eps3497.htm
FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended June 30, 2009
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 incorporation or organization)
(I.R.S. Employer Identification No.)

57 River Street
Wellesley Hills, Massachusetts  02481-2097
(Address of Principal Executive Offices)
(781) 237-6655
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ]    No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [   ]   Accelerated filer [   ]   Non-accelerated filer [   ]   Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]    No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at August 13, 2009
     
Common Stock
 
3,441,551 shares

 
 

 

FORWARD LOOKING STATEMENTS

Some of the information presented in or incorporated by reference in this report constitutes "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks, uncertainties and assumptions.  These statements can be identified by the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project" and other words of similar meaning.  In particular, these include statements relating to intentions, beliefs or current expectations concerning, among other things, future performance, results of operations, the outcome of contingencies, such as bankruptcy and other legal proceedings, and financial conditions.  These statements do not relate strictly to historical or current facts.  These forward-looking statements are based on American Biltrite Inc.’s expectations and American Biltrite Inc.’s understanding of its majority-owned subsidiary Congoleum Corporation’s expectations, as of the date of this report, of future events, and American Biltrite Inc. undertakes no obligation to update any of these forward-looking statements, except as required by federal securities laws.  Although American Biltrite Inc. believes that these expectations are based on reasonable assumptions, within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations.  Readers are cautioned not to place undue reliance on any forward-looking statements.  Any or all of these statements may turn out to be incorrect.  By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future.  Any forward-looking statements made in this report speak only as of the date of this report unless the statement indicates that another date applies.  It is not possible to predict or identify all factors that could potentially cause actual results to differ materially from expected and historical results.  Factors that could cause or contribute to American Biltrite Inc.’s actual results differing from its expectations include those factors discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q and in American Biltrite Inc.’s other filings with the Securities and Exchange Commission.


 
 

 

AMERICAN BILTRITE INC.

INDEX

 
PART I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements:
 
       
   
Consolidating Condensed Balance Sheets – Assets as of June 30, 2009 (Unaudited) and December 31, 2008
1
       
   
Consolidating Condensed Balance Sheets – Liabilities and Stockholders’ Equity as of June 30, 2009 (Unaudited) and December 31, 2008
2
       
   
Consolidating Condensed Statements of Operations (Unaudited) For the Three Months Ended June 30, 2009 and 2008
3
       
   
Consolidating Condensed Statements of Operations (Unaudited) For the Six Months Ended June 30, 2009 and 2008
4
       
   
Consolidating Condensed Statements of Cash Flows – Operating Activities (Unaudited) For the Six Months Ended June 30, 2009 and 2008
5
       
   
Consolidating Condensed Statements of Cash Flows – Investing & Financing  Activities (Unaudited) For the Six Months Ended June 30, 2009 and 2008
6
       
   
Notes to Unaudited Consolidating Condensed Financial Statements
7
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
31
       
 
Item 4T.
Controls and Procedures
45
     
PART II.
OTHER INFORMATION
 
       
 
Item 1.
Legal Proceedings
46
       
 
Item 1A.
Risk Factors
46
       
 
Item 3.
Defaults Upon Senior Securities
57
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
57
       
 
Item 5.
Other Information
57
       
 
Item 6.
Exhibits
58
     
 
Signature
60

 

 
 

 

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements


AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS – ASSETS
(In thousands of dollars)

   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
Assets
                                               
Current Assets:
                                               
Cash and cash equivalents
  $ 18,193     $ 18,072                 $ 13,803     $ 15,077     $ 4,390     $ 2,995  
Restricted cash
    30,767       29,680                   30,767       29,680                  
Short-term investments
    1,000       -                                   1,000       -  
Accounts receivable, net
    37,507       36,627     $ (274 )   $ (367 )     15,036       13,789       22,745       23,205  
Inventories
    67,285       79,082       (60 )     (89 )     31,101       35,814       36,244       43,357  
Taxes receivable
    928       1,334                                       928       1,334  
Prepaid expense & other current assets
    7,013       6,406                       2,883       3,922       4,130       2,484  
Total current assets
    162,693       171,201       (334 )     (456 )     93,590       98,282       69,437       73,375  
                                                                 
