SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
3705 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of principal executive offices)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Class A Common Stock, par value $.01 per share New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 3, 1998, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $43.4
million based on the closing price ($10.19 per share) on the New York Stock
Exchange. For purposes of determining this amount, affiliates are defined as
directors and executive officers of the Registrant and, American Biltrite Inc.
and Hillside Capital Incorporated. All of the shares of Class B Common Stock of
the Registrant are held by affiliates of the Registrant. As of March 3, 1998, an
aggregate of 4,282,800 shares of Class A Common Stock and an aggregate of
4,755,000 shares of Class B Common Stock of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part II. Portions of the Company's Annual Report to
Shareholders for the year ended December 31, 1997
Part III. Portions of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 14, 1998
Some of the information presented in or incorporated by reference in this
report constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Registrant
believes that its expectations are based on reasonable assumptions, within the
bounds of its knowledge of its business and operations, there can be no
assurance that actual results will not differ materially from its expectations.
Factors that could cause actual results to differ from expectations include: (i)
increases in raw material prices, (ii) increased competitive activity from
companies in the flooring industry, some of which have greater resources and
broader distribution channels than the Registrant, (iii) unfavorable
developments in the national economy or in the housing industry in general, (iv)
shipment delays, depletion of inventory and increased production costs resulting
from unforeseen disruptions of operations at any of the Registrant's facilities
or distributors and (v) the future cost and timing of payments associated with
environmental, product and general liability claims.
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PART I
Item 1. BUSINESS
Congoleum Corporation (the "Company") was incorporated in Delaware in
1986, but traces its history in the flooring business back to Nairn Linoleum Co.
which began in 1886. On March 11, 1993 (effective on February 28, 1993), the
business and assets of the Company and those of the Amtico Tile Division of
American Biltrite Inc. (the "Tile Division") were combined (the "Acquisition").
The Acquisition was effected through the organization of a new corporation,
Congoleum Holdings Incorporated ("Congoleum Holdings"), to which Hillside
Industries Incorporated ("Hillside Industries") contributed all of the
outstanding capital stock of Resilient Holdings Incorporated ("Resilient"), the
owner of all of the outstanding capital stock of the Company, and to which
American Biltrite Inc. ("American Biltrite") contributed the assets and certain
liabilities of the Tile Division. Upon consummation of the Acquisition,
Congoleum Holdings owned all of the outstanding capital stock of Resilient,
which, in turn, owned all of the outstanding capital stock of the Company, and
the Company owned the Tile Division. The assets and liabilities comprising the
Tile Division which were acquired by the Company in the Acquisition are held
directly by the Company. On February 8, 1995, the Company completed a public
offering of 4,650,000 shares of Class A Common Stock (the "Offering"). Upon
completion of the Offering, the Company implemented a Plan of Repurchase
pursuant to which its two-tiered holding company ownership structure was
eliminated through the merger of Congoleum Holdings with and into the Company,
with the Company as the surviving corporation.
Congoleum produces both sheet and tile floor covering products with a wide
variety of product features, designs and colors. Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible felt
or a vinyl (for perimeter installed products) backing, printing a design on the
gel, applying a wearlayer, heating the gel layer sufficiently to cause it to
expand into a cushioned foam and, in some products, adding a high-gloss coating.
The Company also produces through-chip inlaid products for both residential and
commercial markets. These products are produced by applying an adhesive coat and
solid vinyl colored chips to a felt backing and laminating the sheet under
pressure with a heated drum. Tile flooring is manufactured by creating a base
stock (consisting primarily of limestone and vinyl resin) which is less flexible
than the backings for sheet flooring, and transferring or laminating to it
preprinted colors and designs followed by a wearlayer and a urethane coating in
some cases. Commercial tile is manufactured by including colored vinyl chips in
the pigmented base stock. For do-it-yourself tile, an adhesive is applied to the
back of the tile. The differences between products within each of the two
product lines consist primarily of content and thickness of wearlayers and
coatings, the use of chemical embossing to impart a texture, the complexity of
designs and the number of colors.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased from multiple sources. The Company has had no
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difficulty in obtaining its requirements for these materials, although
significant price increases in certain materials have been experienced at times.
The Company believes that alternative suppliers are available for
substantially all of its raw material requirements. However, the Company does
not have readily available alternative sources of supply for specific designs of
transfer print paper, which are produced utilizing print cylinders engraved to
the Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of certain products. The Company maintains a raw material inventory
and has an ongoing program to develop new sources which will provide continuity
of supply for its raw material requirements.
Patents and Trademarks
The Company believes that the Congoleum brand name, as well as the other
trademarks it holds, are important to maintaining competitive position. In 1993,
the Company sold the rights to the Amtico trademark in the United States and
began selling tile under the Congoleum brand name.
The Company also believes that patents and know-how play an important role
in maintaining competitive position. In particular, the Company utilizes a
proprietary transfer printing process for certain tile products that it believes
produces visual effects that only one other competitor is presently able to
duplicate.
Distribution
The Company currently sells its products through approximately 35
distributors providing approximately 100 distribution points in the United
States and Canada, as well as directly to a limited number of mass market
retailers. The sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October. Orders are generally
shipped as soon as a truckload quantity has been accumulated, and backorders can
be canceled without penalty. At December 31, 1997, the backlog of unshipped
orders was $7.5 million, compared to $12.3 million at December 31, 1996.
The Company considers its distribution network very important to
maintaining competitive position. While most of its distributors have marketed
the Company's products for many years, replacements are necessary periodically
to maintain the strength of the distribution network. Although the Company has
more than one distributor in many of its distribution territories and actively
manages its credit exposure to its customers, the loss of a major customer could
have a materially adverse impact on the Company's sales, at least until a
suitable replacement was in place. For the year ended December 31, 1997, two
customers each accounted for over 10% of the Company's sales. These customers
were its distributor to the manufactured housing market, LaSalle-Bristol, and
its distributor in the Southwest and on the West Coast, LD Brinkman & Co.
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Working Capital
The Company produces goods for inventory and sells on credit to customers.
Generally, the Company's distributors carry inventory as needed to meet local or
rapid delivery requirements. Credit sales are typically subject to a discount if
paid within terms.
Product Warranties
The Company offers a limited warranty on all of its products against
manufacturing defects. In addition, as a part of efforts to differentiate mid
and high-end products through color, design and other attributes, the Company
offers enhanced warranties with respect to wear, moisture discoloration and
other performance characteristics which increase with the price points of such
products.
Competition
The market for the Company's products is highly competitive. Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile. In residential
applications, both tile and sheet products are used primarily in kitchens,
bathrooms, laundry rooms and foyers and, to a lesser extent, in playrooms and
basements. Ceramic tile is used primarily in kitchens, bathrooms and foyers.
Carpeting is used primarily in bedrooms, family rooms, and living rooms.
Hardwood flooring and melamine laminate are used primarily in family rooms,
foyers, and kitchens. Commercial grade resilient flooring faces substantial
competition from carpeting, ceramic tile, rubber tile, hardwood flooring and
stone in commercial applications. The Company believes, based upon its market
research, that purchase decisions are influenced primarily by fashion elements
such as design, color and style, durability, ease of maintenance, price and ease
of installation. Both tile and sheet resilient flooring are easy to replace for
repair and redecoration and, in the Company's view, have advantages over other
floor covering products in terms of both price and ease of installation and
maintenance.
The Company encounters competition from domestic and, to a much lesser
extent foreign manufacturers. Certain of the Company's competitors, including
Armstrong in the resilient category, have substantially greater financial and
other resources than the Company.
Research and Development
The Company's research and development efforts concentrate on new product
development, trying to increase product durability and expanding technical
expertise in the manufacturing process. Expenditures for research and
development for the year ended December 31, 1997 were $3.7 million, compared to
$4.6 million and $3.7 million for the years ended December 31, 1996 and 1995.
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Environmental Regulation
Due to the nature of the Company's business and certain of the substances
which are or have been used, produced or discharged by the Company, the
Company's operations are subject to extensive federal, state and local laws and
regulations relating to the generation, storage, disposal, handling, emission,
transportation and discharge into the environment of hazardous substances. The
Company, pursuant to administrative consent orders signed at the time of
Hillside's acquisition of the Company in 1986 and in connection with a prior
restructuring, is in the process of implementing cleanup measures at its Trenton
sheet facility under New Jersey's Environmental Clean-up Responsibility Act, as
amended by the New Jersey Industrial Site Recovery Act. The Company does not
anticipate that the additional costs of these measures will be material. In
connection with the Acquisition of the Tile Division, American Biltrite signed a
similar consent order with respect to the Trenton tile facility, and the Company
agreed to be financially responsible for any cleanup measures required. In 1997,
the Company incurred capital expenditures of approximately $1.1 million for
environmental compliance and control facilities.
The Company has historically expended substantial amounts for compliance
with existing environmental laws and regulations, including those matters
described above. The Company will continue to be required to expend amounts in
the future, due to the nature of historic activities at its facilities, to
comply with existing environmental laws, and those amounts may be substantial
but should not, in the Company's judgment, have a material adverse effect on the
financial position of the Company. Because environmental requirements have grown
increasingly strict, however, the Company is unable to determine the ultimate
cost of compliance with environmental laws and enforcement policies.
Employees
At December 31, 1997, the Company employed a total of 1,234 personnel
compared to 1,332 employees at December 31, 1996.
The Company has entered into collective bargaining agreements with hourly
employees at three of its plants and with the drivers of the trucks that provide
interplant transportation. These agreements cover approximately 685 of the
Company's employees. The Trenton tile plant has a three-year collective
bargaining agreement which expires in May 1998. The Marcus Hook plant has a
three-year collective bargaining agreement which expires in November 1998. The
Trenton sheet plant has a five-year collective bargaining agreement which
expires in February 2001. The Finksburg plant has no union affiliation. In the
past five years, there have been no significant strikes by employees at the
Company and the Company believes that its employee relations are satisfactory.
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Executive Officers of the Registrant
The following information is furnished with respect to each of the
executive officers of the Company, each of whom is elected by and serves at the
pleasure of the Board of Directors. The business experience shown for each
officer has been his principal occupation for at least the past five years. Ages
are shown as of February 1, 1998.
Roger S. Marcus (Age 52)
Roger S. Marcus has been a Director and President and Chief Executive Officer of
the Company since March 1993, and Chairman since December 1994. Mr. Marcus is
also a Director (since 1981), Chairman of the Board (since 1992) and Chief
Executive Officer (since 1983) of American Biltrite. From 1983 to 1992, Mr.
Marcus served as Vice Chairman of the Board of American Biltrite.
Richard G. Marcus (Age 50)
Richard G. Marcus has been Vice Chairman of the Company since December 1994, and
a Director since March 1993. Mr. Marcus is also a Director (since 1982) and
President (since 1983) and Chief Operating Officer (since 1992) of American
Biltrite.
Robert N. Agate (Age 53)
Robert N. Agate has been Senior Vice President - Manufacturing of the Company
since March 1993. Prior thereto, he was Vice President of Manufacturing of the
Tile Division of American Biltrite (since 1981).
Howard N. Feist III (Age 41)
Howard N. Feist III has been Senior Vice President - Finance and Secretary of
the Company since March 1993. Prior thereto, he had served as Vice President -
Finance and Secretary of the Company since 1988.
Dennis P. Jarosz (Age 52)
Dennis P. Jarosz has been Senior Vice President - Marketing since July 1995.
Prior thereto, he had served as Vice President - Marketing since March 1993 and
Vice President - Sales & Marketing of the Tile Division of American Biltrite
(since 1986).
