SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1998 Commission File Number 1-4773
- - ------------------------- --------
AMERICAN BILTRITE INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-1701350
- - -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
57 River Street, Wellesley Hills, Massachusetts 02481-2097
(Address of principal executive offices) (Zip Code)
- - -------------------------------------------------- ---------------
Registrant's telephone number, including area code: (781) 237-6655
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $.01 Par Value American Stock Exchange
- - ---------------------------- -----------------------
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 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 (229.405 of this chapter) 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|
The aggregate market value of the voting stock of the registrant held by
non-affiliates as of March 10, 1999 was $43,423,000.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 10, 1999 was 3,646,976 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of stockholders to be
held on May 5, 1999 are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Development of Business. American Biltrite Inc. ("ABI") was
organized in 1908 and is a Delaware corporation. ABI operates domestically
directly through two businesses, the Tape Division and K&M Associates L.P., a
Rhode Island limited partnership ("K&M"), and conducts operations indirectly
through Congoleum Corporation ("Congoleum"), a company in which ABI owns a
controlling interest.
The Tape Division produces adhesive-coated, pressure-sensitive papers and films
used to protect material during handling or storage or to serve as a carrier for
transferring decals or die-cut lettering. The Division also produces pressure
sensitive tapes and adhesive products used for applications in the heating,
ventilating and air conditioning (HVAC), footwear, automotive and electrical and
electronic industries.
In 1995, ABI acquired a controlling interest in K&M, a national supplier,
distributor and servicer of a wide variety of adult, children's and specialty
items of fashion jewelry and related accessories. ABI, through wholly owned
subsidiaries, currently owns an aggregate 82.25% interest (7% as sole general
partner and 75.25% in limited partner interests) in K&M. K&M wholesales its
products to mass merchandisers and other major retailers. It also services
certain retail merchandisers' in-store operations in fashion jewelry and related
accessories departments by assisting retailers in managing inventory and
maintaining displays.
At the beginning of 1995, ABI indirectly held an 8% limited partner interest in
K&M. During 1995 and in January of 1996, the Company acquired, through a series
of transactions by its wholly owned subsidiaries, an additional 67.25% in
limited partner interests and a 7% sole general partner interest in K&M for an
aggregate consideration of $15.5 million in cash, notes and ABI common stock. In
conjunction with these K&M transactions, a wholly owned subsidiary of ABI also
entered into agreements with the remaining limited partners of K&M which provide
the ABI subsidiary with the option to buy, and the limited partners the option
to sell, the limited partners' respective remaining interests in K&M for an
aggregate consideration calculated in accordance with a predetermined formula
which is based in part on such limited partner's capital account balance at the
time of sale. As of the date hereof, based on K&M capital account balances as of
December 31, 1998, the aggregate purchase price under the option agreements for
the remaining limited partner interests in K&M would be $3.0 million. See Note 4
of Notes to the Consolidated Financial Statements.
ABI owns a 49% equity interest in Congoleum Corporation ("Congoleum"), a
manufacturer and producer of resilient floor tile and sheet vinyl flooring.
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On February 8, 1995, Congoleum completed a public offering of 4,650,000 shares
of Class A Common Stock at $13 per share. The net proceeds of the offering,
together with certain other funds of Congoleum, were used to acquire a portion
of Congoleum's outstanding Class B Common Stock held by Hillside Industries
Incorporated. In conjunction with the transaction, ABI exchanged its then
existing shares of Class B Common Stock for 4,395,605 shares of a new series of
Class B Common Stock. The exchange of stock did not change the Company's 44%
equity ownership interest; however, the new shares represented 57% of the voting
power of the outstanding shares of Congoleum, giving ABI majority voting
control. The accounts of Congoleum have been consolidated with the financial
statements of ABI since 1995. During 1997 and 1998, Congoleum's Board of
Directors approved a plan to repurchase up to $15,000,000 of Congoleum's common
stock (Class A and Class B shares). Under the total plan, Congoleum has
repurchased $9,763,000 of common stock at fair market value. The effect of the
repurchase of shares was to increase ABI's ownership interest from 44% to 49%.
In addition, as of December 31, 1998, ABI's ownership of 4,395,605 shares of
Congoleum's Class B common stock represented 64% of the voting control of
Congoleum.
Outside the United States, in addition to international sales of Tape Division
products, the Division operates facilities in Belgium and Singapore where bulk
tape products are converted into various sizes to quickly respond to customer
demands in the European and Asian markets. Other international operations
include: a wholly owned Canadian subsidiary ("ABI-Canada") which produces
resilient floor tile, rubber tiles and Uni-Turf (a vinyl-based floor covering
for use in indoor sports facilities) under license from ABI and industrial
products (including conveyor belting, truck and trailer splash guards and sheet
rubber material); a 50% direct equity interest in a Honduran producer of
footwear components; and, through the Honduran corporation, an indirect interest
in a Guatemalan foam product manufacturer.
For financial reporting purposes, as a result of the consolidation of the
accounts of Congoleum and K&M into the financial statements of ABI, ABI operates
in four industry segments: flooring products, tape products, jewelry and the
Canadian division which produces flooring and rubber products. See Note 15 of
Notes to the Consolidated Financial Statements, set forth in Item 8 below.
(b) Financial Information about Industry Segments. Business segment
information is in Note 15 of Notes to the Consolidated Financial Statements, set
forth in Item 8 below.
(c) Narrative Description of Business.
Marketing, Distribution and Sales. The Tape Division's protective papers and
films are sold domestically and throughout the world, principally through
distributors, but also directly to certain manufacturers. Other tape products
are marketed through the division's own sales force and by sales representatives
and
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distributors throughout the world. ABI's Belgian and Singapore facilities sell
these products throughout Europe and the Far East.
The business and operations of the Tape Division do not experience seasonal
variations, and neither this division nor the industry in which it operates has
any material practices with respect to working capital.
The products of K&M are sold domestically and throughout the world through its
own direct sales force and, indirectly, through a wholly owned subsidiary and
through third-party sales representatives. K&M's business and operations
experience seasonal variations. In general, fashion jewelry supply, distribution
and service businesses respond to the seasonal demands of mass merchandisers and
other major retailers, which typically peak in preparation for end-of-year
holiday shopping. Accordingly, K&M's working capital needs tend to be greatest
in the second and third fiscal quarters, while its revenues tend to be greater
toward the end of each fiscal year, especially in the latter part of the third
quarter and the first half of the fourth quarter.
ABI-Canada's floor tile and rubber tile products are marketed in Canada and the
United States, principally through distributors and to commercial installers.
Uni-Turf is marketed in Canada and internationally through distributors.
ABI-Canada's industrial products are marketed in Canada and the United States
through distributors and also directly to certain large end-users and original
equipment manufacturers.
Congoleum currently sells its products through distributors in the United States
and Canada, as well as directly to a limited number of mass market retailers.
Congoleum considers its distribution network to be very important to maintaining
competitive position. While most of its distributors have marketed Congoleum's
products for many years, replacements are necessary periodically to maintain the
strength of the distribution network. Although Congoleum 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 Congoleum's sales, at least until a suitable
replacement is in place. The sales pattern for Congoleum's products 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.
ABI owns 50% of Compania Hulera Sula, S.A. de C.V. ("Hulera Sula"), a Honduran
corporation, which produces soles, heels, molded soles and heels, sandals and
other footwear products under license from ABI and markets such products in
certain Central American countries. Hulera Sula owns 100% of Hulera
Sacatepequez, S.A., a Guatemalan corporation which manufactures and markets
products in Guatemala similar to those of Hulera Sula. Fomtex, S.A., a
Guatemalan corporation 60% owned by Hulera Sula, manufactures and
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markets foam mattresses, beds and other foam products for sale in the Central
American market.
Working Capital and Cash Flow. In general, ABI's working capital requirements
are not affected by accelerated delivery requirements of major customers or by
obtaining a continuous allotment of raw material from suppliers. ABI does not
provide special rights for customers to return merchandise and does not provide
special seasonal or extended terms to its customers. K&M does provide
pre-approved allowances in the form of markdowns and return authorizations for
end of season merchandise in their service stores.
Congoleum produces goods for inventory and sells on credit to customers.
Generally, Congoleum'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.
Raw Materials. Basically, all of ABI's products are internally designed and
engineered. Generally, the raw materials required by ABI for its manufacturing
operations are available from multiple sources and, as such, ABI has not been
dependent on any particular source of supply for raw materials essential to its
businesses. ABI's subsidiary, Congoleum, does not have readily available
alternative sources of supply for specific designs of transfer print paper,
which are produced utilizing print cylinders engraved to Congoleum'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. Congoleum 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.
Competition. All businesses in which ABI is engaged are highly competitive.
ABI's tape products compete with some of the largest fully integrated rubber and
plastic companies, as well as smaller producers. Included among their
competitors are Minnesota Mining & Manufacturing Company, Permacel and Shuford
Mills, Inc. ABI-Canada's flooring products compete with those of other
manufacturers of rubber and vinyl floor tiles and with all other types of floor
covering. ABI-Canada competes with Armstrong World Industries, Inc., Domco
Industries,Ltd., Mondo Rubber International, Inc. and with other manufacturers
of alternate floor covering products. In the rubber products category,
ABI-Canada has several competitors, principal among them being Goodyear Canada,
Inc.
The market for Congoleum'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
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<PAGE>
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. Congoleum 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 Congoleum's view, have advantages
over other floor covering products in terms of both price and ease of
installation and maintenance.
Congoleum encounters competition from domestic and, to a much lesser extent,
foreign manufacturers. Certain of Congoleum's competitors, including Armstrong
in the resilient category, have substantially greater financial and other
resources than Congoleum.
K&M competes with other companies making similar products on the basis of
product pricing and the effectiveness of merchandising services offered. In
assessing the effectiveness of K&M products and services, customers tend to
focus on margin dollars realized from the sales of product and return on
inventory investment needed to generate sales. In its business of supplying and
servicing fashion jewelry and accessory products, K&M competes with a variety of
suppliers, among them are AAi. Foster Grant, Monet Inc., Victoria Creations Inc.
and a number of other companies offering similar products and/or services. K&M
also competes with numerous importers and overseas suppliers of similar items.
Research and Development. Research and development efforts of both ABI and
Congoleum concentrate on new product development and expanding technical
expertise in the various manufacturing processes. ABI also focuses on improving
existing products. Congoleum also concentrates on ways to increase product
durability. Expenditures for research and development were $5,175,000,
$5,388,000 and $5,513,000 on a consolidated basis for the years ended December
31, 1998, 1997 and 1996, respectively.
Key Customers. For the year ended December 31, 1998, two customers of Congoleum
each accounted for over 10% of ABI's consolidated sales revenue. These customers
were its distributor to the manufactured housing market, LaSalle-Bristol, and
its distributor in the Western U.S., LD Brinkman & Co. K&M sales during 1998
included sales to large customers which accounted for less than 10% of ABI's
consolidated sales revenue. K&M's top three customers in terms of net sales in
1998 together account for approximately 94% of K&M's aggregate net sales, and
the loss of any such customer would have a material adverse effect on K&M. See
Note 15 of Notes to Consolidated Financial Statements set forth in Item 8 below.
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Backlog. The dollar amount of backlog of orders believed to be firm as of
December 31, 1998 and 1997 was $21,800,000 and $15,600,000, respectively. It is
anticipated that all of the backlog as of December 31, 1998 will be filled
within the current fiscal year. There are no seasonal or other significant
aspects of the backlog. In the opinion of management, backlog is not significant
to the business of ABI.
