SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-13612
CONGOLEUM CORPORATION
(Exact name of Registrant as specified in Its Charter)
DELAWARE 02-0398678
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3705 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ 08619-0127
(Address of Principal Executive Offices, including Zip Code)
Telephone number: (609) 584-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 27, 2000
-------------------------------- -----------------------------------
Class A Common Stock 3,651,190
Class B Common Stock 4,608,945
Page 1 of 17
<PAGE>
CONGOLEUM CORPORATION
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of September 30, 2000
and December 31, 1999 (unaudited) .................................3
Statements of Operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited) .....................4
Statements of Changes in Stockholders' Equity for the year
ended December 31, 1999 and the nine months ended
September 30, 2000 (unaudited) ....................................5
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited) .....................6
Notes to Unaudited Condensed Financial Statements .................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...........12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................13
Item 2. Changes in Securities and Use of Proceeds ............................13
Item 3. Defaults Upon Senior Securities ......................................13
Item 4. Submission of Matters to a Vote of Security Holders ..................13
Item 5. Other Information ....................................................13
Item 6. Exhibits and Reports on Form 8-K .....................................13
Signatures ...................................................................14
Exhibit Index ................................................................15
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONGOLEUM CORPORATION
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 14,230 $ 18,768
Short-term investments................................................... 11,233 19,232
Accounts and notes receivable, net....................................... 21,159 13,745
Inventories.............................................................. 47,259 54,599
Prepaid expenses and other current assets................................ 1,510 3,687
Deferred income taxes.................................................... 3,964 3,515
-------- --------
Total current assets................................................. 99,355 113,546
Property, plant and equipment, net............................................ 100,222 96,404
Goodwill, net................................................................. 11,063 11,387
Other noncurrent assets....................................................... 10,229 10,480
-------- --------
Total assets......................................................... $220,869 $231,817
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 16,983 $ 19,160
Accrued expenses......................................................... 25,151 30,597
Accrued taxes............................................................ 618 311
Deferred income taxes.................................................... 4,141 3,757
-------- --------
Total current liabilities............................................ 46,893 53,825
Long-term debt................................................................ 99,612 99,575
Other liabilities............................................................. 18,614 18,405
Noncurrent pension liability.................................................. 8,037 9,230
Accrued postretirement benefit obligation..................................... 9,693 9,647
Deferred income taxes......................................................... 499 1,005
-------- --------
Total liabilities.................................................... 183,348 191,687
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01 per share; 20,000,000
shares authorized; 4,736,950 shares issued; 3,651,190 and
3,711,190 shares outstanding as of September 30, 2000 and
December 31, 1999, respectively.......................................... 47 47
Class B common stock, par value $0.01 per share; 4,608,945 shares
authorized, issued and outstanding as of September 30, 2000
and December 31, 1999, respectively...................................... 46 46
Additional paid-in capital.................................................... 49,105 49,105
Retained deficit.............................................................. (2,864) (452)
Minimum pension liability adjustment.......................................... (1,000) (1,000)
-------- --------
45,334 47,746
Less common stock held in Treasury, at cost; 1,085,760 and 1,025,760 shares
at September 30, 2000 and December 31, 1999, respectively................ 7,813 7,616
-------- --------
Total stockholders' equity........................................... 37,521 40,130
-------- --------
Total liabilities and stockholders' equity........................... $220,869 $231,817
======== ========
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
3
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CONGOLEUM CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------ --------------------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Net sales ....................................................... $60,979 $62,495 $173,109 $192,188
Cost of sales ................................................... 45,470 43,335 132,609 136,148
Selling, general and administrative expenses .................... 11,771 15,512 40,871 47,223
------- ------- -------- --------
Income (loss) from operations ............................ 3,738 3,648 (371) 8,817
Other income (expense):
Interest income .............................................. 452 394 1,363 1,343
Interest expense ............................................. (1,835) (1,935) (5,458) (6,064)
