UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3500 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of principal executive offices, including zip code)
(609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2007
----------------------------- --------------------------------
Class A Common Stock 3,663,390
Class B Common Stock 4,608,945
1
CONGOLEUM CORPORATION
Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2007
(unaudited) and December 31, 2006....................................4
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2007 and 2006 (unaudited)........5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 and 2006 (unaudited)........................6
Notes to Unaudited Condensed Consolidated Financial Statements
(unaudited)..........................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................29
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........38
Item 4. Controls and Procedures.............................................38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................38
Item 1A. Risk Factors........................................................39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........45
Item 3. Defaults Upon Senior Securities.....................................45
Item 4. Submission of Matters to a Vote of Security Holders.................46
Item 5. Other Information...................................................46
Item 6. Exhibits ...........................................................46
Signatures ...................................................................47
2
Factors That May Affect Future Results
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, that involve risks,
uncertainties and assumptions. These statements can be identified by the use of
words such as "anticipate," "believe," "estimate," "expect," "intend," "plan,"
"project" and other words of similar meaning. In particular, these include
statements relating to intentions, beliefs or current expectations concerning,
among other things, future performance, results of operations, the outcome of
contingencies such as bankruptcy and other legal proceedings, and financial
conditions. These statements do not relate strictly to historical or current
facts. These forward-looking statements are based on the expectations of
Congoleum Corporation (the "Company" or "Congoleum"), as of the date of this
report, of future events, and the Company undertakes no obligation to update any
of these forward-looking statements. Although the Company believes that these
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. Readers are cautioned
not to place undue reliance on any forward-looking statements. Any or all of
these statements may turn out to be incorrect. By their nature, forward-looking
statements involve risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. Any
forward-looking statements made in this report speak only as of the date of such
statement. It is not possible to predict or identify all factors that could
potentially cause actual results to differ materially from expected and
historical results. Factors that could cause or contribute to the Company's
actual results differing from its expectations include those factors discussed
elsewhere in this report, including in the section of this report entitled "Risk
Factors" and in the Company's other filings with the Securities and Exchange
Commission.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
September 30, December 31,
2007 2006
(Unaudited)
----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 25,552 $ 18,591
Restricted cash ......................................................... 6,425 9,656
Accounts receivable, less allowances of $1,297 and $1,142 as of
September 30, 2007 and December 31, 2006, respectively ............... 19,198 17,598
Inventories ............................................................. 35,401 34,220
Prepaid expenses and other current assets ............................... 25,584 25,610
----------------------------------------------------------------------------------------------------------
Total current assets ................................................ 112,160 105,675
Property, plant and equipment, net ...................................... 62,306 67,757
Other assets, net ....................................................... 11,449 10,770
----------------------------------------------------------------------------------------------------------
Total assets ....................................................... $ 185,915 $ 184,202
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................ $ 9,026 $ 10,428
Accrued liabilities ..................................................... 23,585 22,263
Asbestos-related liabilities ............................................ 6,454 13,950
Revolving credit loan ................................................... 14,079 12,715
Accrued taxes ........................................................... 294 264
Liabilities subject to compromise - current ............................. 43,055 34,602
----------------------------------------------------------------------------------------------------------
Total current liabilities .......................................... 96,493 94,222
Liabilities subject to compromise - long term ............................. 134,277 136,533
----------------------------------------------------------------------------------------------------------
Total liabilities .................................................. 230,770 230,755
==========================================================================================================
STOCKHOLDERS' EQUITY (DEFICIT)
Class A common stock, par value $0.01; 20,000,000 shares authorized;
4,736,950 shares issued and 3,663,390 shares outstanding at
September 30, 2007 and December 31, 2006 ............................... 47 (47)
Class B common stock, par value $0.01; 4,608,945 shares authorized,
issued and outstanding at September 30, 2007 and December 31, 2006 ..... 46 46
Additional paid-in capital ................................................ 49,363 49,349
Retained deficit .......................................................... (63,042) (64,726)
Accumulated other comprehensive loss ...................................... (23,456) (23,456)
----------------------------------------------------------------------------------------------------------
(37,042) (38,740)
Less Class A common stock held in treasury, at cost; 1,073,560 shares at
September 30, 2007 and 1,074,160 shares at December 31, 2006 ........... 7,813 7,813
----------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) ................................... (44,855) (46,553)
----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) ................... $ 185,915 $ 184,202
==========================================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2007 2006 2007 2006
Net sales ......................................... $ 53,588 $ 57,460 $ 160,444 $ 173,440
Cost of sales ..................................... 39,365 44,562 120,478 133,661
Selling, general and administrative expenses ...... 9,829 10,681 29,243 31,338
Income from operations ............................ 4,394 2,217 10,723 8,441
Other income (expense):
Interest income ................................ 185 104 439 387
Interest expense ............................... (3,146) (2,916) (9,204) (8,517)
Other income (expense) ......................... (213) 77 (247) 124
--------- --------- --------- ---------
Income before taxes ............................... 1,220 (518) 1,711 435
Provision (benefit) for income taxes .............. 20 (94) 27 22
--------- --------- --------- ---------
Net income (loss) ................................. $ 1,200 $ (424) $ 1,684 $ 413
--------- --------- --------- ---------
Net income (loss) per common share, basic .... $ 0.15 $ (0.05) $ 0.20 $ 0.05
========= ========= ========= =========
Net income (loss) per common share, diluted .. $ 0.14 $ (0.05) $ 0.20 $ 0.05
========= ========= ========= =========
Weighted average number of common shares
outstanding, basic ........................ 8,272 8,280 8,272 8,317
========= ========= ========= =========
Weighted average number of common shares
outstanding, diluted ...................... 8,283 8,280 8,287 8,329
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
CONGOLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2007 2006
-------- --------
Cash flows from operating activities:
Net income ....................................................... $ 1,684 $ 413
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation ................................................. 7,714 7,742
Amortization ................................................. 289 289
Stock based compensation expense ............................. 14 169
Changes in certain assets and liabilities:
Accounts and notes receivable ............................ (1,600) (9,639)
Inventories .............................................. (1,181) 545
Prepaid expenses and other assets ........................ 553 479
Insurance recovery (net) for oven replacement ............ 1,561 --
Accounts payable ......................................... (1,402) 2,526
Accrued liabilities ...................................... 9,976 5,689
Asbestos-related liabilities ............................. (10,752) (14,068)
Other .................................................... (2,227) (2,703)
-------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .. 4,629 (8,558)
-------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures ......................................... (2,263) (2,537)
-------------------------------------------------------------------------------------------------
Net cash used in investing activities ................ (2,263) (2,537)
-------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net short-term borrowings .................................... 1,364 4,882
Net change in restricted cash ................................ 3,231 1,424
-------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............ 4,595 6,306
-------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .................. 6,961 (4,789)
Cash and cash equivalents:
Beginning of period .......................................... 18,591 24,511
-------------------------------------------------------------------------------------------------
End of period ................................................ $ 25,552 $ 19,722
-------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated financial statements.
6
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)
1. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal and recurring adjustments) considered
necessary for a fair presentation of Congoleum Corporation's (the "Company" or
"Congoleum") condensed consolidated financial position, results of operations
and cash flows have been included. Operating results for the nine month period
ended September 30, 2007 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2007. For further information,
refer to the consolidated financial statements and related footnotes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2006.
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.
Certain amounts appearing in the prior period's condensed consolidated
financial statements have been reclassified to conform to the current period's
presentation.
The financial statements of Congoleum have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern. As described more fully below
and in Note 6, there is substantial doubt about the Company's ability to
continue as a going concern unless it obtains relief from its substantial
asbestos liabilities through a successful reorganization under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code").
On December 31, 2003, Congoleum filed a voluntary petition with the United
States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court")
(Case No. 03-51524) seeking relief under Chapter 11 of the Bankruptcy Code as a
means to resolve claims asserted against it related to the use of asbestos in
its products decades ago. In January 2004, the Company filed its proposed plan
of reorganization and disclosure statement with the Bankruptcy Court.
In November 2004, Congoleum filed a modified plan of reorganization and
related documents (the "Fourth Plan") with the Bankruptcy Court reflecting the
result of further negotiations with representatives of the Asbestos Claimants'
Committee (the "ACC"), the Future Claimants' Representative (the "FCR") and
other asbestos claimant representatives. The Bankruptcy Court approved the
disclosure statement and plan voting procedures in December 2004 and Congoleum
obtained the requisite votes of asbestos personal injury claimants necessary to
seek approval of the Fourth Plan.
7
In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the trust to be formed upon confirmation
of the plan under Section 524(g) of the Bankruptcy Code to pay asbestos claims
against Congoleum (the "Plan Trust").
In July 2005, Congoleum filed an amended plan of reorganization (the
"Sixth Plan") and related documents with the Bankruptcy Court which reflected
the result of these negotiations, as well as other technical modifications. The
Bankruptcy Court approved the disclosure statement and voting procedures and
Congoleum commenced solicitation of acceptances of the Sixth Plan in August
2005. In September 2005, Congoleum learned that certain asbestos claimants were
unwilling to agree to forbear from exercising their security interest as
contemplated by the Sixth Plan and subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. In March 2006, Congoleum filed a new amended plan of
reorganization (the "Eighth Plan"). In addition, an insurance company,
Continental Casualty Company, and its affiliate, Continental Insurance Company
(collectively, "CNA"), filed a plan of reorganization and the Official
Bondholders' Committee (the "Bondholders' Committee") (representing holders of
the Company's 8-5/8% Senior Notes due August 1, 2008 (the "Senior Notes")) also
filed a plan of reorganization. In May 2006, the Bankruptcy Court ordered all
parties in interest in Congoleum's reorganization proceedings to participate in
global mediation discussions. Several mediation sessions took place from June
through September 2006. During the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with the ACC, the FCR and the Company's controlling shareholder,
American Biltrite Inc. ("ABI"), on certain terms of an amended plan of
reorganization (the "Ninth Plan"), which Congoleum filed and proposed jointly
with the ACC in August 2006. CNA and the Bondholders' Committee jointly filed a
new, competing plan in August 2006 and each withdrew its prior plan of
reorganization. Following further mediated negotiations, Congoleum, the ACC, the
FCR, ABI and the Bondholders' Committee reached agreement on terms of a new
amended plan (the "Tenth Plan"), which Congoleum filed jointly with the ACC in
September 2006. Following the Bondholders' Committee's withdrawal of support for
CNA's plan, CNA filed an amended plan of reorganization (the "CNA Plan"). In
October 2006, Congoleum and the ACC jointly filed a revised version of the Tenth
Plan (the "Eleventh Plan"), which reflected minor technical changes agreed to by
the various parties supporting Congoleum's plan. In October 2006, the Bankruptcy
Court held a hearing to consider the adequacy of the disclosure statements with
respect to the Tenth Plan and the CNA Plan and to hear arguments on respective
summary judgment motions that the Tenth Plan and the CNA Plan were not
confirmable as a matter of law. The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court's ruling on the respective summary judgment motions. In
8
February 2007, the Bankruptcy Court issued two separate opinions ruling that
neither the Tenth Plan nor the CNA Plan was confirmable as a matter of law.
Because the Tenth Plan and Eleventh Plan are substantially identical, the
Company believes the ruling issued with respect to the Tenth Plan also applies
to the Eleventh Plan. Following the Bankruptcy Court's rulings, in March 2007,
Congoleum resumed global plan mediation discussions seeking to resolve the
issues raised in the Bankruptcy Court's ruling with respect to the Tenth Plan.
Congoleum also appealed the ruling with respect to the Tenth Plan to the United
States District Court for the District of New Jersey (the "District Court"). On
October 30, 2007, Congoleum informed the parties to the appeal that it would no
longer be pursuing such appealing. The ACC, which is a co-appellant, has
determined to continue to prosecute the appeal, which appeal remains pending.
There can be no assurance that the Company will be successful in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that the Company will
obtain approval to solicit acceptances of a new plan of reorganization, that the
Company will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation over any
plan of reorganization.