Anthony C. Prestipino (Age 50)
Anthony C. Prestipino has been Senior Vice President - Sales of the Company
since November 1995. Prior thereto, he was Vice President - Sales & Marketing
for commercial products of the Karastan Bigelow Division of Mohawk Industries
and Fieldcrest Cannon (since 1989).
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Peter J. Rohrbacher (Age 46)
Peter J. Rohrbacher has been Senior Vice President - Research and Engineering of
the Company since May 1997. Prior thereto, he had served as Senior Vice
President - Engineering (since September 1993), Vice President - Coatings of the
Company (since March 1993), and Vice President - Research & Development
of the Tile Division of American Biltrite (since 1988).
Thomas A. Sciortino (Age 51)
Thomas A. Sciortino has been Senior Vice President - Administration of the
Company since March 1993. Prior thereto, he was Vice President - Finance of the
Tile Division of American Biltrite (since 1982).
Merrill M. Smith (Age 72)
Merrill M. Smith has been Senior Vice President - Technology of the Company
since March 1993. Prior thereto, he was Vice President - Technology of American
Biltrite (since 1985).
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Item 2. PROPERTIES
The Company owns four manufacturing facilities located in Maryland,
Pennsylvania and New Jersey and leases corporate and marketing offices in
Mercerville, New Jersey, where it has a lease expiring in 2000, which are
described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Mercerville, NJ Leased Corporate Offices 33,594
The Finksburg facility consists primarily of a 16-foot wide felt
production line.
The Marcus Hook facility is capable of manufacturing rotogravure printed
sheet flooring in widths of up to 16 feet. Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.
The Trenton sheet facility is capable of manufacturing rotogravure
printed and through-chip inlaid sheet products in widths up to 6 feet. Major
production lines, all six-foot wide, include an oven, a rotary laminating line
and a press. The examination, packing and warehousing of all sheet products
(except products for the manufactured housing segment) occur at the Trenton
plant distribution center.
The Trenton tile facility consists of three major production lines, a
four foot wide commercial tile line, a two-foot wide residential tile line and a
one-foot wide residential tile line.
Productive capacity and extent of utilization of the Company's facilities
are dependent on a number of factors, including the size, construction, and
quantity of product being manufactured, some of which also dictate which
production line(s) must be utilized to make a given product. The Company's major
production lines were operated an average of 75% of the hours available on a
five-day, three-shift basis in 1997, with the corresponding figure for
individual production lines ranging from 25% to 115%.
Although many of the Company's manufacturing facilities have been
substantially depreciated, the Company has generally maintained and improved the
productive capacity of these facilities over time through a program of regular
capital expenditures. The Company increased capital spending in 1997 to
accelerate improvements to its manufacturing facilities and equipment, including
the refurbishment of an oven line at its Marcus Hook facility. The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.
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Item 3. LEGAL PROCEEDINGS
As of December 31, 1997 the Company was named as defendant, together in most
cases with numerous other companies, in approximately 654 currently pending
lawsuits (including worker's compensation cases) involving approximately 6,455
individuals alleging personal injury from exposure to asbestos or
asbestos-containing products. The plaintiffs in these cases, as well as similar
cases in the past which have been settled or dismissed, allege that they or the
individuals they represent have contracted asbestosis, pleural thickenings,
mesothelioma, cancer or other lung disease as a result of exposure to asbestos
in the course of their activities as plumbers, carpenters, floor installers,
machinists, or in other capacities, either as independent contractors or as
employees of shipyards or other industries utilizing asbestos-containing
products (or, in the worker's compensation cases, as employees of the Company or
the Tile Division) and that included among such products which caused their
diseases were sheet products provided by the Company or resilient tile provided
by the Tile Division, or both. The Company discontinued the manufacture of
asbestos-containing sheet products in 1983, and the Tile Division ceased
manufacturing asbestos-containing tile products in 1984. In general,
asbestos-containing products have not been found to pose a health risk unless
the asbestos becomes airborne. All of the asbestos in asbestos-containing sheet
and tile products sold by the Company or the Tile Division was fully bonded or
encapsulated during the manufacturing process. The Company has issued warnings
not to remove asbestos-containing flooring by sanding or other methods that
allow the asbestos fibers to become airborne. Although there can be no
assurance, the Company believes, based upon the nature of its
asbestos-containing products and its experience with cases to date, that any
potential liability from pending personal injury claims relating to the
Company's asbestos-containing resilient products will not have a material
adverse effect in the aggregate on the financial position of the Company. In one
of these cases tried before a jury in Superior Court of California in Los
Angeles held in May and June 1997, the Company and another defendant were found
liable for $3.2 million in damages, subject to proportional liability under
California law. The jury found that the Company was liable for only 25% of the
plaintiff's non-economic damages but as a result of post-verdict motions the
trial judge purportedly granted plaintiffs' motion for judgment notwithstanding
the verdict and held that California Proposition 51 (establishing proportionate
liability for non-economic damages) did not apply in this case. The Company and
the other defendant have appealed this decision. The Company's insurance carrier
has paid for the defense costs incurred and has indicated that it would be
responsible for paying the ultimate judgment in the case, subject to certain
limitations.
Together with a large number (in most cases, hundreds) of other companies, the
Company is named 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 four
instances, although not named as a PRP, the Company has received a "Request for
Information." These pending proceedings currently relate to ten waste disposal
sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware in which
recovery from generators of hazardous substances is sought for the cost of
cleaning up the contaminated waste disposal sites. Although there can be no
assurances, the Company anticipates that these proceedings will be resolved over
a period of years for amounts (including legal fees and other defense costs)
which the Company believes based on current estimates of liability and, in part,
on insurance
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coverage agreements, will not have a material adverse effect on the financial
position of the Company.
On July 15, 1994, Kentile Floors, Inc. ("Kentile"), a debtor-in-possession
pursuant to Chapter 11 of the United States Bankruptcy Code, commenced an
adversary proceeding against the Company in the Bankruptcy Court for the
Southern District of New York. The complaint asserts that the Company tortiously
interfered with certain of Kentile's contracts with its distributors when those
distributors terminated their agreements with Kentile to become distributors of
the Company's floor tile. Kentile seeks $15.0 million in damages on account of
the alleged interference. Although the Company's motion to have the proceeding
dismissed on the pleadings was denied, the Company believes that Kentile's claim
is without merit and intends to vigorously contest the lawsuit.
In connection with the Chapter 11 cases of Color Tile, Inc. and certain
affiliated companies which were commenced on January 24, 1996 and remain pending
in the United States Bankruptcy Court for the District of Delaware, the
unsecured creditors' committee of Color Tile commenced an adversary proceeding
against the Company in January 1998 seeking the avoidance and recovery of
certain payments aggregating $2.6 million made to the Company as allegedly
voidable preferential and postpetition transfers under the Bankruptcy Code and
the turnover of $150,000 constituting an alleged deposit of Color Tile with the
Company. The Company has not yet answered the complaint but disputes the
allegations made and intends to vigorously defend its position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to all
information under the caption "Market Information" on page 25 of the Company's
Annual Report to Shareholders for the year ended December 31, 1997 (included as
Exhibit 13.1 to this Annual Report on Form 10-K).
Item 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to all
information under the heading "Selected Financial Data" on page 6 of the
Company's Annual Report to Shareholders for the year ended December 31, 1997
(included as Exhibit 13.1 to this Annual Report on Form 10-K).
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to all
information under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 7 through 9 of the Company's
Annual Report to Shareholders for the year ended December 31, 1997 (included as
Exhibit 13.1 to this Annual Report on Form 10-K).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are incorporated by reference and
the financial statement schedule is included in this report on Form 10-K, as
listed in Item 14(a) Part IV of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by these Items (except for the information
regarding executive officers called for by Item 401 of Regulation S-K which is
included in Part I hereof in accordance with General Instruction G(3)), is
hereby incorporated by reference to the Registrant's definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on May 14, 1998.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
(a)(1) The following financial statements of the Company and the report of
independent auditors are incorporated herein by reference to pages 10 to 24
in the Company's Annual Report to Shareholders for the year ended December
31, 1997 (included as Exhibit 13.1 to this Annual Report on Form 10-K).
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Auditors 24
Balance Sheets as of December 31, 1997 and December 31, 1996 10
Statements of Operations for the years ended December 31, 1997,
1996 and 1995 11
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 12
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 13
Notes to Financial Statements 14
Supplementary Data
Quarterly Financial Data (Unaudited) 23
</TABLE>
(2) The following financial statement schedule is included in this report on
Form 10-K:
Page Number
-----------
Schedule II - Valuation and Qualifying Accounts 21
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial
statements or notes thereto.
(3) Exhibits
Exhibit
Number Exhibit
------ -------
2.1 Plan of Repurchase dated as of February 1, 1995 by and among
American Biltrite Inc., Hillside Industries Incorporated, Congoleum
Holdings Incorporated, Resilient Holdings Incorporated and the
Company.
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Amended and Restated Bylaws of the Company.
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Exhibit
Number Exhibit
------ -------
4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing
Agreement"), by and among the CIT Group/Business Credit, Inc.
("CIT"), The Bank of New York Commercial Corporation ("BONY/CC"),
Chemical Bank ("Chemical") and The Chase Manhattan Bank, N.A.
("Chase") (collectively, the "Senior Lenders") and the Company.
4.2 First Amendment, dated March 11, 1993, to the CIT Financing
Agreement by and among the Senior Lenders and the Company.
4.3 Indenture, dated as of February 1, 1994, between the Company and
Chemical Bank, as trustee.
4.4 Registration Rights Agreement, dated as of February 8, 1995 by and
between the Company and Hillside.
10.1 The CIT Financing Agreement (see Exhibit 4.1).
10.2 First Amendment to the CIT Financing Agreement (see Exhibit 4.2).
10.8 Joint Venture Agreement, dated as of December 16, 1992, by and
among Resilient Holdings, Hillside, the Company (collectively the
"Congoleum Group"), Hillside Capital and American Biltrite.
10.9 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite.
10.12 Stockholders Agreement, dated as of March 11, 1993 (the
"Stockholders Agreement"), by and among the Congoleum Group,
American Biltrite and Congoleum Holdings.
10.12.1 First Amendment, dated February 8, 1995, to the Stockholders
Agreement, by and among Hillside, American Biltrite and the
Company.
10.13 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American Biltrite
and the Company.
10.13.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.3 Third Amendment, dated as of March 10, 1998, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.14 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company.
10.14.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company
10.15 Tax Sharing and Indemnification Agreement, dated as of March 11,
1993, by and among Congoleum Holdings, Resilient Holdings, Hillside
Capital and the Company.
10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
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Exhibit
Number Exhibit
------ -------
10.19 Commitment Letter, dated January 19, 1994 regarding Financing
Agreement dated April 19, 1991, as amended, by and among CIT,
BONYCC and the Company.
10.20 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico Company").
10.21 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company.
10.22 Undertaking Concerning Amtico Trademark, dated November 29, 1993,
by and between American Biltrite and Amtico Company.
10.23 Form of 1995 Stock Option Plan.
10.23.1 Form of Amendment to 1995 Stock Option Plan.
10.24 License Agreement, dated as of September 20, 1995 between Congoleum
Intellectual Properties, Inc. and the Company.
11 Statement re: Computation of Per Share Earnings.
13.1 Pages 6 through 25 of the Congoleum Annual Report to Shareholders
for the year ended December 31, 1997.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Opinion of Coopers & Lybrand L.L.P.
