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, 1999
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
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
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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 2, 2000, the aggregate market value of all shares of Class A
Common Stock held by non-affiliates of the Registrant was approximately $11.4
million based on the closing price ($3.1875 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, 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 2, 2000, an
aggregate of 3,651,190 shares of Class A Common Stock and an aggregate of
4,608,945 shares of Class B Common Stock of the Registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II. Portions of Congoleum Corporation's Annual Report to
Shareholders for the year ended December 31, 1999
Part III. Portions of the Congoleum Corporation's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 9, 2000
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, printing a design on the gel, applying a wearlayer, heating the gel layer
sufficiently to cause it to expand into a cushioned foam and, in some products,
adding a high-gloss coating. The Company also produces through-chip inlaid
products for both residential and commercial markets. These products are
produced by applying an adhesive coat and solid vinyl colored chips to a felt
backing and laminating the sheet under pressure with a heated drum. Tile
flooring is manufactured by creating a base stock (consisting primarily of
limestone and vinyl resin) which is less flexible than the backings for sheet
flooring, and transferring or laminating to it preprinted colors and designs
followed by a wearlayer and a urethane coating in some cases. Commercial tile is
manufactured by including colored vinyl chips in the pigmented base stock. For
do-it-yourself tile, an adhesive is applied to the back of the tile. The
differences between products within each of the two product lines consist
primarily of content and thickness of wearlayers and coatings, the use of
chemical embossing to impart a texture, the complexity of designs and the number
of colors. Congoleum also purchases for resale: wood laminates, sundries, and
accessory products.
Raw Materials
The principal raw materials used in the manufacture of sheet and tile
flooring are vinyl resins, plasticizers, latex, limestone, stabilizers,
cellulose paper fibers, urethane and transfer print paper. Most of these raw
materials are purchased from multiple sources. The Company has had no difficulty
in obtaining its requirements for these materials, although significant price
increases in certain materials have been experienced at times.
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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 23
distributors providing approximately 82 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, 1999, the backlog of unshipped orders
was $7.3 million, compared to $13.9 million at December 31, 1998.
The Company considers its distribution network very important to
maintaining competitive position. While most of its distributors have marketed
the Company's products for many years, replacements are necessary periodically
to maintain the strength of the distribution network. Although the Company has
more than one distributor in some of its distribution territories and actively
manages its credit exposure to its customers, the loss of a major customer could
have a materially adverse impact on the Company's sales, at least until a
suitable replacement was in place. For the year ended December 31, 1999, two
customers each accounted for over 10% of the Company's sales. These customers
were its distributor to the manufactured housing market, LaSalle-Bristol, and
its distributor in the Western U.S., LD Brinkman & Co. Together, they accounted
for 49% of the Company's net sales in 1999.
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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, 1999 were $4.2 million, compared to
$3.8 million and $3.7 million for the years ended December 31, 1998 and 1997,
respectively.
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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 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 1999, the Company incurred capital expenditures of
approximately $.3 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, 1999, the Company employed a total of 1,277 personnel
compared to 1,250 employees at December 31, 1998.
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 719 of the
Company's employees. The Trenton tile plant has a five-year collective
bargaining agreement which expires in May 2003. The Marcus Hook plant has a
five-year collective bargaining agreement which expires in November 2003. The
Trenton sheet plant has a five-year collective bargaining agreement which
expires in February 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.
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, 2000.
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Roger S. Marcus (Age 54)
Roger S. Marcus has been a Director and President and Chief Executive Officer of
the Company since 1993, and Chairman since 1994. Mr. Marcus is also a Director
(since 1981), Chairman of the Board (since 1992) and Chief Executive Officer
(since 1983) of American Biltrite. From 1983 to 1992, Mr. Marcus served as Vice
Chairman of the Board of American Biltrite.
Richard G. Marcus (Age 52)
Richard G. Marcus has been Vice Chairman of the Company since 1994, and a
Director since 1993. Mr. Marcus is also a Director (since 1982) and President
(since 1983) and Chief Operating Officer (since 1992) of American Biltrite.
Robert N. Agate (Age 55)
Robert N. Agate has been Executive Vice President of the Company since 1998.
Prior thereto, he was Senior Vice President - Manufacturing of the Company since
1993, and was Vice President of Manufacturing of the Tile Division of American
Biltrite (since 1981).
David W. Bushar (Age 53)
David W. Bushar has been Senior Vice President - Manufacturing of the Company
since 1998. Prior thereto, he was Manager, Technical Services since 1997 and as
Plant Manager of the Company's Trenton, New Jersey sheet facility since 1993.
Michael L. Dumont (Age 45)
Michael L. Dumont has been Senior Vice President - Sales of the Company since
1999. Prior thereto, he had served as Regional Sales Manager - Southwest
Territory (since 1995) and Regional Manager - Western Territory (since 1991).
Howard N. Feist III (Age 43)
Howard N. Feist III has been Chief Financial Officer and Secretary of the
Company since 1988. Mr. Feist is also Vice President - Finance and Chief
Financial Officer of American Biltrite (since January 2000).
Dennis P. Jarosz (Age 54)
Dennis P. Jarosz has been Senior Vice President - Marketing since 1995. Prior
thereto, he had served as Vice President - Marketing since 1993 and Vice
President - Sales & Marketing of the Tile Division of American Biltrite (since
1986).
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Sidharth Nayar (Age 39)
Sidharth Nayar has been Sr. Vice President - Finance of the Company since 1999.
Prior thereto, he had served as Vice President - Finance since 1998 and Vice
President - Controller since 1994.
Peter J. Rohrbacher (Age 48)
Peter J. Rohrbacher has been Senior Vice President - Research and Engineering of
the Company since 1997. Prior thereto, he had served as Senior Vice President -
Engineering (since 1993), Vice President - Coatings of the Company (since 1993),
and Vice President - Research & Development of the Tile Division of American
Biltrite (since 1988).
Thomas A. Sciortino (Age 53)
Thomas A. Sciortino has been Senior Vice President - Administration of the
Company since 1993. Prior thereto, he was Vice President - Finance of the Tile
Division of American Biltrite (since 1982).
Merrill M. Smith (Age 74)
Merrill M. Smith has been Senior Vice President - Technology of the Company
since 1993. Prior thereto, he was Vice President - Technology of American
Biltrite (since 1985).
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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, as well as
storage space in Trenton, New Jersey, which are described below:
Location Owned/Leased Usage Square Feet
-------- ------------ ----- -----------
Finksburg, MD Owned Felt 107,000
Marcus Hook, PA Owned Sheet Flooring 1,000,000
Trenton, NJ Owned Sheet Flooring 1,050,000
Trenton, NJ Owned Tile Flooring 282,000
Trenton, NJ Leased Warehousing 111,314
Mercerville, NJ Leased Corporate Offices 33,597
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 69% of the hours available on a
five-day, three-shift basis in 1999, with the corresponding figure for
individual production lines ranging from 3% to 113%.
Although many of the Company's manufacturing facilities have been
substantially depreciated, the Company has generally maintained and improved the
productive capacity of these facilities over time through a program of regular
capital expenditures. The Company considers its manufacturing facilities to be
adequate for its present and anticipated near-term production needs.
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Item 3. LEGAL PROCEEDINGS
As of December 31, 1999 the Company was named as a defendant, together in
most cases with numerous other defendants, in approximately 670 pending lawsuits
(including workers' compensation cases) involving approximately 6,246
individuals alleging personal injury from exposure to asbestos or
asbestos-containing products. The plaintiffs in these cases seek compensation
for injuries sustained in the course of their employment by third parties (or,
in the workers' compensation cases, by the Company) as a result of exposure to
asbestos in products manufactured by the Company or the Tile Division of
American Biltrite. The Company discontinued the manufacture of
asbestos-containing sheet vinyl flooring products in 1983 and the Tile Division
ceased manufacturing asbestos-containing vinyl tile flooring products in 1984.
In general, asbestos-containing products have not been found to pose a health
risk unless significant amounts of free asbestos fibers become airborne. All of
the asbestos in the asbestos-containing products previously sold by the Company
and the Tile Division was fully bonded or encapsulated during the manufacturing
process. During 1999 approximately 234 personal injury cases involving the
Company were either settled or dismissed and approximately 247 new cases were
commenced against the Company. The total indemnity costs incurred during 1999 to
settle personal injury claims involving the Company (other than the cost of the
partial settlement in the personal injury case described below) was
approximately $2.9 million. All of these costs were paid by the Company's
insurance carriers. The average indemnity cost per resolved personal injury
claim was $12 thousand in 1999. Costs per claim vary depending on a number of
factors, including the number of plaintiffs, the nature of their alleged
exposure and the forum in which the claim is brought. In 1997 a judgment was
entered by the Superior Court of California in Los Angeles following a jury
trial holding the Company and another defendant jointly and severally liable for
$3.3 million in damages, subject to any applicable setoffs for previous
settlements and proportionate liability under California law. The jury found
that the Company was only liable for 25% of the non-economic damages sustained
by the plaintiff. However, as a result of post-verdict motions the court ruled
that California Proposition 51 establishing proportionate liability for
non-economic damages did not apply. The Company appealed this decision to the
Court of Appeals of the State of California. In August 1999 the appellate court
reversed the trial court's decision on the applicability of California
Proposition 51 and ordered the trial court to enter a judgment against the
Company for $818 thousand. The Company's insurance carrier has paid the
Company's defense costs in this matter and has indicated that it would be
responsible for paying the ultimate judgment in this case, subject to the
insurance carrier's denial of liability with respect to a partial settlement of
certain related claims effected by the Company which the Company is contesting.
Although there can be no assurance, the Company believes, based upon the nature
of the asbestos-containing products formerly manufactured by the Company and the
Tile Division and its experience with cases to date, and based upon insurance
coverage it believes it has, that any potential liabilities it may have with
respect to these personal injury cases will not have a material adverse effect
on the results of operations or financial condition of the Company.