On May 18, 2007, the New Jersey state court (the "State Court") issued a
decision ruling that Congoleum's insurers have no coverage obligations under New
Jersey law for a pre-petition settlement agreement (the "Claimant Agreement")
between Congoleum and approximately 79,000 asbestos personal injury claimants.
In that ruling, the State Court judge also cited trial testimony in his opinion
that the releases (given by claimants who signed the Claimant Agreement) were
non-recourse to Congoleum whether or not anyone recovered insurance proceeds.
Based in part upon that finding, Congoleum filed an objection (the "Omnibus
Objection") in the Bankruptcy Court on June 7, 2007 requesting that all
asbestos-related personal injury claims settled and / or liquidated (the
"Settled Claims") pursuant to either a pre-petition settlement agreement, the
Claimant Agreement or the agreements establishing a pre-petition trust (the
"Collateral Trust") be disallowed and expunged. The Omnibus Objection also
requests that if the Bankruptcy Court finds that the holders of Settled Claims
retain viable tort claims with recourse against Congoleum, that the Bankruptcy
Court rescind the pre-petition settlement agreements and the Claimant Agreement
and those claims be disallowed and expunged because, since the filing of
Congoleum's bankruptcy case, supervening events have resulted in a substantial
frustration of the purpose of those agreements. The Bankruptcy Court heard
arguments on the Omnibus Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the
legal status of the Settled Claims. One decision held that the relief requested
in the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
are otherwise protected. The Company amended the complaint in the existing
adversary proceeding to seek the relief requested in the Omnibus Objection. The
Bankruptcy Court also reiterated its view that all the asbestos claims, unless
they had obtained a final judgment as to liability and damages, are similarly
situated and must receive similar treatment in any section 524(g) reorganization
plan.
9
In its other decision, the Bankruptcy Court ruled that the security
interests in insurance collateral that were conveyed to the settled claimants
pre-bankruptcy were ineffective and unenforceable against Congoleum's insurance
policies or the proceeds of those policies because the attempts to create
security interests were outside the scope of Article 9 of the Uniform Commercial
Code; nor could such security interests be considered to be a common law pledge.
The Bankruptcy Court therefore granted summary judgment in Congoleum's favor on
Counts V and VI of the omnibus avoidance action and the sealed avoidance action
commenced by the Company in December 2005 (collectively, the "Avoidance
Actions") which counts sought to void the security interests and liens securing
the pre-petition settlements of asbestos claims.
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Actions, adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending. On October 12, 2007, Congoleum filed a motion for summary judgment in
the Omnibus Adversary Proceeding seeking a ruling that all of the pre-petition
settlement agreements were null and void or should be rescinded. Argument on the
summary judgment motion was heard on November 5, 2007 and the Bankruptcy Court
has taken the motion under advisement.
The FCR filed a plan of reorganization and proposed disclosure statement
("FCR Plan") on July 3, 2007. The FCR Plan is premised upon, among other things,
treatment of all asbestos claimants holding claims against Congoleum on a
substantially similar basis, although the FCR did not propose a resolution of
any pre-petition settlement agreements including the Claimant Agreement. The FCR
Plan provides, among other things, that all existing equity interests of
Congoleum's stockholders will be cancelled and that the stockholders will
receive nothing on account of their equity interests. Disclosure statement
hearings were held on August 30, 2007, November 8, 2007, and a further hearing
is scheduled for December 11, 2007. There is no assurance that the Bankruptcy
Court will approve the disclosure statement or that the FCR Plan will be
confirmed. At the November 8, 2007 hearing, the Bankruptcy Court also ruled that
any competing plans of reorganization must be filed prior to the December 11,
2007 hearing.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Note 6.
American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7") provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. The Company implemented this guidance in
consolidated financial statements for periods after December 31, 2003. Pursuant
to SOP 90-7, companies are required to segregate pre-petition liabilities that
are subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company's liabilities at December 31, 2003
have been reclassified as liabilities subject to compromise. Obligations arising
post-petition, and pre-petition obligations that are secured, are not classified
as liabilities subject to compromise.
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
10
2. Recent Accounting Principles:
Pension and Other Postretirement Plans
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans ("SFAS No.
158"), which amends SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, and SFAS No. 132R, Employers'
Disclosures about Pensions and Other Postretirement Benefits (revised 2003).
SFAS No. 158 requires companies to recognize an asset or liability for the
overfunded or underfunded status of their benefit plans in their financial
statements. SFAS No. 158 also requires the measurement date for plan assets and
liabilities to coincide with the sponsor's year end. This standard provides two
transition alternatives related to the change in measurement date provisions.
The recognition of an asset and liability related to the funded status
provision is effective for fiscal years ending after December 15, 2006, and the
change in measurement date provisions is effective for fiscal years ending after
December 15, 2008. The impact from the recognition at December 31, 2006 of
previously unrecognized amounts reduced stockholders' equity by approximately
$3.8 million.
Accounting for Uncertainty in Income Taxes
Effective January 1, 2007, Congoleum adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 ("FIN 48"). FASB requires that Congoleum recognize the impact of a tax
position taken, or expected to be taken, in tax returns if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. Under FIN 48, tax positions are evaluated for recognition using a
"more-likely-than-not" threshold, and those tax positions requiring recognition
are measured as the largest amount of tax benefit that is greater than fifty
percent likely of being realized upon ultimate settlement with a taxing
authority that has full knowledge of all relevant information. Congoleum
evaluated its tax positions in the tax returns filed, as well as unfiled tax
positions and the amounts comprising deferred tax assets. Congoleum determined
that the adoption of FIN 48 did not have a material impact on its financial
position or results of operations.
Congoleum's policy is to report interest (and penalties, if applicable) as
tax provision (benefit) in the Consolidated Statements of Operations.
Congoleum's federal income tax returns are open and subject to examination
from the 2003 calendar year and later. Congoleum's various state income tax
returns are generally open from the 2002 and later calendar years based on the
statutes of limitations of the various states. Congoleum's tax return net
operating loss carry forwards are significant. The calendar years in which
losses arose may be subject to audit when such carry forwards are utilized to
offset taxable income in future periods.
11
Fair Value of Financial Assets and Liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. The standard permits entities to choose to measure many
financial instruments and certain other items at fair value and is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of the previous fiscal year provided that the entity makes that
choice in the first 120 days of that fiscal year and also elects to apply the
provisions of SFAS No. 157, Fair Value Measurements. The Company is in the
process of evaluating the impact this pronouncement may have on its results of
operations and financial condition.
Reclassifications - Certain amounts appearing in the prior period's financial
statements have been reclassified to conform to the current period's
presentation.
3. Inventories
A summary of the major components of inventories is as follows (in
thousands):
September 30, December 31,
2007 2006
-------------------------------
Finished goods $28,889 $26,515
Work-in-process 1,603 1,912
Raw materials and supplies 4,909 5,793
------- -------
Total inventories $35,401 $34,220
======= =======
4. Income Per Share
Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share is calculated by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, unless their effect is anti-dilutive.
5. 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, totaling $4.4 million at September 30, 2007 and December 31, 2006,
are not reduced by the amount of insurance recoveries. Such estimated insurance
recoveries approximated $2.2 million at September 30, 2007 and December 31,
2006, and are reflected in other non-current assets. Receivables for expected
insurance recoveries are recorded if the related carriers are solvent and paying
claims under a reservation of rights or under an obligation pursuant to coverage
in place or a settlement agreement. Substantially all of Congoleum's recorded
insurance asset for environmental matters is collectible from a single carrier.
12
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, as amended ("CERCLA"), and similar state laws.
In addition, in four other instances, although not named as a PRP, the Company
has received a request for information. The pending proceedings relate to eight
disposal sites in New Jersey, Pennsylvania, and Maryland 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 and funding
obligations 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, the Company, as a PRP, can be held jointly and
severally liable for all environmental costs associated with a site.
The most significant exposure for which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron
Superfund Site"). The PRP group at this site is made up of 81 companies,
substantially all of which are large financially solvent entities. Two removal
actions were substantially complete as of December 31, 1998 and a groundwater
treatment system was installed thereafter. The Environmental Protection Agency
("EPA") has selected a remedy for the soil and shallow groundwater ("Operable
Unit 1" or "OU-1"); however, the remedial investigation/feasibility study
related to the deep groundwater ("OU-2") has not been completed. The PRP group,
of which the Company is a part, has entered into a Consent Decree to perform the
remedy for OU-1 and resolve natural resource damage claims. The Consent Decree
also requires the PRPs to perform the OU-2 remedy, assuming that the estimated
cost of the remedy is not more than $10 million. If the estimated cost of the
OU-2 remedy is more than $10 million, the PRPs may decline to perform it or they
may elect to perform anyway. Cost estimates for the OU-1 and OU-2 work combined
(including natural resource damages) range between $22 million and $34 million,
with the Company's share ranging between approximately $1.0 million and $1.6
million. This assumes that all parties participate and that none cash-out and
pay a premium; those two factors may account for some fluctuation in the
Company's share. Fifty percent (50%) of Congoleum's share of the costs is
presently being paid by one of its insurance carriers, Liberty Mutual Insurance
Company, whose remaining policy limits for this claim are expected to cover
approximately $0.3 million in additional costs. Congoleum expects to fund the
balance to the extent further insurance coverage is not available.
The Company filed a motion before the Bankruptcy Court seeking
authorization and approval of the Consent Decree and related settlement
agreements for the Galaxy/Spectron Superfund Site, as well authorization for
Liberty Mutual Insurance Company and the Company to make certain payments that
have been invoiced to the Company with respect to the Consent Decree and related
settlement agreements. An order authorizing and approving the Consent Decree and
related settlement agreements was issued by the Bankruptcy Court in August 2006.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. The Company has entered into an
administrative consent order with the New Jersey Department of Environmental
Protection and has established a remediation trust fund of $100 thousand as
financial assurance for certain remediation funding obligations. Estimated
13
total cleanup costs of $1.3 million, including capital outlays and future
maintenance costs for soil and groundwater remediation, are primarily based on
engineering studies. Of this amount, $0.3 million is included in current
liabilities subject to compromise and $1.0 million is included in non-current
liabilities subject to compromise.
The Company anticipates that these matters will be resolved over a period
of years and that after application of expected insurance recoveries, funding
the costs will not have a material adverse impact on the Company's liquidity or
financial position. However, unfavorable developments in these matters could
result in significant expenses or judgments that could have a material adverse
effect on the financial position of the Company.
6. Asbestos Liabilities
Claims Settlement and Chapter 11 Reorganization
In early 2003, the Company announced a strategy for resolving current and
future asbestos claims liability through confirmation of a pre-packaged plan of
reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, the
Company entered into the Claimant Agreement. As contemplated by the Claimant
Agreement, the Company also entered into agreements establishing the Collateral
Trust to distribute funds in accordance with the terms of the Claimant Agreement
and granting the Collateral Trust a security interest in the Company's rights
under its applicable insurance coverage and payments from the Company's insurers
for asbestos claims.
The Claimant Agreement established a compensable disease valuation matrix
(the "Matrix") and allowed claimants who qualified to participate in the
Claimant Agreement (the "Qualifying Claimants") to settle their claims for the
Matrix value, secured in part (75%) by a security interest in the collateral
granted to the Collateral Trust. The Collateral Trust provides for distribution
of trust assets according to various requirements that give priority (subject to
aggregate distribution limits) to participating claimants who had pre-existing
unfunded settlement agreements ("Pre-Existing Settlement Agreements") with the
Company and participating claimants who qualified for payment under unfunded
settlement agreements entered into by the Company with plaintiffs that had
asbestos claims pending against the Company and which claims were scheduled for
trial after the effective date of the Claimant Agreement but prior to the
commencement of the Company's anticipated Chapter 11 reorganization case
("Trial-Listed Settlement Agreements").