Environmental Compliance. Because of the nature of the operations conducted by
ABI, ABI's facilities are subject to a broad range of federal, state, local and
foreign legal and regulatory provisions relating to the environment, including
those regulating the discharge of materials into the environment, the handling
and disposal of solid and hazardous substances and wastes and the remediation of
contamination associated with releases of hazardous substances at ABI facilities
and off-site disposal locations. ABI believes that compliance with these
federal, state, local and foreign provisions will not have a material effect
upon its capital expenditures, earnings and competitive position.
Due to the nature of Congoleum's business and certain of the substances which
are or have been used, produced or discharged by Congoleum, Congoleum'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.
Congoleum, 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.
Congoleum 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 Congoleum agreed to be financially responsible for any cleanup
measures required. In 1998, Congoleum incurred capital expenditures of
approximately $.3 million for environmental compliance and control facilities.
Congoleum has historically expended substantial amounts for compliance with
existing environmental laws and regulations, including those matters described
above. Congoleum 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 Congoleum's judgment, have a material adverse effect on the financial
position of Congoleum. Because environmental requirements have grown
increasingly strict, however, Congoleum is unable to determine the ultimate cost
of compliance with environmental laws and enforcement policies.
See Item 3 below for certain additional information regarding environmental
matters.
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Employees. As of December 31, 1998, ABI employed approximately 3,010 people.
(d) Financial information about foreign and domestic operations and export
sales. Financial information concerning foreign and domestic operations is in
Note 15 of Notes to the Consolidated Financial Statements, set forth in Item 8
below. Export sales from the United States were $20,886,000 in 1998, $23,008,000
in 1997 and $17,931,000 in 1996.
ITEM 2. PROPERTIES
At December 31, 1998, ABI and Congoleum operated a total of nine manufacturing
plants, and ABI operated a jewelry product distribution warehouse, as follows:
Owned Industry Segment
or For Which
Location Square Feet Leased Properties Used
- - -------- ----------- ------ ---------------
Trenton, NJ 1,050,000 Owned Flooring products
Marcus Hook, PA 1,000,000 Owned Flooring products
Trenton, NJ 282,000 Owned Flooring products
Finksburg, MD 107,000 Owned Flooring products
Sherbrooke, 330,000 Owned Canadian division
Quebec
Moorestown, NJ 226,000 Owned Tape products
Lowell, MA 57,000 Owned Tape products
Renaix, Belgium 84,000 Owned Tape products
Singapore 32,000 Owned Tape products
Providence, RI 103,000 Owned Jewelry products
ABI knows of no material defect in the titles to any such properties or material
encumbrances thereon. ABI considers that all of its properties are in good
condition and have been well maintained.
It is estimated that during 1998, ABI's plants for the manufacture of floor
covering products operated at approximately 76% of aggregate capacity, its
plants for the manufacture of tape products operated at approximately 97% of
aggregate capacity and the Canadian division operated at approximately 79% of
aggregate capacity. All estimates of aggregate capacity have been made on the
basis of a five-day, three-shift operation.
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ITEM 3. LEGAL PROCEEDINGS
ABI is a co-defendant with many other manufacturers and distributors of
asbestos-containing products in approximately seventy-nine pending claims
involving approximately 590 individuals as of December 31, 1998. These claims
allege personal injury from exposure to asbestos or asbestos-containing
products. See Note 10 to the Consolidated Financial Statements included in Item
8 for detailed information about these claims.
ABI has been named as a Potentially Responsible Party ("PRP") within the meaning
of the federal Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), as to two sites in two separate states. See Note 10
to the Consolidated Financial Statements included in Item 8 for detailed
information about these matters.
In addition, ABI has been named as a defendant in two environmental lawsuits the
details of which are set forth in Note 10 to the Consolidated Financial
Statements included in Item 8.
ABI also is potentially responsible for response and remediation costs as to
four state supervised sites, two sites in Massachusetts, and one each in New
York and New Jersey. See Note 10 to the Consolidated Financial Statements
included in Item 8 for information about ABI's potential liability at these four
sites.
As of December 31, 1998, ABI has accrued $1.2 million for its estimable and
probable amounts for contingencies described above.
As of December 31, 1998 Congoleum was named as a defendant, together in most
cases with numerous other defendants, in approximately 657 pending lawsuits
(including workers' compensation cases) involving approximately 1,984
individuals alleging personal injury from exposure to asbestos or
asbestos-containing products. See Note 10 to the Consolidated Financial
Statements included in Item 8 for information about Congoleum's potential
liabilities to these lawsuits.
Together with a large number (in most cases, hundreds) of other companies,
Congoleum is named as a PRP in pending proceedings under CERCLA and similar
state laws. See Note 10 to the Consolidated Financial Statements included in
Item 8 for detailed information about these matters.
Congoleum 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 Congoleum is therefore unable to estimate the amount, if
any, of its probable liability with respect to the potential remediation of this
site.
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In the ordinary course of its business, ABI and its consolidated entities become
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, ABI and its
consolidated entities do not believe that these matters, individually or in the
aggregate, will have a material adverse effect on their business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The registrant's Common Stock is traded on the American Stock Exchange (ticker
symbol: ABL). The approximate number of record holders of ABI's Common Stock at
March 10, 1999 was 440.
High and low stock prices and dividends for the last two years were:
Sales Price of Common Shares
----------------------------
1998 1997
Quarter ---- ----
Ended High Low High Low
----- ---- --- ---- ---
March 31 31 3/4 23 5/8 26 21 1/8
June 30 31 3/4 29 1/4 25 5/8 20 1/2
September 30 30 7/8 22 1/4 24 3/8 17 7/8
December 31 24 1/4 20 1/2 26 7/8 19 1/2
Cash Dividends Per Common Share
-------------------------------
Quarter
Ended 1998 1997
------- ---- ----
March 31 $ .10 $ .10
June 30 .10 .10
September 30 .125 .10
December 31 .125 .10
------ -----
$ .45 $ .40
====== =====
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $423,879 $417,512 $417,961 $404,473 $106,145
Earnings before
other items 15,321 11,922 13,103 10,811 4,900
Non-controlling
interests (5,145) (3,777) (6,804) (4,706)
Equity in earnings of
joint venture 7,361
Extraordinary item (1,174)
Net earnings 9,002 8,145 6,299 6,105 12,261
Total assets 336,039 299,686 324,966 303,487 82,804
Long-term debt 118,406 94,409 106,721 110,919 4,188
Number of shares used
in computing basic
earnings per share 3,641,337 3,633,076 3,645,089 3,619,198 3,560,471
Basic earnings per
share 2.47 2.24 1.73 1.69 3.44
Cash dividends per common
share .45 .40 .40 .35 .14375
</TABLE>
Congoleum Corporation is included in the consolidated results since 1995 and is
reported as a joint venture in 1994.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales for the year ended December 31, 1998 were $423.9 million as compared
to $417.5 million for the year ended December 31, 1997, an increase of $6.4
million or 1.5%. The major portion of this sales increase occurred at Congoleum
Corporation in improved sales to the manufactured housing industry and to home
centers. Sales from K&M Associates L.P. ("K&M") increased over last year due to
a full year of sales to a major customer we started servicing for the first time
in the latter half of 1997. Sales at ABI's Tape and Canadian divisions reflect
slight decreases compared to last year.
Interest income increased to $1.8 million in 1998 from $1.6 million in 1997 due
to increases in funds available for short-term investment at both Congoleum and
ABI's Canadian division.
Other revenues increased by $.8 million in 1998 to $1.9 million from $1.1
million last year. The major reason for this positive shift is due to the
improvement of the value of the Belgian franc compared to the U.S. dollar during
the course of 1998 which favorably impacted ABI's operation in Belgium.
Cost of products sold in 1998 deceased to 68.5% of net sales from 69.4% last
year. This decrease in cost is mainly attributable to the results at Congoleum
where they experienced declines in raw material costs, increases in
manufacturing productivity and a higher-margin mix of sales. At both ABI and
K&M, cost of products sold as a percentage of net sales were at the same levels
as last year.
Selling, general and administrative expenses as a percentage of net sales were
24.3% for 1998 and 24.4% for 1997. At Congoleum, expenses in this area decreased
as a result of expense control initiatives partially offset by increased
spending related to Year 2000 compliance. At K&M, costs increased due to
increases in field sales expense to service additional sales volume. At ABI,
slight cost increases were also generated covering Year 2000 compliance in
addition to increases in field sales and advertising/promotion expenses.
Interest expense decreased to $9.0 million in 1998 from $9.3 million in 1997.
This decrease occurred at both ABI and K&M due to a reduction in outstanding
indebtedness. This was partially offset by an interest expense increase at
Congoleum primarily due to a lower amount of interest being capitalized rather
than expensed in connection with capital expenditures in 1998.
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During 1998, Congoleum issued $100 million in ten year 8 5/8% Senior Notes and
used most of the proceeds to repay its outstanding 9% Senior Notes due 2001 in
the principal amount of $76.6 million, together with accrued interest,
prepayment premiums and financing fees and expenses. Congoleum recorded an
extraordinary after tax charge of $2.4 million of which ABI recorded $1.2
million, reflecting our 49% ownership interest in Congoleum.
Net income for the year ended December 31, 1998 was $9.0 million, up by $.9
million over last year's net income of $8.1 million. ABI, Congoleum and K&M were
all profitable in 1998. Basic net earnings per share was $2.47 in 1998, up from
$2.24 in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net sales for the year ended December 31, 1997 were $417.5 million as compared
to $418.0 million for the year ended December 31, 1996. Although consolidated
net sales between years were relatively flat, there were significant swings
between the various operations of ABI. The largest positive swing was increased
sales volume at K&M where shipments were made to more than 1900 additional
stores for a major customer who previously had been serviced by K&M at
approximately 200 of its stores. K&M currently is servicing the entire 2100
stores for this customer under a long-term contractual arrangement. At
Congoleum, sales decreased from lower average selling prices due to competitive
pressures, loss of sales to a major retail customer who ceased operations in mid
1997, and an inventory reduction by Congoleum's largest distributor. Sales at
ABI's Tape and Canadian divisions reflect increases over last year.
Other revenues decreased by $1.3 million in 1997 to $1.1 million from $2.4
million last year. The factors that caused the decrease included a decrease in
commission income at K&M, foreign exchange losses at our ABI Belgian operation
and reduced Royalty income at Congoleum. ABI's foreign operations are limited
and conducted in countries that historically have had stable currencies. The
strong U.S. dollar in relation to the Belgian franc in 1997 did penalize our
operation in Belgium by approximately $.5 million. ABI continues to believe that
future movements of foreign currency exchange rates would not significantly
affect its consolidated results of operations.
Cost of products sold in 1997 increased to 69.4% of net sales from 68.5% last
year. This increase in cost is attributable to the results at Congoleum where
margins decreased as a result of higher raw material costs, a less profitable
mix of products sold, and manufacturing inefficiencies experienced preparing for
the overhaul of a major production line. At both ABI and K&M, cost improvements
were experienced, but were not sufficient to cover the cost increases at
Congoleum.
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Selling, general and administrative expenses decreased slightly to 24.4% of net
sales compared to 24.7% last year. Decreases in sales-related costs and
incentive compensation at Congoleum more than offset increased spending for
merchandising displays. At K&M, the increased sales volume experienced in 1997
had the effect of reducing the sales percentage relationship to expenses in this
area.
Interest expense decreased $1.4 million in 1997 to $9.3 million from $10.7
million in 1996. This decrease occurred at Congoleum as a result of lower
average debt outstanding and a greater amount of interest capitalized in
connection with capital expenditures in 1997.
The provision for income taxes declined to 38% of pretax income in 1997 from 40%
in 1996 as a result of the lower income level at Congoleum, which reduced the
average effective statutory rate and lower effective state income tax rates.