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 ("CERCLA") and similar state laws. In two instances, although
not named as a PRP, the Company has received a request for information. These
pending proceedings currently relate to seven disposal sites in New Jersey,
Pennsylvania, Maryland, Connecticut and Delaware in which recovery from
generators of hazardous
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substances is sought for the cost of cleaning up the contaminated waste sites.
The Company's ultimate liability, if any, in connection with these sites will
depend on many factors, including the volume of material contributed to the
site, the number of other PRPs and their financial viability, the remediation
methods and technology to be used and the extent to which costs may be
recoverable from insurance. However, under CERCLA and certain other laws, as a
PRP the Company could be held jointly and severally liable for all remediation
costs associated with a site.
The most significant disposal site environmental matter in which the
Company has been named as a PRP relates to a recycling facility in Elkton,
Maryland. Two removal actions were substantially complete as of December 31,
1998, however, the groundwater remediation phase has not begun and the remedial
investigation/feasibility study related to the groundwater remediation has not
been approved. The PRP group for this site has estimated that the future costs
of groundwater remediation would be approximately $26 million of which, based on
waste allocations among members of the PRP group, the Company's share was
estimated to be approximately 5.5%. At December 31, 1999, the Company believes
its probable liability with respect to this site, based upon present facts and
circumstances, will be approximately $.3 million ($1.5 million estimated
liability net of anticipated insurance recoveries of $1.2 million). Although
there can be no assurance, the Company does not believe, based upon present
facts and circumstances, that its probable liability with respect to any of the
other pending disposal site environmental remediation matters to which it is a
party will be material to the results of operations or financial condition of
the Company.
The Company is also a party to a pending proceeding relating to the
investigation and potential remediation of soil and groundwater contamination at
its manufacturing facility located at 1945 East State Street in Trenton, New
Jersey. The investigation of the nature and extent of any contamination at this
site has not been completed and the Company is therefore unable to estimate the
amount, if any, of its probable liability with respect to the potential
remediation of this site.
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 29 of the Company's
Annual Report to Shareholders for the year ended December 31, 1999 (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 8 of the
Company's Annual Report to Shareholders for the year ended December 31, 1999
(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 9 through 12 of the Company's
Annual Report to Shareholders for the year ended December 31, 1999 (included as
Exhibit 13.1 to this Annual Report on Form 10-K).
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in prevailing market interest rates
affecting the return on its investments but does not consider this interest rate
market risk exposure to be material to its financial condition or results of
operations. The Company invests primarily in highly liquid debt instruments with
strong credit ratings and short-term (less than one year) maturities. The
carrying amount of these investments approximates fair value due to the
short-term maturities. Substantially all of the Company's outstanding long-term
debt as of December 31, 1999 consisted of indebtedness with a fixed rate of
interest which is not subject to change based upon changes in prevailing market
interest rates. Under its current policies, the Company does not use derivative
financial instruments, derivative commodity instruments or other financial
instruments to manage its exposure to changes in interest rates, foreign
currency exchange rates, commodity prices or equity prices.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are incorporated by reference and
the financial statement schedule is included in this report on Form 10-K, as
listed in Item 14(a) Part IV of this report.
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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 9, 2000.
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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 in the
Company's Annual Report to Shareholders for the year ended December
31, 1999 (included as Exhibit 13.1 to this Annual Report on Form
10-K).
Annual Report
Page Number
-----------
Report of Independent Auditors 28
Balance Sheets at December 31, 1999 and
December 31, 1998 13
Statements of Operations for each of the
three years ended December 31,
1999, 1998 and 1997 14
Statements of Changes in Stockholders'
Equity for each of the three years
ended December 31, 1999, 1998 and 1997 15
Statements of Cash Flows for each of the
three years ended December 31, 1999,
1998 and 1997 16
Notes to Financial Statements 17
Supplementary Data
Quarterly Financial Data (Unaudited) 27
(2) The following financial statement schedule is included in this
report on Form 10-K:
Page Number
-----------
Schedule II - Valuation and Qualifying Accounts 24
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial
statements or notes thereto.
(3) Exhibits
These exhibits, required to be filed by Item 601 of Regulation S-K,
are listed in the Exhibit Index included in this report at pages 21
through 23.
Exhibit Exhibit
Number -------
- ------
2.1 Plan of Repurchase dated as of February 1, 1995 by and among
American Biltrite Inc., Hillside Industries Incorporated
("Hillside"), Congoleum Holdings Incorporated ("Congoleum
Holdings"), Resilient Holdings Incorporated ("Resilient Holdings")
and the Company.
3.1 Certificate of Incorporation of the Company, as amended.
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Exhibit Exhibit
Number -------
- ------
3.2 Amended and Restated Bylaws of the Company.
4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing
Agreement"), by and among the CIT Group/Business Credit, Inc.
("CIT"), The Bank of New York Commercial Corporation ("BONY/CC"),
Chemical Bank ("Chemical") and The Chase Manhattan Bank, N.A.
("Chase") (collectively, the "Senior Lenders") and the Company.
4.2 First Amendment, dated March 11, 1993, to the CIT Financing
Agreement by and among the Senior Lenders and the Company.
4.3 Indenture, dated as of February 1, 1994, between the Company and
Chemical, as trustee.
4.4 Registration Rights Agreement, dated as of February 8, 1995 by and
between the Company and Hillside.
4.5 Indenture, dated as of August 3, 1998 (the "1998 Indenture"), by and
between the Company and First Union National Bank, as trustee.
4.6 Loan and Security Agreement, dated December 18, 1998 (the "First
Union Loan Agreement"), by and between First Union National Bank
(the "Lender") and the Company.
4.6.1 Joinder Amendment, dated December 21, 1998 (the "Joinder
Agreement"), by and among the Company, Congoleum Intellectual
Properties, Inc., Congoleum Financial Corporation and the Lender.
10.1 The CIT Financing Agreement (see Exhibit 4.1).
10.2 First Amendment to the CIT Financing Agreement (see Exhibit 4.2).
10.8 Joint Venture Agreement, dated as of December 16, 1992, by and among
Resilient Holdings, Hillside, the Company (collectively the
"Congoleum Group"), Hillside Capital Incorporated ("Hillside
Capital") and American Biltrite.
10.9 Closing Agreement, dated as of March 11, 1993, by and among the
Congoleum Group, Hillside Capital and American Biltrite.
10.12 Stockholders Agreement, dated as of March 11, 1993 (the
"Stockholders Agreement"), by and among the Congoleum Group,
American Biltrite and Congoleum Holdings.
10.12.1 First Amendment, dated February 8, 1995, to the Stockholders
Agreement, by and among Hillside, American Biltrite and the Company.
10.13 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American Biltrite and
the Company.
10.13.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.2 Second Amendment, dated November 15, 1996, to Personal Services
Agreement, by and between American Biltrite and the Company.
10.13.3 Third Amendment, dated as of March 15, 1998, to Personal Services
Agreement, by and between American Biltrite and the Company.
16
<PAGE>
Exhibit Exhibit
Number -------
- ------
10.14 Business Relations Agreement, dated as of March 11, 1993, by and
between American Biltrite and the Company.
10.14.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company.
10.15 Tax Sharing and Indemnification Agreement, dated as of March 11,
1993, by and among Congoleum Holdings, Resilient Holdings, Hillside
Capital and the Company.
10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
10.19 Commitment Letter, dated January 19, 1994 regarding Financing
Agreement dated April 19, 1991, as amended, by and among CIT, BONYCC
and the Company.
10.20 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico Company").
10.21 First Right of Refusal, dated November 29, 1993, by and between
American Biltrite (Canada) Limited and Amtico Company.
10.22 Undertaking Concerning Amtico Trademark, dated November 29, 1993, by
and between American Biltrite and Amtico Company.
10.23 Form of 1995 Stock Option Plan.
10.23.1 Form of Amendment to 1995 Stock Option Plan.
10.24 License Agreement, dated as of September 20, 1995 between Congoleum
Intellectual Properties, Inc. and the Company.
10.25 Registration Rights Agreement, dated as of August 3, 1998, by and
among the Company, Goldman, Sachs & Co., Credit Suisse First Boston
Corporation and ING Barings Furman Selz LLC.
10.26 The First Union Loan Agreement (see Exhibit 4.6).
10.26.1 The Joinder Agreement (see Exhibit 4.6.1).
10.27 Form of Non-Qualified, Non-Employee Directors Stock Option Plan.
11.1 Statement regarding computation of earnings per common share.
13.1 Pages 8 through 29 of the Congoleum Annual Report to Shareholders
for the year ended December 31, 1999.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
17
<PAGE>
(b) Reports on Form 8-K.
During the quarter ended December 31, 1999 the Company filed
no current reports on Form 8-K.
18
<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 27th day of
March, 2000.
CONGOLEUM CORPORATION
By: /s/
----------------------------------------------
Roger S. Marcus
President, Chairman & Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ President, Chairman, Chief March 27, 2000
- --------------------------- Executive Officer
Roger S. Marcus and Director (Principal
Executive Officer)
/s/ Chief Financial Officer March 27, 2000
- --------------------------- (Principal Financial and
Howard N. Feist III Accounting Officer)
/s/ Vice Chairman and Director March 27, 2000
- ---------------------------
Richard G. Marcus
/s/ Director March 27, 2000
- ---------------------------
William M. Marcus
/s/ Director March 27, 2000
- ---------------------------
John N. Irwin III
/s/ Director March 27, 2000
- ---------------------------
Cyril C. Baldwin, Jr.
/s/ Director March 27, 2000
- ---------------------------
David N. Hurwitz
/s/ Director March 27, 2000
- ---------------------------
Mark N. Kaplan
/s/ Director March 27, 2000
- ---------------------------
C. Barnwell Straut
19
<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
("Hillside Industries"), Congoleum Holdings Incorporated
("Congoleum Holdings"), Resilient Holdings Incorporated
("Resilient Holdings") and the Company.
*****3.1 Certificate of Incorporation of the Company, as amended.
*****3.2 Amended and Restated Bylaws of the Company.
**4.1 Financing Agreement, dated April 19, 1991 (the "CIT Financing
Agreement"), by and among the CIT Group/Business Credit, Inc.