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 24th day of
March, 1998.
CONGOLEUM CORPORATION
By: /s/
---------------------------------------
Roger S. Marcus
President, Chairman & Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ President, Chairman, Chief Executive Officer March 24, 1998
- ------------------------ and Director (Principal Executive Officer)
Roger S. Marcus
/s/ Senior Vice President - Finance March 24, 1998
- ------------------------ (Principal Financial and Accounting Officer)
Howard N. Feist
/s/ Director March 24, 1998
- ------------------------
Richard G. Marcus
/s/ Director March 24, 1998
- ------------------------
William M. Marcus
/s/ Director March 24, 1998
- ------------------------
John N. Irwin III
/s/ Director March 24, 1998
- ------------------------
Cyril C. Baldwin, Jr.
/s/ Director March 24, 1998
- ------------------------
David N. Hurwitz
/s/ Director March 24, 1998
- ------------------------
Mark N. Kaplan
/s/ Director March 24, 1998
- ------------------------
C. Barnwell Straut
</TABLE>
17
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------ -------
***2.1 Plan of Repurchase dated as of February 1, 1995 by and among
American Biltrite Inc., Hillside Industries Incorporated,
Congoleum Holdings Incorporated, Resilient Holdings
Incorporated and the Company.
*****3.1 Certificate of Incorporation of the Company, as amended.
*****3.2 Amended and Restated Bylaws of the Company.
**4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing
Agreement"), by and among the CIT Group/Business Credit, Inc.
("CIT"), The Bank of New York Commercial Corporation
("BONY/CC"), Chemical Bank ("Chemical") and The Chase Manhattan
Bank, N.A. ("Chase") (collectively, the "Senior Lenders") and
the Company.
**4.2 First Amendment, dated March 11, 1993, to the CIT Financing
Agreement by and among the Senior Lenders and the Company.
**4.3 Indenture, dated as of February 1, 1994, between the Company
and Chemical Bank, as trustee.
***4.4 Registration Rights Agreement, dated as of February 8, 1995 by
and between the Company and Hillside.
**10.1 The CIT Financing Agreement (see Exhibit 4.1).
**10.2 First Amendment to the CIT Financing Agreement (see Exhibit
4.2).
**10.8 Joint Venture Agreement, dated as of December 16, 1992, by and
among Resilient Holdings, Hillside, the Company (collectively,
the "Congoleum Group"), Hillside Capital and American Biltrite.
**10.9 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite.
**10.12 Stockholders Agreement, dated as of March 11, 1993 (the
"Stockholders Agreement"), by and among the Congoleum Group,
American Biltrite and Congoleum Holdings.
***10.12.1 First Amendment, dated February 8, 1995, to the Stockholders
Agreement, by and among Hillside, American Biltrite and the
Company.
**10.13 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American
Biltrite and the Company.
***10.13.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.3 Third Amendment, dated as of March 10, 1998, to Personal
Services Agreement, by and between American Biltrite and the
Company.
18
<PAGE>
Exhibit
Number Exhibit
------ -------
**10.14 Business Relations Agreement, dated as of March 11, 1993, by
and between American Biltrite and the Company.
10.14.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company
**10.15 Tax Sharing and Indemnification Agreement, dated as of March
11, 1993, by and among Congoleum Holdings, Resilient Holdings,
Hillside Capital and the Company.
10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
**10.19 Commitment Letter, dated January 19, 1994 regarding Financing
Agreement dated April 19, 1991, as amended, by and among CIT,
BONYCC and the Company.
***10.20 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico
Company").
***10.21 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company.
***10.22 Undertaking Concerning Amtico Trademark, dated November 29,
1993, by and between American Biltrite and Amtico Company.
***10.23 Form of 1995 Stock Option Plan.
******10.23.1 Form of Amendment to 1995 Stock Option Plan.
****10.24 License Agreement, dated as of September 20, 1995 between
Congoleum Intellectual Properties, Inc. and the Company.
11 Statement re: Computation of Per Share Earnings.
13.1 Pages 6 through 25 of the Congoleum Annual Report to
Shareholders for the year ended December 31, 1997.
****21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Opinion of Coopers & Lybrand L.L.P.
27.0 Financial Data Schedule.
- -------------
** Incorporated by reference to the exhibit bearing the same number filed
with the Company's Registration Statement on Form S-1 (File No. 33-71836)
declared effective by the Securities and Exchange Commission on January
25, 1994).
*** Incorporated by reference to the exhibit bearing the same number filed
with the Company's Registration Statement on Form S-1 (File No. 33-87282)
declared effective by the Securities and Exchange Commission on February
1, 1995.
19
<PAGE>
**** Incorporated by reference to the exhibit bearing the same number filed
with the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
***** Incorporated by reference to the exhibit bearing the same number filed
with the Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1996.
****** Incorporated by reference to the exhibit bearing the same number filed
with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996
20
<PAGE>
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
-------
<TABLE>
<CAPTION>
Additions
------------------------
Balance at Charged Balance
Beginning to Costs/ Other at end
of Period Expenses (a) Changes Deductions (b) of Period
--------- ------------ ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful
accounts and cash
discounts $(3,406) $ -- $ 33 (c) $ 79 $(3,294)
Year ended December 31, 1996:
Allowance for doubtful
accounts and cash
discounts $(5,095) $ (600) $ -- $2,289 $(3,406)
Year ended December 31, 1995:
Allowance for doubtful
accounts and cash
discounts $(5,213) $(2,800) $ (55)(d) $2,973 $(5,095)
</TABLE>
(a) Uncollectible accounts charged to bad debt expense.
(b) Balances written-off, net of recoveries.
(c) Represents reduction of the allowance for doubtful accounts and cash
discounts.
(d) Represents increase of the allowance for doubtful accounts and cash
discounts.
21
Exhibit 10.13.2
SECOND AMENDMENT TO PERSONAL SERVICES AGREEMENT
-----------------------------------------------
THIS SECOND AMENDMENT TO PERSONAL SERVICES AGREEMENT, dated as of November
15, 1996, by and between American Biltrite Inc., a Delaware corporation ("ABI")
and Congoleum Corporation, a Delaware corporation ("Congoleum");
W I T N E S S E T H:
THAT WHEREAS, ABI and Congoleum are parties to a Personal Services
Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), as
amended February 8, 1995, pursuant to which ABI agreed that Roger S. Marcus
would serve as the Chief Executive Officer of Congoleum and Richard G. Marcus
would serve as the Vice Chairman of Congoleum, subject to certain terms and
conditions set forth in the Personal Services Agreement;
NOW, THEREFORE, in consideration of the agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Amendment of Section 3. Clause (b) of Section 3 of the Personal
Services Agreement is hereby amended to read in full as follows:
(b) Incentive Fees. Congoleum shall pay ABI an annual incentive fee
as determined by a majority of the disinterested members of the Board of
Directors.
4. Ratification. Each of ABI and Congoleum hereby ratifies and confirms
all of the terms and provisions of the Personal Services Agreement, as amended
hereby.
5. Counterparts. This Amendment to Personal Services Agreement may be
executed in one or more counterparts, each of which shall be an original but all
of which shall collectively constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment to Personal Services Agreement as of the date first above written.
AMERICAN BILTRITE INC.
By:________________________________
Name: Roger S. Marcus
Title: Chief Executive Officer
CONGOLEUM CORPORATION
By:________________________________
Name: H. N. Feist
Title: Sr. Vice President - Finance
Exhibit 10.13.3
THIRD AMENDMENT TO PERSONAL SERVICES AGREEMENT
----------------------------------------------
THIS THIRD AMENDMENT TO PERSONAL SERVICES AGREEMENT, dated as of March 10,
1998, by and between American Biltrite Inc., a Delaware corporation ("ABI") and
Congoleum Corporation, a Delaware corporation ("Congoleum");
W I T N E S S E T H:
THAT WHEREAS, ABI and Congoleum are parties to a Personal Services
Agreement, dated as of March 11, 1993 (the "Personal Services Agreement"), as
amended February 8, 1995 and November 15, 1996, pursuant to which ABI agreed
that Roger S. Marcus would serve as the Chief Executive Officer of Congoleum and
Richard G. Marcus would serve as the Vice Chairman of Congoleum, subject to
certain terms and conditions set forth in the Personal Services Agreement;
NOW, THEREFORE, in consideration of the agreements set forth herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Extension of Term. The term of the Personal Services Agreement is
renewed for a five-year period beginning on March 11, 1998.
2. Ratification. Each of ABI and Congoleum hereby ratifies and confirms
all of the terms and provisions of the Personal Services Agreement, as amended
hereby.
3. Counterparts. This Amendment to Personal Services Agreement may be
executed in one or more counterparts, each of which shall be an original but all
of which shall collectively constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment to Personal Services Agreement as of the date first above written.
AMERICAN BILTRITE INC.
By:________________________________
Name: Roger S. Marcus
Title: Chief Executive Officer
CONGOLEUM CORPORATION
By:________________________________
Name: H. N. Feist
Title: Sr. Vice President - Finance
Exhibit 10.14.1
AMENDMENT NO. 1 TO BUSINESS RELATIONS AGREEMENT
-----------------------------------------------
AMENDMENT NO. 1 TO BUSINESS RELATIONS AGREEMENT (this "Amendment") dated
as of August 19, 1997 by and between American Biltrite Inc., a Delaware
corporation ("ABI"), and Congoleum Corporation, a Delaware corporation
("Congoleum").
ABI and Congoleum entered into a Business Relations Agreement as of March
11, 1993 (the "Business Relations Agreement"). Capitalized terms used and not
otherwise defined herein shall have the meanings ascribed thereto in the
Business Relations Agreement.
ABI and Congoleum now desire to amend certain of the terms of the Business
Relations Agreement.
In consideration of the premises and the mutual agreements set forth in
the Business Relations Agreement and this Amendment, the parties hereto agree as
follows:
1. The first sentence of Section 1(a) of the Business Relations Agreement
is amended and restated to read in its entirety as follows:
Congoleum hereby grants to ABI, and ABI hereby accepts, the exclusive
right and license (except as to Congoleum itself, as set forth in
paragraph (d) below) to distribute Congoleum's vinyl, vinyl composition
or other floor tile ("Congoleum Tile") in Canada (the "License").
2. Section 1(C) of the Business Relations Agreement is hereby amended and
restated to read in its entirety as follows:
(c) Other Terms and Conditions
Transactions under this Section 1 shall be conducted in accordance with
ordinary and customary commercial terms. The initial term of the
License granted in Section 1(a) above shall terminate on the fifteenth
anniversary of the date hereof and may be renewed for successive one
year periods of the initial term or any renewal term. Notwithstanding
the foregoing, the License granted in Section 1(a) above may be
terminated at any time after notice by Congoleum if ABI fails to pay
for the Congoleum Tile on a timely basis.
3. Section 1 of the Business Relations Agreement is amended by inserting
the following new paragraph (d) at the end thereof:
(d) Direct Sales by Congoleum in Canada
By prior mutual agreement between ABI and Congoleum, Congoleum may sell
Congoleum Tile direct in Canada. If, by mutual agreement between ABI
and Congoleum, Congoleum sells Congoleum Tile directly to any customer
in
<PAGE>
Canada, then Congoleum shall remit to ABI 50% of the standard gross
margin for the sale, calculated in accordance with generally accepted
accounting principles. This Section 1(d) shall be effective for all
transactions occurring on or after March 11, 1993.