Net income for the year ended December 31, 1997 was $8.1 million, up by $1.8
million over last year's net income of $6.3 million. ABI, Congoleum and K&M were
all profitable in 1997. K&M operated at a loss in 1996 and Congoleum's
contribution to net earnings was greater in 1996. Basic net earnings per share
was $2.24 in 1997, up from $1.73 in 1996.
Liquidity and Capital Resources
At December 31, 1998, consolidated working capital was $96.7 million, the ratio
of current assets to current liabilities was 2.3 to 1, and the debt to equity
ratio was 1.66 to 1. Influencing the debt to equity ratio is $99.5 million of
Congoleum debt as to which there exists no recourse to ABI. Net cash provided by
operations during 1998 was $39.3 million, generated mainly from net earnings and
depreciation. Capital expenditures for 1999 are estimated to be in the range of
$24 to $26 million. At ABI, capital expenditures cover normal replacement of
machinery and equipment and process improvements. Congoleum is proceeding with a
major program to modernize and improve its plant and equipment. Because of these
programs at Congoleum, capital expenditures are expected to continue at this
level for the next two years. Depreciation and amortization expense is forecast
at $15.0 million.
In 1998, Congoleum's Board of Directors approved a plan to purchase up to $5
million of Congoleum's common stock. As of December 31, 1998, Congoleum had
repurchased 24,190 shares of its common stock for an aggregate cost of $0.2
million pursuant to this plan. At ABI, based on a prior Board of Directors
authorization, $4.7 million is available for the purchase of ABI's common stock
as of December 31, 1998.
In 1996, the Company began the initial planning of a comprehensive initiative to
address the impact of the Year 2000 on its information and equipment systems.
The Company organized a Year
14
<PAGE>
2000 oversight team to develop a strategy of evaluation, implementation, testing
and contingency planning to address the Company's Year 2000 readiness. The
evaluation phase involved performing a complete, company-wide inventory to
identify all internal, general purpose and production hardware and software
systems, as well as any embedded logic devices used to control equipment or
facilities, that required modification to become Year 2000 compliant. In
addition to the Company's internal assessment, the Company communicated with all
its key customers and all key third-party suppliers of goods and services to
determine their states of Year 2000 readiness, implementation of Year 2000
compliant systems and related contingency plans.
In the second quarter of 1997, the Company began the implementation and testing
phase of replacing or modifying system hardware, software and devices. As of
January 1999, the Company has completed work on 82% of the systems identified as
requiring modification. The Company anticipates that substantially all of its
systems will be Year 2000 compliant by the beginning of the fourth quarter of
1999.
Costs directly associated with achieving Year 2000 compliance, including
modifying computer software or converting to new programs, consist 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 are expensed as incurred. Costs for new hardware are capitalized in
accordance with the Company's fixed asset policy, and any equipment retired is
written off.
The following table summarizes the Company's direct Year 2000 compliance
expenditures (actual and planned) by year (in thousands):
1997 1998 1999
---- ---- ----
Expenses paid to third parties $307 $462 $376
Allocated payroll costs 457 533 251
Capital expenditures 120 415 196
In addition to work undertaken explicitly to achieve Year 2000 compliance, the
Company has replaced or upgraded a number of systems in the ordinary course of
business where the replacement or upgrade will, in addition to its primary
benefits, also provide Year 2000 compliance. The nature of these costs, and
their accounting treatment, is the same as described above. The following table
summarizes the Company's actual or planned expenditures on systems improvements
undertaken for reasons unrelated to the Year 2000, but also serving to achieve
Year 2000 compliance (in thousands):
1997 1998 1999
---- ---- ----
Expenses paid to third parties $118 $473 $780
Allocated payroll costs 74 279 198
Capital expenditures 244 470 382
15
<PAGE>
The costs of achieving Year 2000 compliance, and of improving the Company's
systems, are being funded through operating cash flow. With respect to embedded
logic devices used to monitor or control equipment or facilities, the Company
has completed a survey of all locations and identified 21 devices which must be
modified or replaced. The Company expects to complete modification or
replacement of these devices by the end of the third quarter of 1999 at an
estimated aggregate cost of $0.3 million.
Although the Company believes it has taken all of the necessary steps to ensure
that the Company will be Year 2000 compliant, there can be no assurances that
the Company will be able to complete all of the modifications in the required
time frame, that all third parties will be Year 2000 compliant, or that
unforeseen Year 2000 issues will not arise. Management currently believes the
worst case scenario with any reasonable probability is that a small number of
vendors, who are not critical to the operations of the Company's business, will
be unable to supply materials for a short time after January 1, 2000, and that
minor additional systems modifications not identified during evaluation or
testing will be identified and corrected in a matter of days. The Company does
not anticipate any disruption of service to its customers.
The Company is currently preparing contingency plans for the various potential
disruptions that could occur in spite of its own efforts and representations
from its customers and suppliers.
ABI 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 ABI
believes its estimate of the future amount of these liabilities is reasonable
and that they will be paid over a period of five to ten years, the timing and
amount of such payments may differ significantly from ABI's assumptions.
Although the effect of future government regulation could have a significant
effect on ABI's costs, ABI is not aware of any pending legislation which could
significantly affect the liabilities ABI has established for these matters.
There can be no assurances that the costs of any future government regulations
could be passed along by ABI to its customers.
Certain legal and administrative claims are pending or have been asserted
against ABI, which are considered incidental to its business. Among these
claims, ABI is a named party in several actions associated with waste disposal
sites and asbestos-related claims. These actions include possible obligations to
remove or mitigate the effects on the environment of wastes deposited at various
sites, including Superfund sites. The exact amount of such future costs to ABI
is 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 ABI's liability in proportion to other potentially responsible
parties and the extent to which costs may be recoverable from insurance. ABI has
recorded provisions in its financial statements for the
16
<PAGE>
estimated probable loss associated with all known environmental and
asbestos-related contingencies. The contingencies also include claims for
personal injury and/or property damage. (See Note 10 of Notes to Consolidated
Financial Statements.)
Cash requirements for capital expenditures, working capital, debt service,
equity investments in K&M and the current authorizations of $4.7 million to
repurchase ABI common stock and $5.2 million to repurchase Congoleum common
stock, are expected to be financed from operating activities and borrowings
under existing lines of credit which are presently $65.0 million.
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, 1998 consisted of indebtedness with a fixed rate of
interest which is not subject to change based upon changes in prevailing market
interest rates.
The Company operates internationally, principally in Canada, Europe and the Far
East, giving rise to exposure to market risks from changes in foreign exchange
rates. To a certain extent, foreign currency exchange rate movements also affect
the Company's competitive position, as exchange rate changes may affect business
practices and/or pricing strategies of non-U.S. based competitors. For foreign
currency exposures existing at December 31, 1998, a 10% unfavorable movement in
currency exchange rates in the near term would not materially affect ABI's
consolidated operating results, financial position or cash flows.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, page 17, for disclosures about market risk.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required under this item are incorporated
herein by reference to pages 20 through 65 of this Form 10-K. The consolidated
financial statement schedule required under this item is incorporated herein by
reference to page 66 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 5, 1999 filed with the
Securities and Exchange Commission within 120 days after December 31, 1998 and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 5, 1999 filed with the
Securities and Exchange Commission within 120 days after December 31, 1998 and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 5, 1999 filed with the
Securities and Exchange Commission within 120 days after December 31, 1998 and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in ABI's Proxy Statement for
its Annual Stockholders' Meeting to be held May 5, 1999 filed with the
Securities and Exchange Commission within 120 days after December 31, 1998 and
is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedules
(1) The following consolidated financial statements of American Biltrite
Inc. and subsidiaries are included in Item 8:
Report of Independent Auditors
Consolidated balance sheets - December 31, 1998 and 1997
Consolidated statements of earnings -
Years ended December 31, 1998, 1997 and 1996
Consolidated statements of stockholders' equity Years ended
December 31, 1998, 1997 and 1996
Consolidated statements of cash flows Years ended December 31,
1998, 1997 and 1996
Notes to consolidated financial statements
(2) The following financial statement schedule is included in Item 14
(d)
SCHEDULE II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Listing of Exhibits
The listing of exhibits required under this item is incorporated
herein by reference to pages 68 through 71 of this Form 10-K.
(b) Reports on Form 8-K. None.
(c) Exhibits: The required exhibits are filed herewith following the required
Exhibit Index.
(d) Financial Statement Schedule: The required consolidated financial
statement schedule is included on page 66 of this Form 10-K.
19
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders
American Biltrite Inc.
We have audited the accompanying consolidated balance sheets of American
Biltrite Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Biltrite
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Boston, Massachusetts
March 8, 1999
20
<PAGE>
American Biltrite Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands of dollars)
December 31
1998 1997
-------------------------
Assets
Current assets:
Cash and cash equivalents $ 59,505 $ 19,306
Short-term investments - 7,900
Accounts and notes receivable, less allowances of
$5,124 in 1998 and $5,052 in 1997 for doubtful
accounts and discounts 33,551 30,254
Inventories 69,722 74,355
Prepaid expenses and other current assets 9,199 9,187
-------------------------
Total current assets 171,977 141,002
Other assets:
Goodwill, net 22,332 23,421
Deferred income taxes 1,863 2,636
Other assets 16,097 12,171
-------------------------
40,292 38,228
Property, plant and equipment, net 123,770 120,456
-------------------------
Total assets $336,039 $299,686
=========================
Liabilities and stockholders' equity
Current liabilities:
Notes payable to banks $ 5,500
Accounts payable $ 20,596 19,060
Accrued expenses 50,328 47,769
Current portion of long-term debt 4,305 1,156
-------------------------
Total current liabilities 75,229 73,485
Long-term debt, less current portion 114,101 93,253
Other liabilities 56,039 51,271
Noncontrolling interests 19,433 16,332
Stockholders' equity:
Common stock, par value $.01--authorized
15,000,000 shares, issued 4,607,902 shares 46 46
Additional paid-in capital 19,423 19,423
Retained earnings 68,247 60,924
Accumulated other comprehensive income (4,906) (3,305)
-------------------------
82,810 77,088
Less cost of shares of common stock in treasury
(960,914 shares in 1998 and 971,394 shares in
1997) 11,573 11,743
-------------------------
Total stockholders' equity 71,237 65,345
-------------------------
Total liabilities and stockholders' equity $336,039 $299,686
=========================
See accompanying notes.
21
<PAGE>
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Earnings
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $423,879 $417,512 $417,961
Interest 1,790 1,626 1,807
Other 1,882 1,078 2,422
---------------------------------------------------
427,551 420,216 422,190
Costs and expenses:
Cost of products sold 290,507 289,739 286,370
Selling, general and administrative expenses 102,999 101,838 103,099
Interest 9,043 9,344 10,747
---------------------------------------------------
402,549 400,921 400,216
---------------------------------------------------
Earnings before income taxes and other items 25,002 19,295 21,974
Provision for income taxes 9,681 7,373 8,871
---------------------------------------------------
15,321 11,922 13,103
Noncontrolling interests (5,145) (3,777) (6,804)
---------------------------------------------------
Earnings before extraordinary item 10,176 8,145 6,299
Extraordinary item--early retirement of debt, net of
income tax benefit (1,174) - -
---------------------------------------------------
Net earnings $ 9,002 $ 8,145 $ 6,299
===================================================
Earnings per share:
Basic
Earnings before extraordinary item $ 2.79 $ 2.24 $ 1.73
Extraordinary item (.32) - -
---------------------------------------------------
Net income $ 2.47 $ 2.24 $ 1.73
===================================================
Diluted
Earnings before extraordinary item $ 2.67 $ 2.18 $ 1.69
Extraordinary item (.31) - -
===================================================
Net income $ 2.36 $ 2.18 $ 1.69
===================================================
</TABLE>
See accompanying notes.