("CIT"), The Bank of New York Commercial Corporation
("BONY/CC"), Chemical Bank ("Chemical") and The Chase
Manhattan Bank, N.A. ("Chase") (collectively, the "Senior
Lenders") and the Company.
**4.2 First Amendment, dated March 11, 1993, to the CIT Financing
Agreement by and among the Senior Lenders and the Company.
**4.3 Indenture, dated as of February 1, 1994, between the Company
and Chemical, as trustee.
***4.4 Registration Rights Agreement, dated as of February 8, 1995
by and between the Company and Hillside.
******4.5 Indenture, dated as of August 3, 1998 (the "1998 Indenture"),
by and between the Company and First Union National Bank, as
trustee.
4.6 Loan and Security Agreement, dated December 18, 1998 (the
"First Union Loan Agreement"), by and between First Union
National Bank (the "Lender") and the Company.
4.6.1 Joinder Amendment, dated December 21, 1998 (the "Joinder
Agreement"), by and among the Company, Congoleum Intellectual
Properties, Inc., Congoleum Financial Corporation and the
Lender.
**10.1 The CIT Financing Agreement (see Exhibit 4.1).
**10.2 First Amendment to the CIT Financing Agreement (see Exhibit
4.2).
**10.8 Joint Venture Agreement, dated as of December 16, 1992, by
and among Resilient Holdings, Hillside, the Company
(collectively, the "Congoleum Group"), Hillside Capital
Incorporated ("Hillside Capital") and American Biltrite.
**10.9 Closing Agreement, dated as of March 11, 1993, by and among
the Congoleum Group, Hillside Capital and American Biltrite.
**10.12 Stockholders Agreement, dated as of March 11, 1993 (the
"Stockholders Agreement"), by and among the Congoleum Group,
American Biltrite and Congoleum Holdings.
***10.12.1 First Amendment, dated February 8, 1995, to the Stockholders
Agreement, by and among Hillside, American Biltrite and the
Company.
**10.13 Personal Services Agreement, dated as of March 11, 1993 (the
"Personal Services Agreement"), by and between American
Biltrite and the Company.
20
<PAGE>
Exhibit
Number Exhibit
- ------ -------
***10.13.1 First Amendment, dated February 8, 1995, to Personal Services
Agreement, by and between American Biltrite and the Company.
*******10.13.2 Second Amendment, dated November 15, 1996, to Personal
Services Agreement, by and between American Biltrite and the
Company.
*******10.13.3 Third Amendment, dated as of March 10, 1998, to Personal
Services Agreement, by and between American Biltrite and the
Company.
**10.14 Business Relations Agreement, dated as of March 11, 1993, by
and between American Biltrite and the Company.
*******10.14.1 First Amendment, dated August 19, 1997, to Business Relations
Agreement, by and between American Biltrite and the Company.
**10.15 Tax Sharing and Indemnification Agreement, dated as of March
11, 1993, by and among Congoleum Holdings, Resilient
Holdings, Hillside Capital and the Company.
*******10.15.1 Tax Sharing Agreement, dated as of November 1, 1996, between
American Biltrite and the Company.
**10.19 Commitment Letter, dated January 19, 1994 regarding Financing
Agreement dated April 19, 1991, as amended, by and among CIT,
BONYCC and the Company.
***10.20 Trademark Purchase Agreement, dated November 29, 1993, by and
between the Company and The Amtico Company LTD ("Amtico
Company").
***10.21 First Right of Refusal, dated November 29, 1993, by and
between American Biltrite (Canada) Limited and Amtico
Company.
***10.22 Undertaking Concerning Amtico Trademark, dated November 29,
1993, by and between American Biltrite and Amtico Company.
***10.23 Form of 1995 Stock Option Plan.
********10.23.1 Form of Amendment to 1995 Stock Option Plan.
****10.24 License Agreement, dated as of September 20, 1995 between
Congoleum Intellectual Properties, Inc. and the Company.
******10.25 Registration Rights Agreement, dated as of August 3, 1998, by
and among the Company, Goldman, Sachs & Co., Credit Suisse
First Boston and ING Barings Furman Selz LLC.
*********10.26 The First Union Loan Agreement (see Exhibit 4.6).
*********10.26.1 The Joinder Agreement (see Exhibit 4.6.1).
10.27 Form of Non-Qualified, Non-Employee Directors Stock Option
Plan.
11.1 Statement regarding computation of earnings per common share.
13.1 Pages 8 through 29 of the Congoleum Annual Report to
Shareholders for the year ended December 31, 1999.
21
<PAGE>
Exhibit
Number Exhibit
- ------ -------
*********21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
27.1 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.
**** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
***** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1996.
****** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1998.
******* Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the
fiscal period ended December 31, 1997.
******** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the
fiscal period ended December 31, 1996.
********* Incorporated by reference to the exhibit bearing the same number
filed with the Company's Annual Report on Form 10-K for the
fiscal period ended December 31, 1998.
********** Incorporated by reference to the exhibit bearing the same number
filed with the Company's Registration Statement on Form S-8
(File No. 33-84387) declared effective by the Securities and
Exchange Commission on August 3, 1999.
22
<PAGE>
SCHEDULE II
CONGOLEUM CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
-------
<TABLE>
<CAPTION>
Balance at Balance
Beginning Other at end
of Period Changes Deductions (a) of Period
--------- ------- -------------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful
accounts and cash
discounts $(3,336) $ (53)(b) $ -- $(3,283)
Year ended December 31, 1998:
Allowance for doubtful
accounts and cash
discounts $(3,294) $ (39)(b) $ (3) $(3,336)
Year ended December 31, 1997:
Allowance for doubtful
accounts and cash
discounts $(3,406) $ 33 (b) $ 79 $(3,294)
</TABLE>
(a) Balances written-off, net of recoveries.
(b) Represents reduction of the allowance for doubtful accounts and cash
discounts.
23
<PAGE>
Exhibit 11.1 - Computation of Earnings Per Common Share
Congoleum Corporation
Computation of EARNINGS Per COMMON Share
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
Basic Earnings Per Common Share: 1999 1998 1997
- -------------------------------- ---- ---- ----
<S> <C> <C> <C>
Income before extraordinary item $4,928 $ 9,853 $7,020
Extraordinary item - early retirement of debt, net of income tax
benefit -- (2,413) (279)
------ ------ ------
Net income $4,928 $7,440 $6,741
====== ====== ======
Weighted average common shares outstanding 8,699 9,038 9,837
====== ====== ======
Income per common share before extraordinary item $0.57 $1.09 $0.72
Extraordinary item -- (0.27) (0.03)
------ ------ ------
Net income per common share $0.57 $0.82 $0.69
====== ====== ======
Diluted Earnings Per Common Share:
Income before extraordinary item $4,928 $9,853 $7,020
Extraordinary item - early retirement of debt, net of income tax
benefit -- (2,413) (279)
------ ------ ------
Net income $4,928 $7,440 $6,741
====== ====== ======
Weighted average common shares outstanding 8,699 9,038 9,837
Effect of assumed exercise of dilutive stock options (1) 0 0 2
------ ------ ------
Weighted average common and common equivalent shares 8,699 9,038 9,839
====== ====== ======
Income per common share before extraordinary item $0.57 $1.09 $0.72
Extraordinary item -- (0.27) (0.03)
------ ------ ------
Net income per common share $0.57 $0.82 $0.69
====== ====== ======
</TABLE>
(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
December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales ............................ $ 246,006 $ 259,126 $ 252,526 $ 269,451 $ 263,147
Cost of sales ........................ 176,559 181,997 180,093 182,585 186,382
Selling, general and
administrative expenses .......... 57,428 56,839 57,094 61,597 55,228
- --------------------------------------------------------------------------------------------------------
Income from operations ............... 12,019 20,290 15,339 25,269 21,537
Interest expense, net ................ (6,101) (5,758) (5,258) (6,369) (6,708)
Other income, net .................... 1,729 984 974 1,095 1,135
- --------------------------------------------------------------------------------------------------------
Income before taxes
and extraordinary item ........... 7,647 15,516 11,055 19,995 15,964
Provision for income
taxes ............................ 2,719 5,663 4,035 7,898 6,529
- --------------------------------------------------------------------------------------------------------
Income before
extraordinary item ............... 4,928 9,853 7,020 12,097 9,435
Extraordinary item ................... -- (2,413) (279) -- --
- --------------------------------------------------------------------------------------------------------
Net income ........................... $ 4,928 $ 7,440 $ 6,741 $ 12,097 $ 9,435
========================================================================================================
Income per common share before
extraordinary item ............... $ 0.57 $ 1.09 $ 0.72 $ 1.21 $ 0.94
Extraordinary Item ................... -- (0.27) (0.03) -- --
- --------------------------------------------------------------------------------------------------------
Net income per common share, basic
and diluted ...................... $ 0.57 $ 0.82 $ 0.69 $ 1.21 $ 0.94
========================================================================================================
Average shares outstanding ........... 8,699 9,038 9,839 10,007 10,022
========================================================================================================
Balance Sheet Data (at end of period):
Total assets ......................... $ 231,817 $ 231,865 $ 196,581 $ 219,798 $ 206,842
Total debt ........................... 99,575 99,526 76,594 87,750 90,000
Stockholders' equity ................. 40,130 37,853 31,783 33,667 22,602
</TABLE>
8
<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, 1999 as compared to year ended December 31, 1998
Net sales for the year ended December 31, 1999 were $246.0 million as
compared to $259.1 million for the year ended December 31, 1998, a decrease of
$13.1 million or 5.1%. This decrease resulted primarily from lower sales of
certain residential products, a decline in commercial product sales, and
competitive pressures which caused 1999 selling prices to average 2.7% below
1998 levels. The decline in residential product sales resulted from lower sales
to two retail buying groups and competition from alternative hard surface
products.