4. The last sentence of Section 2(d) of the Business Relations Agreement
is amended and restated to read in its entirety as follows:
Notwithstanding the foregoing, the Purchase Rights may be terminated at
any time after notice to ABI if Congoleum fails to pay for the floor
tile purchased under Section 2(a) above or the urethane purchased under
Section 2(b) above on a timely basis.
5. The last sentence of Section 3 of the Business Relations Agreement is
amended and restated to read in its entirety as follows:
The agreement set forth in this Section 3 may be terminated at any time
after notice by Congoleum if ABI fails to pay for the data processing services
on a timely basis.
6. The term "Business Relations Agreement" as used in the Business
Relations Agreement shall be deemed to refer to the Business Relations Agreement
as amended hereby.
7. This Amendment shall be effective as of the date hereof, except that
the terms and provisions of Section 1(d) of the Business Relations Agreement as
amended hereby are effective as stated therein.
The parties hereto have caused this Amendment to be duly executed and
delivered as of the date first set forth above.
AMERICAN BILTRITE INC.
By:____________________________
Gilbert K. Gailius
Vice President - Finance
CONGOLEUM CORPORATION
By: ___________________________
H. N. Feist
Sr. Vice President - Finance
Exhibit 10.15.1
CONGOLEUM/ABI
TAX SHARING AGREEMENT
---------------------
Agreement, dated as of November 1, 1996, between American Biltrite Inc.
("Parent") and Congoleum Corporation ("Subsidiary").
Parent owns 57% of the voting shares of capital stock of Subsidiary.
Parent and Subsidiary intend to share the foreign trading gross receipts
("FTGR") limitation of $5,000,000 when filing Form 1120-FSC, U.S. Income Tax
Return of a Foreign Sales Corporation, for the maximum mutual benefit of Parent
& Subsidiary.
Both Parent and Subsidiary each have a small foreign sales corporation
("FSC"). Pursuant to Internal Revenue Code ("IRC") Section 922(b)(2)(B), all
small FSC's which are members of the same controlled group of corporations shall
be treated as a single corporation. The term "controlled group of corporations"
has the meaning given to such term by IRC Section 1563(a), except that "more
than 50 percent" shall be substituted for "at least 80 percent" each place it
appears therein pursuant to IRC Section 927(d)(4). Therefore, for small FSC
purposes, the controlled group shall share the foreign trading gross receipts
("FTGR") limitation of $5,000,000.
Now, therefore, Parent and Subsidiary agree as follows:
1. Payment by Subsidiary to Parent for Using 100% FTGR Limitation.
In the event that the gross profit percentage of the Subsidiary's FTGR is
greater than the Parent's gross profit percentage of its FTGR in any one year,
the Subsidiary will use up to 100 percent of the FTGR limitation of $5,000,000
when filing Form 1120-FSC.
First, Subsidiary shall pay directly to Parent the amount (if any) of the
federal income tax savings for which Parent would have received, computed as
though Parent had filed Form 1120-FSC and used 50 percent of the FTGR
limitation.
Second, Subsidiary shall pay directly to Parent the amount (if any) of 50
percent of the federal income tax savings on the difference between (a) the
Subsidiary's federal tax savings using 100 percent of the FTGR limitation less
(b) both the Parent's federal income tax savings it would have received,
computed as though Parent had filed Form 1120-FSC and used 50 percent of the
FTGR limitation and the Subsidiary's federal income tax savings it would have
received, computed as though Subsidiary had filed Form 1120-FSC and used 50
percent of the FTGR limitation.
Third, the Subsidiary will gross-up such payments mentioned above to
Parent at the Parent's effective tax rate for such year.
<PAGE>
Lastly, Subsidiary shall make such payment not later than the date they
would have become due if Parent had filed a separate return, but in any event
within 180 days after the end of each Tax Return Year.
2. Tax Adjustments. In the event of any adjustment to the tax return of
Subsidiary as filed (by reason of an amended return, claim for refund, or an
audit by the Internal Revenue Service), the liability of the Subsidiary under
Section 1 (or 2 as applicable) shall be determined to give effect to any such
adjustment as if it had been made as part of the original computation of tax
liability, and payment by Subsidiary to Parent shall be made within 270 days
after any such payments are made or refunds are received.
3. Payment by Parent to Subsidiary for using 100% FTGR Limitation
In the event that the Parent's gross profit percentage of FTGR is greater
than the Subsidiary's gross profit percentage of FTGR in any one year, then in
clauses 1 and 2 of this agreement (a) wherever Subsidiary appears, Parent shall
be substituted therefore and (b) wherever Parent appears, Subsidiary shall be
substituted therefore.
4. Subsidiaries. If at any time Subsidiary holds, acquires, or creates one
or more domestic subsidiary corporations that are includable corporations of the
controlled group, under the IRC and the applicable regulations thereunder, they
shall be subject to this Agreement and all references to Subsidiary herein shall
be interpreted to refer to Subsidiary and such subsidiaries as a controlled
group.
5. Successors. This Agreement shall be binding on and inure to the benefit
of any successor, by merger, acquisition of assets, or otherwise to any of the
parties hereto (including but not limited to any successor of Parent or
Subsidiary succeeding to the tax attributes of either under Section 381 of the
Code), to the same extent as if such successor had been an original party to
this Agreement.
6. Prior Agreement. This Agreement shall be binding to both parties unless
otherwise revoked for all tax years beginning on or after January 1, 1995.
AMERICAN BILTRITE INC.
By:_________________________________
Title:
CONGOLEUM CORPORATION
By:_________________________________
Title:
Exhibit 11 - Computation of Earnings Per Common Share
CONGOLEUM CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
--------------------------------------
Basic Earnings Per Common Share: 1997 1996 1995
- -------------------------------- ---- ---- ----
Net income per common and common
equivalent share $6,741 $12,097 $ 9,435
======= ======= =======
Weighted average common shares
outstanding 9,837 9,997 10,000
Net income per common share $ 0.69 $ 1.21 $ 0.94
======= ======= =======
Diluted Earnings Per Common Share:
Net income per common and common
equivalent share $6,741 $12,097 $ 9,435
======= ======= =======
Weighted average common shares
outstanding 9,837 9,997 10,000
Effect of assumed exercise of dilutive
stock options(1) 2 10 22
------- ------- -------
Weighted average common and
common equivalent shares 9,839 10,007 10,022
Net income per common and common
equivalent share $ 0.69 $ 1.21 $ 0.94
======= ======= =======
(1) Computed based on the Treasury Stock method.
================================================================================
Congoleum Corporation
Selected Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended For the ten
December 31, months ended
December 31,
1997 1996(a) 1995(a) 1994(a) 1993 (a)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales ............................ $252,526 $269,451 $263,147 $265,784 $211,140
Cost of sales ........................ 180,093 182,585 186,382 175,059 143,461
Selling, general and
administrative expenses .......... 57,094 61,597 55,228 56,315 44,043
- ------------------------------------------------------------------------------------------------------------
Income from operations ............... 15,339 25,269 21,537 34,410 23,636
Interest expense, net ................ (5,258) (6,369) (6,708) (6,968) (5,341)
Other income (expense), net .......... 974 1,095 1,135 1,184 (562)
- ------------------------------------------------------------------------------------------------------------
Income before taxes
and extraordinary item ........... 11,055 19,995 15,964 28,626 17,733
Provision for income
taxes ............................ 4,035 7,898 6,529 11,131 6,561
- ------------------------------------------------------------------------------------------------------------
Income before
extraordinary item ............... 7,020 12,097 9,435 17,495 11,172
Extraordinary item ................... (279) -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Net income ........................... $ 6,741 $ 12,097 $ 9,435 $ 17,495 $ 11,172
============================================================================================================
Net income per common share (b) ...... $ .69 $ 1.21 $ .94 $ 1.75 $ .98
Average shares outstanding ........... 9,839 10,007 10,022 10,000 11,447
Balance Sheet Data (at end of period):
Total assets ......................... $196,581 $219,798 $206,842 $204,822 $175,546
Total debt ........................... 76,594 87,750 90,000 90,000 61,423
Stockholders' equity ................. 31,783 33,667 22,602 19,410 9,017
</TABLE>
(a) Prior years (1993-1996) cost of sales and selling, general and
administrative expenses have been reclassified to conform with the 1997
presentation.
(b) Net income per common share has been computed and restated to conform to
Statement of Financial Accounting Standards, ("SFAS") No. 128. Due to the
immaterial impact of common stock equivalents, there is no difference
between basic and diluted net income per common share, except for the
period ended 1993, in which, basic and diluted net income per share is
$1.12 and $.98, respectively.
6
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Results Of Operations
The Company's business is cyclical and is affected by the same economic factors
that affect the remodeling and housing industries in general, including the
availability of credit, consumer confidence, changes in interest rates, market
demand and general economic conditions.
In addition to external economic factors, the Company's results are
sensitive to sales and manufacturing volume, competitors' pricing, consumer
preferences for flooring products, raw material costs and the mix of products
sold. The manufacturing process is capital intensive and requires substantial
investment in facilities and equipment. The cost of operating these facilities
generally does not vary in direct proportion to production volume, and
consequently operating results fluctuate disproportionately with changes in
sales volume.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $252.5 million as
compared to $269.5 million for the year ended December 31, 1996, a decrease of
$17.0 million or 6.3%. The decline in sales was due to a number of factors.
These were reduced sales volume of higher priced sheet goods, an inventory
reduction by the Company's largest distributor, lower average selling prices for
certain products, and a decline in shipments to Color Tile, Inc., a major
retailer which ceased operations in mid-1997. In addition, the Company's largest
production line was shut down for refurbishment for four months, which limited
its ability to pursue certain sales initiatives.
Gross profit for the year ended December 31, 1997 was $72.4 million, or
28.7% of sales, compared to $86.9 million, or 32.2% of sales for the previous
year, a decline of $14.5 million or 16.7%. The decline in gross profit was due
to higher raw material costs, a less profitable mix of products sold, and
manufacturing inefficiencies experienced preparing for the shutdown of a major
production line.
Selling, general and administrative expenses were $57.1 million for the
year ended December 31, 1997 as compared to $61.6 million for the year ended
December 31, 1996, a decline of $4.5 million, or 7.3%. This decrease was due to
declines in sales-related costs and incentive compensation, combined with an
overall program of cost control. As a percent of sales, selling, general and
administrative expenses declined to 22.6% in 1997 from 22.9% in 1996.
Income from operations was $15.3 million (6.1% of sales) for the year
ended December 31, 1997, down from $25.3 million (9.4% of sales) for 1996, a
decrease of 39.5%. This decline reflects the lower sales and gross profit,
partly offset by reduced selling, general and administrative expenses discussed
above.
Interest expense decreased from $8.2 million in 1996 to $6.8 million in
1997 as a result of lower average debt outstanding and a greater amount of
interest capitalized in connection with capital expenditures. The provision for
income taxes declined from 39.5% of income before income taxes in 1996 to 36.5%
of income before income taxes in 1997 as a result of the lower income level,
which reduced the average effective statutory rate, and lower effective state
income tax rates.
The Company recorded an extraordinary charge of $0.3 million or $.03 per
share in 1997 for premiums and writeoff of deferred financing costs in
connection with the open market purchase of $11.2 million of its 9% Senior
Notes.
Net income for the year ended December 31, 1997 was $6.7 million, down
44.3% from $12.1 million in 1996. Net income per share in 1997 was $.69, down
from $1.21 in 1996.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $269.5 million as
compared to $263.1 million for the year ended December 31, 1995, an increase of
$6.3 million or 2.4%. Sales were higher in 1996 due to new customers, increased
demand from the manufactured housing industry and a 2-3% price increase.