22
<PAGE>
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands of dollars)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Treasury Stockholders'
Stock Capital Earnings Income Stock Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $19,469 $52,096 $(2,779) $(10,990) $57,796
Comprehensive income:
Net earnings for 1996 6,299 6,299
Other comprehensive income (19) (19)
----------
Total comprehensive income 6,280
Dividends declared ($.40 per share) (1,458) (1,458)
Effects of Congoleum capital transactions (17) (17)
Change in par value $46 (46)
Exercise of stock options 39 39
Purchase of treasury stock (879) (879)
------------------------------------------------------------------------------------
Balance at December 31, 1996 46 19,423 56,920 (2,798) (11,830) 61,761
Comprehensive income:
Net earnings for 1997 8,145 8,145
Other comprehensive income (507) (507)
----------
Total comprehensive income 7,638
Dividends declared ($.40 per share) (1,453) (1,453)
Effects of Congoleum capital transactions (2,688) (2,688)
Exercise of stock options 89 89
Purchase of treasury stock (2) (2)
------------------------------------------------------------------------------------
Balance at December 31, 1997 46 19,423 60,924 (3,305) (11,743) 65,345
Comprehensive income:
Net earnings for 1998 9,002 9,002
Other comprehensive income (1,601) (1,601)
----------
Total comprehensive income 7,401
Dividends declared ($.45 per share) (1,639) (1,639)
Effects of Congoleum capital transactions (40) (40)
Exercise of stock options 171 171
Purchase of treasury stock (1) (1)
------------------------------------------------------------------------------------
Balance at December 31, 1998 $46 $19,423 $68,247 $(4,906) $(11,573) $71,237
====================================================================================
</TABLE>
See accompanying notes.
23
<PAGE>
American Biltrite Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Operating activities
Net earnings $ 9,002 $ 8,145 $ 6,299
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,128 14,501 13,874
Provision for doubtful accounts 2,411 2,433 2,885
Loss on early retirement of debt, including write off of deferred
financing fees 3,809 - -
Deferred income taxes 5,144 (470) 1,934
Accounts and notes receivable (5,769) 1,718 (7,197)
Inventories 4,407 5,830 1,495
Prepaid expenses and other current assets (2,518) (816) 1,733
Accounts payable and accrued expenses 2,342 (9,623) 2,315
Noncontrolling interests 5,145 3,777 6,804
Other 188 (53) (1,165)
-----------------------------------------
Net cash provided by operating activities 39,289 25,442 28,977
Investing activities
Purchases of short-term investments (15,000) (40,200) (45,000)
Proceeds from sales of short-term investments 22,900 49,800 27,500
Investments in property, plant and equipment (17,155) (22,183) (19,869)
Business acquisitions, net of cash acquired - - (1,680)
-----------------------------------------
Net cash used in investing activities (9,255) (12,583) (39,049)
Financing activities
Long-term borrowings 101,719 - 15,000
Payments on long-term debt (77,787) (12,312) (19,457)
Net short-term (payments) borrowings (5,500) (4,750) 10,250
Debt issuance costs (3,310) - -
Premium payment on early retirement of debt (2,563) - -
Purchase and retirement of Congoleum Class B shares - (5,630) -
Purchase of treasury shares (191) (3,896) (879)
Other (1,468) (1,338) (1,419)
-----------------------------------------
Net cash provided (used) by financing activities 10,900 (27,926) 3,495
Effect of foreign exchange rate changes on cash (735) 715 938
-----------------------------------------
Increase (decrease) in cash and cash equivalents 40,199 (14,352) (5,639)
Cash and cash equivalents at beginning of year 19,306 33,658 39,297
-----------------------------------------
Cash and cash equivalents at end of year $ 59,505 $ 19,306 $ 33,658
=========================================
</TABLE>
See accompanying notes.
24
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of American Biltrite
Inc. and its wholly-owned subsidiaries (referred to as ABI or the Company), as
well as entities over which it has voting control, including Congoleum
Corporation, a publicly traded company in which ABI at December 31, 1998 has a
49% ownership interest and 64% of the voting shares. Intercompany accounts and
transactions, including transactions with associated companies which result in
intercompany profit, are eliminated.
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 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. Some of the information presented in this
report constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
Cash Equivalents
Cash equivalents represent highly liquid debt instruments with maturities of
three months or less at the date of purchase. The carrying value of cash
equivalents approximates fair value.
Short-Term Investments
Investments in A1/P1 commercial paper with a maturity greater than three months,
but less than six months, at the time of purchase are considered to be
short-term investments. The carrying amount of the commercial paper approximates
fair value due to its short maturity.
25
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for most of the Company's domestic inventories
and the first-in, first-out (FIFO) method for the Company's foreign inventories.
Property, Plant and Equipment
These assets are stated at cost. Expenditures for maintenance, repairs and
renewals are charged to expense; major improvements are capitalized.
Depreciation, which is determined using the straight-line method, is provided
over the estimated useful lives (30 to 40 years for buildings and building
improvements, 10 to 15 years for production equipment and heavy-duty vehicles,
and three to 10 years for light-duty vehicles and office furnishings and
equipment).
Debt Issue Costs
Costs incurred in connection with the issuance of long-term debt have been
capitalized and are being amortized over the life of the related debt
agreements. During 1998, Congoleum wrote off old debt issue costs and
capitalized new debt issue costs in connection with a debt offering and
redemption (see Note 6). Debt issue costs at December 31, 1998 and 1997 amounted
to $3,170,000 and $1,547,000, respectively, net of accumulated amortization of
$140,000 and $2,603,000, respectively, and are included in other noncurrent
assets.
Goodwill
The excess of purchase cost over the fair value of the net assets acquired
(goodwill) established in 1993 by Congoleum is being amortized on a
straight-line basis over 40 years. Goodwill associated with the K & M
transactions (see Note 4) is being amortized over 20 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 $7,572,000 and
$6,483,000 at December 31, 1998 and 1997, respectively.
26
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate the Company's assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to fair market value is required.
Environmental Remediation Liabilities
Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 96-1,
Environmental Remediation Liabilities. The Company is subject to federal, state
and local environmental laws and regulations. The Company records a liability
for environmental remediation claims when a clean-up 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 5, 7 and
10).
Revenue Recognition
The Company records revenue, net of a provision for estimated returns and
allowances, upon shipment.
Income Taxes
The Company provides for income taxes based upon earnings reported for financial
statement purposes. Deferred tax assets and liabilities are determined based
upon temporary differences between the financial reporting and tax bases of
assets and liabilities.
27
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Stock-Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
requires the recognition of, or disclosure of, compensation expense for grants
of stock options or other equity instruments issued to employees based on their
fair value at the date of grant. As permitted by SFAS No. 123, the Company
elected the disclosure requirements instead of recognition of compensation
expense and therefore will continue to apply existing accounting rules under APB
Opinion No. 25 (APB 25) and related interpretations for its employee stock
options. Under APB 25, when the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Research and Development Costs
Expenditures relating to the development of new products are charged to
operations as incurred and amounted to $5,175,000, $5,388,000 and $5,513,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Foreign Currency Translation
All balance sheet accounts of foreign subsidiaries are translated at the current
exchange rate, and income statement items are translated at the average exchange
rate for the period; resulting translation adjustments are made directly to
accumulated other comprehensive income in stockholders' equity. Realized
exchange gains and losses (immaterial in amount) are included in current
operations.
Issuances of Stock by Subsidiaries
The Company accounts for issuances of stock by its subsidiaries as capital
transactions.
28
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings Per
Share. Under SFAS No. 128, primary and fully diluted earnings per share are
replaced by basic and diluted earnings per share. Basic earnings per share have
been computed based on the weighted-average number of common shares outstanding
during the period. Diluted earnings per share have been computed based upon the
weighted-average number of common shares outstanding during the year, adjusted
for the dilutive effect of shares issuable upon the exercise of stock options
determined based upon average market price for the period.
Reclassifications
For comparative purposes certain prior years' amounts have been reclassified to
conform to the current year presentation.
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 will adopt SOP 98-1 effective January 1, 1999.
The adoption of this SOP would not have had a material impact in 1998.
29
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Inventories
Inventory at December 31 consisted of the following:
1998 1997
------------------------
(In thousands)
Finished goods $ 50,683 $ 53,139
Work-in-process 9,201 9,422
Raw materials and supplies 9,838 11,794
------------------------
$ 69,722 $ 74,355
========================
At December 31, 1998, domestic inventories determined by the LIFO inventory
method amounted to $53,065,000 ($54,713,000 at December 31, 1997). If the FIFO
inventory method, which approximates replacement cost, had been used for these
inventories, they would have been $181,000 and $1,224,000 greater at December
31, 1998 and 1997, respectively.
3. Property, Plant and Equipment
A summary of the major components of property, plant and equipment at December
31 is as follows:
1998 1997
------------------------
(In thousands)
Land and improvements $ 5,402 $ 5,411
Buildings 55,706 50,281
Machinery and equipment 186,741 177,997
Construction-in-progress 5,646 4,643
------------------------
253,495 238,332
Less accumulated depreciation 129,725 117,876
------------------------
$123,770 $120,456
========================
30
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property, Plant and Equipment (continued)
Interest is capitalized in connection with the construction of major facilities.
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
$325,000 and $823,000 for 1998 and 1997, respectively.
Depreciation expense amounted to $13,599,000, $12,600,000 and $12,151,000 in
1998, 1997 and 1996, respectively.
4. Related-Party Transactions
Included in other assets on the accompanying balance sheets is ABI's investment
in Compania Hulera Sula, S.A., a 50%-owned associate. The investment is
accounted for on the cost method due to the uncertainty of the political climate
and currency restrictions in Honduras. During 1997, the Company wrote down its
investment from $1,100,000 to $850,000 to reflect a reduction in Hulera Sula's
net worth.
Congoleum Transactions
In November 1998, Congoleum's Board of Directors authorized Congoleum to
repurchase an additional $5,000,000 of its 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 $15,000,000. Under the
total plan, Congoleum has repurchased $9,763,000 of common stock through
December 31, 1998. Shares of Class B stock repurchased (totaling 595,000) have
been retired. The reduction of Congoleum's equity from the repurchase of common
stock during 1998 and 1997 resulted in a reduction of ABI's investment in
Congoleum of $2,728,000, which was charged to retained earnings.
The effect of the repurchase of Congoleum's common stock was to increase ABI's
ownership interest from 44% to 49%. In addition, as of December 31, 1998, ABI's
ownership of 4,395,605 shares of Congoleum's Class B common stock represented
64% of the voting control of Congoleum. ABI has had voting control of Congoleum
since 1995, and accordingly, the accounts of Congoleum are consolidated into the
financial statements of the Company.
31
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Related-Party Transactions (continued)
K&M Transactions
During 1995, ABI acquired additional partnership interests in K&M, giving ABI
majority ownership and control. In conjunction with the acquisition, ABI also
entered into agreements with the remaining limited partners of K&M, providing
ABI the option to buy, and providing the limited partners of K&M the option to
sell, the remaining partnership interests in K&M. During 1996, ABI acquired an
additional limited partnership interest of 11% for consideration of $1,939,000.
If all of the remaining limited partnership interests in K&M were to be
purchased by ABI, the purchase price would amount to approximately $2,958,000 as
of December 31, 1998. ABI owns an 82% partnership interest in K&M at December
31, 1998.
