------------------------------------------------------------- Net cash (used) provided by operating activities.... (203) 856 10,279 -------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures, net .................................. (7,858) (13,925) (18,670) Purchase of short-term investments.......................... (4,175) (23,392) (51,044) Maturities of short-term investments........................ 14,856 30,527 31,812 -------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities.... 2,823 (6,790) (37,902) -------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock.................................. -- (197) (3,483) Purchase and retirement of Class B stock.................... -- -- (470) -------------------------------------------------------------------------------------------------------- Net cash used by financing activities -- (197) (3,953) -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents........... 2,620 (6,131) (31,576) Cash and cash equivalents: Beginning of year........................................... 12,637 18,768 50,344 -------------------------------------------------------------------------------------------------------- End of year................................................. $ 15,257 $12,637 $ 18,768 ========================================================================================================
The accompanying notes are an integral part of the financial statements. 22 Notes to Consolidated 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. Based upon the nature of the Company's operations, facilities and management structure, the Company considers its business to constitute a single segment for financial reporting purposes. Basis of Consolidation - The accompanying consolidated financial statements reflect the operations, financial position and cash flows of Congoleum Corporation and include the accounts of the Company and its subsidiaries after elimination of all significant intercompany transactions in consolidation. 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, 2001 and 2000 amounted to $2.2 million and $2.5 million, respectively, net of accumulated amortization of $1.1 million and $812 thousand, 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 $6.6 million and $6.1 million at December 31, 2001 and 2000, respectively. 23 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, 2001. Environmental Remediation and Asbestos 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 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). The Company is a party to a number of lawsuits stemming from its manufacture of asbestos-containing products. The Company records a liability for these cases based on its estimate of costs to resolve both open and incurred-but-not-reported claims. The Company also records an insurance receivable based on its estimate of insurance recoveries for these costs. In estimating the Company's asbestos-related exposures, the Company analyzes and considers the possibility of any uncertainties regarding the legal sufficiency of insurance claims or solvency of insurance carriers. (See Note 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, 2001, 2000 and 1999 were $3.5 million, $4.2 million and $4.2 million, 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. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 applies to all business combinations completed after June 30, 2001 and requires the use of the purchase method of accounting. SFAS No. 141 also establishes new criteria for determining whether intangible assets should be recognized separately from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, however, companies with fiscal years beginning after March 15, 2001 may elect to adopt the statement early. SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on an annual basis. Adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of Congoleum. SFAS No. 142 will be effective for the Company as of January 1, 2002. While Congoleum has not fully evaluated the impact of adopting SFAS No. 142, adoption of this standard is expected to result in the elimination of approximately $0.4 million of goodwill amortization expense per year, or $.05 per share. In August 2001, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") was issued. Congoleum will adopt SFAS No. 144 effective January 1, 2002 when adoption is mandatory. Among other things, SFAS No. 144 significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This statement supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the provisions of Accounting Principles Board Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," that relate to reporting the effects of a disposal of a segment of a business. The Company is currently assessing the impact of adopting SFAS No. 144 on its consolidated financial statements. In November 2001, Emerging Issues Task Force (EITF) issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products ("EITF 01-9") was issued. Congoleum will adopt EITF 01-9 effective January 1, 2002 when adoption is mandatory. This issue addresses the manner in which companies account for sales incentives to their customers. The Company's current accounting policies for the 24 recognition of costs related to these programs, which is to accrue for costs as benefits are earned by the Company's customers, are already in accordance with the consensus reached in this issue. The Company does record certain costs relating to these programs in selling, general and administrative expenses that will be reclassified to a reduction of sales in its March 31, 2002 10-Q for all periods presented. Reclassifications - Certain amounts appearing in the prior years' financial statements have been reclassified to conform to the current year's presentation. 