Gross profit for the year ended December 31, 1999 was $69.4 million
compared to $77.1 million in 1998, a decrease of $7.7 million or 10.0%. Gross
profit declined due to lower sales and a decrease in gross profit margins. Gross
profit margins declined from 29.8% of net sales in 1998 to 28.2% of net sales in
1999 due to lower average selling prices and a less profitable mix of sales.
Selling, general and administrative expenses were $57.4 million for the
year ended December 31, 1999 as compared to $56.8 million for the year ended
December 31, 1998, an increase of $0.6 million or 1.0%. As a percent of net
sales, selling, general and administrative expenses increased from 21.9% in 1998
to 23.3% in 1999. The Company introduced a wood laminate flooring product line
in mid-1999 and expensed $2.0 million in displays, samples, and other
launch-related costs. In addition, research and development spending was
increased $0.4 million from 1998 to 1999. These increases offset other expense
reductions, including lower sales-related costs.
Income from operations was $12.0 million (4.9% of net sales) for the year
ended December 31, 1999, compared to $20.3 million (7.8% of net sales) for the
year ended December 31, 1998, a decrease of $8.3 million or 40.8%, primarily due
to the decline in sales and gross profit margins.
Interest expense (net) increased from $5.8 million in 1998 to $6.1 million
in 1999 primarily due to higher average levels of long-term debt in 1999 versus
1998.
Other income (net) increased from $1.0 million in 1998 to $1.7 million in
1999 due to higher sales of sundry items.
Net income in 1999 was $4.9 million as compared to $9.9 million ($7.4
million after an extraordinary charge for debt extinguishment) in 1998. Net
income per common share was $.57 in 1999 as compared to $1.09 ($.82 after
extraordinary charge) in 1998. The weighted average number of common shares
outstanding declined from 9.0 million in 1998 to 8.7 million in 1999 as a result
of share repurchases.
Year ended December 31, 1998 as compared to year ended December 31, 1997
Net sales for the year ended December 31, 1998 were $259.1 million as
compared to $252.5 million for the year ended December 31, 1997, an increase of
$6.6 million or 2.6%. Increases in sales to the manufactured housing industry
and to home centers from 1997 to 1998 were partly offset by a decline in sales
of lower-end products to the specialty retail channel. Price reductions occurred
in certain products and markets which resulted in an aggregate decrease in
prices of 1.2%.
9
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
Gross profit for the year ended December 31, 1998 was $77.1 million
compared to $72.4 million in 1997, an increase of $4.7 million or 6.5%, as a
result of higher sales and improved gross profit margins. Gross profit margins
improved from 28.7% of net sales in 1997 to 29.8% of net sales in 1998 due to
declines in raw material costs, an increase in manufacturing productivity and a
higher margin mix of sales.
Selling, general and administrative expenses were $56.8 million for the
year ended December 31, 1998 as compared to $57.1 million for the year ended
December 31, 1997, a decrease of $0.3 million or 0.4%. As a percent of net
sales, selling, general, and administrative expenses declined from 22.6% in 1997
to 21.9% in 1998. Expense control initiatives have succeeded in reducing these
costs on an overall basis despite increased spending related to Year 2000
compliance. In addition, the sales channels where the Company has experienced
the most sales growth require relatively less sales and marketing support than
the specialty retail channel.
Income from operations was $20.3 million (7.8% of net sales) for the year
ended December 31, 1998 compared to $15.3 million (6.1% of net sales) for the
year ended December 31, 1997, an increase of $5.0 million or 32.3%, primarily
due to the increase in sales and gross profit margins.
Interest expense increased from $6.8 million in 1997 to $7.4 million in
1998 primarily due to a higher amount of interest being capitalized rather than
expensed in connection with capital expenditures in 1997.
During 1998, the Company issued $100 million in ten-year 8 5/8 % Senior
Notes (priced to yield 8.70%). Most of the proceeds were used to retire the
Company's existing 9% Senior Notes due in 2001. In connection with this
transaction, the Company recorded an extraordinary charge of $2.4 million (net
of tax benefit) for the prepayment premium and write-off of deferred financing
costs. In 1997, the Company had recorded an extraordinary charge of $0.3 million
for similar costs in connection with open market purchases of $11.2 million of
the 9% Senior Notes.
Before the extraordinary charges, income in 1998 was $9.9 million as
compared to $7.0 million in 1997, an increase of $2.8 million or 40.4%. Income
per common share before extraordinary item increased 51.4%, from $.72 in 1997 to
$1.09 in 1998.
Net income increased from $6.7 million, or $.69 per share, in 1997, to
$7.4 million, or $.82 per share, in 1998. Weighted average number of common and
equivalent shares outstanding decreased in 1998 to 9.0 million from 9.8 million
in 1997, primarily due to repurchases of its stock in the fourth quarter of
1997.
Liquidity and Capital Resources
Cash and equivalents, including short-term investments at December 31, 1999,
were $38.0 million, a decrease of $12.3 million from December 31, 1998. Working
capital was $59.7 million, down from $68.5 million one year earlier. The ratio
of current assets to current liabilities at December 31, 1999 was 2.1 to one,
compared to 2.4 to one a year earlier. The ratio of debt to total capital at
both December 31, 1999 and 1998 was .43. Net cash provided by operations during
the year ended December 31, 1999 was $10.3 million, down from $24.0 million in
1998. Capital expenditures in 1999 totaled $18.7 million, which included a large
expenditure for a new coating mix facility. The Company increased inventories
$9.4 million in 1999 to support sales of its wood laminate product and to
accommodate larger, more economical production runs of sheet flooring. The
Company is currently planning capital expenditures of approximately $15 million
in both 2000 and 2001.
During 1998, the Company issued $100 million of 8 5/8 % Senior Notes
maturing August 1, 2008 priced at 99.505 to yield 8.70%. Proceeds of the
offering were used to redeem all $76.6 million of its 9% Senior Notes, plus
accrued interest and prepayment premium, to pay certain fees and expenses in
connection with the offering, and for working capital and general corporate
purposes. In connection with this offering, the Company recorded an
extraordinary after-tax charge of $2.4 million in the third quarter of 1998.
During 1998, the Company entered into a new five-year revolving credit
facility which provides for borrowings up to $30 million. Interest ranges from
0-1% below prime, or 0.75% to 1.5% over LIBOR,
10
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
depending on the Company's ratio of debt to EBITDA. This financing agreement
contains certain covenants which include the maintenance of minimum net worth,
income, and fixed charge coverage levels. It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures.
Borrowings under this facility are collateralized by inventory and receivables.
At December 31, 1999, based on the level of receivables and inventory, the
Company had a borrowing base available of $27.8 million, of which $3.7 million
was utilized for outstanding letters of credit.
In 1998, the Company's Board of Directors approved a new plan to
repurchase up to $5.0 million of the Company's common stock. As of December 31,
1999, the Company had repurchased 717,665 shares of its common stock for an
aggregate cost of $4.1 million pursuant to this plan.
From 1997 to 1999, the Company made modifications and replacements to its
systems and equipment necessary for handling dates in the Year 2000.
Costs directly associated with achieving Year 2000 compliance, including
modifying computer software or converting to new programs, consisted of payments
to third parties as well as an allocation of the payroll and benefits of its
employees based on the amount of their time devoted to this activity. These
costs were expensed as incurred. Costs for new hardware were capitalized in
accordance with the Company's fixed asset policy, and any equipment retired was
written off.
The following table summarizes the Company's direct Year 2000 compliance
expenditures by year:
(In thousands) 1997 1998 1999
---- ---- ----
Expenses paid to third parties $52 $330 $127
Allocated payroll costs 174 386 59
Capital expenditures 5 206 --
In addition to work undertaken explicitly to achieve Year 2000 compliance,
the Company replaced or upgraded a number of systems in the ordinary course of
business where the replacement or upgrade, in addition to its primary benefits,
also provided Year 2000 compliance. The nature of these costs, and their
accounting treatment, was the same as described above. The following table
summarizes the Company's expenditures on systems improvements undertaken for
reasons unrelated to the Year 2000, which also served to achieve Year 2000
compliance:
(In thousands) 1997 1998 1999
---- ---- ----
Expenses paid to third parties $13 $76 $95
Allocated payroll costs 48 37 --
Capital expenditures 92 144 126
The Company is not aware of any significant adverse effects of Year 2000
on our systems and operations.
Collective bargaining agreements with hourly employees at the Company's
facilities expire in 2001 and 2003. In the past five years, there have been no
strikes by employees at the Company, and the Company believes that its employee
relations are satisfactory.
The Company has recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse impact on the
Company's financial position, and that they will be paid over a period of five
to ten years, the timing and amount of such payments may differ significantly
from the Company's assumptions. Although the effect of future government
regulation could have a significant effect on the Company's costs, the Company
is not aware of any pending legislation which could have a material adverse
effect on its financial position. There can be no assurances that the costs of
any future government regulations could be passed along to its customers.
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in several actions associated with waste disposal sites, asbestos-related
claims, and general liability claims (more fully discussed in "Legal
Proceedings" in Part I Item 3. and "Environmental Regulation" in Part I Item 1.
of the Company's Annual Report on Form 10-K for the year ended December 31,
1999). These actions include possible obligations to remove or mitigate the
effects on the environment of wastes deposited
11
<PAGE>
Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================
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 15 of Notes to Financial Statements).
Although the outcome of these matters could result in significant expenses
or judgments, the Company does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of the Company.
The Company's principal sources of capital are net cash provided by
operating activities and borrowings under its financing agreement. The Company
believes these sources will be adequate to fund working capital requirements,
debt service payments and planned capital expenditures through the foreseeable
future.