Property, plant & equipment, net
    85,016       88,466                       53,205       56,520       31,811       31,946  
                                                                 
Other assets:
                                                               
Insurance for asbestos-related liabilities
    13,509       13,509                                       13,509       13,509  
Other assets
    23,563       21,825       (109 )     (117 )     17,065       17,065       6,607       4,877  
      37,072       35,334       (109 )     (117 )     17,065       17,065       20,116       18,386  
                                                                 
Total assets
  $ 284,781     $ 295,001     $ (443 )   $ (573 )   $ 163,860     $ 171,867     $ 121,364     $ 123,707  

See accompanying notes to consolidating condensed financial statements.

 
1

 

AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY
(In thousands of dollars)

   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
   
June 30,
2009
   
December 31,
2008
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
Liabilities
                                               
Current liabilities:
                                               
Accounts payable
  $ 14,844     $ 16,298     $ (274 )   $ (366 )   $ 5,863     $ 7,472     $ 9,255     $ 9,192  
Accrued expenses
    30,080       31,880                       13,684       16,897       16,396       14,983  
Asbestos-related liabilities
    46,909       50,022                       46,909       50,022                  
Deferred income taxes
    6,533       6,533                       6,533       6,533                  
Notes payable
    33,362       32,747                       17,248       13,994       16,114       18,753  
Current portion of long-term debt
    1,443       5,611                                       1,443       5,611  
Liabilities subject to compromise
    4,997       4,997                       4,997       4,997                  
Total current liabilities
    138,168       148,088       (274 )     (366 )     95,234       99,915       43,208       48,539  
                                                                 
Long-term debt, less current portion
    7,714       1,112                                       7,714       1,112  
Asbestos-related liabilities
    13,563       13,563                                       13,563       13,563  
Other liabilities
    17,132       16,801                                       17,132       16,801  
Liabilities subject to compromise
    163,113       161,386       (109 )     (117 )     163,222       161,503                  
Total liabilities
    339,690       340,950       (383 )     (483 )     258,456       261,418       81,617       80,015  
                                                                 
Equity
                                                               
Common stock
    46       46       (94 )     (93 )     94       93       46       46  
Additional paid-in capital
    19,850       19,749       (49,391 )     (49,386 )     49,391       49,386       19,850       19,749  
Less treasury shares
    (15,132 )     (15,132 )     7,813       7,813       (7,813 )     (7,813 )     (15,132 )     (15,132 )
Accumulated other comprehensive loss
    (52,344 )     (53,250 )     6,111       6,110       (51,179 )     (51,179 )     (7,276 )     (8,181 )
(Deficit) retained earnings
    (5,846 )     1,803       37,772       35,466       (85,089 )     (80,038 )     41,471       46,375  
Total stockholders’ (deficit) equity of controlling interests
    (53,426 )     (46,784 )     2,211       (90 )     (94,596 )     (89,551 )     38,959       42,857  
Noncontrolling interests
    (1,483 )     835       (2,271 )                             788       835  
Total (deficit) equity
    (54,909 )     (45,949 )     (60 )     (90 )     (94,596 )     (89,551 )     39,747       43,692  
Total liabilities and equity
  $ 284,781     $ 295,001     $ (443 )   $ (573 )   $ 163,860     $ 171,867     $ 121,364     $ 123,707  

See accompanying notes to consolidating condensed financial statements.