2. Inventories: A summary of the major components of inventories is as follows (in 000s): December 31, December 31, 2001 2000 ---------------------------------------------------------------- Finished goods $ 43,680 $ 41,879 Work-in-process 4,425 3,600 Raw materials and supplies 7,677 7,428 ---------------------------------------------------------------- Total inventories $ 55,782 $ 52,907 ================================================================ If the FIFO (first-in, first-out) method of inventory accounting (which ap proximates current cost) had been used, inventories would have been ap proximately $731 thousand lower and $26 thousand higher than reported at De cember 31, 2001 and 2000, respectively. 3. Property, Plant, and Equipment: A summary of the major components of property, plant, and equipment is as follows (in 000s): December 31, December 31, 2001 2000 ---------------------------------------------------------------- Land $ 2,930 $ 2,930 Buildings and improvements 44,335 42,133 Machinery and equipment 166,002 158,829 Construction-in-progress 6,594 10,177 ---------------------------------------------------------------- 219,861 214,069 Less accumulated depreciation 123,957 114,659 ---------------------------------------------------------------- Total property, plant, and equipment, net $ 95,904 $ 99,410 ---------------------------------------------------------------- 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 $330 thousand, $1.1 million, and $691 thousand for 2001, 2000, and 1999, respectively. The amount of approved but unexpended capital appropriations at December 31, 2001 was $4.2 million, substantially all of which is planned to be expended during 2002. 25 4. Accrued Liabilities: Accrued liabilities consists of the following (in 000s): December 31, December 31, 2001 2000 --------------------------------------------------------------- Accrued warranty, marketing and sales promotion $19,449 $19,236 Employee compensation and related benefits 3,678 3,165 Interest 3,595 3,595 Environmental remediation and product- related liabilities 1,140 1,140 Distributor termination costs -- 4,659 Reserve for sales returns -- 4,034 Other 1,723 2,471 --------------------------------------------------------------- Total accrued liabilities $29,585 $38,300 =============================================================== 5. Long-Term Debt: Long-term debt consists of the following (in 000s): December 31, December 31, 2001 2000 --------------------------------------------------------------- 8 5/8% Senior Notes due 2008 $99,674 $99,625 --------------------------------------------------------------- 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. 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 $65 million and $50 million at December 31, 2001 and 2000, respectively. In December 2001, the Company entered into a revolving credit facility which expires in 2004 that provides for borrowings up to $30.0 million depending on levels of the Company's inventory and receivables. This agreement provides for a monthly commitment fee based on the average daily unused portion of the commitment equal to three-eighths of one percent and a monthly servicing fee of $2,500. This financing agreement contains certain covenants which include the maintenance of a minimum tangible net worth if borrowing availability falls below a certain level. 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, 2001; however, the facility provides for standby letters of credit which total $1.8 million at December 31, 2001. 26 6. Other Liabilities: Other liabilities consists of the following (in 000s): December 31, December 31, 2001 2000 -------------------------------------------------------------- Environmental remediation and product-related liabilities $22,864 $20,553 Accrued workers' compensation claims 5,971 5,196 Other 1,245 1,295 -------------------------------------------------------------- Total other liabilities $30,080 $27,044 ============================================================== 7. Research and Development Costs: Total research and development costs charged to operations amounted to $3.5 million, $4.3 million and $4.2 million for the years ended December 31, 2001, 2000, and 1999, 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, 2001 are as follows (in 000s): Years Ending ------------------------------------------------------------- 2002 $2,833 2003 2,142 2004 1,962 2005 1,389 2006 1,296 Thereafter 5,132 ------------------------------------------------------------- Total minimum lease payments $14,754 ============================================================= Rent expense was $3.6 million, $2.8 million and $3.0 million for the years ended December 31, 2001, 2000, and 1999, respectively. 