The Claimant Agreement incorporated Pre-Existing Settlement Agreements and
the settlement of certain Trial-Listed Settlement Agreement claims for a fully
secured claim against the Collateral Trust, and it settled all other claims for
a secured claim against the Collateral Trust equal to 75% of the claim value and
an unsecured claim for the remaining 25%. In December 2005, the Company
commenced the Avoidance Actions seeking to void the security interest granted to
the Collateral Trust and such settlements.
14
In October 2003, the Company began soliciting acceptances for its proposed
pre-packaged plan of reorganization and the Company received the votes necessary
for acceptance of the plan in late December 2003. On December 31, 2003,
Congoleum filed a voluntary petition with the Bankruptcy Court (Case No.
03-51524) seeking relief under Chapter 11 of the Bankruptcy Code. In January
2004, the Company filed its proposed plan of reorganization and disclosure
statement with the Bankruptcy Court.
In November 2004, Congoleum filed the Fourth Plan with the Bankruptcy
Court reflecting the result of further negotiations with representatives of the
ACC, the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with
the Bankruptcy Court which reflected the result of these negotiations, as well
as other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and
subsequently withdrew the Sixth Plan.
In November 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In
addition, an insurance company, CNA, filed a plan of reorganization and the
Bondholders' Committee also filed a plan of reorganization. In May 2006, the
Bankruptcy Court ordered all parties in interest in Congoleum's reorganization
proceedings to participate in global mediation discussions. Several mediation
sessions took place from June through September 2006. During the initial
mediation negotiations, Congoleum reached an agreement in principle, subject to
mutually agreeable definitive documentation, with the ACC, the FCR and the
Company's controlling shareholder, ABI, on certain terms of the Ninth Plan,
which Congoleum filed and proposed jointly with the ACC in August 2006. CNA and
the Bondholders' Committee jointly filed a new, competing plan in August 2006
and each withdrew its prior plan of reorganization. Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders' Committee
reached agreement on terms of the Tenth Plan, which Congoleum filed jointly with
the ACC in September 2006. Following the Bondholders' Committee's withdrawal of
support for CNA's plan, CNA filed the CNA Plan. In October 2006, Congoleum and
the ACC jointly filed a revised version of the Tenth Plan, the Eleventh Plan,
which reflected minor technical changes agreed to by the various parties
15
supporting Congoleum's plan. In October 2006, the Bankruptcy Court held a
hearing to consider the adequacy of the disclosure statements with respect to
the Tenth Plan and the CNA Plan and to hear arguments on respective summary
judgment motions that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law. The Bankruptcy Court provisionally approved the disclosure
statements for both the Tenth Plan and the CNA Plan subject to the Bankruptcy
Court's ruling on the respective summary judgment motions. In February 2007, the
Bankruptcy Court issued two separate opinions ruling that neither the Tenth Plan
nor the CNA Plan was confirmable as a matter of law. Because the Tenth Plan and
Eleventh Plan are substantially identical, the Company believes the ruling
issued with respect to the Tenth Plan also applies to the Eleventh Plan.
Following the Bankruptcy Court's rulings, in March 2007, Congoleum resumed
global plan mediation discussions seeking to resolve the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum also
appealed the ruling with respect to the Tenth Plan to the District Court. On
October 30, 2007, Congoleum informed the parties to the appeal that it would no
longer be pursuing such appealing. The ACC, which is a co-appellant, has
determined to continue to prosecute the appeal, which appeal remains pending.
There can be no assurance that the Company will be successful in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that the Company will
obtain approval to solicit acceptances of a new plan of reorganization, that the
Company will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation over a
plan of reorganization.
On May 18, 2007, the State Court issued a decision ruling that Congoleum's
insurers have no coverage obligations under New Jersey law for the Claimant
Agreement. In that ruling, the State Court judge also citied trial testimony in
his opinion that the releases (given by claimants who signed the Claimant
Agreement) were non-recourse to Congoleum whether or not anyone recovered
insurance proceeds. Based in part upon that finding, Congoleum filed the Omnibus
Objection in the Bankruptcy Court on June 7, 2007 requesting that the Settled
Claims be disallowed and expunged. The Omnibus Objection also requests that if
the Bankruptcy Court finds that the holders of Settled Claims retain viable tort
claims with recourse against Congoleum, that the Bankruptcy Court rescind the
pre-petition settlement agreements and the Claimant Agreement and those claims
be disallowed and expunged because, since the filing of Congoleum's bankruptcy
case, supervening events have resulted in a substantial frustration of the
purpose of those agreements. The Bankruptcy Court heard arguments on the Omnibus
Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the
legal status of the Settled Claims. One decision held that the relief requested
in the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
are otherwise protected. The Company amended the complaint in the existing
adversary proceeding to seek the relief requested in the Omnibus Objection. The
Bankruptcy Court also reiterated its view that all the asbestos claims, unless
they had obtained a final judgment as to liability and damages, are similarly
situated and must receive similar treatment in any section 524(g) reorganization
plan.
16
In its other decision, the Bankruptcy Court ruled that the security
interests in insurance collateral that were conveyed to the settled claimants
pre-bankruptcy were ineffective and unenforceable against Congoleum's insurance
policies or the proceeds of those policies because the attempts to create
security interests were outside the scope of Article 9 of the Uniform Commercial
Code; nor could such security interests be considered to be a common law pledge.
The Bankruptcy Court therefore granted summary judgment in Congoleum's favor on
Counts V and VI of the Avoidance Actions, which counts sought to void the
security interests and liens securing the pre-petition settlements of asbestos
claims.
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Actions, adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending. On October 12, 2007, Congoleum filed a motion for summary judgment in
the Omnibus Adversary Proceeding seeking a ruling that all of the pre-petition
settlement agreements were null and void or should be rescinded. Argument on the
summary judgment motion was heard on November 5, 2007 and the Bankruptcy Court
has taken the motion under advisement.
The FCR filed the FCR Plan on July 3, 2007. The FCR Plan is premised upon,
among other things, treatment of all asbestos claimants holding claims against
Congoleum on a substantially similar basis, although the FCR did not propose a
resolution of any pre-petition settlement agreements, including the Claimant
Agreement. The FCR Plan provides, among other things, that all existing equity
interests of Congoleum's stockholders will be cancelled and that the
stockholders will receive nothing on account of their equity interests.
Disclosure statement hearings were held on August 30, 2007, and November 8, 2007
and a further hearing is scheduled for December 11, 2007. There is no assurance
that the Bankruptcy Court will approve the disclosure statement or that the FCR
Plan will be confirmed. At the November 8, 2007 hearing, the Bankruptcy Court
also ruled that any competing plans of reorganization must be filed prior to the
December 11, 2007 hearing.
Congoleum continues to be involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to any future plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to any future plan.
During 2005 and 2006, Congoleum entered into a number of settlement
agreements with excess insurance carriers over coverage for asbestos-related
claims. In May 2005, certain AIG companies agreed to pay approximately $103
million over ten years to the Plan Trust. This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code. An insurer appealed the
approval order granted by the Bankruptcy Court to the District Court. The
District Court, however, entered an order in September 2006 that
administratively terminated the appeal. The AIG settlement provides that any
17
party may declare that the settlement agreement is null and void if the
Confirmation Order fails to become a final order by May 12, 2007, and AIG may
terminate the settlement agreement pursuant to this provision. On or about June
25, 2007, Congoleum and AIG executed a letter agreement providing that the
parties would provide 45 days advance notice of their intent to terminate the
AIG settlement. To date, neither party has given notice of an intent to
terminate the agreement. At this time, it is not known whether AIG ultimately
will seek to terminate the settlement agreement. In June 2005, the Company
entered into a settlement agreement with certain underwriters at Lloyd's,
London, pursuant to which the certain underwriters paid approximately $20
million into an escrow account in exchange for a release of insurance coverage
obligations. The escrow agent will transfer certain of the funds to the Plan
Trust once a plan of reorganization with the Section 524(g) protection specified
in the settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. The settlement provided that any party may declare that
the settlement would be null and void if the confirmation order fails to become
a final order by June 22, 2007. In November 2007, Congoleum filed a motion to
amend the settlement agreement (the "Second Amendment"). Under the Second
Amendment, the above provision providing for the settlement becoming null and
void has been deleted. Also, within ten business days after the order approving
the Second Amendment becomes a final order, the parties will direct the escrow
agent (i) to disburse to Lloyd's London, 25% of the net interest that had
accrued in the escrow account as of September 30, 2007; and (ii) to disburse to
Lloyd's London, at the end of each calendar quarter, 75% of the net interest
that accrued during each quarterly period occurring after September 30, 2007.
Further, within five business days of the Trigger Date (as defined in the Second
Amendment), the parties will direct the escrow agent to release the Settlement
Amount (as defined in the Second Amendment) in full, together with any accrued
interest that is due to Congoleum, to the Plan Trust or as other wise directed
by the Bankruptcy Court. In August 2005, the Company entered into a settlement
agreement with Federal Insurance Company pursuant to which Federal will pay $4
million to the Plan Trust, subject to certain adjustments, once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds. The FCR appealed the approval order granted by the Bankruptcy Court to
the District Court. The FCR, Federal and the Company reached an agreement to
resolve the appeal pursuant to which the Federal settlement agreement will be
amended to fix the settlement amount payable by Federal at $2.1 million and to
delete from the settlement agreement the adjustment mechanism, which operated
under certain circumstances to reduce the settlement amount, and the Bankruptcy
Court has approved this treatment. In October 2005, Congoleum entered into a
settlement agreement with Mt. McKinley Insurance Company and Everest Reinsurance
Company pursuant to which Mt. McKinley and Everest paid $21.5 million into an
escrow account. The escrow agent will transfer the funds to the Plan Trust once
a plan of reorganization with the Section 524(g) protection specified in the
settlement agreement goes effective and the Bankruptcy Court approves the
transfer of the funds. An insurer and the FCR appealed the approval order
granted by the Bankruptcy Court to the District Court, but the appeal has been
administratively terminated by agreement. The Mount McKinley settlement
agreement contains a provision that any party may declare the agreement to be
null and void if the confirmation order and approval order do not become final
orders within two years of the Execution Date (as that term is defined in the
Mount McKinley settlement agreement). At this time, Mount McKinley has not
sought to terminate the Settlement Agreement. In March 2006, Congoleum entered
into a settlement agreement with Harper Insurance Limited. Under the terms of
18
this settlement, Harper will pay approximately $1.4 million to Congoleum or the
Plan Trust once certain conditions are satisfied, including the effectiveness of
a plan of reorganization containing the Section 524(g) protection specified in
the settlement agreement. The Bankruptcy Court approved this settlement in April
2006. In April 2006, Congoleum entered into a settlement agreement with
Travelers Casualty and Surety Company and St. Paul Fire and Marine Insurance
Company (collectively, "Travelers"). Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds. The FCR sought, and was granted, limited
discovery with respect to the Travelers settlement to which the FCR has
objected. A hearing to consider approval of the Travelers settlement was held in
April 2007, and on May 11, 2007 the Bankruptcy Court issued a decision denying
approval of the Travelers settlement. Congoleum and Travelers have appealed that
decision to the District Court. In April 2006, Congoleum also entered into a
settlement agreement with Fireman's Fund Insurance Company. Under the terms of
this settlement, Fireman's Fund will pay $1 million to the Plan Trust once a
plan of reorganization with the Section 524(g) protection specified in the
settlement agreement becomes effective and the Bankruptcy Court approves the
transfer of the funds. The settlement was approved by the Bankruptcy Court in
September 2006. In August 2006, Congoleum entered into a settlement agreement
with Century Indemnity Company and its affiliates ("Century"). Under the terms
of this settlement, Century will pay $16.95 million to the Plan Trust in four
installments over a three-year period commencing 60 days after all conditions to
the agreement have been satisfied. The Bankruptcy Court approved this settlement
in September 2006. Certain insurance companies appealed the Bankruptcy Court
approval order to the District Court. Upon the entry of stipulations with the
appellants, the appeal was dismissed. It is possible that one or more of the
settling insurers may argue temporal, Plan-related, and other conditions to
payment have not been satisfied and therefore such insurer is relieved of
certain of its settlement obligations. If the Company is unable to confirm a
plan of reorganization with Section 524(g) protection, the settlements described
in this paragraph are subject to termination.