 
2

 

AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended June 30, 2009 and 2008
(In thousands of dollars, except share and per share amounts)

   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                                 
Net sales
  $ 81,322     $ 101,239     $ -     $ -     $ 39,350     $ 47,166     $ 41,972     $ 54,073  
                                                                 
Cost of products sold
    64,943       77,677       (194 )     (400 )     32,859       37,277       32,278       40,800  
Selling, general & administrative expenses
    19,111       23,576                       7,449       9,238       11,662       14,338  
(Loss) income from operations
    (2,732 )     (14 )     194       400       (958 )     651       (1,968 )     (1,065 )
Other income (expense)
                                                               
Interest income
    6       212                       1       64       5       148  
Interest expense
    (316 )     (611 )                     (100 )     -       (216 )     (611 )
Other income (expense)
    485       (146 )     (181 )     (407 )     113       (350 )     553       611  
      175       (545 )     (181 )     (407 )     14       (286 )     342       148  
(Loss) income before taxes
    (2,557 )     (559 )     13       (7 )     (944 )     365       (1,626 )     (917 )
Provision for income taxes
    21       563                       -       153       21       410  
Net (loss) income
    (2,578 )     (1,122 )     13       (7 )     (944 )     212       (1,647 )     (1,327 )
Noncontrolling interests
    421       27       424                               (3 )     27  
(Loss) income from continuing operations
    (2,157 )     (1,095 )     437       (7 )     (944 )     212       (1,650 )     (1,300 )
Discontinued operation
    -       1,025                                       -       1,025  
Net (loss) income attributable to controlling interests
  $ (2,157 )   $ (70 )   $ 437     $ (7 )   $ (944 )   $ 212     $ (1,650 )   $ (275 )

   
Basic
   
Diluted
 
   
2009
   
2008
   
2009
   
2008
 
Loss from continuing operations per common share
  $ (0.63 )   $ (0.32 )   $ (0.63 )   $ (0.32 )
Discontinued operation
    -       0.30       -       0.30  
Net loss attributable to controlling interests per common share
  $ (0.63 )   $ (0.02 )   $ (0.63 )   $ (0.02 )
                                 
Weighted average number of common and equivalent shares outstanding
    3,441,551       3,441,551       3,441,551       3,441,551  

See accompanying notes to consolidating condensed financial statements.

 
3

 

AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2009 and 2008
(In thousands of dollars, except share and per share amounts)

   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
                                                 
Net sales
  $ 151,383     $ 196,996     $ -     $ -     $ 69,456     $ 94,863     $ 81,927     $ 102,133  
                                                                 
Cost of products sold
    121,104       150,270       (503 )     (700 )     58,819       74,101       62,788       76,869  
Selling, general & administrative expenses
    39,621       45,965                       15,699       18,370       23,922       27,595  
(Loss) income from operations
    (9,342 )     761       503       700       (5,062 )     2,392       (4,783 )     (2,331 )
Other income (expense)
                                                               
Interest income
    13       1,363                       3       1,192       10       171  
Interest expense
    (661 )     (1,319 )                     (208 )     (197 )     (453 )     (1,122 )
Other (expense) income
    (14 )     87       (474 )     (699 )     231       (414 )     229       1,200  
      (662 )     131       (474 )     (699 )     26       581       (214 )     249  
(Loss) income before taxes
    (10,004 )     892       29       1       (5,036 )     2,973       (4,997 )     (2,082 )
(Benefit from) provision for income taxes
    (32 )     1,082                       15       1,082       (47 )     -  
Net (loss) income
    (9,972 )     (190 )     29       1       (5,051 )     1,891       (4,950 )     (2,082 )
Noncontrolling interests
    2,318       67       2,271       -                       47       67  
(Loss) income from continuing operations
    (7,654 )     (123 )     2,300       1       (5,051 )     1,891       (4,903 )     (2,015 )
Discontinued operation
    -       1,025                                       -       1,025  
Net (loss) income attributable to controlling interests
  $ (7,654 )   $ 902     $ 2,300     $ 1     $ (5,051 )   $ 1,891     $ (4,903 )   $ (990 )

   
Basic
   
Diluted
 
   
2009
   
2008
   
2009
   
2008
 
Loss from continuing operations per common share
  $ (2.22 )   $ (0.04 )   $ (2.22 )   $ (0.04 )
Discontinued operation
    -       0.30       -       0.30  
Net (loss) income attributable to controlling interests per common share
  $ (2.22 )   $ 0.26     $ (2.22 )   $ 0.26  
                                 
Weighted average number of common and equivalent shares outstanding
    3,441,551       3,441,551       3,441,551       3,441,551  

See accompanying notes to consolidating condensed financial statements.