Partially offsetting this was a decline in purchases by Color Tile, Inc.
Gross profit for the year ended December 31, 1996 was $86.9 million, or
32.3% of sales, compared to $76.8 million, or 29.2% of sales for the previous
year, an increase of $10.1 million, or 13.2%. The improvement in gross profit
during 1996 was due to lower raw material costs, increased sales and pricing,
7
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
and improved manufacturing productivity.
Selling, general and administrative expenses amounted to $61.6 million for
the year ended December 31, 1996, compared to $55.2 million for 1995, an
increase of $6.4 million or 11.6%. Higher spending on marketing and new product
development programs, together with costs associated with establishing new
distribution in Canada, were the primary contributors to the increase, which was
partially offset by lower bad debt expense in 1996. As a percent of sales,
selling, general and administrative expenses amounted to 22.9% for the year
ended December 31, 1996, compared to 21.0% for 1995.
Income from operations was $25.3 million (9.4% of net sales) for the year
ended December 31, 1996, up from $21.5 million (8.2% of net sales) for 1995, an
increase of $3.8 million (17.7%). The improvement in operating income during
1996 was the result of higher sales and gross profit margins, net of the
increase in selling, general and administrative costs.
Interest income increased from $1.5 million in 1995 to $1.8 million in
1996 due to higher average cash and short-term investment balances during the
year ended December 31, 1996. The provision for income taxes declined from 40.9%
of income before income taxes for 1995 to 39.5% for 1996 as a result of lower
effective state income tax rates.
Net income for the year ended December 31, 1996 was $12.1 million,
compared to net income of $9.4 million for 1995, an increase of $2.7 million or
28.7%.
Liquidity and Capital Resources
On February 8, 1995, the Company completed a public offering of 4,650,000
shares of a new series of Class A Common Stock (the Class A shares) for $13 per
share (the "Offering") and implemented a Plan of Repurchase (see Notes 1 and 17
of Notes to Financial Statements). The Company's capital stock outstanding
immediately prior to the consummation of the merger contemplated in the Plan of
Repurchase was converted in the merger into 10,000,000 shares of a new series of
Class B Common Stock (the Class B shares). The net proceeds of approximately
$55.2 million after deducting fees, together with approximately $5.2 million of
other funds of the Company, were used to repurchase 4,650,000 Class B shares
held by Hillside Capital Incorporated ("Hillside"). As a result, the cash and
stockholders' equity of the Company immediately following the Offering was
approximately $5.2 million lower than it was immediately prior to the Offering.
The Company's revolving credit facility provides for borrowings up to $30
million with interest at 1% over prime, or 2 3/4% over LIBOR. This financing
agreement contains certain covenants which include the maintenance of minimum
net worth and restrictions on the incurrence of additional debt. Borrowings
under this facility are collateralized by inventory, receivables and documents
of title. At December 31, 1997, the Company had unused borrowing availability
under the amended revolving credit facility of $26.6 million.
Cash and equivalents, including short-term investments at December 31,
1997, were $19.0 million, a decrease of $29.2 million from December 31, 1996.
Working capital was $39.0 million, down from $62.0 million one year earlier. The
ratio of current assets to current liabilities at December 31, 1997 was 1.9 to
one, compared to 2.1 to one a year earlier. The ratio of debt to total capital
at December 31, 1997 was .39, compared to .40 at December 31, 1996. Net cash
provided by operations during the year ended December 31, 1997 was $11.0
million, down from $23.1 million in 1996. Capital expenditures in 1997 totaled
$19.8 million. The Company is currently planning capital expenditures of $15
million to $20 million in 1998 and $20 million to $25 million in 1999.
During 1997, the Company repurchased 959,700 shares of its Common Stock
for an aggregate cost of $9.5 million. The Company also purchased $11.2 million
par value of its 9% Senior Notes. The Company may repurchase an additional $6.6
million par value of its 9% Senior Notes pursuant to an existing authorization.
The Company's Board of Directors may change this authorization, or authorize
additional purchases of the Company's Common Stock, in the future.
The Company has completed an assessment of the steps it believes will be
necessary for its existing and planned data processing systems to operate
properly when confronted with dates beginning in the year 2000. A plan has been
developed which identifies the systems affected and the steps that will be
required to assure year 2000 compliance. The Company's existing plans to improve
operations by replacing or upgrading systems in the ordinary course of business
during 1998
8
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
and 1999 will have the additional benefit of providing year 2000 compliance in
many instances. The resources required to make the remaining systems compliant
have been estimated, and are being provided by a combination of existing
employees and outside contractors. The Company has retained or believes it will
be able to retain the necessary employees and outside resources to accomplish
this, and that the cost to achieve compliance will not be material to the
Company's financial position, liquidity or results of operations. However, if
any governmental agencies, key customers or key suppliers are unable to make the
necessary computer systems changes on a timely basis, such inability could
negatively impact the Company's results of operations.
Collective bargaining agreements with hourly employees at two of the
Company's facilities will expire in 1998. In the past five years, there have
been no significant strikes by employees at the Company, and the Company
believes that its employee relations are satisfactory.
The Company has recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse impact on the
Company's financial position, and that they will be paid over a period of five
to ten years, the timing and amount of such payments may differ significantly
from the Company's assumptions. Although the effect of future government
regulation could have a significant effect on the Company's costs, the Company
is not aware of any pending legislation which could have a material adverse
effect on its financial position. There can be no assurances that the costs of
any future government regulations could be passed along to its customers.
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in several actions associated with waste disposal sites, asbestos-related
claims, and general liability claims (more fully discussed in "Legal
Proceedings" in Part I Item 3. and "Environmental Regulation" in Part I Item 1.
of the Company's Annual Report on Form 10-K). These actions include possible
obligations to remove or mitigate the effects on the environment of wastes
deposited at various sites, including Superfund sites and certain of the
Company's owned and previously owned facilities. The contingencies also include
claims for personal injury and/or property damage. The exact amount of such
future cost and timing of payments are indeterminable due to such unknown
factors as the magnitude of cleanup costs, the timing and extent of the remedial
actions that may be required, the determination of the Company's liability in
proportion to other potentially responsible parties, and the extent to which
costs may be recoverable from insurance. The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general, environmental and asbestos-related contingencies.
The Company records a liability for environmental remediation,
asbestos-related claim costs, and general liability claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
Estimated insurance recoveries related to these liabilities are reflected in
other noncurrent assets (see Note 16 of Notes to Financial Statements).
Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its Amended and Restated Financing
Agreement. The Company believes these sources will be adequate to fund working
capital requirements, debt service payments and planned capital expenditures
through the foreseeable future.
9
<PAGE>
Congoleum Corporation
Balance Sheets
(dollars in thousands, except share amounts)
================================================================================
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 11,069 $ 30,629
Short-term investments ........................................................... 7,900 17,500
Accounts and notes receivable, less allowance for doubtful accounts and cash
discounts of $3,294 and $3,406 as of December 31, 1997 and 1996, respectively... 14,512 17,728
Inventories ...................................................................... 44,434 47,450
Prepaid expenses and other current assets ........................................ 2,965 2,172
Deferred income taxes ............................................................ 3,041 2,874
- ----------------------------------------------------------------------------------------------------------------------
Total current assets ........................................................... 83,921 118,353
Property, plant, and equipment, net ................................................. 88,401 78,313
Goodwill, net ....................................................................... 12,251 12,683
Deferred income taxes ............................................................... 2,636 3,068
Other noncurrent assets ............................................................. 9,372 7,381
- ----------------------------------------------------------------------------------------------------------------------
Total assets ................................................................... $ 196,581 $ 219,798
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 13,440 $ 19,935
Accrued liabilities .............................................................. 28,793 32,828
Accrued income taxes ............................................................. 918 1,663
Deferred income taxes ............................................................ 1,752 1,924
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities ...................................................... 44,903 56,350
Long-term debt ...................................................................... 76,594 87,750
Other liabilities ................................................................... 22,305 19,401
Noncurrent pension liability ........................................................ 11,038 12,381
Accrued postretirement benefit obligation ........................................... 9,958 10,249
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities .............................................................. 164,798 186,131
- ----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,650,000
shares issued; 4,282,800 and 4,645,500
outstanding as of December 31, 1997 and 1996, respectively ....................... 47 47
Class B common stock, par value $0.01; 4,755,000 and 5,350,000 shares authorized,
issued and outstanding as of December 31, 1997 and 1996, respectively ............ 47 53
Additional paid-in capital .......................................................... 49,574 55,172
Retained deficit .................................................................... (12,820) (19,561)
Minimum pension liability adjustment ................................................ (1,122) (1,995)
Common stock held in treasury, at cost; 375,200 shares and 4,500 shares at
December 31, 1997 and 1996, respectively ......................................... (3,943) (49)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ..................................................... 31,783 33,667
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ..................................... $ 196,581 $ 219,798
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Congoleum Corporation
Statements of Operations
(in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................................................... $ 252,526 $ 269,451 $ 263,147
Cost of sales ................................................ 180,093 182,585 186,382
Selling, general and administrative expenses ................. 57,094 61,597 55,228
- --------------------------------------------------------------------------------------------------------
Income from operations ................................ 15,339 25,269 21,537
Other income (expense):
Interest income ........................................... 1,539 1,784 1,479
Interest expense .......................................... (6,797) (8,153) (8,187)
Other income .............................................. 1,287 1,436 1,407
Other expense ............................................. (313) (341) (272)
- --------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item ..... 11,055 19,995 15,964
Provision for income taxes ................................ 4,035 7,898 6,529
========================================================================================================
Income before extraordinary item ...................... $ 7,020 $ 12,097 $ 9,435
Extraordinary item-early retirement of debt,
net of income tax benefit ....................... (279) -- --
- --------------------------------------------------------------------------------------------------------
Net income ............................................ $ 6,741 $ 12,097 $ 9,435
========================================================================================================
Net income per common share before extraordinary item.. $ .72 $ 1.21 $ .94
Extraordinary item .................................... (.03) -- --
- --------------------------------------------------------------------------------------------------------
Net income per common share, basic and diluted... $ .69 $ 1.21 $ .94
========================================================================================================
Weighted average number of common and
equivalent shares outstanding ................... 9,839 10,007 10,022
========================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Congoleum Corporation
Statements of Changes in Stockholders' Equity
(dollars in thousands, except share amounts)
================================================================================
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
par value $0.01 Additional Comprehensive
----------------- Paid-in Retained Income/(Loss) Treasury
Class A Class B Capital Deficit Adjustment* Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ........ $ -- $100 $55,570 $(36,260) $ -- $ -- $19,410
Initial public offering of
4,650,000 shares of Class A
common stock ................... 47 55,172 55,219
Repurchase and retirement of
4,650,000 shares of Class B
common stock ................... (47) (55,570) (4,833) (60,450)
Minimum pension liability
adjustment, net of tax benefit.. (1,012) (1,012)
Net income ........................ 9,435 9,435
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ........ 47 53 55,172 (31,658) (1,012) 22,602
Purchase of treasury stock ........ (49) (49)
Minimum pension liability
adjustment, net of tax benefit.. (983) (983)
Net income ........................ 12,097 12,097
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ........ 47 53 55,172 (19,561) (1,995) (49) 33,667
Purchase of treasury stock ........ (3,894) (3,894)
Purchase and retirement of
Class B stock .................. (6) (5,624) (5,630)
Exercise of stock options ......... 26 26
Minimum pension liability
adjustment, net of tax ......... 873 873
Net income ........................ 6,741 6,741
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ........ $47 $47 $49,574 $(12,820) $(1,122) $(3,943) $31,783
===================================================================================================================================
</TABLE>
*Entire amount relates to minimum pension liability adjustment.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Congoleum Corporation
Statements of Cash Flows
(dollars in thousands)
================================================================================
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 6,741 $ 12,097 $ 9,435
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation ............................................. 9,102 8,696 7,593
Amortization and writeoff of deferred refinancing fees ... 1,244 1,087 1,025
Provision for doubtful accounts .......................... -- 600 2,800
Deferred income taxes .................................... 93 994 1,107
Loss on disposition of assets ............................ 331 16 94
Changes in certain assets and liabilities:
Accounts and notes receivable ....................... 3,216 (3,897) (1,362)
Inventories ......................................... 3,016 568 (1,124)
Prepaid expenses and other current assets ........... (1,294) 1026 (506)
Accounts payable .................................... (6,495) (1,151) (350)
Accrued liabilities ................................. (4,781) 4,200 (1,422)
Other liabilities ................................... (156) (1,094) (596)
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ........ 11,017 23,142 16,694
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceed from sale of property, plant and equipment ............. 244 -- --
Capital expenditures ........................................... (19,767) (12,817) (10,178)
Purchase of short-term investments ............................. (40,200) (45,000) (12,500)
Maturities of short-term investments ........................... 49,800 27,500 36,500
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities.. (9,923) (30,317) 13,822
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Exercise of stock options ...................................... 26 -- --
Payments to reduce long-term debt .............................. (11,156) (2,250) --
Equity offering cost ........................................... -- -- (1,000)
Proceeds from equity offering .................................. -- -- 56,219
Purchase and retirement of Class B stock ....................... (5,630) -- (60,450)
Purchase of treasury stock ..................................... (3,894) (49) --
- -------------------------------------------------------------------------------------------------------
Net cash used by financing activities ............ (20,654) (2,299) (5,231)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash ................................... (19,560) (9,474) 25,285
Cash and cash equivalents:
Beginning of year .............................................. 30,629 40,103 14,818
- -------------------------------------------------------------------------------------------------------
End of year .................................................... $ 11,069 $ 30,629 $ 40,103
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Congoleum Corporation
Notes to Financial Statements
(dollars in thousands, except per share amounts)
================================================================================
1. Summary of Significant
Accounting Policies:
Nature of Business and Basis of Presentation - Congoleum Corporation (the
"Company" or "Congoleum") manufactures and sells resilient sheet and tile
flooring products primarily to wholesale distributors and major retailers in the
United States and Canada. Prior to the closing of a public offering in February
1995 (the "Offering" - Note 17), the Company was an indirect subsidiary of
Congoleum Holdings Incorporated ("Holdings"), which was controlled jointly by
Hillside Industries Incorporated ("Hillside") and American Biltrite Inc.