Other income ................................................. 299 341 1,160 1,505
Other expense ................................................ (3) (29) (4) (86)
------- ------- -------- --------
Income (loss) before income taxes ........................ 2,651 2,419 (3,310) 5,515
Provision (credit) for income taxes .......................... 926 913 (898) 2,082
------- ------- -------- --------
Net income (loss) ........................................ $ 1,725 $ 1,506 $ (2,412) $ 3,433
======= ======= ======== ========
Net income (loss) per common share, basic and diluted .... $ 0.21 $ 0.17 $ (0.29) $ 0.39
======= ======= ======== ========
Weighted average number of common and
equivalent shares outstanding
Basic shares ............................................. 8,260 8,662 8,269 8,800
======= ======= ======== ========
Diluted shares ........................................... 8,265 8,662 8,269 8,800
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
4
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CONGOLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
par value $0.01 Additional Accumulated Other
---------------- Paid-in Retained Comprehensive Loss Treasury Comprehensive
Class A Class B Capital Deficit Adjustment* Stock Total Income
------- ------- ------- ------- ----------- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ........... $47 $47 $49,574 $(5,380) $(2,302) $(4,133) $37,853
Purchase of treasury stock ........... (3,483) (3,483)
Purchase and retirement of
Class B stock .................... (1) (469) (470)
Minimum pension liability adjustment,
net of tax of $748 ............... 1,302 1,302 $ 1,302
Net income ........................... 4,928 4,928 4,928
-------
Net comprehensive income ............. $ 6,230
------ ------ ------- ------- ------- ------- ------- =======
Balance, December 31, 1999 ........... 47 46 49,105 (452) (1,000) (7,616) 40,130
Purchase of treasury stock ........... (197) (197)
Net loss ............................. (2,412) (2,412) $(2,412)
-------
Net comprehensive loss ............... $(2,412)
------ ------ ------- ------- ------- ------- ------- =======
Balance, September 30, 2000 .......... $47 $46 $49,105 $(2,864) $(1,000) $(7,813) $37,521
====== ====== ======= ======= ======= ======= =======
</TABLE>
*Entire amount relates to minimum pension liability adjustment.
The accompanying notes are an integral part
of the condensed financial statements.
5
<PAGE>
CONGOLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------------------------------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................................ $(2,412) $ 3,433
Adjustments to reconcile net (loss) income to net cash used
by operating activities:
Depreciation ............................................. 8,043 7,624
Amortization and write-off of deferred refinancing fees .. 613 613
Deferred taxes ........................................... (571) 2,502
Changes in certain assets and liabilities:
Accounts and notes receivable ....................... (7,414) (3,644)
Inventories ......................................... 7,340 (13,520)
Prepaid expenses and other current assets ........... 2,177 (1,262)
Accounts payable .................................... (2,177) (597)
Accrued expenses .................................... (5,139) 5,298
Other liabilities ................................... (938) (1,108)
------- -------
Net cash used by operating activities .......... (478) (661)
------- -------
Cash flows from investing activities:
Capital expenditures ..................................... (11,862) (13,356)
Purchase of short-term investments ....................... (17,535) (4,301)
Maturities of short-term investments ..................... 25,534 4,301
------- -------
Net cash used by investing activities .......... (3,863) (13,356)
------- -------
Cash flows from financing activities:
Purchase and retirement of Class B stock ................. -- (470)
Purchase of treasury stock ............................... (197) (3,112)
------- -------
Net cash used by financing activities .......... (197) (3,582)
------- -------
Net decrease in cash and cash equivalents ......................... (4,538) (17,599)
Cash and cash equivalents:
Beginning of period .......................................... 18,768 50,344
------- -------
End of period ................................................ $14,230 $32,745
======= =======
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
6
<PAGE>
CONGOLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
The condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with Rule 10-01 of Regulation S-X and have not been audited by the Company's
independent accountants. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles for complete financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. The preparation of condensed financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses during the
reporting period. In the opinion of management, all adjustments (consisting of
normal and recurring adjustments) considered necessary for a fair presentation
of the Company's financial position have been included. The results of
operations for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for a full year. These
condensed financial statements should be read in conjunction with the Company's
audited financial statements which appear in the Company's Annual Report to
Stockholders for the period ended December 31, 1999.
2. Inventories
A summary of the major classifications of inventories is as follows:
September 30, December 31,
2000 1999
------------- ------------
Finished goods ................... $36,445 $43,719
Work-in-process .................. 3,757 2,743
Raw materials and supplies ....... 7,057 8,137
------- --------
$47,259 $54,599
======= =======
If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $95 higher and $1,640 lower than reported at September 30, 2000
and December 31, 1999, respectively.