5. Accrued Expenses
Accrued expenses at December 31 consisted of the following:
1998 1997
------------------------
(In thousands)
Accrued advertising and sales promotions $22,804 $21,215
Employee compensation and related benefits 11,225 9,880
Interest 3,836 3,223
Environmental liabilities 3,690 3,535
Income taxes 4,739 5,130
Other 4,034 4,786
------------------------
$50,328 $47,769
========================
32
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements
Long-term debt at December 31 consisted of the following:
1998 1997
------------------------
(In thousands)
8 5/8% Senior Notes, due 2008 $ 99,526
9% Senior Notes, due 2001 - $76,594
Series A Notes 15,000 15,000
Other notes 3,880 2,815
------------------------
118,406 94,409
Less current portion 4,305 1,156
------------------------
$114,101 $93,253
========================
In August 1998, Congoleum issued $100,000,000 face amount 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 Congoleum, in whole or in part, at any
time on or after August 1, 2003 at a predetermined redemption price (ranging
from 104% to 100%), plus accrued and unpaid interest to the date of redemption.
The indenture under which the notes were issued includes certain restrictions on
additional indebtedness and uses of cash by Congoleum, including dividend
payments. The holders of the Senior Notes have no recourse to the assets of ABI
and K&M.
Proceeds from the 8 5/8% Senior Notes were used to redeem all of the previously
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 purposes. In connection with the offering, Congoleum recorded an
extraordinary charge of $2,413,000, net of $1,400,000 of income tax benefit, to
write off debt issuance costs and premiums associated with the repurchase of the
9% Senior Notes. ABI recorded its share of this extraordinary charge in the
amount of $1,174,000.
33
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
During 1997 and 1996, Congoleum repurchased $11,156,000 and $2,250,000,
respectively, of the 9% Senior Notes. In connection with the repurchases in
1997, Congoleum recorded an extraordinary charge of $279,000, net of $160,000 of
income tax benefit, to write off the portion of the debt issuance costs and
premiums associated with the repurchased Senior Notes. Such charges were
immaterial to the financial statements for 1996.
The fair value of Congoleum'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 $98,500,000 at December 31, 1998. The estimated fair value of the 9%
Senior Notes was $77,743,000 at December 31, 1997.
In January 1996, ABI entered into a credit agreement with an insurance company
(the Agreement) providing for the issuance of senior promissory notes
aggregating $30 million. In January 1996, $15 million principal amount of notes
were issued (Series A Notes). The Series A Notes bear interest at 6.7% per annum
and are payable in annual installments of $3 million beginning in 1999. Notes
issued under the Agreement are obligations of ABI, and the holders of the Notes
have no recourse to the assets of Congoleum or K&M. The fair value of the Series
A Notes approximates their carrying value at both December 31, 1998 and 1997.
Other notes consist of promissory notes issued in connection with various
transactions. In 1998, the Company obtained loans from local banks in connection
with the acquisition of buildings in Belgium and Singapore. The loans were for
2,500,000 Belgian francs and 2,700,000 Singapore dollars. The loans are payable
in equal installments through 2008 and 2018, respectively. The interest rates on
the loans are 5.6% for the Belgian loan and 1.5% above the local bank's prime
rate (7.5% at December 31, 1998) for the Singapore loan. The loans are secured
by the property acquired. Other notes also include promissory notes issued in
connection with the K&M transactions (described in Note 4), which bear interest
at 1% above BankBoston's base lending rate (7.75% at December 31, 1998), and are
repayable through 1999.
34
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Financing Arrangements (continued)
At December 31, 1998, the Company had revolving and other short-term agreements
providing for secured and unsecured borrowings up to $65 million, with interest
accruing at variable rates. No borrowings were outstanding under these
agreements at December 31, 1998. At December 31, 1997, the weighted-average
interest rate on the $5.5 million outstanding under these arrangements, which
was unsecured, was approximately 7.4%. The carrying value of amounts outstanding
under these agreements at December 31, 1997 approximated fair value. Commitment
fees and compensating balance requirements associated with these agreements are
insignificant.
The terms of the Company's loan agreements impose certain restrictions on its
ability to incur additional indebtedness and call for the maintenance of
specific levels of working capital and minimum net worth and restrict the
payment of cash dividends to holders of common stock and other capital
distributions as defined. At December 31, 1998, retained earnings which were
unrestricted as to such distributions amounted to $6,156,000.
Interest paid on all outstanding debt amounted to $9,480,000 in 1998,
$10,216,000 in 1997 and $10,825,000 in 1996.
Principal payments on the Company's long-term obligations due in each of the
next five years are as follows (in thousands):
1999 $4,305
2000 3,110
2001 3,113
2002 3,117
2003 3,120
35
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Other Liabilities
Other liabilities at December 31 consisted of the following:
1998 1997
------------------------
(In thousands)
Pension benefits $14,531 $13,248
Other postretirement benefits 9,872 9,958
Environmental remediation and
product-related liabilities 16,198 13,981
Accrued workers' compensation 4,987 4,425
Deferred income taxes 6,658 4,404
Accrued compensation 1,061 961
Other 2,732 4,294
------------------------
$56,039 $51,271
========================
36
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans
The Company sponsors several noncontributory defined benefit pension plans
covering substantially all employees. Amounts funded annually by the Company are
actuarially determined using the projected unit credit and unit credit methods
and are equal to or exceed the minimum required by government regulations.
Pension fund assets are invested in a variety of equity and fixed-income
securities.
Net periodic pension cost includes the following components:
Year ended December 31
1998 1997 1996
------------------------------
(In thousands)
Service cost $ 1,609 $ 1,535 $ 1,495
Interest cost 4,871 4,809 4,706
Expected return on assets (5,384) (4,809) (4,603)
Amortization of prior service benefit (229) (240) (230)
Amortization of transition obligation 277 274 272
Recognized net actuarial (gains) losses (221) 103 10
------------------------------
Net periodic benefit cost $ 923 $ 1,672 $ 1,650
=============================
The weighted-average assumptions as of December 31 were:
1998 1997
----------------------------
Discount rate 6.75%-7.50% 7.00%-7.50%
Expected return on plan assets 7.50%-9.00% 7.50%-9.00%
Rate of compensation increase 5.00% 5.00%-5.50%
37
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The following table sets forth the components of the change in projected benefit
obligation and fair value of plan assets during 1998 and 1997:
1998 1997
------------------------
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of year $71,956 $70,097
Service cost 1,609 1,535
Interest cost 4,871 4,809
Plan participants' contributions 111 111
Plan amendments - 29
Actuarial losses 2,018 1,078
Foreign currency exchange rate changes (79) (252)
Benefits paid (5,446) (5,451)
------------------------
Benefit obligation at end of year $75,040 $71,956
========================
Change in plan assets
Fair value of plan assets at beginning of year $64,230 $56,432
Actual return on plan assets 4,794 10,143
Company contributions 1,749 3,017
Plan participants' contributions 111 111
Foreign currency exchange rate changes (511) (22)
Benefits paid (5,446) (5,451)
------------------------
Fair value of plan assets at end of year $64,927 $64,230
========================
38
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The funded status of the plans at December 31 were as follows:
1998 1997
-------------------------
(In thousands)
Funded status of the plan (underfunded) $(10,114) $ (7,900)
Unrecognized net actuarial losses (gains) 788 (2,013)
Unrecognized transition obligation 525 775
Unamortized prior service benefit (1,702) (2,192)
-------------------------
Net amount recognized $(10,503) $(11,330)
=========================
The amounts recorded in the statement of financial position as of December 31
were:
1998 1997
-------------------------
(In thousands)
Accrued benefit liability $(14,923) $(13,967)
Intangible asset 796 870
Deferred tax asset 1,322 645
Accumulated other comprehensive loss 2,302 1,122
-------------------------
Net amount recognized $(10,503) $(11,330)
=========================
As of December 31, 1998 and 1997, the Company had pension plans with projected
benefit obligations which exceeded plan assets. For such plans, the aggregated
projected benefit obligations were $60,352,000 and $26,758,000 for 1998 and
1997, respectively, and the aggregated plan assets were $46,926,000 and
$15,069,000, respectively.
The Company also has three 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute 12% to 15%
of compensation with partially matching Company contributions. Defined
contribution pension expense for the Company was $1,779,000, $1,579,000 and
$2,043,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
39
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Postretirement Benefits Other than Pensions
Net periodic postretirement benefits cost for the year ended December 31 is as
follows:
1998 1997 1996
----------------------------
(In thousands)
Service cost $ 139 $ 139 $ 141
Interest cost 480 505 484
Amortization of prior service benefit (409) (409) (447)
Amortization of net loss 60 99 90
----------------------------
Net periodic benefit cost $ 270 $ 334 $ 268
============================
Weighted-average discount rate 6.75% 7.0% 7.0%
The change in benefit obligation and the actuarial and recorded liabilities for
these postretirement benefits at December 31, none of which has been funded in
1998 and 1997, were as follows:
1998 1997
----------------------
(In thousands)
Change in benefit obligation:
Benefit obligation at end of prior year $ 7,552 $ 7,490
Service cost (with interest) 139 139
Interest cost 480 505
Actuarial (gain) loss (256) 16
Benefits paid (539) (598)
----------------------
Benefit obligation at end of year $ 7,376 $ 7,552
======================
Funded status (unfunded) $ (7,376) $ (7,552)
Unrecognized net (gain) loss (96) 220
Unrecognized prior service benefit (2,815) (3,224)
----------------------
Accrued postretirement benefit cost (10,287) (10,556)
Less current portion 415 598
----------------------
Noncurrent postretirement benefit obligations $ (9,872) $ (9,958)
======================
40
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Postretirement Benefits Other than Pensions (continued)
The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 8.1% in 1998; the rate was assumed to decrease
gradually to 5.0% over the next eight 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 $53,000 for the year
ended December 31, 1998 and would increase the accumulated postretirement
benefit obligations by $605,000 at December 31, 1998.
10. Commitments and Contingencies
Leases
The Company occupies certain warehouse and office space and uses certain
equipment and motor vehicles under lease agreements expiring at various dates
through 2004. The leases generally require the Company to pay for utilities,
insurance, taxes and maintenance, and some contain renewal options. Total rent
expense charged to operations was $3,889,000 in 1998, $3,428,000 in 1997 and
$3,179,000 in 1996.
Future minimum payments relating to operating leases are as follows (in
thousands):
1999 $3,082
2000 2,255
2001 1,249
2002 729
2003 590
Thereafter 40
------------
Total future minimum lease payments $7,945
============
41
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
Environmental and Other Liabilities
The Company records a liability for environmental remediation claims when a
clean-up program or claim payments become probable and the costs can be
reasonably estimated. As assessments and clean-up 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.
American Biltrite Inc.
ABI is a codefendant with many other manufacturers and distributors of
asbestos-containing products in approximately seventy-nine pending claims
involving approximately 590 individuals as of December 31, 1998. These claims
allege personal injury from exposure to asbestos or asbestos-containing
products. As of December 31, 1997, there were approximately sixty-six pending
claims involving approximately 577 individuals. Activity related to asbestos
claims during the years ended December 31, 1998 and 1997 was as follows:
1998 1997
------------------------
Claims at January 1 66 64
New claims 31 16
Settlements (3) (3)
Dismissals (15) (11)
------------------------
Claims at December 31 79 66
========================
42
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
The total indemnity costs incurred to settle claims during 1998 and 1997 were
$265,000 and $510,000, respectively, all of which were paid by ABI's insurance
carriers, as were the related defense costs. The average indemnity cost per
resolved claim was $15,000 in 1998 and $36,000 in 1997. Furthermore, under
certain circumstances, third parties are contractually liable for up to the full
amount of any liabilities suffered by ABI in connection with these claims. In
general, asbestos-containing products have not been found to pose a health risk
unless significant amounts of free asbestos fibers become airborne. The asbestos
in asbestos-containing products sold by ABI was encapsulated during the
manufacturing process. ABI believes that these suits are without merit and that,
in any event, the damages sought are substantially within the coverages of its
applicable liability insurance policies, and accordingly, no dedicated reserves
have been set aside for these suits.