The terms of any new plan of reorganization are likely to be materially
different from the Eleventh Plan, and could be amended or modified as a result
of further negotiations with various parties. The Company expects that it will
take until some time in the third quarter of 2008 at the earliest to obtain
confirmation of any plan of reorganization.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($24.8 million at September 30, 2007). As noted
earlier, the Tenth and Eleventh plans were deemed unconfirmable and therefore
any write-off of these receivables as well as any forgiveness of indebtedness
income pursuant to any future plan and any other applicable charges or credits
may be recorded at a future date, the net effect of which cannot be determined.
19
There were no asbestos related property damage claims asserted against the
Company at the time of its bankruptcy filing. The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company's bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand. It is anticipated that any
plan of reorganization will provide for payment of those claims in full from
certain insurance proceeds.
On October 12, 2007, the Bondholders' Committee filed a motion seeking a
bar order requiring all known holders of asbestos personal injury claims to file
proofs of claim on or before January 8, 2008 or be forever barred from asserting
asbestos personal injury claims against Congoleum. A hearing on the bar order
motion was held on November 5, 2007, at the conclusion of which the Bankruptcy
Court took the matter under advisement. Entry of a bar order and the subsequent
filing of asbestos personal injury proofs of claim may affect the amount
currently recorded for such liabilities in the Company's financial statements.
Based on Congoleum's Eighth Plan, the Company has made provision in its
financial statements for the minimum amount of the range of estimates for its
contribution to effect its plan to settle asbestos liabilities through a Plan
Trust. The Company recorded charges aggregating approximately $51.3 million in
prior years, and is not yet able to determine the amount of the additional cost
that will be required to complete any future plan of reorganization. Amounts
that may be contributed to any Plan Trust and costs for pursuing and
implementing any plan of reorganization could be materially higher than
currently recorded or previously estimated. Delays in proposing, filing or
obtaining approval of a new amended plan of reorganization, or the proposal or
solicitation of additional plans by other parties could result in a proceeding
that takes longer and is more costly than the Company has previously estimated.
The Company may record significant additional charges in connection with its
reorganization proceedings.
Pending Asbestos Claims
In 2003, the Company was one of many defendants in approximately 22
thousand pending lawsuits (including workers' compensation cases) involving
approximately 106 thousand individuals, alleging personal injury or death from
exposure to asbestos or asbestos-containing products. Claims involving
approximately 80 thousand individuals were settled pursuant to the Claimant
Agreement and litigation related to unsettled or new claims is presently stayed
by the Bankruptcy Code. The Company expects unsettled and future claims to be
handled in accordance with the terms of a plan of reorganization and a Plan
Trust. In December 2005, Congoleum commenced the Avoidance Actions seeking to
void the security interest granted to the Collateral Trust and such settlements.
In March 2006, Congoleum filed a motion for summary judgment in the Avoidance
Actions seeking to avoid the Claimant Agreement settlements and liens under
various bankruptcy theories, which motion was denied in June 2006. In April
2007, the Company filed a new motion for summary judgment in the Avoidance
Actions, seeking to avoid the security interests in insurance allegedly securing
the Claimant Agreement settlements. On June 7, 2007, Congoleum filed the Omnibus
Objection in the Bankruptcy Court requesting that the Settled Claims be
disallowed and expunged. The Omnibus Objection also requests that if the
Bankruptcy Court finds that the holders of Settled Claims retain viable tort
claims with recourse against Congoleum, that the Bankruptcy Court rescind the
20
pre-petition settlement agreements and the Claimant Agreement and those claims
be disallowed and expunged because, since the filing of Congoleum's bankruptcy
case, supervening events have resulted in a substantial frustration of the
purpose of those agreements. The Bankruptcy Court heard arguments on the Omnibus
Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the
legal status of the Settled Claims. One decision held that the relief requested
in the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
are otherwise protected. The Company amended the complaint in the existing
adversary proceeding to seek the relief requested in the Omnibus Objection. The
Bankruptcy Court also reiterated its view that all the asbestos claims, unless
they had obtained a final judgment as to liability and damages, are similarly
situated and must receive similar treatment in any section 524(g) reorganization
plan.
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Actions, adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending. On October 12, 2007, Congoleum filed a motion for summary judgment in
the Omnibus Adversary Proceeding seeking a ruling that all of the pre-petition
settlement agreements were null and void or should be rescinded. Argument on the
summary judgment motion was heard on November 5, 2007 and the Bankruptcy Court
has taken the motion under advisement.
In its other decision, the Bankruptcy Court ruled that the security
interests in insurance collateral that were conveyed to the settled claimants
pre-bankruptcy were ineffective and unenforceable against Congoleum's insurance
policies or the proceeds of those policies because the attempts to create
security interests were outside the scope of Article 9 of the Uniform Commercial
Code; nor could such security interests be considered to be a common law pledge.
The Bankruptcy Court therefore granted summary judgment in Congoleum's favor on
Counts V and VI of the Avoidance Actions, which counts sought to void the
security interests and liens securing the pre-petition settlements of asbestos
claims.
Nearly all asbestos-related claims that have been brought against the
Company to date allege that various diseases were caused by exposure to
asbestos-containing products, including resilient sheet vinyl and 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 products in 1983 and
asbestos-containing tile products in 1974. In general, governmental authorities
have determined that asbestos-containing materials in the sheet and tile
products are non-friable (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 non-friable. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that may cause the
product to become friable.
21
Status of Insurance Coverage
During the period that Congoleum produced asbestos-containing products,
until claims for asbestos were excluded under insurance policies, the Company
purchased primary and excess insurance policies providing in excess of $1
billion of coverage for general and product liability claims. Through August
2002, substantially all asbestos-related claims and defense costs were paid
through primary insurance coverage. In August 2002, the Company received notice
that its primary insurance limits had been paid in full. The payment of limits
in full by one of the primary insurance companies was based on its contention
that limits in successive policies were not cumulative for asbestos claims and
that Congoleum was limited to only one policy limit for multiple years of
coverage. Certain excess insurance carriers claimed that the non-cumulation
provisions of the primary policies were not binding on them and that there
remained an additional $13 million in primary insurance limits plus related
defense costs before their policies were implicated. There is insurance coverage
litigation currently pending in the New Jersey State Court between Congoleum and
its excess insurance carriers, and the guaranty funds and associations for the
State of New Jersey. The litigation was initiated in September 2001, by one of
Congoleum's excess insurers (the "Coverage Action"). In April 2003, the New
Jersey Supreme Court ruled in another case involving the same non-cumulation
provisions as in the Congoleum primary policies (the "Spaulding Case") that the
non-cumulation provisions are invalid under New Jersey law and that the primary
policies provide coverage for the full amount of their annual limits for all
successive policies. Congoleum has reached a settlement agreement (the "Liberty
Settlement") with the insurance carrier whose policies contained the
non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date. Pursuant to the terms of the Security
Agreement, the Company is obligated to pay any insurance proceeds it receives
under the Liberty Settlement, net of any fees and expenses it may be entitled to
deduct, to the Collateral Trust or Plan Trust. Payment of such fees and expenses
are subject to Bankruptcy Court order or approval. As of December 31, 2002, the
Company had already entered into settlement agreements with asbestos claimants
exceeding the amount of this previously disputed primary coverage. Based on
these settlements, the Company contended that, even allowing for annual limits
of all primary policies, primary coverage was exhausted and the excess policies
triggered. The excess carriers have objected to the reasonableness of several of
these settlements, and Congoleum believes that they will continue to dispute the
reasonableness of the settlements and contend that their policies still are not
implicated and will dispute their coverage for that and other various reasons in
ongoing coverage litigation.
The excess insurance carriers have objected to the global settlement of
the asbestos claims currently pending against Congoleum as contemplated by the
Claimant Agreement on the grounds that, among other things, the negotiations
leading to the settlement and the Claimant Agreement violate provisions in their
insurance policies, including but not limited to the carriers' right to
associate in the defense of the asbestos cases, the duty of Congoleum to
cooperate with the carriers and the right of the carriers to consent to any
settlement. The excess insurance carriers also contend the settlement terms in
the Claimant Agreement are not fair or reasonable and/or that the Claimant
Agreement was not negotiated at arm's length or in good faith. Additionally,
certain insurers have argued that Congoleum's entering into the Claimant
Agreement voids the insurance for the underlying claims in their entirety.
Certain insurers also have claimed that the Claimant Agreement voids their
entire policy obligations. Congoleum has disputed the allegations and
22
contentions of the excess insurance carriers. In November 2003, the State Court
denied a motion for summary judgment by the excess insurance carriers that the
Claimant Agreement was not fair, reasonable or in good faith, ruling that
material facts concerning these issues were in dispute. In April 2004, the State
Court denied motions for summary judgment by the excess carriers that the
Claimant Agreement was not binding on them because Congoleum had breached the
consent and cooperation clauses of their insurance policies by, among other
things, entering into the Claimant Agreement without their consent. Congoleum
has argued, among other things, that it was entitled to enter into the Claimant
Agreement and/or the Claimant Agreement was binding on the excess insurance
carriers because they were in breach of their policies and/or had denied
coverage and/or had created a conflict with Congoleum by reserving rights to
deny coverage and / or the Claimant Agreement was fair, reasonable and in good
faith and/or there was and is no prejudice to the excess insurance carriers from
the Claimant Agreement and/or the excess insurance carriers had breached their
duties of good faith and fair dealing.
In August 2004, the State Court entered a case management order that
divided the trial into three phases. A new judge was assigned to the case in
February 2005 and the schedule was modified as a result.
In February 2005, the State Court ruled on a series of summary judgment
motions filed by various insurers. The State Court denied a motion for summary
judgment filed by certain insurers, holding that there were disputed issues of
fact regarding whether the Claimant Agreement and other settlement agreements
between Congoleum and the claimants had released Congoleum and the insurers from
any liability for the asbestos bodily injury claims of the claimants who signed
the Claimant Agreement and the other settlement agreements.
The State Court also denied another motion for summary judgment filed by
various insurers who argued that they did not have to cover the liability
arising from the Claimant Agreement because they had not consented to it.
The State Court granted summary judgment regarding Congoleum's bad faith
claims against excess insurers (other than first-layer excess insurers), holding
that the refusal of these excess insurers to cover the Claimant Agreement was at
least fairly debatable and therefore not in bad faith.
In March 2005, the Company filed a motion in the Bankruptcy Court asking
the Bankruptcy Court to vacate its prior order lifting the automatic stay in
bankruptcy to permit the Coverage Action to proceed. The Company requested that
the Coverage Action proceedings be stayed until the Company has completed its
plan confirmation process in the Bankruptcy Court. A hearing on the Company's
motion was held in April 2005 and the motion was denied.
The first phase of the trial began in August 2005. Phase 1 was limited to
deciding whether the insurers are obligated to provide coverage under the
policies at issue in this litigation for the asbestos claims settled under the
terms of the global Claimant Agreement. Three months into the trial, in October
2005, a federal appeals court ruled that the law firm of Gilbert Heintz &
Randolph ("GHR"), which had been acting as the Company's insurance co-counsel in
the Coverage Action, had other representations which were in conflict with its
representation of Congoleum. As a result of this ruling, with Bankruptcy Court
approval, Congoleum retained the firm of Covington & Burling to represent it as
co-counsel with Dughi & Hewit in the insurance coverage litigation and insurance
settlement matters previously handled by GHR.
23
In the middle of Congoleum presenting its case, in or about mid-November
2005, and in early December 2005, certain insurers filed motions for summary
judgment on the grounds, inter alia, that the decision of the United States
Court of Appeals for the Third Circuit reversing the Bankruptcy Court's order
approving the retention of GHR in In re Congoleum, 426 F.3d 675 (3d Cir. 2005),
and/or Congoleum's filing of the Avoidance Actions in the Bankruptcy Court,
entitled them to judgment as a matter of law on the Phase 1 issues. Congoleum
opposed the motions. The motions were argued in January 2006, and in March 2006
the State Court denied the motions for summary judgment.