3. Distribution
On September 25, 2000 the Company announced the appointment of Mohawk
Industries, Inc. ("Mohawk") as a distributor of its products throughout the
continental United States effective November 1, 2000. The Company also announced
it would be phasing out its distributor arrangements with LDBrinkman
7
<PAGE>
& Co. ("Brinkman"), its distributor in the central and western United States,
which accounted for 20% of the Company's sales in 1999. On October 5, 2000, the
Company filed a demand for arbitration with the American Arbitration Association
("AAA") in New York, New York requesting that a panel of three arbitrators
declare that the Company rightfully terminated its distributor agreement with
Brinkman and award the Company damages relating to Brinkman's alleged breaches
of the distributor agreement as well as pre-award interest, attorneys' fees and
costs. On October 6, 2000, Brinkman filed its own demand for arbitration with
the AAA in Atlanta, Georgia requesting that the arbitrators find that the
Company wrongfully terminated the distributor agreement and award emergency
relief prohibiting the Company from selling products to Mohawk, the Company's
new distributor, and requiring that the Company continue to sell products to
Brinkman for Brinkman's distribution, or award Brinkman damages. These two
proceedings have been consolidated with the AAA in its New York, New York
offices. Subsequent to the parties' initial filings with the AAA, Brinkman filed
an application for emergency relief with the AAA requesting an interim award for
the emergency relief. On November 3, 2000, the arbitrator ordered that the
Company may continue to sell products to Mohawk for Mohawk's distribution and
that, until January 1, 2001 (unless this order is otherwise vacated, modified or
extended by the arbitration panel), the Company should continue to sell products
to Brinkman for Brinkman's distribution under the parties' customary delivery
and pricing terms.
Although the Company does not anticipate any disruption of sales as a
result of these proceedings and its transition of distribution, there can be no
assurances about the outcome or the potential impact on sales. The Company
expects to record a charge in the fourth quarter of 2000 for costs associated
with this transition.
4. Income Taxes
The effective tax rate in the third quarter of 2000 was 35.0%. The rate
change reflects updated taxable income revisions for 2000. For the balance of
the year, the Company presently anticipates an effective tax rate of 35.0%
5. Income Per Share
Income per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding. Due to the immaterial
effect of common stock equivalents, there is no difference between basic and
diluted net income per common share for the three and nine month periods ending
September 30, 2000 and 1999.
6. Commitments and Contingencies
The Company is subject to federal, state and local environmental laws and
regulations and certain legal and administrative claims are pending or have been
asserted against the Company. Among these claims, the Company is a named party
in several actions associated with waste disposal sites, asbestos-related claims
and general liability claims. These actions include possible obligations to
remove or mitigate the effects on the environment of wastes deposited at various
sites, including Superfund sites and certain of the Company's owned and
previously owned facilities. The contingencies also include claims for personal
injury and/or property damage. The exact amount of such future costs and timing
of payments are indeterminable due to such unknown factors as the magnitude of
clean-up costs, the timing and extent of the remedial actions that may be
required, the determination of the Company's liability in proportion to other
potentially responsible parties and the extent to which costs may be recoverable
from insurance.
The Company records a liability for environmental remediation,
asbestos-related claim costs and general liability claims when a clean-up
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and clean-ups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
The recorded liabilities are not discounted for delays in future payments and
are not reduced by the amount of estimated insurance recoveries. Such estimated
insurance recoveries are considered probable of recovery.
8
<PAGE>
Although the outcome of these matters could result in significant expenses
or judgments, management does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of the Company.
7. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those investments at fair value.
In December 1999, the Securities and Exchange Commission (SEC) staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), which summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements.
The Company will adopt SAB 101 in the fourth quarter of fiscal 2000 and
SFAS 133 in the first quarter of fiscal 2001. The adoption of these
pronouncements is not expected to have a significant effect on the Company's
consolidated results of operations or financial position.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three and nine months ended September 30, 2000 as compared to three and nine
months ended September 30, 1999.
Net sales for the third quarter of 2000 were $61.0 million, as compared to
$62.5 million in the third quarter of 1999, a decrease of $1.5 million or 2.4%.
Year-to-date net sales for the first nine months of 2000 were $173.1 million, a
decrease of $19.1 million or 9.9% from the first nine months of 1999. The
decrease in sales in the third quarter and first nine months of 2000 from the
comparable periods in 1999 is due to lower sales of products to the manufactured
housing industry and lower sales of promotional goods. Sales of general line
residential products, which were below comparable prior year levels in the first
half of 2000, exceeded year earlier levels in the third quarter of 2000 due to
sales of the newly-introduced Ultima(TM) product line.