 
4

 

AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS – OPERATING ACTIVITIES (Unaudited)
For the Six Months Ended June 30, 2009 and 2008
(In thousands of dollars)


   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Operating activities
                                               
Net (loss) income
  $ (9,972 )   $ 835     $ 29     $ 1     $ (5,051 )   $ 1,891     $ (4,950 )   $ (1,057 )
Net income from discontinued operation
    -       (1,025 )                                     -       (1,025 )
(Loss) income from continuing operations
    (9,972 )     (190 )     29       1       (5,051 )     1,891       (4,950 )     (2,082 )
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
                                                               
Depreciation and amortization
    6,919       7,915                       4,835       5,299       2,084       2,616  
Stock compensation expense
    103       53                       4       9       99       44  
Change in operating assets and liabilities:
                                                               
Accounts and notes receivable
    (662 )     (2,335 )     (100 )     108       (1,247 )     (2,958 )     685       515  
Inventories
    12,451       (5,039 )     (29 )     (1 )     4,713       (5,797 )     7,767       759  
Prepaid expenses and other assets
    1,058       593                       1,039       669       19       (76 )
Proceeds from legal fees disgorgement
    -       9,168                       -       9,168                  
Accounts payable and accrued expenses
    (1,976 )     (7,330 )     100       (108 )     (3,662 )     (6,456 )     1,586       (766 )
Asbestos-related expenses
    (4,200 )     (8,472 )                     (4,200 )     (8,472 )                
Other
    1,677       1,559                       1,648       1,373       29       186  
Net cash provided (used) by operating activities of continuing operations
  $ 5,398     $ (4,078 )   $ -     $ -     $ (1,921 )   $ (5,274 )   $ 7,319     $ 1,196  

See accompanying notes to consolidating condensed financial statements.

 
5

 

 AMERICAN BILTRITE INC. AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS – INVESTING & FINANCING ACTIVITIES (Unaudited)
For the Six Months Ended June 30, 2009 and 2008
(In thousands of dollars)


   
ABI Consolidated
   
Eliminations
   
Congoleum
   
American Biltrite
 
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
 
Investing activities
                                               
Investments in property, plant and equipment
  $ (2,934 )   $ (2,274 )   $ -     $ -     $ (1,520 )   $ (1,504 )   $ (1,414 )   $ (770 )
Purchase of short-term investments
    (1,000 )     -                                       (1,000 )     -  
                                                                 
Net cash used by investing activities
    (3,934 )     (2,274 )     -       -       (1,520 )     (1,504 )     (2,414 )     (770 )
                                                                 
Financing activities
                                                               
Net short-term borrowings (repayments)
    352       2,173                       3,254       6,885       (2,902 )     (4,712 )
Payments on long-term debt
    (5,566 )     (662 )                                     (5,566 )     (662 )
Proceeds from borrowings on long-term debt
    8,000       -                                       8,000       -  
Refinancing costs
    (1,527 )     -                                       (1,527 )     -  
Funding of letters of credit
    (1,628 )     -                                       (1,628 )     -  
Collection on Janus note receivable
    -       4,034                                       -       4,034  
Net change in restricted cash
    (1,087 )     40                       (1,087 )     40                  
Net cash (used) provided by financing activities
    (1,456 )     5,585       -       -       2,167       6,925       (3,623 )     (1,340 )
Effect of foreign exchange rate changes on cash
    113       (369 )                                     113       (369 )
Net increase (decrease) in cash
    121       (1,136 )     -       -       (1,274 )     147       1,395       (1,283 )
Cash and cash equivalents at beginning of period
    18,072       30,185                       15,077       26,327       2,995       3,858  
                                                                 
Cash and cash equivalents at end of period
  $ 18,193     $ 29,049     $ -     $ -     $ 13,803     $ 26,474     $ 4,390     $ 2,575  

See accompanying notes to consolidating condensed financial statements.