27 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 (in 000s): For the years ended December 31, -------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------- Service cost $ 1,089 $ 1,079 $ 1,152 Interest cost 4,140 4,063 3,920 Expected return on plan assets (4,068) (4,329) (4,100) Amortization of transition amount 76 76 76 Amortization of prior service benefit (242) (242) (242) Recognized actuarial (gain) loss 363 (44) 186 ------------------------------------------------------------------------- Net periodic pension cost $ 1,358 $ 603 $ 992 ========================================================================= Weighted-average assumptions as of December 31 were as follows: 2001 2000 1999 ------------------------------------------------------------------------- Discount rate 7.25% 7.25% 7.25% Rate of compensation increase 5.00% 5.00% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00% 28 The following table sets forth the components of the change in projected benefit obligation and fair value of plan assets during 2001 and 2000 as well as funded status of the plans at December 31, 2001 and 2000 (in 000s): December 31, December 31, 2001 2000 ------------------------------------------------------------------------ Accumulated benefit obligation at end of year $ 58,662 $ 57,721 ======================================================================== Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 58,799 $ 58,281 Service cost 1,089 1,079 Interest cost 4,140 4,063 Actuarial gain 512 (99) Benefits paid (4,601) (4,525) ------------------------------------------------------------------------ Projected benefit obligation at the end of the year $ 59,939 $ 58,799 ======================================================================== Change in plan assets: Fair value of plan assets at beginning of year $ 46,346 $ 49,177 Actual return on assets (345) (713) Employer contributions 2,603 2,407 Benefit paid (4,601) (4,525) ------------------------------------------------------------------------ Fair value of plan assets at end of year $ 44,003 $ 46,346 ======================================================================== Funded status $(15,936) $(12,453) Unrecognized transition amount (219) (143) Unrecognized prior service benefit (1,251) (1,493) Unrecognized net actuarial loss 12,932 8,370 ------------------------------------------------------------------------ Net amount recognized $ (4,474) $ (5,719) ======================================================================== Amounts recognized in the financial statements consist of: Accrued benefit liability $(14,658) $(11,786) Intangible asset 560 564 Deferred tax asset 3,513 2,009 ------------------------------------------------------------------------ Accumulated other comprehensive income 6,111 3,494 ------------------------------------------------------------------------ Net amount recognized $ (4,474) $ (5,719) ======================================================================== 29 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 $1.4 million, $1.1 million and $1.4 million for the years ended December 31, 2001, 2000, and 1999, respectively. 10. Postretirement Benefits Other Than Pensions: Net periodic postretirement benefits cost is as follows (in 000s): For the years ended December 31, ------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------- Service cost $ 142 $ 134 $ 148 Interest cost 474 461 480 Amortization of prior service benefit (462) (417) (409) Amortization of net (gain) loss (9) (3) 71 ------------------------------------------------------------------------- Net periodic benefits cost $ 145 $ 175 $ 290 ========================================================================= Weighted average discount rate 7.25% 7.25% 7.25% ========================================================================= The change in benefit obligation and the actuarial and recorded liabilities for these postretirement benefits, none of which have been funded in 2001 and 2000, were as follows (in 000s): December 31, December 31, 2001 2000 ------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at end of prior year $ 6,800 $ 7,141 Service cost (with interest) 142 134 Interest cost 474 461 Actuarial loss (gain) 121 (449) Benefits paid (504) (487) ------------------------------------------------------------------------- Benefit obligation at end of year $ 7,033 $ 6,800 ========================================================================= Funded status $(7,033) $(6,800) Unrecognized net gain (829) (959) Unrecognized prior service benefit (1,527) (1,989) ------------------------------------------------------------------------- Accrued postretirement benefit cost (9,389) (9,748) Less current portion 417 419 ------------------------------------------------------------------------- Noncurrent postretirement benefit obligations $(8,972) $(9,329) ========================================================================= 30 The annual rate of increase in the per capita cost of covered health care benefits was assumed to be 8.0% in 2001; the rate was assumed to decrease gradually to 5.0% over the next 5 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 $52 thousand for the year ended December 31, 2001, and would increase the accumulated postretirement benefit obligations by $492 thousand at December 31, 2001. 11. Income Taxes: The provision (benefit) for income taxes is comprised of the following (in 000s): For the years ended December 31, ------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------- Current: Federal $ 40 $(2,297) $ 259 State 106 88 113 Deferred: Federal (652) (1,633) 2,123 State (273) (1,220) (245) Valuation allowance 273 1,086 469 ------------------------------------------------------------------------- Provision (benefit) for income taxes $(506) $(3,976) $2,719 ========================================================================= 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, ---------------------------------- 2001 2000 1999 ------------------------------------------------------------------------- Statutory federal income tax rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 7.5 5.5 2.7 Goodwill (6.8) (1.2) 1.9 Other (11.1) (5.4) (3.0) ------------------------------------------------------------------------- Effective tax rate 23.6% 32.9% 35.6% ========================================================================= 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 (in 000s): 31 