Gross profit for the third quarter of 2000 was $15.5 million, down $3.7
million from $19.2 million in the third quarter of 1999. Gross profit as a
percent of net sales declined to 25.4% in the third quarter of 2000 from 30.7%
in the third quarter of 1999. Gross profit for the first nine months of 2000 was
$40.5 million (23.4% of net sales), as compared to $56.0 million (29.2% of net
sales) for the first nine months of 1999. The decline in gross profit and gross
profit margins during the 2000 periods was due to lower sales and production
volumes, combined with higher raw material costs.
Selling, general and administrative expenses were $11.8 million in the
third quarter of 2000, down 24.1% from the third quarter of 1999. As a percent
of net sales, selling, general and administrative expenses were 19.3% in the
third quarter of 2000, as compared to 24.8% in the third quarter of 1999. For
the nine months ended September 30, 2000, selling, general and administrative
expenses were $40.9 million (23.6% of net sales), as compared to $47.2 million
(24.6% of net sales) in the same period one year earlier. Selling, general and
administrative costs have declined in 2000 as compared to the first nine months
of 1999, both in dollar terms and as a percent of sales, as a result of cost
reduction initiatives undertaken in 2000 and as well as lower selling-related
costs.
Income from operations for the third quarter of 2000 was $3.7 million, as
compared to income from operations of $3.6 million in the third quarter of 1999.
The operating loss for the first nine months of 2000 was $0.3 million, down from
income of $8.8 million in the first nine months of 1999. Operating income and
margins for the nine months ended September 30, 2000 declined primarily due to
the lower sales in the first half of 2000.
Interest expense for the three and nine month periods ended September 30,
2000 was below the comparable year earlier period amounts due to a greater
portion of the interest on the Company's 8 5/8% senior notes being capitalized
in connection with capital projects in 2000 than in 1999.
Net income for the third quarter of 2000 was $1.7 million, compared with
net income of $1.5 million for the same period last year, reflecting the lower
selling, general and administrative expenses in 2000. The year-to-date net loss
through September 30, 2000 was $2.4 million, as compared with
10
<PAGE>
net income of $3.4 million in the first nine months of 1999 as a result of the
weak 2000 first half results.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments declined $12.5 million
for the nine months ended September 30, 2000 to $25.5 million. Working capital
at September 30, 2000 was $52.5 million, down from $59.7 million at December 31,
1999. The ratio of current assets to current liabilities was 2.1 at September
30, 2000 and December 31, 1999. The ratio of debt to total capital at September
30, 2000 was .45 compared to .43 at December 31, 1999. Cash used by operations
was $0.5 million for the first nine months of 2000, compared to cash used by
operations of $0.7 million in the first nine months of 1999. Cash generated from
improved inventory management substantially offset lower cash from net income
and lower payables and accrued expenses growth.
Capital expenditures were $11.9 million for the first nine months of 2000.
Total 2000 capital spending is projected to be approximately $13.0 million, with
2001 capital spending estimated at $12.0 million.
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 effect on the
financial position of the Company 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 results of operations or financial position. There can be
no assurances that such costs could be passed along to its customers.
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 September 30,
2000, the Company had repurchased 777,665 shares of its common stock for an
aggregate cost of $4.3 million pursuant to this plan. Expenditures on share
repurchases in the first nine months of 2000 totaled $0.2 million.
The Company's principal sources of liquidity are net cash provided by
operating activities and borrowings under its Amended and Restated Financing
Agreement. The Company believes that these sources will be adequate to fund
working capital requirements, debt service payments, stock and note repurchases
and planned capital expenditures through the foreseeable future.
Some of the information presented in this report constitutes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company 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 Company, (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
11
<PAGE>
unforeseen disruptions of operations at any of the Company's facilities or
distributors and (v) the future cost and timing of payments associated with
environmental, product and general liability claims.
Item 3: Quantitative and Qualitative Disclosure 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 September 30, 2000 consisted of indebtedness with a fixed rate of
interest which is not subject to change based upon changes in prevailing market
interest rates. Under its current policies, the Company does not use derivative
financial instruments, derivative commodity instruments or other financial
instruments to manage its exposure to changes in interest rates, foreign
currency exchange rates, commodity prices or equity prices.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities and Use of Proceeds: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: 11. Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K: None
13
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CONGOLEUM CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONGOLEUM CORPORATION
(Registrant)
Date: November 8, 2000 By: /s/ Howard N. Feist III
--------------------------------------
(signature)
Howard N. Feist III
Chief Financial Officer
(Principal Financial & Accounting Officer)
14
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EXHIBIT INDEX
Exhibit Number
------- ------
Computation of Per Share Earnings 11
Financial Data Schedule 27
15