Congoleum completed the presentation of its case in April 2006. Certain
insurers moved for a directed verdict in their favor during the first week of
May 2006. Hearings of arguments on the directed verdict motion took place in
June 2006. In July 2006 the State Court denied the motion for a directed
verdict. The trial resumed in September 2006. Defendant insurers presented their
case, for the most part, through documents and deposition designations. Post
trial briefs were submitted by the parties in November 2006. On May 18, 2007,
the State Court issued a decision ruling that the defendant insurers have no
coverage obligations for the Claimant Agreement under New Jersey law.
The second phase of the trial will address all coverage issues, including
but not limited to whether certain other trial listed settlements were fair,
reasonable and negotiated in good faith and covered by insurance as well as
trigger and allocation of asbestos losses to insurance policies. Any additional
discovery, and scheduling of pre-trial motions and trial dates for Phase 2 will
be addressed by the State Court at an appropriate time.
The third and final phase of the trial will address bad faith punitive
damages, if appropriate.
Given the actions of its excess insurance carriers, the Company believes
it likely that it would currently have to fund any asbestos-related expenses for
defense expense and indemnity itself. However, litigation by asbestos claimants
against the Company is stayed pursuant to the Company's bankruptcy proceedings,
and should the Company obtain a channeling injunction in a plan of
reorganization, the Company would not anticipate its future expenditures for
defense and indemnity of asbestos-related claims, other than expenditures
pursuant to a plan of reorganization, will be significant.
Accounting for Asbestos-Related Claims
Under the terms of the Claimant Agreement, the Company's claims processing
agent processed 79,630 claims meeting the requirements of the Claimant Agreement
with a settlement value in excess of $466 million. In addition, Pre-Existing
Settlement Agreements and Trial-Listed Settlement Agreements with claims secured
by the Collateral Trust total approximately $25 million. As a result of
tabulating ballots on its Fourth Plan, the Company is also aware of claims by
approximately 33,000 claimants whose claims were not determined under the
Claimant Agreement but who have submitted claims with a value of approximately
$512 million based on the settlement values applicable in the Sixth Plan. The
outcome of the Omnibus Objection and the terms of any Trust Distribution
Procedures ("TDP") that may be approved in connection with any plan of
reorganization could result in the settlement of these claims for materially
different amounts.
24
The Company's gross liability of in excess of $491 million for these
settlements and contingent liability for the additional approximately $512
million in unsettled claims is substantially in excess of the total assets of
the Company. The Company believes that it does not have the necessary financial
resources to litigate and/or fund judgments and/or settlements of the asbestos
claims in the ordinary course of business. Therefore, the Company believes the
most meaningful measure of its probable loss due to asbestos litigation is the
amount it will have to contribute to a Plan Trust plus the costs to effect its
reorganization under Chapter 11. Congoleum cannot presently determine the amount
of fees, expenses, and trust contributions it may incur in connection with
obtaining confirmation of its plan of reorganization. Required expenditures
could be materially higher than amounts recorded in the financial statements or
previous estimates.
In February 2006, the Bankruptcy Court ordered GHR to disgorge all fees
and certain expenses it was paid by Congoleum. The amount of the disgorgement is
approximately $9.6 million. In October 2006, Congoleum and GHR entered into a
settlement agreement (the "GHR Settlement") under which GHR would pay Congoleum
approximately $9.2 million in full satisfaction of the disgorgement order. The
payment would be secured by assets of GHR and would be made over time according
to a formula based on GHR's earnings. The Bankruptcy Court approved the GHR
settlement in April 2007. Treatment of funds received pursuant to the GHR
Settlement under a future amended plan of reorganization may differ from the
treatment accorded by any prior plans.
The Company recorded charges aggregating approximately $51.3 million in
prior years, and is not yet able to determine the amount of the additional cost
that will be required to complete its reorganization. Additional charges may be
required in the future should the minimum estimated cost increase. The maximum
amount of the range of possible asbestos-related losses is limited to the going
concern or liquidation value of the Company, an amount which the Company
believes is substantially less than the minimum gross liability for the known
claims against it.
The Company has not attempted to make an estimate of its probable
insurance recoveries for financial statement purposes given the accounting for
its estimate of future asbestos-related costs. Substantially all future
insurance recoveries will be assigned to the Collateral Trust or a Plan Trust.
25
Amounts Recorded in Financial Statements
The table below provides an analysis of changes in the Company's asbestos
reserves and related receivables from December 31, 2006 to September 30, 2007:
Spending Recoveries
Balance at Additions Against From Balance at
(In thousands) 12/31/2006 (Deletions) Reserve Insurance 9/30/2007
-------------------------------------------------------------------------------------------
Reserves
Current $ 7,800 $ -- $ (7,733) $ -- $ 67
Long-Term -- -- -- --
Receivables
Current (21,813) -- (3,020) -- (24,833)
Long-Term -- -- -- -- --
-------------------------------------------------------------------------------------------
Net Asbestos Liability
(Asset) $ (14,013) $ -- $ (10,752) $ -- $ (24,766)
========== ========== ========== ========== ==========
Restricted Cash
Insurance Proceeds $ 6,149 $ -- $ -- $ 238 $ 6,387
========== ========== ========== ========== ==========
The table below provides an analysis of changes in the Company's asbestos
reserves and insurance receivables from December 31, 2005 to September 30, 2006:
Spending Recoveries
Balance at Additions Against From Balance at
(In thousands) 12/31/2005 (Deletions) Reserve Insurance 9/30/2006
-------------------------------------------------------------------------------------------
Reserves
Current $ 19,469 $ -- $ (8,818) $ -- $ 10,651
Long-Term -- -- -- --
Receivables
Current (14,793) -- (8,934) 3,684 (20,043)
Long-Term -- -- -- -- --
-------------------------------------------------------------------------------------------
Net Asbestos Liability
$ 4,676 $ -- $ (17,752) $ 3,684 $ (9,392)
========== ========== ========== ========== ==========
Restricted Cash
Insurance Proceeds $ 8,901 $ 768 $ (3,684) $ -- $ 5,985
========== ========== ========== ========== ==========
26
7. Product Warranties
The Company provides product warranties for specific product lines and
accrues for estimated future warranty cost in the period in which the revenue is
recognized. The following table sets forth activity in the Company's warranty
reserves (in thousands):
Nine months Ended September 30,
2007 2006
-------- --------
Beginning balance $ 1,957 $ 2,122
Accruals 2,390 2,965
Charges (2,560) (3,014)
-------- --------
Ending balance $ 1,787 $ 2,073
======== ========
8. Liabilities Subject to Compromise
As a result of the Company's Chapter 11 filing (see Notes 1 and 6),
pursuant to SOP 90-7, the Company is required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
consolidated balance sheet. Liabilities that may be affected by a plan of
reorganization are recorded at the amount of the expected allowed claims, even
if they may be settled for lesser amounts. Substantially all of the Company's
pre-petition debt is recorded at face value and is classified within liabilities
subject to compromise. In addition, the Company's accrued interest expense on
its Senior Notes is also recorded in liabilities subject to compromise.
Liabilities subject to compromise at September 30, 2007 and December 31,
2006 are as follows (in thousands):
September 30, December 31,
2007 2006
-------- --------
Current
-------
Pre-petition other payables and
accrued interest $ 43,055 $ 34,602
Non-current
-----------
Debt (at face value) 100,000 100,000
Pension liability 12,907 15,494
Other post-retirement benefit obligation 9,612 9,249
Pre-petition other liabilities 11,758 11,790
-------- --------
Non Current 134,277 136,533
-------- --------
Total liabilities subject to compromise $177,332 $171,135
======== ========
Additional pre-petition claims (liabilities subject to compromise) may
arise due to the rejection of executory contracts or unexpired leases, or as a
result of the allowance of contingent or disputed claims.
27
9. Accrued Liabilities
A summary of the significant components of accrued liabilities consists of
the following (in thousands):
September 30, December 31,
2007 2006
---------- ----------
Accrued warranty, marketing and
sales promotion $ 16,007 $ 18,429
Employee compensation and related
benefits 3,604 3,333
Other 3,974 501
---------- ----------
Total accrued liabilities $ 23,585 $ 22,263
========== ==========
As a result of the Company's Chapter 11 bankruptcy filing and in
accordance with SOP 90-7, certain liabilities are included in liabilities
subject to compromise on the balance sheet as of September 30, 2007 and December
31, 2006 (see Note 8).
10. Pensions and Other Postretirement Plans
The Company sponsors several non-contributory defined benefit pension
plans covering most of the Company's employees. Benefits under the plans are
based on years of service and employee compensation. Amounts funded annually by
the Company are actuarially determined using the projected unit credit and unit
credit methods and are equal to or exceed the minimum required by government
regulations. The Company also maintains health and life insurance programs for
retirees (reflected in the table below in "Other Benefits").
The following summarizes the components of the net periodic benefit cost
for the Pension and Other Benefit Plans for the three months ended September 30,
2007 and 2006 (in thousands):
Three Months Ended Three Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 366 $ 53 $ 274 $ 46
Interest cost (1,206) 142 1,138 128
Expected return on plan assets (1,146) -- (994) --
Recognized net actuarial loss 349 18 525 15
Amortization of prior service cost 11 3 (53) 9
-------- -------- -------- --------
Net periodic benefit cost $ 786 $ 216 $ 890 $ 198
======== ======== ======== ========
28
Nine Months Ended Nine Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 1,098 $ 159 $ 995 $ 97
Interest cost (3,618) 426 3,364 266
Expected return on plan assets (3,438) -- (2,988) --
Recognized net actuarial loss 1,047 54 1,256 18
Amortization of prior service cost 33 9 (161) 32
-------- -------- -------- --------
Net periodic benefit cost $ 2,358 $ 648 $ 2,466 $ 410
======== ======== ======== ========
The weighted average assumptions used to determine net periodic benefit cost
were as follows:
September 30, 2007 September 30, 2006
------------------ ------------------
Other Other
Pension Benefits Pension Benefits
------- -------- ------- --------
Discount rate 6.00% 6.00% 6.00% 6.00%
Expected long-term return on plan assets 7.00% -- 7.00% --
Rate of compensation increase 5.00% -- 4.00% --
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto contained in Item
1 of Part I of this Quarterly Report on Form 10-Q.
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.
On December 31, 2003, Congoleum filed a voluntary petition with the
Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code as a
means to resolve claims asserted against it related to the use of asbestos in
its products decades ago. During 2003, Congoleum had obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of a
proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004, the
Company filed its proposed plan of reorganization and disclosure statement with
29
the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan
reflecting the result of further negotiations with representatives of the ACC,
the FCR and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting procedures in December 2004
and Congoleum obtained the requisite votes of asbestos personal injury claimants
necessary to seek approval of the Fourth Plan.
In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with all other present and future asbestos claimants in
insurance proceeds and other assets of the Plan Trust.
In July 2005, Congoleum filed the Sixth Plan and related documents with
the Bankruptcy Court which reflected the result of these negotiations, as well
as other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn.