December 31, December 31, 2001 2000 ------------------------------------------------------------------------ Deferred tax asset: Accounts receivable $ 195 $ 198 Unfunded pension liability 4,810 4,225 Environmental remediation and product-related reserves 10,034 9,743 Postretirement benefit obligations 4,138 4,313 Tax credit and other carryovers 5,739 2,788 Other accruals 2,380 2,437 ------------------------------------------------------------------------ Deferred tax asset 27,296 23,704 Valuation allowance (1,828) (1,555) ------------------------------------------------------------------------ Net deferred tax asset 25,468 22,149 ------------------------------------------------------------------------ Deferred tax liability: Depreciation and amortization (12,659) (11,987) Inventory (3,363) (3,211) Other (5,334) (4,995) ------------------------------------------------------------------------ Total deferred tax liability (21,356) (20,193) ------------------------------------------------------------------------ Net deferred tax asset $ 4,112 $ 1,956 ========================================================================= At December 31, 2001 and 2000, the Company had federal available net operating loss carryforwards of approximately $8.7 million and $3.2 million respectively, to offset future taxable income. The federal loss carry-forward will expire in 2021. 12. Supplemental Cash Flow Information: Cash payments for interest were $8.6 million for each of the years ended December 31, 2001, 2000 and 1999, respectively. Net cash payments (refunds) for income taxes were $(145) thousand, $(3.5) million and $903 thousand for the years ended December 31, 2001, 2000, and 1999, 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 negotiated agreements. The Company had the following transactions with ABI (in 000s): For the years ended December 31, ----------------------------------- 2001 2000 1999 ---------------------------------------------------------------- Sales to ABI $ 214 $ 361 $ 568 Raw material transfers to ABI 3,413 3,384 4,637 Computer service income from ABI 22 20 17 Material purchases from ABI 8,330 6,762 7,306 Management fees to ABI 580 562 900 ================================================================ Amounts as of December 31, 2001 and 2000 due from ABI totaled $301 thousand and $820 thousand, respectively, and are included in accounts receivable. Amounts as of December 31, 2001 and 2000 due to ABI totaled $464 thousand and $1.4 million, respectively, and are included in accounts payable. 32 14. Major Customers: Substantially all the Company's sales are to select flooring distributors and retailers located in the United States and Canada. 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 25% and 23% of the Company's net sales for the year ended December 31, 2001, 26% and 18% for the year ended December 31, 2000, and 28% and 21% for the year ended December 31, 1999. One of these customers accounted for 31% and 42% of accounts receivable at December 31, 2001 and 2000, respectively, while another unrelated customer accounted for 14% of accounts receivable at December 31, 2001. 15. Environmental and Other Liabilities: The Company records a liability for environmental remediation claims when a cleanup program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and cleanup programs progress, these liabilities are adjusted based upon the progress in determining the timing and extent of remedial actions and the related costs and damages. The recorded liabilities are not reduced by the amount of insurance recoveries. Such estimated insurance recoveries are reflected in other noncurrent assets and are considered probable of recovery. The Company is named, together with a large number (in most cases, hundreds) of other companies, as a potentially responsible party ("PRP") in pending proceedings under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, and similar state laws. In two instances, although not named as a PRP, the Company has received a request for information. These pending proceedings currently relate to seven disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which recovery from generators of hazardous substances is sought for the cost of 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. The PRP group at this site is made up of 51 companies, substantially all of which are large financially solvent entities. 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, based on engineering and consultant studies conducted, would be approximately $26 million. Congoleum's proportionate share, based on waste disposed at the site, was estimated to be approximately 6.1%. 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 6,563 pending claims (including workers' compensation cases) involving approximately 23,139 individuals as of December 31, 2001, alleging personal injury or death from exposure to asbestos or asbestos-containing products. There were 1,754 claims at December 31, 2000 that involved approximately 12,079 individuals. Activity related to asbestos claims during the years ended December 31, 2001 and 2000 was as follows: 33 2001 2000 ---------------------------------------------------- Claims at Jan. 1 1,754 670 New Claims 5,048 1,302 Settlements (40) (76) Dismissals (199) (142) ---------------------------------------------------- Claims at Dec. 31 6,563 1,754 ==================================================== The total indemnity costs incurred to settle claims during 2001 and 2000 were $1.1 million and $3.9 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, 2001, the Company has incurred asbestos-related claims of $11.4 million, to resolve claims of over 33,000 claimants, substantially all of which have been paid by the Company's insurance carriers. The average indemnity cost per resolved claimant is $340. Over 99% 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 were typically lead defendants in asbestos-related cases, is likely to have a negative impact on 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. The Company periodically updates 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. The Company believes that its range of probable and estimable undiscounted losses for asbestos-related claims through the year 2049 is $53.3 million to $195.6 million before considering the effects of insurance recoveries. 