12
<PAGE>
Congoleum Corporation
Balance Sheets
(dollars in thousands, except share amounts)
================================================================================
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 18,768 $ 50,344
Short-term investments .......................................................... 19,232 --
Accounts and notes receivable, less allowance for doubtful accounts and cash
discounts of $3,283 and $3,336 as of December 31, 1999 and 1998, respectively . 13,745 15,880
Inventories ..................................................................... 54,599 45,192
Prepaid expenses and other current assets ....................................... 3,687 3,022
Deferred income taxes ........................................................... 3,515 3,046
- -------------------------------------------------------------------------------------------------------------------
Total current assets .......................................................... 113,546 117,484
Property, plant, and equipment, net ................................................ 96,404 87,954
Goodwill, net ...................................................................... 11,387 11,819
Deferred income taxes .............................................................. -- 1,863
Other noncurrent assets ............................................................ 10,480 12,745
- -------------------------------------------------------------------------------------------------------------------
Total assets.................................................................. $ 231,817 $ 231,865
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 19,160 $ 14,399
Accrued liabilities ............................................................. 30,597 31,209
Accrued taxes ................................................................... 311 317
Deferred income taxes ........................................................... 3,757 3,058
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities ..................................................... 53,825 48,983
Long-term debt ..................................................................... 99,575 99,526
Other liabilities .................................................................. 18,405 23,501
Noncurrent pension liability ....................................................... 9,230 12,130
Accrued postretirement benefit obligation .......................................... 9,647 9,872
Deferred income taxes .............................................................. 1,005 --
- -------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................. 191,687 194,012
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
shares issued; 3,711,190 and 4,258,610 shares
outstanding as of December 31, 1999 and 1998, respectively ...................... 47 47
Class B common stock, par value $0.01; 4,608,945 and 4,755,000 shares authorized,
issued and outstanding as of December 31, 1999 and 1998, respectively ........... 46 47
Additional paid-in capital ......................................................... 49,105 49,574
Retained deficit ................................................................... (452) (5,380)
Minimum pension liability adjustment ............................................... (1,000) (2,302)
Common stock held in treasury, at cost; 1,025,760 shares and 399,390 shares at
December 31, 1999 and 1998, respectively ....................................... (7,616) (4,133)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity .................................................... 40,130 37,853
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity.................................... $ 231,817 $ 231,865
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Congoleum Corporation
Statements of Operations
(in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................................. $ 246,006 $ 259,126 $ 252,526
Cost of sales ............................................. 176,559 181,997 180,093
Selling, general and administrative expenses .............. 57,428 56,839 57,094
- ----------------------------------------------------------------------------------------------------
Income from operations ............................. 12,019 20,290 15,339
Other income (expense):
Interest income ........................................ 1,837 1,607 1,539
Interest expense ....................................... (7,938) (7,365) (6,797)
Other income ........................................... 1,819 1,249 1,287
Other expense .......................................... (90) (265) (313)
- ----------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item .. 7,647 15,516 11,055
Provision for income taxes ................................ 2,719 5,663 4,035
- ----------------------------------------------------------------------------------------------------
Income before extraordinary item ................... 4,928 9,853 7,020
Extraordinary item-early retirement of debt,
net of income tax benefit .............................. -- (2,413) (279)
- ----------------------------------------------------------------------------------------------------
Net income ......................................... $ 4,928 $ 7,440 $ 6,741
====================================================================================================
Income per common share before extraordinary item .. $ .57 $ 1.09 $ .72
Extraordinary item ................................. -- (.27) (.03)
- ----------------------------------------------------------------------------------------------------
Net income per common share, basic and diluted ..... $ .57 $ .82 $ .69
====================================================================================================
Weighted average number of common and
equivalent shares outstanding ................ 8,699 9,038 9,839
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Congoleum Corporation
Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
Common Stock
par value $0.01 Additional
------------------ Paid-in Retained
Class A Class B Capital Deficit
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 .............. $ 47 $ 53 $ 55,172 $ (19,561)
Purchase of treasury stock ..............
Purchase and retirement of
Class B stock ......................... (6) (5,624)
Exercise of stock options ............... 26
Minimum pension liability adjustment,
net of tax of $658 ....................
Net income .............................. 6,741
Net comprehensive income ................
- ------------------------------------------------------------------------------------------
Balance, December 31, 1997 .............. 47 47 49,574 (12,820)
Purchase of treasury stock ..............
Minimum pension liability adjustment,
net of tax benefit of $678 ............
Net income .............................. 7,440
Net comprehensive income ................
- ------------------------------------------------------------------------------------------
Balance, December 31, 1998 .............. 47 47 49,574 (5,380)
Purchase of treasury stock ..............
Purchase and retirement of
Class B stock ......................... (1) (469)
Minimum pension liability adjustment,
net of tax of $748 ....................
Net income .............................. 4,928
Net comprehensive income ................
- ------------------------------------------------------------------------------------------
Balance, December 31, 1999 .............. $ 47 $ 46 $ 49,105 $ (452)
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Loss) Treasury Comprehensive
Adjustment* Stock Total Income
- -------------------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 .............. $ (1,995) $ (49) $ 33,667
Purchase of treasury stock .............. (3,894) (3,894)
Purchase and retirement of
Class B stock ......................... (5,630)
Exercise of stock options ............... 26
Minimum pension liability adjustment,
net of tax of $658 .................... 873 873 $ 873
Net income .............................. 6,741 6,741
-----------
Net comprehensive income ................ $ 7,614
- -------------------------------------------------------------------------------------- ===========
Balance, December 31, 1997 .............. (1,122) (3,943) 31,783
Purchase of treasury stock .............. (190) (190)
Minimum pension liability adjustment,
net of tax benefit of $678 ............ (1,180) (1,180) $ (1,180)
Net income .............................. 7,440 7,440
-----------
Net comprehensive income ................ $ 6,260
- -------------------------------------------------------------------------------------- ===========
Balance, December 31, 1998 .............. (2,302) (4,133) 37,853
Purchase of treasury stock .............. (3,483) (3,483)
Purchase and retirement of
Class B stock ......................... (470)
Minimum pension liability adjustment,
net of tax of $748 .................... 1,302 1,302 $ 1,302
Net income .............................. 4,928 4,928
-----------
Net comprehensive income ................ $ 6,230
- -------------------------------------------------------------------------------------- ===========
Balance, December 31, 1999 .............. $ (1,000) $ (7,616) $ 40,130
======================================================================================
</TABLE>
* Entire amount relates to minimum pension liability adjustment.
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
Congoleum Corporation
Statements of Cash Flows
(dollars in thousands)
================================================================================
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 4,928 $ 7,440 $ 6,741
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ..................................................... 10,220 9,848 9,102
Amortization ..................................................... 818 893 992
Loss on early retirement of debt, including write-off
of deferred financing fees .................................. -- 3,809 252
Deferred income taxes ............................................ 2,350 2,074 93
Loss on disposition of assets .................................... -- -- 331
Changes in certain assets and liabilities:
Accounts and notes receivable ............................... 2,135 (1,368) 3,216
Inventories ................................................. (9,407) (758) 3,016
Prepaid expenses and other current assets ................... (1,147) (2,299) (1,294)
Accounts payable ............................................ 4,761 959 (6,495)
Accrued liabilities ......................................... (2,218) 1,854 (4,781)
Other liabilities ........................................... (2,161) 1,515 (156)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .............. 10,279 23,967 11,017
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net .............................................. (18,670) (9,440) (19,523)
Purchase of short-term investments ..................................... (51,044) (15,000) (40,200)
Maturities of short-term investments ................................... 31,812 22,900 49,800
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities .................. (37,902) (1,540) (9,923)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of long-term debt ............................................. -- 99,505 --
Debt issuance costs .................................................... -- (3,310) --
Payments to reduce long-term debt ...................................... -- (76,594) (11,156)
Premium payments on early retirement of debt ........................... -- (2,563) --
Purchase of treasury stock ............................................. (3,483) (190) (3,894)
Purchase and retirement of Class B stock ............................... (470) -- (5,630)
Exercise of stock options .............................................. -- -- 26
- --------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities ........ (3,953) 16,848 (20,654)
- --------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash ........................................... (31,576) 39,275 (19,560)
Cash and cash equivalents:
Beginning of year ...................................................... 50,344 11,069 30,629
- --------------------------------------------------------------------------------------------------------------
End of year ............................................................ $ 18,768 $ 50,344 $ 11,069
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<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 resilient sheet and tile flooring
products. These products, together with a limited quantity of related products
purchased for resale, are sold primarily to wholesale distributors and major
retailers in the United States and Canada.
Use of Estimates - The preparation of financial statements in conformity with
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. The carrying amount reported in the balance sheets for cash and
cash equivalents approximates its fair value.
Short-Term Investments - The Company invests in highly liquid debt instruments
with strong credit ratings. Commercial Paper investments with a maturity greater
than three months, but less than one year at the time of purchase are considered
to be short-term investments. The carrying amount of the investments
approximates fair value due to their short maturity. The Company maintains cash
and cash equivalents and short-term investments with certain financial
institutions. The Company performs periodic evaluations of the relative credit
standing of those financial institutions that are considered in the Company's
investment strategy.
Inventories - Inventories are stated at the lower of cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories.
Property, Plant, and Equipment - Property, plant, and equipment are recorded at
cost and are depreciated over their estimated useful lives (30 years for
buildings, 15 years for building improvements, production equipment and
heavy-duty vehicles, 3 to 10 years for light-duty vehicles and office
furnishings and equipment) on the straight-line method for financial reporting
and accelerated methods for income tax purposes. Costs of major additions and
betterments are capitalized; maintenance and repairs which do not improve or
extend the life of the respective assets are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the asset
and the related accumulated depreciation are removed from the respective
accounts and any resulting gain or loss is reflected in operations.
Debt Issue Costs - Costs incurred in connection with the issuance of long-term
debt have been capitalized and are being amortized over the life of the related
debt. Such costs at December 31, 1999 and 1998 amounted to $2,834 and $3,170,
respectively, net of accumulated amortization of $476 and $140, 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
$5,705 and $5,273 at December 31, 1999 and 1998, respectively.
The Company periodically evaluates goodwill to ensure it is fully
recoverable from projected undiscounted cash flows of the related business
operations. There have been no impairment adjustments to goodwill through
December 31, 1999.