("ABI").
Upon completion of the Offering, the Company implemented a Plan of
Repurchase pursuant to which its two-tiered holding company ownership structure
was eliminated through the merger of Congoleum Holdings with and into the
Company, with the Company as the surviving corporation.
Use of Estimates - Some of the information presented in this report constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the sales value
of goods returned, trade discounts and customers' allowances.
Cash and Cash Equivalents - All highly liquid debt instruments with a maturity
of three months or less at the time of purchase are considered to be cash
equivalents.
Short-Term Investments - Investments in A1/P1 Commercial Paper with a maturity
greater than three months, but less than six months at the time of purchase are
considered to be short-term investments. The carrying amount of the Commercial
Paper approximates fair value due to its short maturity.
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories.
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings and building improvements, 15 years for production equipment and heavy
duty vehicles, 4 to 10 years for light duty vehicles and office furnishings and
equipment) on the straight-line method for financial reporting and accelerated
methods for income tax purposes. Costs of major additions and betterments are
capitalized; maintenance and repairs which do not improve or extend the life of
the respective assets are charged to operations as incurred. When an asset is
sold, retired or otherwise disposed of, the cost of the asset and the related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of long-term
debt have been capitalized and are being amortized over the life of the related
debt agreements. Such costs, net of accumulated amortization, amounted to $1,547
and $2,359 at December 31, 1997 and 1996, respectively, and are included in
other noncurrent assets.
Goodwill - The excess of purchase cost over the fair value of net assets
acquired (goodwill) is being amortized on a straight-line basis over 40 years.
At each balance sheet date, the Company evaluates the recoverability of its
goodwill using certain financial indicators, such as historical and future
ability to generate income from operations. Accumulated amortization amounted to
$4,841 and $4,409 at December 31, 1997 and 1996, respectively.
Income Taxes - The provision for income taxes is based on earnings reported in
the financial statements under an asset and liability approach in accordance
with SFAS No. 109, "Accounting for Income Taxes," that requires the
14
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
recognition of deferred tax assets and liabilities for the difference between
the tax basis of assets and liabilities and their reported amounts for financial
statement purposes.
Reclassifications - For comparative purposes, certain amounts have been
reclassfied to conform to the current year presention.
Income Per Share - Effective October 1, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This
statement establishes new standards for computing and presenting earnings per
share. Earnings per share data for prior periods have been restated to conform
to SFAS 128. The effect of the restatement on prior periods was immaterial. Due
to the immaterial effect of common stock equivalents there is no difference
between basic and fully diluted earnings per share for any period presented.
Changes in Accounting Principles - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement establishes new rules for the reporting
and display of comprehensive income. The adoption of this standard had no impact
on the Company's financial position, income or liquidity.
In June 1997, the Financial Accounting Standards Board issued ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that companies report information
about operating segments and is effective for financial statements for the year
ended December 31, 1998 for the Company. The Company believes that it operates
in one segment, resilient flooring products. The adoption of SFAS No. 131 is
expected to have no effect on the Company's financial position, income or
liquidity.
Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") SOP 96-1, "Environmental Remediation
Liabilities," which provides authoritative guidance on the recognition,
measurement, display and disclosure of environmental remediation liabilities.
The adoption of this standard did not have a material effect on the Company's
financial position, income or liquidity.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS 123 requires the recognition of, or disclosure of,
compensation expense for grants of stock options or other equity instruments
issued to employees based on their fair value at the date of grant. As permitted
by SFAS No 123, the Company elected the disclosure requirements instead of
recognition of compensation expense and therefore will continue to apply
existing rules under APB Opinion 25. The adoption of this standard had no effect
on the Company's financial position, income or liquidity.
2. Inventories:
A summary of the major components of inventories is as follows:
December 31, December 31,
1997 1996
- --------------------------------------------------------------------------------
Finished goods .............. $34,914 $34,920
Work-in-process ............. 3,160 2,089
Raw materials and supplies... 6,360 10,441
- --------------------------------------------------------------------------------
Total inventories............ $44,434 $47,450
================================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $340 and $2,027 lower than reported at December 31, 1997 and 1996,
respectively. The carrying value of certain LIFO inventories was reduced by
market valuation reserves of $229 and $650 at December 31, 1997 and 1996,
respectively.
3. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows:
December 31, December 31,
1997 1996
- --------------------------------------------------------------------------------
Land .......................... $ 2,930 $ 2,960
Buildings and improvements .... 33,259 27,706
Machinery and equipment ....... 132,414 113,352
Construction-in-progress ...... 3,819 11,844
- --------------------------------------------------------------------------------
172,422 155,862
Less accumulated
depreciation ............... (84,021) (77,549)
- --------------------------------------------------------------------------------
Total property, plant,
and equipment, net ............ $88,401 $ 78,313
================================================================================
15
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
Interest is capitalized in connection with the construction of major facilities.
The capitalized interest is recorded as part of the asset to which it relates
and is amortized over the asset's estimated useful life. In 1997, $823 of
interest cost was capitalized. The impact of capitalized interest in 1996 and
1995 was not material.
The amount of approved but unexpended capital appropriations at December
31, 1997 was $3,795, substantially all of which is planned to be expended during
1998.
4. Accrued Liabilities:
Accrued liabilities consists of the following:
December 31, December 31,
1997 1996
- --------------------------------------------------------------------------------
Accrued marketing
and sales
promotion...............$ 17,244 $16,565
Employee
compensation and
related benefits ........ 5,766 8,709
Interest ................... 2,935 3,362
Environmental
remediation and
product-related
liabilities ............. 1,035 957
Other ...................... 1,813 3,235
- --------------------------------------------------------------------------------
Total accrued
liabilities.............$ 28,793 $32,828
================================================================================
5. Long-Term Debt:
Long-term debt consists of the following:
December 31, December 31,
1997 1996
- --------------------------------------------------------------------------------
9% Senior Notes
due 2001...............$ 76,594 $ 87,750
================================================================================
On February 1, 1994, the Company completed a public offering for $90,000
of Senior Notes (the "Senior Notes") due 2001. The Senior Notes, issued at par,
bear interest at 9.0%. The Indenture under which the notes were issued includes
certain restrictions on additional indebtedness and dividend payments.
The Senior Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after February 1, 1998 at a predetermined redemption
price (ranging from 103% to 100%), plus accrued and unpaid interest to the date
of redemption.
The fair value of the Senior Notes, estimated based on the quoted market
price, was approximately $77,743 at December 31, 1997.
In 1996, the Company's Board of Directors had approved a program to
repurchase up to $10,000 of its outstanding Senior Notes either in the open
market or in privately negotiated transactions. During 1997, the Board of
Directors increased the repurchase program to $20,000. During 1996 and 1997, the
Company had repurchased $2,250 and $11,156, respectively, of its Senior Notes.
In connection with the repurchases in 1997, the Company recorded an
extraordinary charge of $279, net of $160 of income tax benefits, or $ 0.03 per
common share, to write off the portion of the debt issuance cost and premiums
associated with the repurchased Senior Notes. Such writeoffs were immaterial to
the financial statements for 1996 and were included in other expense.
The Company has a revolving credit facility which expires in 2000 that
provides for borrowings up to $30,000 with interest at 1% over prime, or 2 3/4%
over LIBOR, at the Company's option. This agreement provides for a commitment
fee based on the average daily unused portion of the commitment equal to one
quarter of one percent per annum. This financing agreement contains certain
covenants which include the maintenance of minimum net worth and restrictions on
the incurrence of additional debt. Borrowings under this facility are
collateralized by inventory and receivables. There were no borrowings
outstanding under this facility at December 31, 1997, however, the facility
provides for standby letters of credit which total $3,380 at December 31, 1997.
6. Comprehensive Income:
Comprehensive income for the three years ended December 31, 1997 includes the
following components:
1997 1996 1995
- --------------------------------------------------------------------------------
Net income...................$ 6,741 $12,097 $ 9,435
Other comprehensive
income (loss):
Minimum pension
liability adjustment 873 (983) (1,012)
- --------------------------------------------------------------------------------
Comprehensive income $ 7,614 $11,114 $ 8,423
================================================================================
16
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
7. Other Liabilities:
Other liabilities consists of the following:
December 31, December 31,
1997 1996
- --------------------------------------------------------------------------------
Environmental
remediation and
product-related
liabilities............ $ 13,981 $ 10,926
Accrued workers'
compensation
claims................. 4,425 4,871
Other..................... 3,899 3,604
- --------------------------------------------------------------------------------
Total other liabilities... $ 22,305 $ 19,401
================================================================================
8. Research and Development Costs:
Total research and development costs charged to operations amounted to $3,718,
$4,552 and $3,683 for the years ended December 31, 1997, 1996 and 1995,
respectively.