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 $53.3 million in accordance with accounting principles generally accepted in the United States. During the period that Congoleum produced asbestos-containing products, the Company purchased primary and excess insurance policies providing in excess of $1 billion coverage for bodily injury asbestos claims. To date, all claims and defense costs have been paid through primary insurance coverage. At December 31, 2001, the Company had $2.6 million in remaining primary insurance coverage for bodily injury asbestos claims. Once all primary coverage is exhausted, the Company expects defense and indemnity costs to be covered by its excess insurance policies. However, it is likely that the Company will share in these costs. The first layer of excess insurance policies provides for $135 million in coverage. Of this layer, approximately 16% to 28% (depending on the method used to allocate losses) was underwritten by carriers who are presently insolvent. The Company antici- 34 pates that it will have to pay some or all of the portion of costs for resolving asbestos-related claims that are allocable to such insolvent carriers, and that it may in turn be able to recover a portion of such payments from the estates or insurance guaranty funds responsible for the obligations of these carriers. 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, how legal and other loss handling costs will be covered by the insurance policies, and interpretation of the effect on coverage of various policy terms and limits and their interrelationships. Congoleum has filed suit regarding insurance coverage issues against certain of its primary insurance carriers, the carriers comprising its first layer of excess insurance, state guaranty funds representing insolvent carriers, and its insurance brokers and has begun settlement negotiations with several of these parties. The Company has determined, based on its review of its insurance policies and the advice of legal counsel, that approximately $42.5 million of the estimated $53.3 million gross liability is probable of recovery. This determination was made after considering the terms of the available insurance coverage, the financial viability of the insurance companies and the status of negotiations with its carriers. The Company further believes that the criteria, as defined by accounting principles generally accepted in the United States, to offset the estimated gross liability with a portion of the probable insurance recovery, equal to $35.5 million, have been met. Additionally, in 2001, the Company recorded an asset of $2.5 million for the probable settlement of disputed insurance coverage. The Company also recognized a liability for asbestos product liability of $2.8 million. The balance of the estimated gross liability of $17.8 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 $9.6 million that represents an estimate of probable insurance recoveries that do not qualify for offsetting against the gross liability and for the probable insurance settlement discussed previously. 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 liability for 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. Additionally, since the Company has recorded an amount representing the low end of the range of exposure for asbestos-related claims, it is possible that over time another amount within the range will be a better estimate of the actual losses. Although the resolution of these claims is anticipated to take decades, amounts recorded for the liability are not discounted, and the effect on results of operations in any given year from a revision to these estimates could be material. 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 (in millions): 2001 2000 Liability Receivable Liability Receivable -------------------------------------------------------------------------- Environmental liabilities $ 5.0 $ 2.0 $5.1 $2.0 Asbestos product liability 17.8 9.6 15.3 7.1 Other 1.2 .2 1.3 0.1 ========================================================================== Total $24.0 $11.8 $21.7 $ 9.2 ========================================================================== 35 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, as amended, (the "1995 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 under the 1995 Plan 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. In December 2001, the Company offered its eligible option holders to exchange all options then outstanding and granted to them under the 1995 Plan or the Company's 1999 Stock Option Plan For Non-Employee Directors, as amended (the "1999 Plan"), for new stock options to be granted under those plans not earlier than six months and one day after the date the Company canceled any options tendered to and accepted by it pursuant to the offer to exchange. On January 4, 2002, the Company accepted and canceled 667,500 options that had been previously granted under the 1995 Plan and all options that had been previously