ABI has been named as a Potentially Responsible Party ("PRP") within the meaning
of the Federal Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), as to two sites in two separate states. At one of
the two sites located in Southington, Connecticut, ("Southington Site"), ABI's
subsidiary ("Ideal") is also named as a PRP. At the Southington Site, the
currently estimated aggregate future cost of remediation and monitoring is
approximately $28 million. ABI's and Ideal's share of the assessments to the
PRPs to date is approximately $115,000. Subject to a final allocation among the
PRPs, ABI's and Ideal's share of the future remediation costs is currently
estimated to be approximately $340,000. Under an agreement, Ideal will share a
percentage of this cost with the former owner of Ideal's assets. Under an
agreement between ABI and The Biltrite Corporation ("TBC"), TBC is liable for
37.5% of the costs incurred by ABI with respect to the Southington Site.
43
<PAGE>
10. Commitments and Contingencies (continued)
At the other site, ABI, together with 26 other PRPs, signed a consent decree and
site remediation agreement which, without an admission of liability, requires
remediation at the ILCO Superfund site located in Leeds, Alabama (the "ILCO
Site"). On April 22, 1997, the United States District Court for the Northern
District of Alabama approved the consent decree. The currently estimated
aggregate future cost of remediation at the ILCO Site is $34.3 million. Pursuant
to a final allocation among consent decree participants, ABI's share of the
currently estimated remediation cost is approximately $1.0 million after
considering commitments from de minimus settlors, the City of Leeds, one of the
City of Leeds insurers and TBC, which is, by agreement, liable for 37.5% of the
remediation costs incurred by ABI. ABI has paid approximately $85,000 of this
amount, with the rest payable over the next four to seven years. ABI has
asserted a claim for a portion of the allocation share attributable to ABI
against a third party who the Company believes arranged for the shipment of the
alleged hazardous substances generated by ABI to the ILCO site. ABI and the
other settling PRPs also are pursuing litigation against PRPs who used the ILCO
Site and have not settled.
In addition, ABI has been named as a defendant in two environmental lawsuits. In
one case, ABI is alleged to have sent hazardous waste to a municipal landfill in
New Hampshire. The past and future costs to clean up the site are expected to be
approximately $24 million. ABI does not have nor has it been furnished any
information by any party to the litigation to estimate what its potential
liability would be at this site. However, in order to avoid the cost of
litigation, ABI has offered to contribute $173,000 as part of $2.8 million being
raised by fourteen third-party defendants to reach a global settlement of the
case. The global settlement has not yet been, and there can be no assurance that
it will be, agreed or concluded. One of ABI's insurance carriers has agreed to
contribute one-half of ABI's share of this global settlement. Furthermore under
an agreement between ABI and TBC, TBC is liable for 37.5% of the costs incurred
by ABI.
44
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
In the other environmental lawsuit, ABI currently is a defendant in which Olin
Corporation, the present owner of a former chemical plant in Wilmington,
Massachusetts, claims that ABI and other defendants are liable for a portion of
the costs associated with remediating environmental conditions at the site. ABI
believes that its exposure to liability in this lawsuit may be material. The
lawsuit, captioned Olin Corporation v. Fisons, plc et al., was filed on May 26,
1993 in the Federal District Court of Massachusetts. A wholly owned subsidiary
of ABI owned and operated the Wilmington plant from 1959 to 1964 and, for
approximately one month during 1964, ABI held title to the property directly.
ABI may be liable for the activities of that subsidiary corporation from 1953 to
1964. Past plant operations from 1953 to 1986 have caused surface and
groundwater contamination at and near the site. Since 1989, Olin has conducted
an environmental assessment of the site and awaits a decision by Massachusetts
officials concerning the scope of any remedial actions which must be undertaken
at the site. Olin claims to have spent more than $23 million in investigative
and other response costs to date. While additional expenditures are anticipated,
because Massachusetts officials have not yet determined what the remedy for the
site will be, ABI is unable to determine the amount of additional expenditures
which may be required at the site. Also, because the matter currently is subject
to litigation, ABI is unable to express an opinion as to what portion of the
costs incurred at the site ABI may be required to pay. Management continues to
defend against this lawsuit vigorously. Under an agreement between ABI and TBC,
TBC is liable for 37.5% of the costs that may be incurred by ABI as a result of
this lawsuit.
ABI also is potentially responsible for response and remediation costs as to
four state-supervised sites, two sites in Massachusetts, and one each in New
York and New Jersey. At these four sites, ABI's liability will be based upon
disposal of allegedly hazardous waste material from its current and former
plants. While the exact amount of the future costs to ABI resulting from its
liability is 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, determination of ABI's liability in proportion to other responsible
parties and the extent to which costs may be recoverable from insurance, ABI
believes, based upon current information available, that its liability at any of
these sites will not be material. Under an agreement between ABI and TBC, TBC is
liable for 37.5% of the costs which may be incurred by ABI at all of these
sites.
45
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
ABI has made demands against its insurance carriers to provide defense and
indemnity for ABI's liabilities at the Southington site, the ILCO site, the New
Hampshire municipal landfill for that portion of the settlement not covered by
the agreement with one of ABI's insurance carriers, the Olin site and the
state-supervised sites in Massachusetts, New York and New Jersey. ABI and its
principal carrier have entered into negotiations to resolve this insurance
coverage demand made against the carrier. ABI cannot estimate the probable
insurance recovery from this carrier or any of its other insurance carriers at
any of the sites at this stage of negotiations.
ABI is involved in other routine legal proceedings relating to its business and
operations. ABI does not believe that these proceedings, in the aggregate, will
have a material adverse effect on ABI's results of operations or financial
condition.
As of December 31, 1998, the Company has accrued $1.2 million for ABI's
estimable and probable amounts for contingencies described above. Additional
amounts have been provided for matters related to Congoleum as described below.
Congoleum Corporation
Congoleum is named, together with a large number (in most cases, hundreds) of
other companies, as a PRP in pending proceedings under the CERCLA, as amended,
and similar state laws. In two instances, although not named as a PRP, Congoleum
has received a request for information. These pending proceedings currently
relate to seven disposal sites in New Jersey, Pennsylvania, Maryland,
Connecticut and Delaware in which recovery from generators of hazardous
substances is sought for the cost of cleaning up the contaminated waste sites.
Congoleum'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, Congoleum can be held
jointly and severally liable for all environmental costs associated with a site.
46
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
The most significant exposure to which Congoleum has been named a PRP relates to
a recycling facility site in Elkton, Maryland. Two removal actions are
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 among members of the PRP
group, Congoleum's share was estimated to be approximately 5.5%. At December 31,
1998, Congoleum believes its probable liability, which has been recorded in
other liabilities, based on present facts and circumstances, to be approximately
$2 million. A corresponding insurance receivable of $1.5 million has been
recorded in other noncurrent assets. No other PRP sites are material on an
individual basis.
Congoleum also accrues remediation costs for certain of Congoleum's owned
facilities on an undiscounted basis. Estimated total clean-up costs, including
capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.
Although there can be no assurances, Congoleum anticipates that these matters
will be resolved over a period of years for amounts (including legal fees and
other defense costs) that Congoleum 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 Congoleum.
47
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
Congoleum is one of many defendants in approximately 657 pending claims
(including workers' compensation cases), involving approximately 1,984
individuals as of December 31, 1998, alleging personal injury from exposure to
asbestos or asbestos-containing products. There were 654 claims at December 31,
1997 which involved approximately 6,455 individuals. Activity related to
asbestos claims during the years ended December 31, 1998 and 1997 was as
follows:
1998 1997
------------------------
Claims at January 1 654 661
New claims 203 126
Settlements (63) (44)
Dismissals (137) (89)
------------------------
Claims at December 31 657 654
========================
The total indemnity costs incurred, excluding the case noted below, to settle
claims during 1998 and 1997 were $2,160,000 and $949,000, respectively, which
were paid by Congoleum's insurance carriers, as were the related defense costs.
The average indemnity cost per resolved claim was $11,000 in 1998 and $7,000 in
1997, all of which costs were covered by our 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 their activities either as
independent contractors or as employees of shipyards or other industries
utilizing asbestos-containing products (or, in the workers' compensation cases,
as employees of Congoleum) and that included among such products which allegedly
caused their diseases were sheet products provided by Congoleum or resilient
tile provided by the Amtico Tile Division of ABI (the "Tile Division") or both.
Congoleum 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
48
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
of the asbestos in asbestos-containing sheet and tile products sold by Congoleum
or the Tile Division was fully bonded or encapsulated during the manufacturing
process. Congoleum 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, Congoleum and another defendant were found
liable for $3.3 million in damages, subject to proportional liability under
California law. Congoleum had previously settled one count for an immaterial
amount and had gone to trial for the remaining counts. The jury found that
Congoleum 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. Congoleum and the other defendant have appealed this decision.
Congoleum'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, 1998, Congoleum has accrued approximately $6.9 million for costs
related to asbestos product liability. Estimated insurance coverage of $3.3
million has been recorded in other noncurrent assets at December 31, 1998 and
are considered probable of recovery.
Although there can be no assurance, Congoleum 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 Congoleum's
asbestos-containing products will not have a material adverse effect on the
financial position of Congoleum.
49
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies (continued)
The total balances of environmental and asbestos-related liabilities and the
related insurance receivables deemed probable of recovery at December 31 for
Congoleum are as follows:
1998 1997
Liability Receivable Liability Receivable
----------------------------------------------
(In thousands)
Asbestos product liability $ 9,200 $2,900 $ 7,900 $1,400
Environmental liabilities 6,900 3,300 6,600 3,300
Other 1,100 - 500 -
----------------------------------------------
Total $17,200 $6,200 $15,000 $4,700
==============================================
Other
In the ordinary course of its business, ABI and Congoleum become 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, ABI and Congoleum do
not believe that these matters, individually or in the aggregate, will have a
material adverse effect on their business or financial condition.
50
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 and
1997 were as follows:
1998 1997
------------------------
(In thousands)
Deferred tax assets:
Accruals and reserves $21,959 $21,414
Credit carryforwards 336 1,178
------------------------
Total deferred tax assets 22,295 22,592
Deferred tax liabilities:
Depreciation 14,212 12,723
Insurance 3,438 2,661
Inventory 2,538 1,211
Undistributed domestic earnings 2,517 2,038
Foreign taxes 1,087 991
Other 1,640 1,560
------------------------
Total deferred tax liabilities 25,432 21,184
------------------------
Net deferred tax (liability) asset $(3,137) $ 1,408
========================
Credit carryforwards consist primarily of alternative minimum tax credits and
foreign tax credits. The components of earnings before income taxes for the year
ended December 31 are:
1998 1997 1996
-------------------------------------
(In thousands)
Domestic $21,722 $16,849 $20,037
Foreign 3,280 2,446 1,937
-------------------------------------
$25,002 $19,295 $21,974
=====================================
51
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
Significant components of the provision for income taxes for the year ended
December 31 were as follows:
1998 1997 1996
------------------------------------
(In thousands)
Current:
Federal $3,087 $6,346 $5,887
Foreign 1,185 931 339
State 265 566 711
------------------------------------
Total current 4,537 7,843 6,937
Deferred 5,144 (470) 1,934
------------------------------------
$9,681 $7,373 $8,871
====================================
Deferred income taxes include provisions of $479,000, $301,000 and $532,000
during 1998, 1997 and 1996, respectively, for ABI's share of the undistributed
earnings of Congoleum, which does not file a consolidated tax return with ABI.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense for the year ended December 31 is:
1998 1997 1996
------------------------------------
U.S. statutory rate 35% 34% 35%
State income taxes, net of
federal benefits 2 3 4
Undistributed domestic earnings 2 1 2
Other - - (1)
------------------------------------
Effective tax rate 39% 38% 40%
====================================
52
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
Undistributed earnings of foreign subsidiaries aggregated approximately
$17,211,000 at December 31, 1998, which, under existing law, will not be subject
to U.S. tax until distributed as dividends. Because the earnings have been or
are intended to be indefinitely reinvested in foreign operations, no provision
has been made for U.S. income taxes that may be applicable thereto.