9.Operating Lease Commitments and Rent Expense:
The Company leases certain office facilities and equipment under leases with
varying terms.
Future minimum lease payments of significant, noncancelable operating
leases having initial or remaining lease terms in excess of one year as of
December 31, 1997 are as follows:
Years Ending
- --------------------------------------------------------------------------------
1998............................................. $1,486
1999............................................. 1,178
2000............................................. 843
2001............................................. 42
2002............................................. 5
Thereafter....................................... --
- --------------------------------------------------------------------------------
Total minimum lease payments..................... $3,554
================================================================================
Rent expense was $1,902, $1,772 and $1,791 for the years ended December
31, 1997, 1996 and 1995, respectively.
10. Retirement Plans:
Retirement benefits are provided for substantially all employees under
Company-sponsored defined benefit pension plans. The plans are noncontributory
and generally provide monthly lifetime payments, normally commencing at age 65.
Benefits under the plans are based upon the provisions of negotiated labor
contracts and years of service. It is the Company's policy to make contributions
to these plans sufficient to meet the minimum funding requirements of applicable
laws and regulations plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate. The projected unit credit and
unit credit methods were utilized for determination of the actuarial cost.
Net periodic pension cost includes the following components:
For the years ended
December 31,
--------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Benefits earned
during the year
(service cost) ................ $1,144 $1,113 $919
Interest cost on
projected benefit
obligation .................... 3,863 3,743 3,797
Return on plan assets ............. (7,130) (2,515) (6,088)
Net amortization
and deferral .................. 3,640 (1,088) 2,745
- -------------------------------------------------------------------------------
Net periodic
pension cost .................. $1,517 $1,253 $1,373
===============================================================================
17
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
The following tables present a reconciliation of the Plans' status at
December 31, 1997 and 1996:
Plan Whose Plan(s) Whose
Assets Exceed Accumulated
Accumulated Benefits
Benefits Exceed Assets
December 31, 1997:
Actuarial present value of
benefit obligations:
Vested benefit obligations ................ $ 29,941 $ 25,790
===============================================================================
Accumulated benefit
obligations ............................ $ 30,527 $ 26,758
===============================================================================
Projected benefit
obligations ............................ $ 31,242 $ 26,758
Plan assets at fair
market value ........................... 31,336 15,069
- -------------------------------------------------------------------------------
Projected benefit obligations
in excess of plan assets ............... 94 (11,689)
Unrecognized net loss ..................... 3,070 1,339
Unrecognized net
obligation ............................. 434 (349)
Unrecognized prior
service cost ........................... (3,404) 1,183
Adjustment required to
recognize minimum
liability .............................. -- (2,604)
- -------------------------------------------------------------------------------
Prepaid (accrued) pension
liability ($1,082 included
in accrued liabilities) ................ $ 194 $(12,120)
===============================================================================
December 31, 1996:
Actuarial present value
of benefit obligations:
Vested benefit obligations ................ $ -- $ 54,168
===============================================================================
Accumulated benefit
obligations ............................ $ -- $ 55,678
===============================================================================
Projected benefit obligations ............. $ -- $ 56,182
Plan assets at fair
market value ........................... -- 41,010
- -------------------------------------------------------------------------------
Projected benefit obligations
in excess of plan assets ............... -- (15,172)
Unrecognized net loss ..................... -- 7,108
Unrecognized net obligation ............... -- 161
Unrecognized prior
service cost ........................... -- (2,463)
Adjustment required to
recognize minimum
liability .............................. -- (4,302)
- -------------------------------------------------------------------------------
Accrued pension
liability ($2,287 included
in accrued liabilities) ................ $ -- $(14,668)
===============================================================================
Plan assets which are deposited with a trustee consist principally of
fixed income, equity and short-term investments and cash equivalents.
The provisions of FASB Statement No. 87, "Employers' Accounting for
Pensions," require the recognition of an additional minimum liability for plans
whose accumulated benefits exceed assets. These amounts have been recorded as a
long-term liability with an offsetting intangible asset included in other
noncurrent assets amounting to $837 and $1,005 at December 31, 1997 and 1996,
respectively. Because the asset recognized may not exceed the amount of
unrecognized prior service cost, the difference of $1,122, net of tax benefits
of $645, is reported as a separate reduction of stockholders' equity at December
31, 1997.
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligations are 7.0% and 5.5% as of December 31, 1997 and
1996, respectively. The expected long-term rate of return on plan assets is 9.0%
for all years presented.
The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
of compensation with partially matching Company contributions. Defined
contribution pension expense for the Company was $1,316, $1,363 and $1,128 for
the years ended December 31, 1997, 1996 and 1995, respectively.
11. Postretirement Benefits
Other Than Pensions:
The Company provides certain health care and life insurance benefits for certain
retirees. The determination of benefit cost for postretirement plans is based on
plan provisions. These benefits are provided through insurance companies whose
premiums are based on benefits paid or claims experience.
18
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
Net periodic postretirement benefits cost, calculated in accordance with SFAS
No. 106, is as follows:
For the years ended
December 31,
---------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost-benefits earned
during the year ..................... $ 139 $ 141 $ 137
Interest cost on
postretirement
benefit obligations ................. 505 484 480
Amortization of
prior service cost .................. (409) (447) (524)
Amortization of losses .................. 99 90 47
- -------------------------------------------------------------------------------
Net periodic postretirement
benefits cost ....................... $ 334 $ 268 $ 140
===============================================================================
At December 31, 1997 and 1996, the actuarial and recorded liabilities for these
postretirement benefits, none of which have been funded, were as follows:
December 31, December 31,
1997 1996
- -------------------------------------------------------------------------------
Accumulated present value
of postretirement benefit
obligations:
Retirees and
dependents ............................ $ (4,106) $ (4,136)
Fully eligible active
plan participants ..................... (1,191) (999)
Other active plan
participants .......................... (2,255) (2,355)
Unrecognized prior
service cost .......................... (3,224) (3,633)
Unrecognized net loss ................... 220 303
- -------------------------------------------------------------------------------
Accrued postretirement
benefit obligation .................... (10,556) (10,820)
Less current portion .................... 598 571
- -------------------------------------------------------------------------------
Noncurrent postretirement
benefit obligations ................... $ (9,958) $(10,249)
===============================================================================
A weighted average assumed discount rate of 7.0% was used to measure the
accumulated postretirement benefit obligations as of December 31, 1997 and 1996.
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 6.1% in 1997; the rate was assumed to decrease
gradually to 5.0% over the next 10 years and remain level thereafter. An
increase of one percentage point in the assumed health care cost trend rates for
each future year would increase the aggregate of the service and interest cost
components of net periodic postretirement benefits cost by $70, for the year
ended December 31, 1997, and would increase the accumulated postretirement
benefit obligations by $706 at December 31, 1997.
12. Income Taxes:
The provision for income taxes is comprised of the following:
For the years ended
December 31,
-----------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal .................... $ 3,980 $ 5,591 $ 4,114
State ...................... 246 711 608
Deferred:
Federal .................... (213) 1,348 1,272
State ...................... 22 248 535
- --------------------------------------------------------------------------------
Provision for
income taxes ............... $ 4,035 $ 7,898 $ 6,529
================================================================================
19
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
The following is a reconciliation of the statutory federal income tax rate to
the Company's effective tax rate expressed as a percentage of income before
income taxes:
For the years ended
December 31,
------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Statutory federal
income tax rate .............. 34.0% 35.0% 35.0%
State income taxes,
net of federal
benefit ...................... 1.6 3.5 4.4
Goodwill ......................... 1.4 0.8 1.0
Other ............................ (0.5) 0.2 0.5
- -------------------------------------------------------------------------------
Effective tax rate ............... 36.5% 39.5% 40.9%
===============================================================================
Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences:
December 31, December 31,
1997 1996
- -------------------------------------------------------------------------------
Deferred tax asset:
Accounts receivable .................... $ 933 $ 1,021
Unfunded pension
liability ........................... 4,362 5,264
Environmental
remediation and
product-related
reserves ............................ 9,050 8,009
Postretirement
benefit obligations ................. 4,091 4,241
Other accruals ......................... 1,071 974
- -------------------------------------------------------------------------------
Total deferred
tax asset ........................... 19,507 19,509
- -------------------------------------------------------------------------------
Deferred tax liability:
Depreciation and
amortization ........................ (11,169) (12,023)
Inventory .............................. (1,752) (1,924)
Other .................................. (2,661) (1,544)
- -------------------------------------------------------------------------------
Total deferred tax
liability ........................... (15,582) (15,491)
- -------------------------------------------------------------------------------
Net deferred
tax asset ........................... $ 3,925 $ 4,018
===============================================================================
20
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
13. Supplemental Cash Flow Information:
Cash payments for interest were $7,710, $8,168 and $8,102 for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash payments for income taxes
were $4,964, $4,335 and $6,183 for the years ended December 31, 1997, 1996 and
1995, respectively.
14. Related Party Transactions:
The Company and ABI provide certain goods and services to each other pursuant to
agreements negotiated at arm's length. The Company had the following
transactions with ABI:
For the years ended
December 31,
--------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Sales ............................. $ 964 $1,213 $1,409
Raw material
transfers to ABI ............... 2,942 3,115 2,899
Computer service
income ......................... 145 226 262
Material purchases
from ABI ....................... 5,269 5,814 3,817
Management fees ................... 1,221 1,265 993
================================================================================
Amounts as of December 31, 1997 and 1996 due from an affiliate of ABI
totaled $290 and $620, respectively. Amounts as of December 31, 1997 and 1996
due to ABI and its affiliates totaled $1,094 and $1,586, respectively.
15. Major Customers:
Substantially all the Company's sales are to select flooring distributors and
retailers located in the United States. Economic and market conditions, as well
as the individual financial condition of each customer, are considered when
establishing allowances for losses from doubtful accounts.
Two customers accounted for 23% and 19% of the Company's net sales for the
year ended December 31, 1997, 22% and 20% for the year ended December 31, 1996,
and 21% and 21% for the year ended December 31, 1995 and accounted for 40% and
41% of accounts receivable at December 31, 1997 and 1996, respectively.
16. Contingent and Other Liabilities:
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in several actions associated with waste disposal sites, asbestos-related
claims, and general liability claims. These actions include possible obligations
to remove or mitigate the effects on the environment of wastes deposited at
various sites, including Superfund sites and certain of the Company's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future cost and timing
of payments are indeterminable due to such unknown factors as the magnitude of
cleanup costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's liability in proportion to other
potentially responsible parties, and the extent to which costs may be
recoverable from insurance.
The Company records a liability for environmental remediation,
asbestos-related claim costs, and general liability claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
The recorded liabilities (Notes 4 and 7) are not discounted for delays in future
payments and are not reduced by the amount of estimated insurance recoveries.
Such estimated insurance recoveries of $6,918 and $3,939 are reflected in other
noncurrent assets at December 31, 1997 and 1996 and are considered probable of
recovery.
Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of the Company.