granted under the 1999 Plan that were tendered to and accepted by the Company pursuant to the offer to exchange. The Company expects to issue the new options on or about July 5, 2002. The new options will be exercisable for the same number of shares of the Company's Class A common stock as the canceled options were exercisable for. The exercise price of the new options will be equal to the fair market value as of the date of grant as determined under the applicable stock option plan pursuant to which the new option is granted. The new options granted under the 1995 Plan will generally vest annually in equal installments over a five-year period beginning on the first anniversary of the date of grant, and the new options granted under the 1999 Plan will generally vest 100% six months from 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, and 1999 respectively: option forfeiture of 15%; risk-free interest rates of 5.08% and 6.61%; no dividends; volatility factors of the expected market price of the Company's common stock of .597 for 2000 and .576 for 1999; and a weighted-average expected life of the options of 7 years. There were no options granted in 2001. The exercise prices of options outstanding at December 31, 2001 are as follows: 96,000 shares @ $3.50 to $3.63; 280,000 shares @ $7.19 to $9.00; and 300,000 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. The Company's estimated pro forma compensation expense from stock options for the years ended December 31, 2001, 2000, and 1999, respectively, was $381, $388, and $684. The Company's pro forma net (loss) income for the years ended December 31, 2001, 2000, and 1999, respectively, is as follows: 2001, $(2.0) million or $(0.24) per share; 2000, $(8.5) million, or $(1.03) per share; and 1999, $4.2 million, or $0.49 per share. A summary of the Company's 1995 Stock Option Plan activity, and related information, is as follows: 36 December 31, 2001: -------------------------------------------------------------------------- Shares Weighted average exercise price -------------------------------------------------------------------------- Options outstanding beginning of year 693,000 $ 9.93 Options granted -- -- Options exercised -- -- Options forfeited (17,000) 7.87 -------- Options outstanding end of year 676,000 $ 9.98 ========================================================================== Exercisable at end of year 486,200 $ 11.27 Weighted average remaining contractual life 5 years -- Stock options available for future issuance 122,000 -- ========================================================================== 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 -- ========================================================================== 37 The weighted average grant date fair value of options granted under the 1995 Plan in 2000 and 1999 was $2.28 and $4.67, respectively. There were no options granted in 2001. On July 1, 1999, the 1999 Plan was established, under which non-employee directors may be granted options to purchase up to 50,000 shares of the Company's Class A common stock. Options granted under the 1999 Plan have ten-year terms and vest 6 months from the grant date. The exercise price of options granted under the 1999 Plan and outstanding at December 31, 2001 range from $3.00 to $7.19 per share. A summary of the 1999 Plan activity, and related information, is as follows: December 31, 2001: -------------------------------------------------------------------------- Shares Weighted average exercise price -------------------------------------------------------------------------- Options outstanding beginning of year 8,000 $6.02 Options granted 2,500 3.00 Options exercised -- -- Options forfeited -- -- ------ Options outstanding end of year 10,500 $5.30 ========================================================================== 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 ========================================================================== 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 under the 1999 Plan in 2001, 2000, and 1999 was $1.67, $1.79, and $3.15, respectively. 17. Stockholders' Equity: Holders of shares of the Company's Class B common stock are entitled to two votes per share on all matters submitted to a vote of stockholders other than certain extraordinary matters. The holders of shares of the 38 Company's Class A common stock 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 $5.0 million 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 $15.0 million. Under the total plan, Congoleum has repurchased shares of its common stock at an aggregate cost of $14.0 million through December 31, 2001. Shares of Class B stock repurchased (totaling 741,055 shares) have been retired. As of December 31, 2001, ABI owned 151,100 Class A shares and 4,395,605 Class B shares that represented an aggregate 69.5% of the voting interest of the Company. 