Environmental Remediation Liabilities - The Company is subject to federal, state
and local environmental laws and regulations. The Company records a lia-
17
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
bility for environmental remediation claims when a cleanup program or claim
payment becomes probable and the costs can be reasonably estimated. The recorded
liabilities are not discounted for delays in future payments (see Notes 4, 6,
and 15).
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 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.
Changes in Accounting Principles - During 1998, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement requires certain costs of internally developed
software to be capitalized for years beginning after December 15, 1998. The
Company adopted SOP 98-1 effective January 1, 1999. The adoption of this SOP did
not have a material impact in 1999.
2. Inventories:
A summary of the major components of inventories is as follows:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Finished goods ............... $43,719 $36,018
Work-in-process .............. 2,743 3,106
Raw materials and supplies ... 8,137 6,068
- --------------------------------------------------------------------------------
Total inventories ............ $54,599 $45,192
================================================================================
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $1,640 and $1,251 lower than reported at December 31, 1999 and
1998, respectively. The carrying value of certain LIFO inventories was reduced
by market valuation reserves of $100 and $300 at December 31, 1999 and 1998,
respectively.
3. Property, Plant, and Equipment:
A summary of the major components of property, plant, and equipment is as
follows:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Land ............................................ $ 2,930 $ 2,930
Buildings and improvements ...................... 37,309 35,759
Machinery and equipment ......................... 142,062 138,782
Construction-in-progress ........................ 17,912 4,072
- --------------------------------------------------------------------------------
200,213 181,543
Less accumulated
depreciation ................................. (103,809) (93,589)
- --------------------------------------------------------------------------------
Total property, plant,
and equipment, net ........................... $ 96,404 $ 87,954
================================================================================
Interest is capitalized in connection with the construction of major
facilities and equipment. The capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated useful
life. Capitalized interest cost was $691 and $325 for 1999 and 1998,
respectively.
The amount of approved but unexpended capital appropriations at December
31, 1999 was $5,800, substantially all of which is planned to be expended during
2000.
4. Accrued Liabilities:
Accrued liabilities consists of the following:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Accrued warranty,
marketing and sales
promotion ....................................... $19,021 $18,174
Employee
compensation and
related benefits ................................ 5,115 6,377
Interest ........................................... 3,595 3,599
Environmental
remediation and
product-related
liabilities ..................................... 1,070 1,040
Other .............................................. 1,796 2,019
- --------------------------------------------------------------------------------
Total accrued
liabilities ..................................... $30,597 $31,209
================================================================================
18
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
5. Long-Term Debt:
Long-term debt consists of the following:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
8 5/8% Senior Notes
due 2008 ......................................$ 99,575 $ 99,526
On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes
maturing August 1, 2008 priced at 99.505 to yield 8.70%. The Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after August 1, 2003 at predetermined redemption prices (ranging from 104% to
100%), plus accrued and unpaid interest to date of redemption. The Indenture
under which the notes were issued includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments.
Proceeds of the offering were used to redeem all of the outstanding 9%
Senior Notes, including accrued interest and prepayment premium, to pay certain
fees and expenses in connection with the offering, and for working capital and
general corporate purposes. In connection with this offering, the Company
recorded an extraordinary charge of $2.4 million, net of $1.4 million of income
tax benefits, to write off debt issuance costs and premiums associated with the
repurchase of the 9% Senior Notes.
During 1997, the Company repurchased $11,156 of its 9% Senior Notes. In
connection with the repurchase in 1997, the Company recorded an extraordinary
charge of $279, net of $160 of income tax benefits, to write off the portion of
the debt issuance cost and premiums associated with the repurchased 9% Senior
Notes.
The fair value of the Company's long-term debt is based on the quoted
market prices for publicly traded issues. The estimated fair value of the 8 5/8%
Senior Notes was approximately $88,000 and $98,500 at December 31, 1999 and
1998, respectively.
The Company has a revolving credit facility which expires in 2003 that
provides for borrowings up to $30,000 with interest varying based on the
Company's ratio of debt to EBITDA, as defined. This agreement provides for a
commitment fee based on the average daily unused portion of the commitment equal
to one-fifth of one percent per annum. This financing agreement contains certain
covenants which include the maintenance of minimum net worth, income, and fixed
charge coverage levels. It also includes restrictions on the incurrence of
additional debt and limitations on capital expenditures. Borrowings under this
facility are collateralized by inventory and receivables. There were no
borrowings outstanding under this facility at December 31, 1999; however, the
facility provides for standby letters of credit which total $3,689 at December
31, 1999.
6. Other Liabilities:
Other liabilities consists of the following:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Environmental
remediation and
product-related
liabilities .................................... $11,928 $16,198
Accrued workers'
compensation
claims ......................................... 5,164 4,987
Other ............................................. 1,313 2,316
- --------------------------------------------------------------------------------
Total other liabilities ........................... $18,405 $23,501
================================================================================
7. Research and Development Costs:
Total research and development costs charged to operations amounted to $4,242,
$3,819 and $3,718 for the years ended December 31, 1999, 1998 and 1997,
respectively.
8. Operating Lease Commitments and Rent Expense:
The Company leases certain office facilities and equipment under leases with
varying terms.
Future minimum lease payments of significant,
19
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
noncancelable operating leases having initial or remaining lease terms in excess
of one year as of December 31, 1999 are as follows:
Years Ending
- --------------------------------------------------------------------------------
2000 ....................................................... $ 1,942
2001 ....................................................... 2,480
2002 ....................................................... 2,231
2003 ....................................................... 2,056
2004 ....................................................... 1,626
Thereafter ................................................. 9,227
- --------------------------------------------------------------------------------
Total minimum lease payments ............................... $19,562
================================================================================
Rent expense was $3,030, $2,368 and $1,902 for the years ended December
31, 1999, 1998 and 1997, respectively.
9. Retirement Plans:
Retirement benefits are provided for substantially all employees under
Company-sponsored defined benefit pension plans. The plans are noncontributory
and generally provide monthly lifetime payments, normally commencing at age 65.
Benefits under the plans are based upon the provisions of negotiated labor
contracts and years of service. It is the Company's policy to make contributions
to these plans sufficient to meet the minimum funding requirements of applicable
laws and regulations plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate.
Net periodic pension cost includes the following components:
For the years ended
December 31,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost .................................. $ 1,152 $ 1,134 $ 1,144
Interest cost ................................. 3,920 3,898 3,863
Expected return on
plan assets ............................... (4,100) (4,070) (3,614)
Amortization of transition
amount .................................... 76 76 76
Amortization of prior
service benefit ........................... (242) (242) (242)
Recognized actuarial
loss ...................................... 186 2 290
- --------------------------------------------------------------------------------
Net periodic
pension cost .............................. $ 992 $ 798 $ 1,517
================================================================================
Weighted average rate assumptions as of December 31 were as follows:
1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate .............................. 7.25% 6.75% 7.00%
Rate of compensation
increase ............................... 5.00% 5.00% 5.50%
Expected long-term
rate of return
on assets .............................. 9.00% 9.00% 9.00%
The following table sets forth the components of the change in projected
benefit obligation and fair value of plan assets during 1999 and 1998 as well as
funded status of the plans at December 31, 1999 and 1998:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Accumulated benefit
obligation at end of year ...................... $ 57,314 $ 59,451
================================================================================
Change in projected benefit obligation:
Projected benefit obligation
at beginning of year ....................... $ 60,352 $ 58,000
Service cost ................................. 1,152 1,134
Interest cost ................................ 3,920 3,898
Actuarial (gain) loss ....................... (2,713) 1,629
Benefits paid ................................ (4,430) (4,309)
- --------------------------------------------------------------------------------
Projected benefit obligation
at the end of the year ..................... $ 58,281 $ 60,352
================================================================================
Change in plan assets:
Fair value of plan assets
at beginning of year ....................... $ 46,926 $ 46,405
Actual return on assets ...................... 4,823 3,100
Employer contributions ....................... 1,858 1,730
Benefit paid ................................. (4,430) (4,309)
- --------------------------------------------------------------------------------
20
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
Fair value of plan assets
at end of year .................................... $ 49,177 $ 46,926
================================================================================
Funded status........................................... $ (9,104) $(13,426)
Unrecognized transition
amount ............................................... (67) 9
Unrecognized prior
service benefit ...................................... (1,736) (1,978)
Unrecognized net
actuarial loss ....................................... 3,383 7,006
- --------------------------------------------------------------------------------
Net amount
recognized ........................................... $ (7,524) $ (8,389)
================================================================================
Amounts recognized in the
financial statements consist of:
Accrued benefit liability
(including current amount
of $730 and $864,
respectively) .................................. $ (9,754) $(12,759)
Intangible asset .................................. 655 746
Deferred tax asset ................................ 575 1,322
Accumulated other
comprehensive
income ......................................... 1,000 2,302
- --------------------------------------------------------------------------------
Net amount
recognized ........................................... $ (7,524) $ (8,389)
================================================================================
For the year ended December 31, 1999, one of the plan's assets exceeded
the projected benefit obligation. At December 31, 1999 the projected benefit
obligation, accumulated benefit obligation, and assets were $31,276, $30,309 and
$31,695, respectively.
The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
of compensation with partially matching Company contributions. The charge to
income relating to the Company match was $1,356, $1,529 and $1,316 for the years
ended December 31, 1999, 1998 and 1997, respectively.