21
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
17. Initial Public Offering:
On February 8, 1995, the Company completed a public offering of 4,650,000 shares
of a new series of Class A Common Stock (the Class A shares) for $13 per share
(the "Offering") and implemented a Plan of Repurchase (Note 1). The Company's
capital stock outstanding immediately prior to the consummation of the merger
contemplated in the Plan of Repurchase was converted in the merger into
10,000,000 shares (the "Recapitalization") of a new series of Class B Common
Stock (the Class B shares). Hillside and ABI as holders of the Class B shares
are entitled to two votes per share on all matters submitted to a vote of
stockholders other than certain extraordinary matters. The holders of the Class
A shares are entitled to one vote per share on all matters submitted to a vote
of stockholders. In addition, the Stockholders' Agreement among the Company,
Holdings, ABI and Hillside, and certain other agreements were either amended or
terminated, and Hillside made a cash payment of $2,000 to ABI in consideration
of ABI's agreement to enter into the Plan of Repurchase and consummate the
transactions contemplated thereby. The net proceeds of approximately $55,219
after deducting fees, together with approximately $5,231 of other funds of the
Company, were used to repurchase 4,650,000 Class B shares held by Hillside.
In 1996, the Company's Board of Directors approved a plan to repurchase up
to $5,000 (increased to $10,000 in 1997) of the Company's common stock (Class A
and Class B shares). At December 31, 1997, the Company had repurchased $9,573 of
common stock under this program. Shares of Class B stock repurchased (totalling
595,00) have been retired. As of December 31, 1997, ABI owned 4,395,605 Class B
shares that represented 63.7% of the voting control of the Company.
18. 1995 Stock Option Plan:
Effective with the public offering (Note 17), the Company adopted the 1995 stock
option plan ("The Plan"). Under The Plan, options to purchase up to 550,000
shares of the Company's Class A common stock may be issued to officers and key
employees. The Company amended the plan to increase the number of shares
authorized to be issued from 550,000 to 800,000, an increase of 250,000 shares.
These options may be either incentive stock options or nonqualified stock
options, and the options exercise price must be at least equal to the fair value
of the Company's Class A common stock on the date of grant. All options granted
have ten-year terms and vest over five years at the rate of 20% per year
beginning on the first anniversary of the date of grant.
Effective January 1, 1996, the Company adopted the disclosure-only option
under SFAS No.123, "Accounting for Stock-Based Compensation." The Company
continues to use the accounting method under APB Opinion No. 25 (APB 25) and
related interpretations for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma disclosure, as required by SFAS No.123, regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement.
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: option forfeiture of 15%;
risk-free interest rates of 5.76%, 5.99% and 5.9%; no dividends; volatility
factors of the expected market price of the Company's common stock of .356 for
1997 and .388 for 1996 and 1995; and a weighted-average expected life of the
options of 7 years.
For purposes of pro forma disclosures, the estimated fair value of the
options ($243 for the 1997 grant, $103 for the 1996 grant, and $2,832 for the
1995 grant) is amortized to expense over the options' vesting period. The
initial impact on pro forma net income may not be representative of compensation
expense in future years, when the effect of the amortization of multiple awards
would be reflected in the pro forma disclosures. The Company's pro forma
information follows:
22
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
For the years ended
December 31,
-----------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------
Net income ........................ $ 6,741 $ 12,097 $ 9,435
Estimated pro forma
compensation expense
from stock options:
1995 grant ................... (566) (566) (518)
1996 grant ................... (21) (19) --
1997 grant ................... (44) -- --
- -------------------------------------------------------------------------------
Pro forma net income .............. $ 6,110 $ 11,512 $ 8,917
================================================================================
Pro forma basic and diluted net
income per share ............... $ .62 $ 1.15 $ .89
================================================================================
A summary of the Company's stock option activity, and related information
is as follows:
December 31, 1997:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year .......................... 484,500 --
Options granted ............................... 56,000 $ 14.25
Options exercised ............................. (2,000) 13.00
Options forfeited ............................. (26,600) 13.53
- --------------------------------------------------------------------------------
Options outstanding
end of year ................................ 511,900 $ 13.01
================================================================================
Exercisable at end of year .................... 185,200 $ 12.95
Stock options available for
future issuance ............................ 286,100 --
================================================================================
December 31, 1996:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year ............................. 481,000 --
Options granted .................................. 22,000 $10.63
Options exercised ................................ -- --
Options forfeited ................................ (18,500) 13.00
- --------------------------------------------------------------------------------
Options outstanding
end of year ................................... 484,500 $12.89
================================================================================
Exercisable at end of year ....................... 94,100 $13.00
Stock options available for
future issuance ............................... 65,500 --
================================================================================
December 31, 1995:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year .............................. -- --
Options granted ................................... 498,000 $13.00
Options exercised ................................. -- --
Options forfeited ................................. (17,000) 13.00
- --------------------------------------------------------------------------------
Options outstanding
end of year .................................... 481,000 $13.00
================================================================================
Exercisable at end of year ........................ -- --
Stock options available for
future issuance ................................ 69,000 --
================================================================================
19. Quarterly Financial Data (Unaudited):
The following table sets forth certain unaudited quarterly financial
information.
Year ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(a)
- --------------------------------------------------------------------------------
Net sales .............. $61,083 $64,909 $69,526 $57,008
Gross profit ........... 18,241 19,805 19,676 14,710
Net income ............. 1,013 2,104 2,198 1,426
Net income per
common share ......... .10 .21 .22 .15
================================================================================
Year ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter(b)
- --------------------------------------------------------------------------------
Net sales ............. $54,118 $74,380 $71,900 $69,053
Gross profit .......... 13,935 25,056 24,373 23,502
Net income
(loss) ............. (1,044) 4,850 4,392 3,899
Net income
(loss) per
common share ....... (.10) .48 .44 .39
================================================================================
(a) Fourth quarter 1997 includes a $0.3 million (after tax) charge (0.03 per
share) for an extraordinary item. (See Note 5.)
(b) Fourth quarter 1996 includes a $0.6 million (after tax) charge for
accelerated depreciation of certain machinery and equipment.
23
<PAGE>
Congoleum Corporation
Report of Independent Auditors
================================================================================
To the Board of Directors
and Shareholders of
Congoleum Corporation:
We have audited the accompanying balance sheets of Congoleum Corporation as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The statements of operations, changes in stockholders' equity, and
cash flows for the year ended December 31, 1995 were audited by other auditors
whose report dated February 20, 1996, expressed an unqualified opinion on those
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 financial statements present fairly, in all
material respects, the financial position of Congoleum Corporation at December
31, 1997, and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
February 18, 1998
24
<PAGE>
Directors and Officers
================================================================================
Board of Directors
Roger S. Marcus
Chairman of the Board, President and
Chief Executive Officer of Congoleum
Corporation and Chairman of the Board
and Chief Executive Officer of American
Biltrite Inc.
Cyril C. Baldwin, Jr.
Chairman of the Board of
Cambrex Corporation
David N. Hurwitz
President and Chief Executive Officer
of Goodson Newspaper Group
John N. Irwin III
Managing Director of Hillside Capital
Incorporated
Mark N. Kaplan
Partner, Skadden, Arps, Slate,
Meagher & Flom (Attorneys)
Richard G. Marcus
Vice Chairman of Congoleum Corporation
and President and Chief Operating
Officer of American Biltrite Inc.
William M. Marcus
Executive Vice President and
Treasurer of American Biltrite Inc.
C. Barnwell Straut
Managing Director of Hillside
Capital Incorporated
Corporate Officers
Roger S. Marcus
Chairman of the Board,
President and Chief Executive Officer
Richard G. Marcus
Vice Chairman
Robert N. Agate
Senior Vice President - Manufacturing
Howard N. Feist III
Senior Vice President - Finance and Secretary
Dennis P. Jarosz
Senior Vice President - Marketing
Anthony C. Prestipino
Senior Vice President - Sales
Peter J. Rohrbacher
Senior Vice President - Research and Engineering
Thomas A. Sciortino
Senior Vice President - Administration
Merrill M. Smith
Senior Vice President - Technology
Corporate Information
================================================================================
Corporate Headquarters
Congoleum Corporation
3705 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(609) 584-3000
Annual Meeting
The 1998 Annual Meeting of the Stockholders of Congoleum Corporation will be
held on Thursday, May 14, 1998 in Conference Room 6, 8th Floor, Fleet Bank, 1
Federal Street Boston, Massachusetts at 1:00 p.m. local time.
General Counsel
Patterson, Belknap, Webb & Tyler L.L.P.
1133 Avenue of the Americas
New York, NY 10036-6710
Independent Auditors
Ernst & Young LLP
Two Commerce Square
Suite 4000
2001 Market Street
Philadelphia, PA 19103
Market Information
The Company's Class A Common Stock is listed on the New York Stock Exchange. The
following table reflects the high and low prices (rounded to the nearest
one-eighth) based on New York Stock Exchange trading over the past two years.
The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future change in the Company's dividend policy is within
the discretion of the Board of Directors and will depend, among other things, on
the Company's earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant. The payment of cash dividends is limited under the
terms of the Indenture relating to the Company's Senior Notes and the terms of
the Company's existing revolving credit facility, subject to the Company's
cumulative earnings and other factors.
The number of registered and beneficial holders of the Class A Common
Stock on February 7, 1998 was approximately 2,000.
1997 High Low
- --------------------------------------------------------------------------------
First Quarter ............................... 14 7/8 11 3/4
Second Quarter .............................. 13 1/8 10 1/2
Third Quarter ............................... 13 3/4 10 11/16
Fourth Quarter .............................. 11 9/16 8 3/4
1996 High Low
- --------------------------------------------------------------------------------
First Quarter ............................... 12 3/4 9 1/8
Second Quarter .............................. 12 5/8 8 7/8
Third Quarter ............................... 13 11 1/8
Fourth Quarter .............................. 14 1/4 12 1/2
Stockholder Information
The Company will supply any owner of common stock, upon written request to Mr.
Howard N. Feist III of the Company at the address set forth herein, and without
charge, a copy of the Annual Report on Form 10-K for the year ended December 31,
1997, which has been filed with the Securities and Exchange Commission.
Registrar and Transfer Agent
BankBoston N.P.
c/o Boston Equiserve L.P.
P.O. Box 8040
Boston, MA 02266-8040
(718) 575-3400
www.equiserve.com
[Recycle Logo]
Printed on Recycled Paper
Exhibit 23.1 - Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Congoleum Corporation of our report dated February 18, 1998, included in the
1997 Annual Report to Shareholders of Congoleum Corporation.
Our audits also included the financial statement schedule of Congoleum
Corporation for the year ended December 31, 1997 and 1996 listed in Item 14(a).
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-97220 and 333-34653) pertaining to the Congoleum Corporation
1995 Stock Option Plan of this report on the financial statement schedule and
our report dated February 18, 1998, with respect to the 1997 financial
statements of Congoleum Corporation incorporated by reference in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Philadelphia, Pennsylvania
March 24, 1998
Exhibit 23.2 - Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement of
Congoleum Corporation on Form S-8 (File Nos. 33-97220 and 333-34653) of our
report dated February 20, 1996 on our audit of the financial statements and
financial statement schedule of Congoleum Corporation for the year ended
December 31, 1995, which report is included as Exhibit 23.3 in this Form 10-K.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 24, 1998
Exhibit 23.3 - Report of Independent Accountants
To The Board of Directors and Shareholders
Congoleum Corporation
We have audited the statements of operations, changes in stockholders' equity
and cash flows of Congoleum Corporation for the year ended December 31, 1995,
which are included on pages 6 through 25 of the 1997 Annual Report to
Shareholders of Congoleum Corporation and incorporated by reference herein. We
have also audited the financial statement schedule listed in the Index as Item
14(a) for the year ended December 31, 1995. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations, its stockholders' equity,
and its cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 20, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
This schedule contains summary financial information extracted from the
consolidated balance sheets, statements of operations and statements of cash
flows as reported in the form 10-K and is qualified in its entirety by reference
to such financial statements.
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
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