18. Distributor Transition Costs: During the third quarter of 2000, the Company announced the appointment of Mohawk Industries, Inc. as a national distributor. At the same time, the Company announced it was terminating its distribution arrangements with LDBrinkman & Co., who had been its exclusive distributor in much of the southwestern United States, accounting for 21% of the Company's sales in 1999. LDBrinkman & Co. contested the Company's right to terminate its distributor agreement and the matter went to arbitration in the fourth quarter of 2000. The parties signed a final settlement agreement in February 2001. The Company recorded a charge of $7.7 million 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, which included training, meetings, and legal costs. The Company also agreed to subsidize a portion of the costs of merchandising materials for Mohawk such as samples and displays. Also included in the charge are certain termination payments to be made to LDBrinkman pursuant to the terms of the settlement agreement. The Company also re-evaluated its allowance for doubtful accounts in light of the settlement agreement and concluded it should be reduced by $1.8 million, which was recorded as a credit to bad debt expense in the fourth quarter of 2000. The Company provided right-of-return provisions to LDBrinkman in the termination agreement whereby LDBrinkman could return certain unsold inventory purchased from the Company that met minimum size and quality requirements. The Company deferred the recognition of revenue for its estimate of returns of inventory under this right-of-return agreement. Inventory was returned pursuant to this agreement during the third quarter of 2001 and the Company has no further obligations under this provision. The resolution of this matter did not have a material effect on the results of operations for the year ended December 31, 2001. A summary of the distributor transition costs appears below (in 000s): ------------------------------------------------------------- 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 pretax income 9,008 Tax effect 2,959 ------------------------------------------------------------- Total reduction in net income $6,049 ============================================================= Of the $7.7 million in costs, $4.7 million remained unpaid as of December 31, 2000 and was included in accrued expenses. Accrued expenses and inventory were increased by the provision for returned goods. These costs have all been paid as of December 31, 2001. 39 19. Fair Value of Financial Instruments The Company's cash and cash equivalents, short-term investments, accounts receivable, accounts payable and long-term debt are financial instruments. With the exception of the Company's long-term debt, the carrying value of these financial instruments approximates their fair value at December 31, 2001. The Company's long-term debt had a book value of $99.7 million and the fair market value of $65.0 million at December 31, 2001. The Company's long-term debt had a book value of $99.6 million and a fair market value of $50.0 million at December 31, 2000. The fair value of the Company's long-term debt is determined based on quoted market values. The fair value of the Company's other financial instruments is determined based on discounted cash flows. Due to the short period over which the cash flows are expected to be realized, the carrying value of the financial instruments approximates the net present value of cash flows and changes in interest rate assumptions would not have a material effect on the calculation. 20. Quarterly Financial Data (Unaudited): The following table summarizes unaudited quarterly financial information (in 000s). Year ended December 31, 2001 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------------------------------------- Net sales $ 53,183 $ 55,535 $57,881 $ 56,651 Gross profit 10,573 14,872 16,250 15,872 Net income (loss) (3,677) 155 1,170 712 Net income (loss) per common share $ (.45) $ .02 $ .14 $ .09 ========================================================================== 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 common share $ (.23) $ (.27) $ .21 $ (.69) ========================================================================== (1) The loss in 2000 includes $6.0 million or $.73 per share for the after-tax cost of a major distributor change referred to in Note 18 of the Financial Statements. 40 Report of Independent Auditors To the Board of Directors and Stockholders of Congoleum Corporation: We have audited the accompanying consolidated balance sheets of Congoleum Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial position of Congoleum Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Philadelphia, Pennsylvania February 15, 2002 41 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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, 2002. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following financial statements of the Company are included in this report on Form 10-K: Page Number ----------- Report of Independent Auditors 41 Balance Sheets at December 31, 2001 and December 31, 2000 19 Statements of Operations for each of the three years ended December 31, 2001, 2000 and 1999 20 Statements of Changes in Stockholders Equity for each of the three years ended December 31, 2001, 2000 and 1999 21 Statements of Cash Flows for each of the three years ended December 31, 2001, 2000 and 1999 22 Notes to Consolidated financial Statements 23 Supplementary Data Quarterly Financial Data (Unaudited) 40 (2) The following financial statement schedule is included in this report on Form 10-K: Page Number ----------- Schedule II - Valuation and Qualifying Accounts 48 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 46 through 47. 42 Exhibits -------- Number Exhibit ------- 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. 4.4 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 Agreement, dated December 21, 1998 (the "Joinder Agreement"), by and among the Company, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and the Lender. 4.7 Loan and Security Agreement, dated December 10, 2001 (the "Congress Financial Loan Agreement") by and between Congress Financial Corp. (the "Lender") and the Company. 10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among Resilient Holdings, Hillside, the Company (collectively, the "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and American Biltrite. 