Income taxes paid amounted to approximately $6,160,000 in 1998, $5,727,000 in
1997, and $4,526,000 in 1996.
12. Other Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components; however, the adoption of this Statement has no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on available-for-sale securities, foreign currency translation
adjustments and changes in certain minimum pension liabilities, which, prior to
adoption, were reported separately in stockholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No.
130.
Components of other comprehensive income (loss) for the year ended December 31
consisted of the following:
1998 1997 1996
------------------------------------
(In thousands)
Foreign currency translation adjustments $(1,024) $(838) $ 413
Change in minimum pension liability (577) 331 (432)
------------------------------------
$(1,601) $(507) $ (19)
====================================
53
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Other Comprehensive Income (continued)
Accumulated balances related to each component of other comprehensive income as
of December 31 are as follows:
1998 1997 1996
------------------------------------
(In thousands)
Foreign currency translation adjustments $(3,783) $(2,759) $(1,921)
Minimum pension liability (1,123) (546) (877)
------------------------------------
$(4,906) $(3,305) $(2,798)
====================================
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the year ended December 31:
1998 1997 1996
-----------------------------------
(In thousands, except per share amounts)
Numerator:
Net income $ 9,002 $ 8,145 $ 6,299
-----------------------------------
Denominator:
Denominator for basic earnings per
share: Weighted-average shares 3,641 3,633 3,645
Dilutive employee stock options 165 105 84
-----------------------------------
Denominator for diluted earnings
per share:
Adjusted weighted-average shares
and assumed conversions 3,806 3,738 3,729
===================================
Basic earnings per share $ 2.47 $ 2.24 $ 1.73
===================================
Diluted earnings per share $ 2.36 $ 2.18 $ 1.69
===================================
Options to purchase 238,000 and 238,500 shares of common stock at $23.63 per
share were outstanding during 1998 and 1997, respectively, but were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
54
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stock Option Plans
ABI Stock Plans
During 1993, ABI adopted a stock award and incentive plan which permits the
issuance of options, stock appreciation rights (SARs), limited SARs, restricted
stock, restricted stock units and other stock-based awards to selected employees
and independent contractors of the Company. The plan reserved 400,000 shares of
common stock for grant and provides that the term of each award be determined by
the committee of the Board of Directors (Committee) charged with administering
the plan. During 1997, the Board of Directors approved an amendment to the plan
to increase the number of shares reserved for grant from 400,000 to 550,000.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock options and the exercise price, determined by the Committee, may
not be less than the fair market value of a share on the date of grant. SARs and
limited SARs granted in tandem with an option shall be exercisable only to the
extent the underlying option is exercisable and the grant price shall be equal
to the exercise price of the underlying option. In addition, the Committee may
grant restricted stock to participants of the plan at no cost. No SARs or
restricted stock have been granted under the plan since its adoption. Other than
the restrictions which limit the sale and transfer of these shares, participants
are entitled to all the rights of a shareholder.
During 1985, ABI adopted a stock option plan which permits the issuance of
300,000 shares of common stock to key executives. Under the terms of the plan,
options granted may be either nonqualified or incentive stock options and are
issued at prices ranging from 85% to 100% of fair market value at the date of
grant. Options granted under the plan are exercisable in installments; however,
no options are exercisable within one year or later than ten years from the date
of grant.
55
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stock Option Plans (continued)
The following tables summarize information about ABI's fixed stock options:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 574,580 $18.79 342,640 $15.60 349,440 $15.17
Granted - 238,500 23.63 - -
Exercised (44,500) 16.73 (6,560) 13.56 (5,800) 6.76
Forfeited - - - (1,000) 7.00
------------ ----------- -------------
Outstanding at end of year 530,080 18.97 574,580 18.79 342,640 15.60
============ =========== =============
Options exercisable at end of
year 373,397 312,932 227,024
Available for grant at end of
year 19,340 19,340 107,840
</TABLE>
<TABLE>
<CAPTION>
Number Number
Outstanding at Exercisable at Weighted-Average
Option December 31 December 31 Remaining Exercise
Grant Date 1998 1998 Contractual Life Price
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 1991 50,400 50,400 2.42 years $ 7.00
August 1993 241,680 241,680 4.75 years 16.88
April 1997 238,000 81,317 8.33 years 23.63
</TABLE>
Congoleum Stock Option Plan
Effective with its public offering, Congoleum adopted the 1995 stock option plan
(the plan). Under the plan, options to purchase up to 800,000 shares of
Congoleum's Class A common stock may be issued to officers and key employees.
These options may be either incentive stock options or nonqualified stock
options, and the option price must be at least equal to the fair value of
Congoleum'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.
56
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stock Option Plans (continued)
The following table summarizes information about Congoleum's fixed stock
options:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 511,900 $13.01 484,500 $12.89 481,000 $13.00
Granted 345,000 9.00 56,000 14.25 22,000 10.63
Exercised - - (2,000) 13.00 -
Forfeited (230,900) 12.72 (26,600) 13.53 (18,500) 13.00
----------- ------------ ------------
Outstanding at end of year 626,000 10.91 511,900 13.01 484,500 12.89
=========== ============ ============
Options exercisable at end of year 180,000 185,200 94,100
Available for grant at end of year 172,000 286,100 65,500
</TABLE>
Pro Forma Disclosure
Pro forma disclosure, as required by SFAS No. 123, regarding net income and
earnings per share has been determined as if the Company had accounted for its
employee stock options under the fair value method of the Statement.
The fair value for the ABI options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: risk-free interest rate of 6.69%, expected dividend yield
of 12.70%, volatility factor of the expected market price of the Company's
common stock of .288, and a weighted-average expected life of the options of
seven and a half years.
57
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Stock Option Plans (continued)
The fair value for the Congoleum options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: option forfeiture of 15%,
risk-free interest rates of 4.80%, 5.76% and 5.99%, no dividends, volatility
factors of the expected market price of Congoleum's common stock of .365, .356
and .388, and a weighted-average expected life of the options of seven years.
The weighted-average fair value of options granted under ABI's 1993 Stock Award
and Incentive Plan during 1997 was $1.25. The weighted-average fair value of
options granted under Congoleum's 1995 Stock Option Plan during 1998, 1997 and
1996 was $4.72, $4.34 and $4.68, respectively.
For purposes of pro forma disclosures, the estimated fair value of the ABI and
Congoleum options is amortized to expense over the options' vesting period. The
impact on pro forma net income may not be representative of compensation expense
in future years, when the effect of the amortization of multiple awards would be
reflected in the pro forma disclosures.
The Company's pro forma information follows:
1998 1997 1996
--------------------------------------
(In thousands, except per share amounts)
Net income $9,002 $8,145 $6,299
Estimated pro forma
compensation expense from
stock options (355) (332) (257)
--------------------------------------
Pro forma net income $8,647 $7,813 $6,042
======================================
Pro forma earnings per share
Basic $ 2.38 $ 2.15 $ 1.66
Diluted 2.27 2.09 1.62
58
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments
Description of Products and Services
The Company has four reportable segments: flooring products, tape products,
jewelry and a Canadian division which produces flooring and rubber products.
Congoleum represents the Company's flooring products segment, which manufactures
vinyl and vinyl composition floor coverings with distribution primarily through
floor covering distributors, retailers and contractors for commercial and
residential use. The tape products segment consists of two production facilities
in the United States and finishing and sales facilities in Belgium and
Singapore. The tape products segment manufactures paper, film, HVAC, electrical,
shoe and other tape products for use in industrial and automotive markets. The
jewelry segment reflects the results of K&M Associates L.P., a national costume
jewelry supplier to the mass merchandiser markets. The Company's Canadian
division produces flooring, rubber products, including materials used by
footwear manufacturers, and other industrial products.
Measurement of Segment Profit or Loss and Segment Assets
The Company considers all revenues and expenses to be of an operating nature
and, accordingly, allocates them to industry segments regardless of the profit
center in which recorded. Costs specific to a segment, such as pension expense,
are charged to the segment. Corporate office expenses are allocated to certain
segments based on resources allocated. All assets, except investment in Hulera
Sula, are considered operating assets. Significant assets of the Corporate
office include cash, deferred tax assets, goodwill, and investment in Hulera
Sula. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales or transfers.
Factors Used to Identify Reportable Segments
Reportable segments are business units that offer different products and are
each managed separately. The Company's Canadian division manufactures certain
products which are similar to products of the flooring segment; however, the
Canadian division is managed and reports separately from the flooring segment.
59
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments (continued)
Segment Profit and Assets
Year ended December 31
1998 1997 1996
-----------------------------
Revenues (In thousands)
Revenues from external customers:
Flooring products $258,258 $251,562 $268,237
Tape products 82,233 83,389 78,567
Jewelry 47,350 44,537 34,372
Canadian division 36,038 38,024 36,785
-----------------------------
Total revenues from external customers 423,879 417,512 417,961
Intersegment revenues:
Flooring products 868 964 1,214
Tape products 193 162 124
Jewelry - - -
Canadian division 6,613 5,110 5,485
-----------------------------
Total intersegment revenues 7,674 6,236 6,823
-----------------------------
431,553 423,748 424,784
Reconciling items
Intersegment revenues (7,674) (6,236) (6,823)
=============================
Total consolidated revenues $423,879 $417,512 $417,961
=============================
Approximately 50%, 50% and 51% of the Canadian division's revenues from external
customers were for flooring products for 1998, 1997 and 1996, respectively. The
remaining revenues from the Canadian division's external customers were from
sale of rubber and other industrial products.
60
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments (continued)
Year ended December 31
1998 1997 1996
----------------------------
(In thousands)
Interest revenue
Flooring products $ 1,607 $ 1,539 $ 1,784
Tape products 22 15 8
Jewelry 61 - -
Canadian division 163 87 3
----------------------------
Total segment interest revenue 1,853 1,641 1,795
Reconciling items
Corporate office interest revenue 37 23 12
Intersegment interest revenue (100) (38) -
----------------------------
Total consolidated interest revenue $ 1,790 $ 1,626 $ 1,807
============================
Interest expense
Flooring products $ 7,365 $ 6,797 $ 8,153
Tape products 74 - 8
Jewelry 1,312 1,654 1,712
Canadian division 1 4 134
----------------------------
Total segment interest expense 8,752 8,455 10,007
Reconciling items
Corporate office interest expense 391 927 740
Intersegment interest expense (100) (38) -
----------------------------
Total consolidated interest expense $ 9,043 $ 9,344 $10,747
============================
Depreciation and amortization expense
Flooring products $10,741 $10,346 $ 9,783
Tape products 1,979 1,831 1,664
Jewelry 239 237 258
Canadian division 1,494 1,395 1,502
----------------------------
Total segment depreciation and amortization 14,453 13,809 13,207
Reconciling items
Corporate office depreciation and
amortization 675 692 667
----------------------------
Total consolidated depreciation and
amortization $15,128 $14,501 $13,874
============================
61
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments (continued)
Year ended December 31
1998 1997 1996
----------------------------
(In thousands)
Segment profit (loss)
Flooring products $15,516 $11,055 $19,995
Tape products 3,797 4,512 5,000
Jewelry 2,657 2,731 (3,342)
Canadian division 3,095 2,879 1,253
----------------------------
Total segment profit 25,065 21,177 22,906
Reconciling items
Corporate office profit or loss (4) (1,940) (694)
Intercompany profit or loss (59) 58 (238)
----------------------------
Total consolidated earnings before income
taxes and other items $25,002 $19,295 $21,974
============================
Segment profit or loss is before income tax expense or benefit and extraordinary
items. In 1998 and 1997, the flooring segment recorded a loss on early
retirement of debt, net of income tax benefit, of $2,413,000 and $279,000,
respectively. The extraordinary losses are not included in the segment profit
for 1998 and 1997 disclosed above.