In November 2005, the Bankruptcy Court denied a request to extend
Congoleum's exclusive right to file a plan of reorganization and solicit
acceptances thereof. In March 2006, Congoleum filed the Eighth Plan. In
addition, an insurance company, CNA, filed a plan of reorganization and the
Bondholders' Committee also filed a plan of reorganization. In May 2006, the
Bankruptcy Court ordered all parties in interest in Congoleum's reorganization
proceedings to participate in global mediation discussions. Several mediation
sessions took place from June through September 2006. During the initial
mediation negotiations, Congoleum reached an agreement in principle, subject to
mutually agreeable definitive documentation, with the ACC, the FCR and the
Company's controlling shareholder, ABI, on certain terms of the Ninth Plan,
which Congoleum filed and proposed jointly with the ACC in August 2006. CNA and
the Bondholders' Committee jointly filed a new, competing plan in August 2006
and each withdrew its prior plan of reorganization. Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders' Committee
reached agreement on terms of the Tenth Plan, which Congoleum filed jointly with
the ACC in September 2006. Following the Bondholders' Committee's withdrawal of
support for CNA's plan, CNA filed the CNA Plan. In October 2006, Congoleum and
the ACC jointly filed a revised version of the Tenth Plan, the Eleventh Plan,
which reflected minor technical changes agreed to by the various parties
supporting Congoleum's plan. In October 2006, the Bankruptcy Court held a
hearing to consider the adequacy of the disclosure statements with respect to
the Tenth Plan and the CNA Plan and to hear arguments on respective summary
judgment motions that the Tenth Plan and the CNA Plan are not confirmable as a
matter of law. The Bankruptcy Court provisionally approved the disclosure
statements for both the Tenth Plan and the CNA Plan subject to the Bankruptcy
Court's ruling on the respective summary judgment motions. In February 2007, the
Bankruptcy Court issued two separate opinions ruling that neither the Tenth Plan
nor the CNA Plan was confirmable as a matter of law. Because the Tenth Plan and
Eleventh Plan are substantially identical, the Company believes the ruling
issued with respect to the Tenth Plan also applies to the Eleventh Plan.
Following the Bankruptcy Court's rulings, in March 2007, Congoleum resumed
global plan mediation discussions seeking to resolve the issues raised in the
30
Bankruptcy Court's ruling with respect to the Tenth Plan. Congoleum also
appealed the ruling with respect to the Tenth Plan to the District Court. On
October 30, 2007, Congoleum informed the parties to the appeal that it would no
longer be pursuing such appealing. The ACC, which is a co-appellant, has
determined to continue to prosecute the appeal, which appeal remains pending.
There can be no assurance that the Company will be successful in
negotiating a new plan of reorganization that resolves the issues raised in the
Bankruptcy Court's ruling with respect to the Tenth Plan, that the Company will
obtain approval to solicit acceptances of a new plan of reorganization, that the
Company will receive the acceptances necessary for confirmation of a plan of
reorganization, that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and the
District Court, or that such approvals will be received in a timely fashion,
that a plan will be confirmed, that a plan, if confirmed, will become effective,
or that there will be sufficient funds to pay for continued litigation over any
plan of reorganization.
The FCR filed the FCR Plan on July 3, 2007. The FCR Plan is premised upon,
among other things, treatment of all asbestos claimants holding claims against
Congoleum on a substantially similar basis, although the FCR did not propose a
resolution of any pre-petition settlement agreements including the Claimant
Agreement. The FCR Plan provides, among other things, that all existing equity
interests of Congoleum's stockholders will be cancelled and that the
stockholders will receive nothing on account of their equity interests.
Disclosure statement hearings were held on August 30, 2007 and November 8, 2007,
and a further hearing is scheduled for December 11, 2007. There is no assurance
that the Bankruptcy Court will approve the disclosure statement or that the FCR
Plan will be confirmed. At the November 8, 2007 hearing, the Bankruptcy Court
also ruled that any competing plans of reorganization must be filed prior to the
December 11, 2007 hearing.
The terms of any new plan of reorganization are likely to be materially
different from the Tenth and Eleventh Plans, and could be amended or modified as
a result of further negotiations with various parties. The Company expects that
it will take until some time in the first quarter of 2008 at the earliest to
obtain confirmation of any plan of reorganization.
Congoleum continues to be involved in litigation with certain insurance
carriers related to disputed insurance coverage for asbestos related
liabilities, and certain insurance carriers filed various objections to
Congoleum's previously proposed plans of reorganization and related matters and
are expected to file objections to any future plan. Certain other parties have
also filed various objections to Congoleum's previously proposed plans of
reorganization and may file objections to any future plan.
In anticipation of Congoleum's commencement of the Chapter 11 cases,
Congoleum entered into the Claimant Agreement, which provides for an aggregate
settlement value of at least $466 million as well as an additional number of
individually negotiated trial listed settlements with an aggregate value of
approximately $25 million, for total settlements in excess of $491 million. As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum's rights under its applicable insurance coverage and
payments from Congoleum's insurers for asbestos claims. In December 2005,
Congoleum commenced the Avoidance Actions seeking to void the security interest
31
granted to the Collateral Trust and such settlements. In March 2006, Congoleum
filed a motion for summary judgment in the Avoidance Actions seeking to avoid
the Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006 and the Avoidance Actions remain pending.
On June 7, 2007, Congoleum filed the Omnibus Objection in the Bankruptcy Court
requesting that the Settled Claims be disallowed and expunged. The Omnibus
Objection also requests that if the Bankruptcy Court finds that the holders of
Settled Claims retain viable tort claims with recourse against Congoleum, that
the Bankruptcy Court rescind the pre-petition settlement agreements and the
Claimant Agreement be rescinded and those claims be disallowed and expunged
because, since the filing of Congoleum's bankruptcy case, supervening events
have resulted in a substantial frustration of the purpose of those agreements.
The Bankruptcy Court heard arguments on the Omnibus Objection on July 9, 2007.
On July 27, 2007, the Bankruptcy Court issued two decisions regarding the
legal status of the Settled Claims. One decision held that the relief requested
in the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
are otherwise protected. The Company amended the complaint in the existing
adversary proceeding to seek the relief requested in the Omnibus Objection. The
Bankruptcy Court also reiterated its view that all the asbestos claims, unless
they had obtained a final judgment as to liability and damages, are similarly
situated and must receive similar treatment in any section 524(g) reorganization
plan.
In its other decision, the Bankruptcy Court ruled that the security
interests in insurance collateral that were conveyed to the settled claimants
pre-bankruptcy were ineffective and unenforceable against Congoleum's insurance
policies or the proceeds of those policies because the attempts to create
security interests were outside the scope of Article 9 of the Uniform Commercial
Code; nor could such security interest be considered to be a common law pledge.
The Bankruptcy Court therefore granted summary judgment in Congoleum's favor on
Counts V and VI of the Avoidance Actions, which counts sought to void the
security interests and liens securing the pre-petition settlements of asbestos
claims.
On September 4, 2007, Congoleum filed the Third Amended Complaint in the
Avoidance Actions, adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending. On October 12, 2007, Congoleum filed a motion for summary judgment in
the Omnibus Adversary Proceeding seeking a ruling that all of the pre-petition
settlement agreements were null and void or should be rescinded. Argument on the
summary judgment motion was heard on November 5, 2007 and the Bankruptcy Court
has taken the motion under advisement.
Due to, among other things, the ongoing Avoidance Actions and Omnibus
Objection, the liability associated with the asbestos personal injury claims
against Congoleum may be materially different than the present estimates of such
items. As a result of tabulating ballots on the Fourth Plan, the Company is also
aware of claims by approximately 33,000 claimants whose claims were not
determined under the Claimant Agreement but who have submitted claims with a
value of approximately $512 million based on the settlement values applicable in
the Sixth Plan.
For more information regarding the Company's asbestos liability and plan
for resolving that liability, please refer to Notes 1 and 17 of the Notes to
Consolidated Financial Statements contained in Item 8 of the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the
32
Securities and Exchange Commission. In addition, please refer to "Risk Factors -
The Company has significant asbestos liability and funding exposure, and its
most recent proposed amended plan of reorganization has been ruled unconfirmable
as a matter of law" contained in Part II, Item 1A, of this Quarterly Report on
Form 10-Q for a discussion of certain factors that could cause actual results to
differ from the Company's goals for resolving its asbestos liability through a
plan of reorganization.
Three and nine months ended September 30, 2007 as compared to the three and nine
months ended September 30, 2006
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
(In thousands of dollars) (In thousands of dollars)
Net sales $ 53,588 $ 57,460 $160,444 $173,440
Cost of sales 39,365 44,562 120,478 133,661
-------- -------- -------- --------
Gross profit 14,223 26.5% 12,898 22.4% 39,966 24.9% 39,779 22.9%
Selling, general and
administrative expenses 9,829 18.3% 10,681 18.6% 29,243 18.2% 31,338 18.1%
-------- -------- -------- --------
Operating income 4,394 2,217 10,723 8,441
Interest expense, net (2,961) (2,812) (8,765) (8,130)
Other income, net (213) 77 (247) 124
-------- -------- -------- --------
Income (loss) before taxes 1,220 (518) 1,711 435
Provision (benefit) for income taxes 20 (94) 27 22
-------- -------- -------- --------
Net income (loss) $ 1,200 $ (424) $ 1,684 $ 413
======== ======== ======== ========
Net sales for the three months ended September 30, 2007 were $53.6 million
as compared to $57.5 million for the three months ended September 30, 2006, down
$3.9 million or 6.8%, due to lower sales volume of products for new residential
construction and lower sales of resilient sheet specials, partially offset by
increased selling prices.
Net sales for the nine months ended September 30, 2007 were $160.4 million
as compared to $173.4 million for the nine months ended September 30, 2006, down
$13.0 million or 7.5%. The first quarter of 2006 included sales to the
manufactured housing industry for production requirements carried over from the
2005 hurricane season and is the primary reason for the lower sales comparison
versus 2007. Lower sales of new residential, remodel, and special products also
contributed to the sales decrease, partially offset by increased selling prices.
Gross profit for the three months ended September 30, 2007 totaled $14.2
million, or 26.5% of net sales, compared to $12.9 million, or 22.4% of net
sales, for the same period last year. The increase in gross profit dollars and
gross profit as a percent of net sales was driven by the improvement in product
mix as a result of reduced sales of lower margin builder products and specials,
a price increase instituted late in the second quarter of 2007 and the impact of
cost reduction programs instituted early in 2007.
33
Gross profit for the nine months ended September 30, 2007 totaled $40.0
million or 24.9% of net sales, compared to $39.8 million or 22.9% of net sales
for the same period last year. The improvement in gross margin percent reflected
the improvement in product mix and the impact of price increases instituted in
the second half of 2006, partially offset by the unfavorable impact of lower
volume to spread fixed manufacturing expense. The decline in gross profit was
due to lower sales, partially offset by the improvement in margins.
Selling, general and administrative expenses were $9.8 million for the
three months ended September 30, 2007 as compared to $10.7 million for the three
months ended September 30, 2006, a decrease of $0.9 million. The decrease in
selling, general and administrative expenses primarily reflect reduced payroll
and related benefits costs related to headcount reductions coupled with lower
merchandising costs. As a percent of net sales, selling, general and
administrative costs were 18.3% for the third quarter of 2007 compared to 18.6%
for the same period last year. Selling, general and administrative expenses were
$29.2 million for the nine months ended September 30, 2007 as compared to $31.3
million for the nine months ended September 30, 2006. The lower selling, general
and administrative expenses reflect lower payroll and benefits related expenses
related to headcount reductions in the first quarter of 2007 coupled with lower
merchandising costs. As a percent of net sales, selling, general and
administrative costs were 18.2% for the nine months ended September 30, 2007
compared to 18.1% for the same period last year.
Income from operations totaled $4.4 million for the quarter ended
September 30, 2007 compared to income of $2.2 million for the quarter ended
September 30, 2006. The increase in operating income reflects the higher gross
profit margins achieved during the quarter coupled with reductions in operating
expenses.
Income from operations was $10.7 million for the nine months ended
September 30, 2007 compared to income of $8.4 million for the nine months ended
September 30, 2006. The increase in operating income resulted from reduced
operating expenses and improved gross profit margins which mitigated the effect
of lower sales volumes.
Liquidity and Capital Resources
The Unaudited Condensed Consolidated Financial Statements of the Company
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
Accordingly, the Unaudited Condensed Consolidated Financial Statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern. As described more fully in the Notes to Unaudited
Condensed Consolidated Financial Statements contained in Part I, Item 1 of this
Quarterly Report on Form 10-Q, there is substantial doubt about the Company's
ability to continue as a going concern unless it obtains relief from its
substantial asbestos liabilities through a successful reorganization under
Chapter 11 of the Bankruptcy Code.