 
6

 

AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)

Note A - Basis of Presentation

The accompanying unaudited consolidating condensed financial statements which include the accounts of American Biltrite Inc. and its wholly owned subsidiaries (and including, unless the context otherwise indicates, its majority-owned subsidiary K&M Associates L.P., are referred to herein as "ABI", "American Biltrite" or the "Company") as well as entities over which it has voting control have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments and provisions to effect a plan of reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") of Congoleum Corporation ("Congoleum"), a majority-owned subsidiary of the Company, to settle asbestos liabilities) considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for future periods, including the year ending December 31, 2009.  For further information, refer to the consolidating financial statements and the notes to those financial statements included in American Biltrite Inc.'s Annual Report on Form 10-K for the year ended December 31, 2008.

The consolidating condensed balance sheet at December 31, 2008 has been derived from the audited financial statements as of that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

During 2003, the Company decided to discontinue the operations of its Janus Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished hardwood flooring, and sell the related assets.  Historical financial results were restated to reflect the classification of Janus as a discontinued operation in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  Results of Janus, including charges resulting from the shutdown, are being reported as a discontinued operation.  In April 2006, the Company completed the sale of Janus’ remaining building and land (see Note C).  As a result of the sale of property, the discontinued operation was effectively dissolved during 2006.  As of December 31, 2006, the Company merged Janus with and into American Biltrite Inc.’s subsidiary, American Biltrite (Canada) Ltd. ("AB Canada"), primarily for the purposes of utilizing Janus’ prior years’ net operating losses against future taxable income.


 
7

 

Note A - Basis of Presentation (continued)

As discussed more fully below and elsewhere in these notes to consolidating condensed financial statements, the Company's subsidiary Congoleum filed for bankruptcy protection on December 31, 2003 in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").  The accompanying consolidated financial statements include the results for Congoleum for all periods presented.  Congoleum’s results include losses (including other comprehensive losses) of $92.3 million and $89.6 million in excess of the value of ABI’s investment in Congoleum at June 30, 2009 and December 31, 2008, respectively.  ABI owns a majority of the voting stock of Congoleum, and expects to continue doing so until Congoleum’s reorganization proceedings are concluded.  Upon effectiveness of any plan of reorganization for Congoleum, ABI expects that its ownership interests in Congoleum will be cancelled, at which time ABI would no longer include Congoleum's results in the consolidated results of the Company.  The Company has elected to continue to consolidate the financial statements of Congoleum in its consolidated results because it believes that is the appropriate presentation given its current voting control of Congoleum.  However, the accompanying financial statements also present the details of consolidation to separately show the financial condition, operating results and cash flows of ABI (including its non-debtor subsidiaries) and Congoleum (and its debtor subsidiaries), which may be more meaningful for certain analyses.

For more information regarding Congoleum’s asbestos liability and plan for resolving that liability, please refer to Note I.

The American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"), provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code.  Congoleum has implemented this guidance in its consolidated financial statements for periods commencing after December 31, 2003.  Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy Code are required to segregate pre-petition liabilities that are subject to compromise and report them separately on the balance sheet.  Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts.  Liabilities for asbestos claims are recorded based upon the minimum amount Congoleum expects to spend for its contribution to, and costs to settle asbestos liabilities through, the Plan Trust (as described in Note I).  Obligations arising post-petition and pre-petition obligations that are secured or that the Bankruptcy Court has authorized Congoleum to pay, are not classified as liabilities subject to compromise.  Other pre-petition claims (which would be classified as liabilities subject to compromise) may arise due to the rejection by Congoleum of executory contracts or unexpired leases pursuant to the Bankruptcy Code or as a result of the allowance by the Bankruptcy Court of contingent or disputed claims related to pre-petition matters.