10.9 Closing Agreement, dated as of March 11, 1993, by and among the Congoleum Group, Hillside Capital and American Biltrite. 10.12 Stockholders Agreement, dated as of March 11, 1993 (the "Stockholders Agreement"), by and among the Congoleum Group, American Biltrite and Congoleum Holdings. 10.12.1 First Amendment, dated February 8, 1995, to the Stockholders Agreement, by and among Hillside, American Biltrite and the Company. 10.13 Personal Services Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), by and between American Biltrite and the Company. 10.13.1 First Amendment, dated February 8, 1995, to Personal Services Agreement, by and between American Biltrite and the Company. 10.13.2 Second Amendment, dated November 15, 1996, to Personal Services Agreement, by and between American Biltrite and the Company. 10.13.3 Third Amendment, dated as of March 15, 1998, to Personal Services Agreement, by and between American Biltrite and the Company. 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. 10.20 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. 10.27.1 Form of Amendment to Non-Qualified, Non-Employee Directors Stock Option Plan. 10.28 Loan and Security Agreement, dated December 10, 2001 (the "Congress Financial Loan Agreement") by and between Congress Financial Corp. (the "Lender") and the Company. 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. 21.1 Subsidiaries of the Company. 43 23.1 Consent of Independent Auditors, Ernst & Young LLP. (b) Reports on Form 8-K. During the quarter ended December 31, 2001 the Company filed no current reports on Form 8-K. 44 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, 2002. CONGOLEUM CORPORATION By: /s/ ----------------------------------------- Roger S. Marcus President, Chairman & Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ President, Chairman, Chief Executive Officer March 27, 2002 -------------------------- and Director (Principal Executive Officer) Roger S. Marcus /s/ Chief Financial Officer March 27, 2002 -------------------------- (Principal Financial and Accounting Officer) Howard N. Feist III /s/ Vice Chairman and Director March 27, 2002 -------------------------- Richard G. Marcus /s/ Director March 27, 2002 -------------------------- William M. Marcus /s/ Director March 27, 2002 -------------------------- John N. Irwin III /s/ Director March 27, 2002 -------------------------- Cyril C. Baldwin, Jr. /s/ Director March 27, 2002 -------------------------- Mark S. Newman /s/ Director March 27, 2002 -------------------------- Mark N. Kaplan /s/ Director March 27, 2002 -------------------------- C. Barnwell Straut
45 INDEX TO EXHIBITS Exhibit Number Exhibits -------- ***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. ***4.4 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. ***********4.7 Loan and Security Agreement, dated December 10, 2001 (the "Congress Financial Loan Agreement") by and between Congress Financial Corp. (the "Lender") and the Company. *********4.6.1 Joinder Agreement, dated December 21, 1998 (the "Joinder Agreement"), by and among the Company, Congoleum Intellectual Properties, Inc., Congoleum Financial Corporation and the Lender. **10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among Resilient Holdings, Hillside, the Company (collectively, the "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and American Biltrite. **10.9 Closing Agreement, dated as of March 11, 1993, by and among the Congoleum Group, Hillside Capital and American Biltrite. **10.12 Stockholders Agreement, dated as of March 11, 1993 (the "Stockholders Agreement"), by and among the Congoleum Group, American Biltrite and Congoleum Holdings. ***10.12.1 First Amendment, dated February 8, 1995, to the Stockholders Agreement, by and among Hillside, American Biltrite and the Company. **10.13 Personal Services Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), by and between American Biltrite and the Company. ***10.13.1 First Amendment, dated February 8, 1995, to Personal Services Agreement, by and between American Biltrite and the Company. *******10.13.2 Second Amendment, dated November 15, 1996, to Personal Services Agreement, by and between American Biltrite and the Company. *******10.13.3 Third Amendment, dated as of March 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. ***10.20 Trademark Purchase Agreement, dated November 29, 1993, by and between the Company and The Amtico Company LTD ("Amtico Company"). 46 ***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. ***********10.27.1 Form of Amendment to Non-Qualified, Non-Employee Directors Stock Option Plan. ***********10.28 Loan and Security Agreement, dated December 10, 2001 (the "Congress Financial Loan Agreement") by and between Congress Financial Corp. (the "Lender") and the Company. 12.1 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. *********21.1 Subsidiaries of the Company. 23.1 Consent of Independent Auditors, Ernst & Young LLP ---------- ** 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. *********** 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, 2001. 47 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, 2001: Allowance for doubtful accounts and cash discounts $(1,934) $ -- $ 67(b) $ 8 $(1,859) Year ended December 31, 2000: Allowance for doubtful accounts and cash discounts $(3,283) $1,785 $(562)(b) $126 $(1,934) Year ended December 31, 1999: Allowance for doubtful accounts and cash discounts $(3,336) $ -- $ 53(b) $ -- $(3,283)
(a) Balances written off, net of recoveries. (b) Represents net provision (utilization) of the allowance for doubtful accounts and cash discounts. 48