On December 31, 2003, Congoleum filed a voluntary petition with the
Bankruptcy Court (Case No. 03-51524) seeking relief under the Bankruptcy Code.
See Notes 1 and 6 of the Notes to Unaudited Condensed Consolidated Financial
Statements, contained in Part I, Item 1 of this Quarterly Report on Form 10-Q,
for a discussion of the Company's bankruptcy proceedings. These matters continue
to have a material adverse impact on liquidity and capital resources. During the
first nine months of 2007, the Company paid $10.8 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 and
34
litigation with certain insurance companies. Furthermore, at September 30, 2007,
the Company had incurred but not paid approximately $7.2 million in additional
fees and expenses for services rendered through that date.
Under plans prior to the Tenth Plan, Congoleum's assignment of insurance
recoveries to the Plan Trust was net of costs incurred by Congoleum in
connection with insurance coverage litigation, and Congoleum was entitled to
withhold from recoveries, or seek reimbursement from the Plan Trust, for
coverage litigation costs incurred after January 1, 2003 and for $1.3 million in
claims processing fees paid in connection with claims settled under the Claimant
Agreement. A receivable was recorded for these costs as they were paid. Under
the Eleventh Plan, Congoleum would have been entitled to reimbursement of only
the $1.3 million in claims processing fees and would not have collected the
balance of these receivables ($24.8 million at September 30, 2007). The
write-off, as well as forgiveness of indebtedness income pursuant to any future
plan and any other applicable charges or credits is expected to be recorded at a
future date, the net effect of which cannot be determined. Congoleum cannot
presently determine the amount of fees, expenses, and trust contributions it may
incur in connection with obtaining confirmation of a plan of reorganization.
Due to the Chapter 11 proceedings, the Company has been precluded from
making interest payments on its outstanding Senior Notes since January 1, 2004.
The amount of accrued interest that is due but has not been paid on the Senior
Notes at September 30, 2007 is approximately $41.7 million and $42.6 million at
October 31, 2007.
In February 2006, the Bankruptcy Court ordered GHR to disgorge all fees
and certain expenses it was paid by Congoleum. In October 2006, Congoleum and
GHR entered into the GHR Settlement under which GHR will pay Congoleum
approximately $9.2 million in full satisfaction of the disgorgement order. In
April 2007, the Bankruptcy Court approved the GHR Settlement. The payment is
secured by assets of GHR and is to be made over time according to a formula
based on GHR's earnings. Treatment of funds received pursuant to the GHR
Settlement under a future amended plan of reorganization may differ from the
treatment accorded by any prior plans.
Unrestricted cash and cash equivalents, including short-term investments
at September 30, 2007, were $25.6 million, an increase of $7.0 million from
December 31, 2006. Under the terms of its revolving credit agreement, payments
on the Company's accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance. Funds deposited in this account but not yet applied
to the loan balance, which amounted to $0.0 million and $3.6 million at
September 30, 2007 and December 31, 2006, respectively, are recorded as
restricted cash. Additionally, $6.4 million remaining from a $14.5 million
settlement received in August 2004 from an insurance carrier, which is subject
to the purported lien of the Collateral Trust, is included as restricted cash at
September 30, 2007. The Company expects to contribute these funds to the Plan
Trust. Working capital was $15.7 million at September 30, 2007, up from $11.5
million at December 31, 2006. The ratio of current assets to current liabilities
at September 30, 2007 was 1.2 to 1.0, which is up slightly from 1.1 to 1.0 at
December 31, 2006. Net cash provided by operations during the first nine months
of 2007 was $4.6 million, as compared to net cash used in operations of $8.6
million in the first nine months of 2006. The reduction in cash used in
operations was primarily due to lower working capital requirements for
receivables and accrued expenses, as well as lower reorganization related
expenditures.
35
Capital expenditures for the nine months ended September 30, 2007 totaled
$2.2 million. The Company is currently planning capital expenditures of
approximately $5.0 million in 2007 and between $5 million and $7 million in
2008, primarily for maintenance and improvement of plants and equipment, which
it expects to fund with cash from operations and credit facilities.
In January 2004, the Bankruptcy Court authorized entry of a final order
approving Congoleum's debtor-in-possession financing, which replaced its
pre-petition credit facility on substantially similar terms. The
debtor-in-possession financing agreement (as amended and approved by the
Bankruptcy Court to date) provides a revolving credit facility expiring on the
earlier of (i) December 31, 2007 and (ii) the date the plan of reorganization in
Congoleum's bankruptcy cases as confirmed by the Bankruptcy Court becomes
effective. Total borrowing under the facility may not exceed $30 million.
Interest is based on 0.25% above the prime rate. This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization ("EBITDA"). It also
includes restrictions on the incurrence of additional debt and limitations on
capital expenditures. The covenants and conditions under this financing
agreement must be met in order for the Company to borrow from the facility. The
Company was in compliance with these covenants at September 30, 2007. Borrowings
under this facility are collateralized by inventory and receivables. At
September 30, 2007, based on the level of receivables and inventory, $21.5
million was available under thefacility, of which $2.2 million was utilized for
outstanding letters of credit and $14.1 million was utilized by the revolving
loan. The Company anticipates that its debtor-in-possession financing facility
(including anticipated extensions thereof) together with cash from operations,
will provide it with sufficient liquidity to operate during 2007 and 2008 while
under Chapter 11 protection. There can be no assurances that the Company will
continue to be in compliance with the required covenants under this facility or
that the debtor-in-possession facility (as extended) will be renewed prior to
its expiration if a plan of reorganization is not confirmed before that time.
For a plan of reorganization to be confirmed, the Company will need to obtain
and demonstrate the sufficiency of exit financing. The Company cannot presently
determine the terms of such financing, nor can there be any assurances of its
success in obtaining it.
In addition to the provision for asbestos litigation discussed
previously, the Company has also recorded what it believes are adequate
provisions for environmental remediation and product-related liabilities (other
than asbestos-related claims), including provisions for testing for potential
remediation of conditions at its own facilities. 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 (more fully discussed in Note 5 of the Notes to
Unaudited Condensed Consolidated Financial Statements contained in Part I, Item
1 of this Quarterly Report on Form 10-Q). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of the
Company's owned and previously owned facilities. The contingencies also include
claims for personal injury and/or property damage. The exact amount of such
future costs and timing of payments are indeterminable due to such unknown
factors as the magnitude of 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
36
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 and environmental contingencies. While the Company believes its
estimate of the future amount of these liabilities is reasonable, 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 would
reasonably have such an effect. There can be no assurances that the costs of any
future government regulations could be passed along to its customers. Estimated
insurance recoveries related to these liabilities are reflected in other
non-current assets.
The outcome of these environmental matters could result in significant
expenses incurred by or judgments assessed against the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. Congoleum
cannot presently determine the amount of fees, expenses, and trust contributions
it may incur in connection with obtaining confirmation of its plan of
reorganization. The Company believes that its existing cash (including
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2007 and 2008. Congoleum's ability to emerge from Chapter 11
will depend on obtaining sufficient exit financing to settle administrative
expenses of the reorganization and any other related obligations, and to provide
adequate future liquidity.
37
Item 3. 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. Over 90%
of the Company's outstanding long-term debt as of September 30, 2007 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 and does not hold any instruments for trading purposes.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act")) as of the end of the period covered by this
quarterly report (the "Evaluation Date"). Based on this evaluation,
such officers have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to
the Company required to be included in the Company's reports filed
or submitted under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal controls over financial
reporting during the last quarter covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings:
The information contained in Note 5, "Environmental and Other
Liabilities", and Note 6, "Asbestos Liabilities", of the Notes to
Unaudited Condensed Consolidated Financial Statements is
incorporated herein by reference.
38
Item 1A. Risk Factors:
The Company has significant asbestos liability and funding exposure, and
its most recent proposed amended plan of reorganization has been ruled
unconfirmable as a matter of law.
As more fully set forth in Notes 1 and 6 of the Notes to Unaudited
Condensed Consolidated Financial Statements, which are included in
this Quarterly Report on Form 10-Q, the Company has significant
liability and funding exposure for asbestos claims. The Company has
entered into settlement agreements with various asbestos claimants
totaling in excess of $491 million. The Bankruptcy Court issued a
ruling in February 2007 stating that these claimants cannot receive
more value as a result of their pre-petition settlements than is
afforded to other, unsettled, asbestos claimants. The Company has
been engaged in global plan mediation discussions to resolve this
and certain other plan issues. .
There can be no assurance that the Company will be successful in
negotiating a new plan of reorganization that resolves the issues
raised in the Bankruptcy Court's ruling with respect to the Tenth
Plan, that the Company will obtain approval to solicit acceptances
of a new plan of reorganization, that the Company will receive the
acceptances necessary for confirmation of a plan of reorganization,
that any proposed plan will not be modified further, that a plan
will receive necessary court approvals from the Bankruptcy Court and
the District Court, or that such approvals will be received in a
timely fashion, that a plan will be confirmed, that a plan, if
confirmed, will become effective, or that there will be sufficient
funds to pay for continued litigation over any plan of
reorganization. It also is unclear whether the FCR any other person
will successfully propose and confirm a plan or what any such plan,
when confirmed, would ultimately provide, and whether the Bankruptcy
Court would approve such a plan.
The terms of any new plan of reorganization are likely to be
materially different from the Tenth and Eleventh Plans, and could be
amended or modified as a result of further negotiations with various
parties. The Company expects that it will take until some time in
the third quarter of 2008 at the earliest to obtain confirmation of
any plan of reorganization.
Under the terms of the Eleventh Plan, on the effective date of the
Eleventh Plan (the "Effective Date"), the Plan Trust would have
provided a loan to Congoleum, which loan was intended, when combined
with cash on hand and available drawings under the revolving credit
facility, to provide Congoleum with $18 million of total liquidity,
on a pro forma basis as of December 31, 2006 (the "Plan Trust
Note"). The total liquidity required by Congoleum, and thus the
amount of the Plan Trust Note, would have been as mutually agreed
among the ACC, the FCR, the representatives of holders of
pre-petition secured asbestos claims (the "Claimants'
Representative") and Congoleum. The proceeds of the Plan Trust Note
would only have been used for working capital and general corporate
purposes. The Plan Trust Note would have been due and payable on
December 31, 2011, would have borne interest at 10% per annum
39
payable semi-annually until the maturity date, and would have
contained such covenants, warranties, and representations as agreed
among Congoleum, the ACC, the FCR and the Claimants' Representative.
The principal amount of the Plan Trust Note, which would have been
subject to review and approval by the FCR and the ACC, could not
have exceeded $14 million unless both the FCR and ACC agreed. There
can be no assurance that a new amended plan will provide Congoleum a
similar liquidity source, or that Congoleum will be able to obtain
such liquidity from an alternative source.
Any plan of reorganization pursued by the Company or another plan
proponent or confirmed by the Bankruptcy Court and the District
Court could materially differ from the description of the Eleventh
Plan contained in this Quarterly Report on Form 10-Q. Furthermore,
the estimated costs and contributions to effect the Eleventh Plan or
an alternative plan could be significantly greater than currently
estimated. Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements,
including Bankruptcy Court and District Court approvals, and there
can be no assurance that such conditions, approvals and other
requirements will be satisfied or obtained.
Confirmation of a plan of reorganization will depend on the Company
obtaining exit financing to provide it with sufficient liquidity to
fund obligations upon the plan becoming effective. If the Company's
cash flow from operations is materially less than anticipated,
and/or if the costs in connection with seeking confirmation of the
Company's plan of reorganization or in connection with the State
Court insurance coverage litigation discussed elsewhere in this
Quarterly Report on Form 10-Q are materially more than anticipated,
or if sufficient funds from insurance proceeds or other sources are
not available at confirmation, the Company may be unable to obtain
exit financing, when combined with net cash provided from operating
activities, that would provide it with sufficient funds, which would
likely result in the Company not being able to confirm an amended
plan of reorganization or have such plan become effective.