10. Postretirement Benefits Other Than Pensions:
Net periodic postretirement benefits cost is as follows:
For the years ended
December 31,
-----------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost .................................. $ 148 $ 139 $ 139
Interest cost ................................. 480 480 505
Amortization of
prior service benefit ..................... (409) (409) (409)
Amortization of
net loss .................................. 71 60 99
- --------------------------------------------------------------------------------
Net periodic benefits cost .................... $ 290 $ 270 $ 334
================================================================================
Weighted average
discount rate ............................. 7.25% 6.75% 7.00%
================================================================================
The change in benefit obligation and the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded in
1999 and 1998, were as follows:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at end of
prior year ............................... $ 7,376 $ 7,552
Service cost
(with interest) ........................... 148 139
Interest cost ................................ 480 480
Actuarial gain ............................... (346) (256)
Benefits paid ................................ (517) (539)
- --------------------------------------------------------------------------------
Benefit obligation at end
of year ......................................... $ 7,141 $ 7,376
================================================================================
Funded status ..................................... $ (7,141) $ (7,376)
Unrecognized net
gain ............................................ (513) (96)
Unrecognized prior
service benefit ................................. (2,406) (2,815)
- --------------------------------------------------------------------------------
Accrued postretirement
benefit cost .................................... (10,060) (10,287)
Less current portion ............................ 413 415
- --------------------------------------------------------------------------------
Noncurrent
postretirement
benefit obligations .......................... $ (9,647) $ (9,872)
================================================================================
21
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 7.4% in 1999; the rate was assumed to decrease
gradually to 5.0% over the next 7 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 $56 for the year
ended December 31, 1999, and would increase the accumulated postretirement
benefit obligations by $506 at December 31, 1999.
11. Income Taxes:
The provision for income taxes is comprised of the following:
For the years ended
December 31,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal .................................. $ 259 $2,866 $ 3,980
State .................................... 113 45 246
Deferred:
Federal .................................. 2,123 2,353 (213)
State .................................... 224 399 22
- --------------------------------------------------------------------------------
Provision for
income taxes ............................. $2,719 $5,663 $ 4,035
================================================================================
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,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Statutory federal
income tax rate ........................ 34.0% 34.0% 34.0%
State income taxes,
net of federal
benefit ................................ 2.7 1.9 1.6
Goodwill ................................... 1.9 1.0 1.4
Other ...................................... (3.0) (0.4) (0.5)
- --------------------------------------------------------------------------------
Effective tax rate ......................... 35.6% 36.5% 36.5%
================================================================================
Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences:
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------
Deferred tax asset:
Accounts receivable .......................... $ 941 $ 949
Unfunded pension
liability ................................. 3,303 3,895
Environmental
remediation and
product-related
reserves .................................. 6,399 8,416
Postretirement
benefit obligations ....................... 3,926 4,053
Other accruals ............................... 2,958 3,313
- --------------------------------------------------------------------------------
Total deferred tax asset ......................... 17,527 20,626
- --------------------------------------------------------------------------------
Deferred tax liability:
Depreciation and
amortization .............................. (12,403) (12,279)
Inventory .................................... (3,756) (3,058)
Other ........................................ (2,615) (3,438)
- --------------------------------------------------------------------------------
Total deferred tax
liability .................................... (18,774) (18,775)
- --------------------------------------------------------------------------------
Net deferred tax
(liability) asset ............................ $ (1,247) $ 1,851
================================================================================
22
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
12. Supplemental Cash Flow Information:
Cash payments for interest were $8,577, $7,580 and $7,710 for the years ended
December 31, 1999, 1998 and 1997, respectively. Cash payments for income taxes
were $2,494, $3,494 and $4,964 for the years ended December 31, 1999, 1998 and
1997, respectively.
13. Related Party Transactions:
The Company and its controlling shareholder, American Biltrite Inc. ("ABI"- see
Note 17) provide certain goods and services to each other pursuant to agreements
negotiated at arm's length. The Company had the following transactions with ABI:
For the years ended
December 31,
--------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Sales ...................................... $ 568 $ 868 $ 964
Raw material
transfers to ABI ........................ 4,637 3,493 2,942
Computer service
income .................................. 17 134 145
Material purchases
from ABI ................................ 7,306 7,079 5,269
Management fees ............................ 900 1,291 1,221
================================================================================
Amounts as of December 31, 1999 and 1998 due from an affiliate of ABI
totaled $310 and $243, respectively, and are included in accounts receivable.
Amounts as of December 31, 1999 and 1998 due to ABI and its affiliates totaled
$1,315 and $1,425, respectively, and are included in accounts payable.
14. Major Customers:
Substantially all the Company's sales are to select flooring distributors and
retailers located in the United States. Economic and market conditions, as well
as the individual financial condition of each customer, are considered when
establishing allowances for losses from doubtful accounts.
Two customers accounted for 28% and 21% of the Company's net sales for the
year ended December 31, 1999, 25% and 22% for the year ended December 31, 1998,
and 23% and 19% for the year ended December 31, 1997 and accounted for 42% of
accounts receivable at December 31, 1999 and 1998.
15. Environmental and Other Liabilities:
The Company records a liability for environmental remediation claims when a
cleanup program or claim payment becomes probable and the costs can be
reasonably estimated. As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries are reflected in other noncurrent assets and are
considered probable of recovery.
The Company is named, together with a large number (in most cases,
hundreds) of other companies, as a potentially responsible party ("PRP") in
pending proceedings under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended, and similar state laws.
In two instances, although not named as a PRP, the Company has received a
request for information. These pending proceedings currently relate to seven
disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware
in which recovery from generators of hazardous substances is sought for the cost
of
23
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
cleaning up the contaminated waste sites. The Company's ultimate liability in
connection with those sites may depend on many factors, including the volume of
material contributed to the site, the number of other PRPs and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance. However, under CERCLA, and
certain other laws, as a PRP, the Company can be held jointly and severally
liable for all environmental costs associated with a site.
The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. Two removal actions
were substantially complete as of December 31, 1998, however, the groundwater
remediation phase has not begun and the remedial investigation/feasibility study
related to the groundwater remediation has not been approved. The PRP group
estimated that future costs of groundwater remediation would be approximately
$26 million of which, based on waste allocations amongst members of the PRP
group, Congoleum's share was estimated to be approximately 5.5%. At December 31,
1999, the Company believes its probable liability, which has been recorded in
other liabilities, based on present facts and circumstances, to be approximately
$1.5 million. A corresponding insurance receivable of $1.2 million has been
recorded in other noncurrent assets. No other PRP sites are material on an
individual basis.
The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.
Although there can be no assurance, the Company anticipates that these
matters will be resolved over a period of years for amounts (including legal
fees and other defense costs) which the Company believes based on current
estimates of liability and, in part, on insurance coverage, and based on advice
from counsel, will not have a material adverse effect on the financial position
of the Company.
Asbestos-Related Liabilities: The Company is one of many defendants in
approximately 670 pending claims (including workers' compensation cases)
involving approximately 6,246 individuals as of December 31, 1999, alleging
personal injury from exposure to asbestos or asbestos-containing products. There
were 657 claims at December 31, 1998 which involved approximately 1,984
individuals. Activity related to asbestos claims during the years ended December
31, 1999 and 1998 was as follows:
1999 1998
- --------------------------------------------------------------------------------
Claims at Jan. 1 ......................................... 657 654
New Claims ............................................... 247 203
Settlements .............................................. (48) (63)
Dismissals ............................................... (186) (137)
- --------------------------------------------------------------------------------
Claims at Dec. 31 ........................................ 670 657
================================================================================
The total indemnity costs incurred, excluding the case noted below, to
settle claims during 1999 and 1998 were $2,924 and $2,160, respectively, which
were paid by the Company's insurance carriers, as were the related defense
costs. The average indemnity cost per resolved claim was $12 in 1999 and $11 in
1998, all of which costs were covered by the Company's insurance carriers. Costs
per claim vary depending on a number of factors, including the number of
plaintiffs, the nature of their alleged exposure, and the location of the claim.
Nearly all claims allege that various diseases or health issues were
contracted as a result of exposure to asbestos in the course of activities
either as independent contractors or as employees of shipyards or other
industries utilizing asbestos-containing products (or, in the workers' compen
sation cases, as employees of the Company) and that included among such products
which allegedly caused their diseases were sheet products provided by the
Company or resilient tile provided by the Amtico Tile Division of ABI (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
significant amounts of free asbestos fibers become airborne. All of the asbestos
in asbestos-containing sheet and tile prod-
24
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
ucts 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 do not comply with
governmental asbestos handling standards.
In one of the 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 $3.3 million in damages, subject to proportional liability
under California law. The Company had previously settled one count for an
immaterial amount and had gone to trial for the remaining counts. 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 granted plaintiff's
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 appealed this
decision and in August 1999 the appeal court reversed the judgment
notwithstanding the verdict and ordered the trial court to enter a judgment
against Congoleum for $818. 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.
At December 31, 1999, the Company has accrued approximately $4.4 million
for costs related to asbestos product liability. Estimated insurance coverage of
$0.8 million has been recorded in other noncurrent assets at December 31, 1999
and is considered probable of recovery.
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 products will not have a material adverse
effect on the financial position of the Company.
The total balances of environmental and asbestos-related liabilities and
the related insurance receiv ables deemed probable of recovery at
December 31 are as follows:
1999 1998
(in millions) Liability Receivable Liability Receivable
- --------------------------------------------------------------------------------
Environmental
liabilities...... $ 7.5 $ 2.0 $ 9.2 $ 2.9
Asbestos product
liability........ 4.4 .8 6.9 3.3
Other............... .8 -- 1.1 --
- --------------------------------------------------------------------------------
Total............... $12.7 $ 2.8 $17.2 $ 6.2
================================================================================
Other: In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability, and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years. On
the basis of information furnished by counsel and others, the Company does not
believe that these matters, individually or in the aggregate, will have a
material adverse effect on its business or financial condition.
16. Stock Option Plans:
Under the Company's 1995 Stock Option Plan, options to purchase up to 800,000
shares of the Company's Class A common stock may be issued to officers and key
employees. Such options may be either incentive stock options or nonqualified
stock options, and the options' exercise price must be at least equal to the
fair value of the Company's Class A common stock on the date of grant. All
options granted have ten-year terms and vest over five years at the rate of 20%
per year beginning on the first anniversary of the date of grant.