Year ended December 31
1998 1997 1996
------------------------------
(In thousands)
Segment assets
Flooring products $231,865 $196,581 $219,798
Tape products 48,308 47,728 50,727
Jewelry 16,298 18,074 19,306
Canadian division 20,710 20,179 20,455
-------------------------------
Total segment assets 317,181 282,562 310,286
Reconciling items
Corporate office assets 29,446 32,606 34,270
Intersegment accounts receivable (10,436) (15,389) (19,439)
Intersegment profit in inventory (152) (93) (151)
-------------------------------
Total consolidated assets $336,039 $299,686 $324,966
===============================
62
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments (continued)
Year ended December 31
1998 1997 1996
----------------------------
(In thousands)
Expenditures for additions to long-lived assets
Flooring products $ 9,440 $19,767 $12,817
Tape products 4,396 1,249 5,700
Jewelry 613 112 87
Canadian division 2,693 1,038 1,237
----------------------------
Total expenditures for additions to
long-lived assets 17,142 22,166 19,841
Reconciling items
Corporate office expenditures for
additions to long-lived assets 13 17 28
----------------------------
Total expenditures for additions to
long-lived assets $17,155 $22,183 $19,869
============================
Geographic Area Information
Year ended December 31
1998 1997 1996
------------------------------
(In thousands)
Revenues from external customers
United States $363,742 $353,325 $359,252
Canada 31,314 35,667 32,002
Europe 16,225 16,000 15,459
Asia 7,397 8,676 8,066
Other 5,201 3,844 3,182
------------------------------
Total revenues from external customers $423,879 $417,512 $417,961
==============================
Revenues are attributed to countries based on the location of customers.
63
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Industry Segments (continued)
December 31
1998 1997 1996
-----------------------------
(In thousands)
Long-lived assets by area
United States $150,079 $147,707 $137,018
Canada 8,284 7,549 8,234
Europe 1,275 622 678
Asia 2,561 170 243
=============================
Total long-lived assets $162,199 $156,048 $146,173
=============================
During 1998, the Company acquired buildings in Belgium and Singapore (see Note
6).
16. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
(In thousands of dollars, except per share amounts)
1998
Net sales $106,388 $108,501 $110,681 $ 98,309
Gross profit 31,578 34,354 35,401 32,039
Net earnings 1,325 2,101 1,821 3,755
Net earnings per share:
Basic .36 .58 .50 1.03
Diluted .35 .55 .48 1.00
In the third quarter of 1998, ABI recorded an extraordinary loss in the amount
of $1,174 to recognize its share of Congoleum's loss on early retirement of
debt, net of income tax benefit. Basic and diluted earnings per share before
extraordinary item for the third quarter ended October 3, 1998 were $.82 and
$.79, respectively
64
<PAGE>
American Biltrite Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Quarterly Financial Information (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------
(In thousands of dollars, except per share amounts)
1997
Net sales $95,513 $101,592 $120,036 $100,371
Gross profit 28,570 31,378 38,420 29,405
Net earnings 47 884 4,820 2,394
Net earnings per share:
Basic .01 .24 1.33 .66
Diluted .01 .24 1.31 .64
65
<PAGE>
American Biltrite Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
Year ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
- - ---------------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts-- Deductions-- Balance at
Description Period Expenses Describe Other Describe End of Period
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
Allowances for doubtful accounts
and cash discounts $5,052 $ 2,411 $ 2,339(A) $5,124
================================================================================
Reserve for returns and
markdowns $3,141 $12,318 $12,619(A) $2,840
================================================================================
1997
Allowances for doubtful accounts
and cash discounts $4,935 $ 2,433 $ 2,316(A) $5,052
================================================================================
Reserve for returns and
markdowns $3,880 $10,588 $11,327(A) $3,141
================================================================================
1996
Allowances for doubtful accounts
and cash discounts $6,477 $ 2,885 $ 4,427(A) $4,935
================================================================================
Reserve for returns and
markdowns $3,301 $11,342 $10,763(A) $3,880
================================================================================
</TABLE>
(A) Represents accounts charged off during the year, net of recoveries
66
<PAGE>
Pursuant to the requirement 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,
AMERICAN BILTRITE INC.
(Registrant)
Date: March 9, 1999 by: /s/ Gilbert K. Gailius
-----------------------------------
Gilbert K. Gailius, Vice President
Finance, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 9, 1999 by: /s/ Roger S. Marcus
-----------------------------------
Roger S. Marcus, Chairman of the
Board, Chief Executive Officer
and Director
Date: March 9, 1999 by: /s/ Richard G. Marcus
-----------------------------------
Richard G. Marcus, President, Chief
Operating Officer and Director
Date: March 9, 1999 by: /s/ William M. Marcus
-----------------------------------
William M. Marcus, Executive Vice
President, Treasurer, Chairman of
the Executive Committee and Director
Date: March 9, 1999 by: /s/ John C. Garrels, 3rd
-----------------------------------
John C. Garrels, 3rd, Director
Date: March 9, 1999 by: /s/ Kenneth I. Watchmaker
-----------------------------------
Kenneth I. Watchmaker, Director
Date: March 9, 1999 by: /s/ Edward J. Lapointe
-----------------------------------
Edward J. Lapointe, Controller
67
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description Page No.
- - ----------- ----------- --------
3(1) XI Restated Certificate of Incorporation -
3(2) IV By-Laws, amended and restated as of March 13, -
1991
10(3) I, V 1985 Stock Option Plan ("the 1985 Plan") -
10(4) II, V Form of Agreement pursuant to the 1985 Plan -
providing for ISO's
10(5) III, V Form of Agreement pursuant to the 1985 Plan -
providing for NQSO's
10(6) VI Joint Venture Agreement dated as of December 16, -
1992 by and among American Biltrite Inc.,
Resilient Holdings Incorporated, Congoleum
Corporation, Hillside Industries Incorporated
and Hillside Capital Corporation
10(7) VII Closing Agreement dated as of March 11, 1993 by -
and among American Biltrite Inc., Resilient
Holdings Incorporated, Congoleum Corporation,
Hillside Industries Incorporated and Hillside
Capital Corporation
10(8) XII, V 1993 Stock Award and Incentive Plan as Amended -
and Restated as of March 4, 1997
10(9) IX K&M Associates L.P. Amended and Restated -
Agreement of Limited Partnership
10(10) VIII Purchase Agreement dated as of March 31, 1995 by -
and among Ocean State and certain limited
partners of K&M
68
<PAGE>
Page No.
--------
10(11) VIII Agreement and Plan of Merger dated as of April -
1, 1995 by and among the Company, Jewelco
Acquisition Co., Inc., AIMPAR, Inc., Arthur I.
Maier, Bruce Maier and Edythe J. Wagner
10(12) VIII Option Agreement dated as of April 1, 1995 by -
and among Ocean State and certain limited
partners of K&M
10(13) VIII Agreement and Plan of Merger dated as of May 3, -
1995 by and among the Company, Zirconia
Acquisition Co., Inc., Wilbur A. Cowett
Incorporated and Wilbur A. Cowett
10(14) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
Michael J. Glazerman, Trustee of the Marcus
Family Insurance Trust u/t/d March 1, 1990
10(15) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
the Marcus Family 1990 Insurance Trust
10(16) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
the Marcus Family 1996 Irrevocable Insurance
Trust Dated October 28, 1996
10(17) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
The Richard G. Marcus Irrevocable Insurance
Trust of 1990 Dated June 1, 1990
69
<PAGE>
Page No.
--------
10(18) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
the Roger S. Marcus Irrevocable Insurance Trust
Dated Nov. 29, 1996, Richard G. Marcus, Trustee
10(19) X, V Split-Dollar Agreement dated as of December 20, -
1996 by and between American Biltrite Inc. and
the Roger S. Marcus Irrevocable Insurance Trust
Dated Nov. 29, 1996
10(20) X, V Split-Dollar Agreement dated as of January 9, -
1997 by and between American Biltrite Inc. and
Joseph D. Burns
10(21) X, V Description of Supplemental Retirement Benefits -
for Gilbert K. Gailius
11 XI Statement Re: Computation of Per Share Earnings -
21 Subsidiaries of the Registrant (including each 72-73
subsidiary's jurisdiction of incorporation and
the name under which each subsidiary does
business)
23(1) Consent of Ernst & Young LLP, Independent 74
Auditors
27 Financial Data Schedule, filed herewith -
70
<PAGE>
- - ----------
I Incorporated by reference to exhibit 10(2) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1986. (1-4773)
II Incorporated by reference to exhibit 10(3) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1986. (1-4773)
III Incorporated by reference to exhibit 10(4) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1986. (1-4773)
IV Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1991. (1-4773)
V Compensatory plans required to be filed as exhibits pursuant to Item 14(c)
of Form 10-K.
VI Incorporated by reference to the exhibits filed with the Company's Current
Report on Form 8-K filed December 21, 1992. (1-4773)
VII Incorporated by reference to the exhibits filed with the Company's Current
Report on Form 8-K filed March 25, 1993. (1-4773)
VIII Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-K as amended by the Form 8-K/A filed respectively on May 17,
1995 and July 17, 1995.
IX Incorporated by reference to Item 14 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
X Incorporated by reference to the exhibits to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
XI Incorporated by reference to Note 12 of the Company's consolidated
financial statements (filed herewith).
XII Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q filed on June 28, 1997.
71
Exhibit No. 21
SUBSIDIARIES OF THE REGISTRANT
Effective as of March 25, 1999
Name Jurisdiction
---- ------------
American Biltrite (Canada) Ltd. Canada
200 Bank Street
Sherbrooke, Quebec JIH 4K3
also doing business in Canada
as Produits American Biltrite Ltee
American Biltrite Far East, Inc. Delaware
57 River Street
Wellesley Hills, Massachusetts 02481
American Biltrite Sales Corporation Virgin Islands
57 River Street
Wellesley Hills, Massachusetts 02481
Majestic Jewelry, Inc. Delaware
57 River Street
Wellesley Hills, Massachusetts 02481
Ocean State Jewelry, Inc. Rhode Island
57 River Street
Wellesley Hills, Massachusetts 02481
Aimpar, Inc. New York
57 River Street
Wellesley Hills, Massachusetts 02481
ABTRE, Inc. Tennessee
57 River Street
Wellesley Hills, Massachusetts 02481
Ideal Tape Co., Inc. Delaware
1400 Middlesex Street
Lowell, Massachusetts 01851
American Biltrite Intellectual Properties, Inc. Delaware
103 Foulk Road Suite 200
Wilmington, Delaware 19803
72
<PAGE>
K & M Trading (H.K.) Limited Hong Kong
1001 Hutchison House
10 Harcourt Road
Hong Kong
Congoleum Corporation Delaware
3705 Quakerbridge Road
Mercerville, New Jersey 08619
ABItalia, Inc. Delaware
57 River Street
Wellesley Hills, Massachusetts 02481
73
Exhibit 23(1)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-11879) pertaining to the 1985 Stock Option Plan of American Biltrite
Inc. and the Registration Statement (Form S-8 No. 33-77318) pertaining to the
1993 Stock Award and Incentive Plan of American Biltrite Inc. of our report
dated March 8, 1999, with respect to the consolidated financial statements and
schedule of American Biltrite Inc. and subsidiaries included in the Annual
Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
March 23, 1999
74
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