Some additional factors that could cause actual results to differ
from the Company's goals for resolving its asbestos liability
through an amended plan of reorganization include: (i) the future
cost and timing of estimated asbestos liabilities and payments, (ii)
the availability of insurance coverage and reimbursement from
insurance companies that underwrote the applicable insurance
policies for the Company for asbestos-related claims, (iii) the
costs relating to the execution and implementation of any plan of
reorganization pursued by the Company, (iv) timely agreement with
other creditors, or classes of creditors, that exist or may emerge,
(v) satisfaction of the conditions and obligations under the
Company's outstanding debt instruments, (vi) the response from time
to time of the lenders, customers, suppliers and other
constituencies of the Company and ABI to the ongoing process arising
from the Company's strategy to settle its asbestos liability, (vii)
the Company's ability to maintain debtor-in-possession financing
sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing
sufficient to provide it with funding that may be needed for its
operations after emerging from the bankruptcy process, in each case,
on reasonable terms, (viii) timely creditor and court approval
40
(including the results of any relevant appeals) of any
reorganization plan pursued by the Company and the court overruling
any objections to the Company's reorganization plan that may be
filed, (ix) costs of, developments in and the outcome of insurance
coverage litigation pending in the State Court involving Congoleum
and certain insurers, (x) compliance with the Bankruptcy Code,
including Section 524(g), and (xi) the possible adoption of another
party's plan of reorganization which may prove to be unfeasible. In
any event, if the Company is not successful in obtaining sufficient
creditor and court approval of its amended plan of reorganization,
such failure would have a material adverse effect upon its business,
results of operations and financial condition.
For further information regarding the Company's asbestos liability,
insurance coverage and strategy to resolve its asbestos liability,
please see Notes 1 and 17 of Notes to the Consolidated Financial
Statements, which are included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, and Notes 1
and 6 of Notes to the Unaudited Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q.
The Company may incur substantial liability for environmental, product and
general liability claims in addition to asbestos-related claims, and its
insurance coverage and its likely recoverable insurance proceeds may be
substantially less than the liability incurred by the Company for these
claims.
Environmental Liabilities. 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 has historically expended substantial
amounts for compliance with existing environmental laws or
regulations, including environmental remediation costs at both
third-party sites and Company-owned sites. The Company will continue
to be required to expend amounts in the future for costs related to
prior activities at its facilities and third party sites, and for
ongoing costs to comply with existing environmental laws and such
amounts may be substantial. There is no certainty that these amounts
will not have a material adverse effect on its business, results of
operations and financial condition because, as a result of
environmental requirements becoming increasingly strict, the Company
is unable to determine the ultimate cost of compliance with
environmental laws and enforcement policies. Moreover, in addition
to potentially having to pay substantial amounts for compliance,
future environmental laws or regulations may require or cause the
Company to modify or curtail its operations, which could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Product and General Liabilities. In the ordinary course of its
business, the Company becomes involved in lawsuits, administrative
proceedings, product liability claims (in addition to
asbestos-related claims) and other matters. In some of these
41
proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for
several years. These matters could have a material adverse effect on
the Company's business, results of operations and financial
condition if the Company is unable to successfully defend against or
settle these matters, its insurance coverage is insufficient to
satisfy unfavorable judgments or settlements relating to these
matters, or the Company is unable to collect insurance proceeds
relating to these matters.
The Company is dependent upon a continuous supply of raw materials from
third party suppliers and would be harmed if there were a significant,
prolonged disruption in supply or increase in its raw material costs.
The Company's business is dependent upon a continuous supply of raw
materials from third party suppliers. The principal raw materials
used by the Company in its manufacture of sheet and tile flooring
are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print film. The
Company purchases most of these raw materials from multiple sources.
Although the Company has historically been able to obtain its
requirements for these materials, it has occasionally experienced
significant price increases for some of these materials, and has
periodically needed to find new sources for cost, quality or
sufficiency of supply reasons. Raw material prices in 2004 and 2005
increased significantly, and supplies of certain materials,
particularly vinyl resins, remained tight in the first half of 2006
due to several factors, including the effect of hurricanes in 2005.
Although the Company has been able to obtain sufficient supplies of
specialty resins and other raw materials, there can be no assurances
that it may not experience difficulty in the future, particularly if
global supply conditions deteriorate, which could have a material
adverse effect on profit margins.
The Company believes that suitable alternative suppliers are
generally available for substantially all of its raw material
requirements, although quantities of certain materials available
from alternative suppliers may be in limited supply and production
trials may be required to qualify new materials for use. The Company
does not have readily available alternative sources of supply for
specific designs of transfer print film, 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 some of the Company's products. In an attempt to
protect against this risk of loss of supply, the Company maintains a
raw material inventory and continually seeks to develop new sources
which will provide continuity of supply for its raw material
requirements. However, there is no certainty that the Company's
maintenance of its raw material inventory or its ongoing efforts to
develop new sources of supply would be successful in avoiding a
material adverse effect on its business, results of operations and
financial condition if it were to realize an extended interruption
in the supply of its raw materials.
42
In addition, the Company could incur significant increases in the
costs of its raw materials. Although the Company generally attempts
to pass on increases in the costs of its raw materials to its
customers, the Company's ability to do so is, to a large extent,
dependent upon the rate and magnitude of any increase, competitive
pressures and market conditions for its products. There have been in
the past, and may be in the future, periods of time during which
increases in these costs cannot be recovered. During those periods
of time, there could be a material adverse effect on the Company's
business, results of operations and financial condition.
The Company operates in a highly competitive flooring industry and some of
its competitors have greater resources and broader distribution channels
than the Company.
The market for the Company's products is highly competitive. The
Company encounters competition from three other manufacturers in
North America and, to a lesser extent, foreign manufacturers. Some
of the Company's competitors have greater financial and other
resources and access to capital than the Company. Furthermore, one
of the Company's major competitors has successfully confirmed a plan
of reorganization under Chapter 11 of the Bankruptcy Code. Having
shed much of its pre-filing asbestos and other liabilities, that
competitor may have a competitive cost advantage over the Company.
In addition, in order to maintain its competitive position, the
Company may need to make substantial investments in its business,
including its product development, manufacturing facilities,
distribution network and sales and marketing activities. Competitive
pressures may also result in decreased demand for the Company's
products and in the loss of the Company's market share for its
products. Moreover, due to the competitive nature of the Company's
industry, the Company may be commercially restricted from raising or
even maintaining the sales prices of its products, which could
result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increased
percentage of the Company's sales.
The Company's business is subject to general economic conditions and
conditions specific to the remodeling and housing industries.
The Company is subject to the effects of general economic
conditions. A sustained general economic slowdown could have serious
negative consequences for the Company's business, results of
operations and financial condition. Moreover, the Company's business
is cyclical and is affected by the economic factors that affect the
remodeling and housing industries in general and the manufactured
housing industry specifically, including the availability of credit,
consumer confidence, changes in interest rates, market demand and
general economic conditions. The Company has experienced a
significant decline in sales as a result of weakness in the housing
market. The Company may experience further sales declines resulting
from this weakness, which may be compounded by contraction in the
subprime lending industry.
43
The Company could realize shipment delays, depletion of inventory and
increased production costs resulting from unexpected disruptions of
operations at any of the Company's facilities.
The Company's business depends upon its ability to timely
manufacture and deliver products that meet the needs of its
customers and the end users of the Company's products. If the
Company were to realize an unexpected, significant and prolonged
disruption of its operations at any of its facilities, including
disruptions in its manufacturing operations, it could result in
shipment delays of its products, depletion of its inventory as a
result of reduced production and increased production costs as a
result of taking actions in an attempt to cure the disruption or
carry on its business while the disruption remains. Any resulting
delay, depletion or increased production cost could result in
increased costs, lower revenues and damaged customer and product end
user relations, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company offers limited warranties on its products which could result
in the Company incurring significant costs as a result of warranty claims.
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of its 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 generally increase with the price of such
products. If the Company were to incur a significant number of
warranty claims, the resulting warranty costs could be substantial.
The Company is heavily dependent upon its distributors to sell the
Company's products and the loss of a major distributor could have a
material adverse effect on the Company's business, results of operations
and financial condition.
The Company currently sells its products through approximately 13
distributors providing approximately 74 distribution points in the
United States and Canada, as well as directly to a limited number of
mass market retailers. The Company considers its distribution
network very important to maintaining its competitive position.
Although the Company has more than one distributor in some of its
distribution territories and actively manages its credit exposure to
its distributors, the loss of a major distributor could have a
material adverse impact on the Company's business, results of
operations and financial condition. The Company derives a
significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc.
LaSalle-Bristol Corporation serves as the Company's manufactured
housing market distributor, and Mohawk Industries, Inc. serves as
its retail market distributor. These two distributors accounted for
69% and 68% of the Company's net sales for the nine months ended
September 30, 2007 and 2006, respectively.
44
Stockholder votes are controlled by ABI; Congoleum's interests may not be
the same as ABI's interests.
ABI owns a majority (approximately 55% as of December 31, 2006) of
the outstanding shares of the Company's common stock, representing a
69.4% voting interest. As a result, ABI can elect all of the
Company's directors and can control the vote on all matters,
including determinations such as: approval of mergers or other
business combinations, sales of all or substantially all of the
Company's assets, any matters submitted to a vote of the Company's
stockholders, issuance of any additional common stock or other
equity securities, incurrence of debt other than in the ordinary
course of business, payment of dividends with respect to common
stock or other equity securities, and other matters that might be
favorable to ABI. ABI's ability to prevent an unsolicited bid for
Congoleum or any other change in control could have an adverse
effect on the market price for the Company's common stock. In
addition, certain officers of Congoleum are officers of ABI and
members of the family group that owns a controlling interest in ABI.
Possible future sales of shares by ABI could adversely affect the market
for Congoleum's stock.
ABI may sell shares of the Company's common stock in compliance with
the federal securities laws. By virtue of ABI's current control of
Congoleum, ABI could sell large amounts of shares of the Company's
common stock by causing the Company to file a registration statement
that would allow them to sell shares more easily. In addition, ABI
could sell shares of the Company's common stock without
registration. Although the Company can make no prediction as to the
effect, if any, that such sales would have on the market price of
the Company's common stock, sales of substantial amounts of the
Company's common stock, or the perception that such sales could
occur, could adversely affect the market price of the Company's
common stock. If ABI sells or transfers shares of the Company's
common stock as a block, another person or entity could become the
Company's controlling stockholder.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities:
The commencement of the Chapter 11 proceedings by Congoleum
constituted an event of default under the indenture governing
Congoleum's 8 5/8% Senior Notes Due 2008. Due to the Chapter 11
proceedings, the Company has not made interest payments that were
due on February 1 and August 1 of 2004, 2005, 2006 and 2007. The
aggregate amount of interest payments not paid on the Senior Notes
with respect to those interest payment due dates is approximately
$34.5 million. In addition, the Company has accrued interest on the
unpaid interest in accordance with the terms of the indenture
governing Congoleum's 8 5/8% Senior Notes Due 2008. As of September
30, 2007, the total accrued and unpaid interest aggregated $41.7
million and was included in "Liabilities Subject to Compromise" in
the Company's consolidating condensed balance sheet included in this
report. As of October 31, 2007, the total accrued and unpaid
interest recorded by the Company was $42.6 million. The aggregate
outstanding principal amount of the Senior Notes as of September 30,
2007 and October 31, 2007 was $100 million.
45
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits:
Exhibit
Number Exhibits
------ --------
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of the Chief Executive
Officer
32.2 Section 1350 Certification of the Chief Financial
Officer
46
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: November 14, 2007 By: /s/ Howard N. Feist III
------------------------
Howard N. Feist III
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial & Accounting Officer)
47
Exhibit Index
Exhibit
Number Exhibits
------ --------
31.1 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/ 15d-14(a) Certification of Chief
Financial Officer
32.1 Section 1350 Certification of the Chief Executive
Officer
32.2 Section 1350 Certification of the Chief Financial
Officer
48