Pro forma disclosure regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998, and 1997,
respectively: option forfeiture of 15%; risk-free interest rates of 6.61%,
4.80%, and 5.76%; no dividends; volatility fac-
25
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
tors of the expected market price of the Company's common stock of .576 for
1999, .365 for 1998, and .356 for 1997; and a weighted-average expected life of
the options of 7 years. The exercise price of options outstanding at December
31, 1999 range from $7.18 to $13.00 per share.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Certain
options repriced in 1998 were not fully vested and, accordingly, were subject to
a new vesting schedule. The additional pro forma compensation (along with any
existing unamortized pro forma compensation) will be amortized over the new
vesting period beginning in 1998. The Company's estimated pro forma compensation
expense from stock options for the years ended December 31, 1999, 1998, and
1997, respectively, was $684, $648, and $631. The Company's pro forma net income
for the years ended December 31, 1999, 1998, and 1997, respectively, is as
follows: 1999, $4,244 or $0.49 per share; 1998, $6,792, or $0.75 per share; and
1997, $6,110, or $0.62 per share. 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.
A summary of the Company's 1995 Stock Option Plan activity, and related
information, is as follows:
December 31, 1999:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year ............................. 626,000 $ 10.91
Options granted ................................. 5,000 7.19
Options exercised ............................... -- --
Options forfeited ............................... (14,000) 9.00
--------
Options outstanding
end of year ................................... 617,000 $ 10.93
================================================================================
Exercisable at end of year ...................... 306,200 $ 12.12
Weighted average remaining
contractual life .............................. 7 years --
Stock options available
for future issuance ........................... 181,000 --
================================================================================
December 31, 1998:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year ............................ 511,900 $ 13.01
Options granted* ............................... 345,000 9.00
Options exercised .............................. -- --
Options forfeited .............................. (22,400) 11.82
Options exchanged* ............................. (208,500) 12.82
--------
Options outstanding
end of year .................................. 626,000 $ 10.91
================================================================================
Exercisable at end of year ..................... 180,000 $ 13.00
Weighted average remaining
contractual life ............................. 8 years --
Stock options available
for future issuance .......................... 172,000 --
================================================================================
December 31, 1997:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year ............................ 484,500 $ 12.89
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
Weighted average remaining
contractual life ............................. 7 years --
Stock options available
for future issuance .......................... 286,100 --
================================================================================
* Includes 208,500 options repriced in 1998.
The weighted average grant date fair value of options granted for the 1995
Plan in 1999, 1998 and 1997 was $4.67, $4.31 and $6.97, respectively.
On July 1, 1999, a Directors Stock Option Plan was established, under which
non-employee directors may be granted options to purchase up to 50,000 shares of
Class A common stock. Options granted have ten-year terms and vest 6 months from
the grant date. During 1999, options to purchase 5,000 shares were granted under
the plan.
26
<PAGE>
Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================
A summary of the Directors Stock Option Plan activity, and related information,
is as follows:
December 31, 1999:
- --------------------------------------------------------------------------------
Shares Weighted average
exercise price
- --------------------------------------------------------------------------------
Options outstanding
beginning of year ............................. -- --
Options granted ................................. 5,000 $ 7.19
Options exercised ............................... -- --
Options forfeited ............................... -- --
-----
Options outstanding
end of year ................................... 5,000 $ 7.19
================================================================================
The weighted average grant date fair value of options granted for the Directors
Stock Option Plan in 1999 was $3.15.
17. Stockholders' Equity:
Holders of the Class B shares are entitled to two votes per share on all matters
submitted to a vote of stockholders other than certain extraordinary matters.
The holders of the Class A shares are entitled to one vote per share on all
matters submitted to a vote of stockholders.
In November 1998, the Board of Directors authorized the Company to
repurchase an additional $5,000 of the Company's common stock (Class A and Class
B shares) through the open market or through privately negotiated transactions,
bringing the total authorized common share repurchases to $15,000. Under the
total plan, Congoleum has repurchased $13,716 of common stock through December
31, 1999. Shares of Class B stock repurchased (totaling 741,055) have been
retired. As of December 31, 1999, ABI owned 4,395,605 Class B shares that
represented 68.0% of the voting control of the Company.
18. Quarterly Financial Data (Unaudited):
The following table sets forth certain unaudited quarterly financial
information.
Year ended December 31, 1999
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales .............................. $65,387 $64,306 $62,495 $53,818
Gross profit ........................... 18,193 18,688 19,160 13,406
Net income ............................. 737 1,191 1,506 1,494
Net income per
common share ......................... $ .08 $ .14 $ .17 $ .18
================================================================================
Year ended December 31, 1998
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter(a) Quarter
- --------------------------------------------------------------------------------
Net sales .............................. $63,875 $69,750 $68,644 $56,857
Gross profit ........................... 17,357 21,001 21,930 16,841
Net income ............................. 427 2,645 1,493 2,875
Net income per
common share ......................... $ .05 $ .29 $ .17 $ .32
================================================================================
(a) Third quarter 1998 includes a $2.4 million (after tax) charge ($0.26 per
share for the quarter ended) for an extraordinary item (see Note 5).
27
<PAGE>
Congoleum Corporation
Report of Independent Auditors
================================================================================
To the Board of Directors
and Stockholders of
Congoleum Corporation:
We have audited the accompanying balance sheets of Congoleum Corporation as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
Congoleum Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Congoleum Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young, LLP
Ernst & Young, LLP
Philadelphia, Pennsylvania
February 11, 2000
28
<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 Emeritus of the Board of Cambrex Corporation
David N. Hurwitz
Former President and Chief Executive Officer of Goodson Newspaper Group
John N. Irwin III
Managing Director of Hillside Capital Incorporated
Mark N. Kaplan
Of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP (Attorneys)
Richard G. Marcus
Vice Chairman of Congoleum Corporation and President and Chief Operating Officer
of American Biltrite Inc.
William M. Marcus
Executive Vice President and Treasurer of American Biltrite Inc.
C. Barnwell Straut
Managing Director of Hillside Capital Incorporated
Corporate Officers
Roger S. Marcus
Chairman of the Board, President and Chief Executive Officer
Richard G. Marcus
Vice Chairman
Robert N. Agate
Executive Vice President
David W. Bushar
Senior Vice President - Manufacturing
Michael L. Dumont
Senior Vice President - Sales
Howard N. Feist III
Chief Financial Officer and Secretary
Dennis P. Jarosz
Senior Vice President - Marketing
Sidharth Nayar
Senior Vice President - Finance
Peter J. Rohrbacher
Senior Vice President - 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
Internet: www.Congoleum.com
General Counsel
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036-6710
Independent Auditors
Ernst & Young LLP
Two Commerce Square
Suite 4000
2001 Market Street
Philadelphia, PA 19103
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(908) 497-2300
Market Information
The Company's Class A common stock is listed on the New York Stock Exchange. The
following table reflects the high and low prices (rounded to the nearest
one-sixteenth) based on New York Stock Exchange trading over the past two years.
1999 High Low
- --------------------------------------------------------------------------------
First Quarter ........................................ 8 15/16 6 1/2
Second Quarter ....................................... 9 3/8 6 5/8
Third Quarter ........................................ 7 7/8 5
Fourth Quarter ....................................... 4 15/16 2 3/4
1998 High Low
- --------------------------------------------------------------------------------
First Quarter ........................................ 11 1/4 9 1/16
Second Quarter ....................................... 10 1/2 9 1/16
Third Quarter ........................................ 9 3/4 6
Fourth Quarter ....................................... 9 7/16 6
The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future change in the Company's dividend policy is within
the discretion of the Board of Directors and will depend, among other things, on
the Company's earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant. The payment of cash dividends is limited under the
terms of the Indenture relating to the Company's Senior Notes and the terms of
the Company's existing revolving credit facility, subject to the Company's
cumulative earnings and other factors.
The number of registered and beneficial holders of the Class A common
stock on February 10, 2000 was approximately 1,000.
Annual Meeting
The 2000 Annual Meeting of the Stockholders of Congoleum Corporation will be
held on Tuesday, May 9, 2000 in the Long Lane Room, 2nd Floor, FleetBoston
Financial Corporation, 100 Federal Street, Boston, Massachusetts at 8:30 a.m.
local time.
Stockholder Information
The Company will supply any owner of common stock, upon written request to Mr.
Howard N. Feist III of the Company at the address set forth herein, and without
charge, a copy of the Annual Report on Form 10-K for the year ended December 31,
1999, which has been filed with the Securities and Exchange Commission.
<PAGE>
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 11, 2000 included in the
1999 Annual Report to Shareholders of Congoleum Corporation.
Our audits also included the financial statement schedule of Congoleum
Corporation for the years ended December 31, 1999, 1998 and 1997 listed in Item
14(a). This schedule is the responsibility of Congoleum Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-97220, 333-34653 and 33-84387) pertaining to the Congoleum
Corporation 1995 Stock Option Plan and Non-Qualified, Non-Employee Directors
Stock Option Plan of this report on the financial statement schedule and our
report dated February 11, 2000, with respect to the 1999 financial statements of
Congoleum Corporation incorporated by reference in the Annual Report (Form 10-K)
for the year ended December 31, 1999.
Ernst & Young LLP
Philadelphia, Pennsylvania
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Company's Form 10-K for the fiscal year
ended December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,768
<SECURITIES> 19,232
<RECEIVABLES> 17,028
<ALLOWANCES> 3,283
<INVENTORY> 54,599
<CURRENT-ASSETS> 113,546
<PP&E> 200,213
<DEPRECIATION> 103,809
<TOTAL-ASSETS> 231,817
<CURRENT-LIABILITIES> 53,825
<BONDS> 99,575
0
0
<COMMON> 93
<OTHER-SE> 40,130
<TOTAL-LIABILITY-AND-EQUITY> 231,817
<SALES> 246,006
<TOTAL-REVENUES> 249,662
<CGS> 176,559
<TOTAL-COSTS> 176,559
<OTHER-EXPENSES> 57,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,938
<INCOME-PRETAX> 7,647
<INCOME-TAX> 2,719
<INCOME-CONTINUING> 4,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,928
<EPS-BASIC> .57
<EPS-DILUTED> .57
</TABLE>