 
8

 

Note A - Basis of Presentation (continued)

The consolidated financial statements of American Biltrite Inc. have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  Accordingly, the financial statements do not include any adjustments that might be necessary should American Biltrite or Congoleum be unable to continue as a going concern.  At December 31, 2008, there was substantial doubt about American Biltrite’s ability to continue as a going concern unless it was successful in obtaining replacement financing.  As described in Note D, the Company was successful in obtaining replacement financing in June 2009.  In light of Congoleum’s substantial asbestos liabilities (see Note I), there is substantial doubt about Congoleum’s ability to continue as a going concern unless it timely obtains relief from those liabilities through a successful reorganization under Chapter 11 of the Bankruptcy Code.

Recently Issued Accounting Principles

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 168, which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 168”), to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States.  SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009.  The Company does not believe that the adoption of this standard will have a material impact on its consolidated financial position, operations or cash flows.

In May 2009, the FASB issued Statement of Financial Accounting Standard No. 165, Subsequent Events (“SFAS No. 165”).  SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  In particular, SFAS No. 165 establishes (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  The adoption of SFAS No. 165 did not have a material effect on the Company’s financial condition or results of operations.  There were no events subsequent to June 30, 2009 and through our financial statement issuance date of August 13, 2009 requiring disclosure in accordance with SFAS No. 165.


 
9

 

Note A - Basis of Presentation (continued)

On January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No. 160”).  The new standard changed the accounting and reporting of noncontrolling interests.  SFAS No. 160 requires that noncontrolling interests be presented in the consolidated balance sheets within equity, but separate from the Company’s stockholders’ equity, and that the amount of consolidated net income (loss) attributable to American Biltrite Inc. and to the noncontrolling interests be clearly identified and presented in the consolidated statement of operations.  Any losses in excess of the noncontrolling interests’ equity interests will continue to be allocated to the noncontrolling interests.  Purchases or sales of equity interests that do not result in a change of control will be accounted for as equity transactions.  Upon a sale of equity interests that results in a loss of control of previously controlling interest, the interest sold, as well as any interest retained, will be measured at fair value, with the gain or loss recognized in earnings.  The new standard has been applied prospectively as of January 1, 2009, except for the presentation and disclosure requirements, which have been applied retrospectively for prior periods presented (see Note J).

Note B - Inventories

 
Inventories at June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

   
June 30,
2009
   
December 31,
2008
 
             
Finished goods
  $ 46,924     $ 56,262  
Work-in-process
    10,700       10,847  
Raw materials and supplies
    9,661       11,973  
                 
    $ 67,285     $ 79,082  


 
10

 

Note C – Accrued Expenses

Accrued expenses at June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

   
June 30,
2009
   
December 31,
2008
 
             
Accrued advertising and sales promotions
  $ 14,633     $ 17,625  
Employee compensation and related benefits
    7,166       7,124  
Interest
    8       -  
Environmental matters
    993       815  
Royalties
    577       959  
Income taxes
    435       371  
Other
    6,268       4,986  
                 
    $ 30,080     $ 31,880  

See Note F for Liabilities Subject to Compromise.

Note D – Financing Arrangements

American Biltrite Inc.’s primary source of borrowings are the revolving credit facility (the "Revolver") and the term loan ("Term Loan") it has with Wachovia Bank, National Association ("Wachovia") pursuant to a loan and security agreement (the "Credit Agreement").  The Credit Agreement was entered into on June 30, 2009, and initial borrowings on the Credit Agreement were used to pay off borrowings from another financial institution and to pay fees and expenses in connection with the refinancing.

The Credit Agreement provides American Biltrite Inc. and its subsidiaries with (i) a $30.0 million commitment under the Revolver (including a $12 million Canadian revolving credit facility sublimit) and (ii) a $8.0 million Term Loan.  The Credit Agreement also provides letter of credit facilities with availability of up to $6.0 million (including a $3 million Canadian letters of credit facility sublimit) subject to availability under the Revolver.  The Revolver expires on June 30, 2012.  The Term Loan principal is payable in 72 monthly installments of $111 thousand beginning August 1, 2009 and ending on July 1, 2015.  The maximum amount available for revolving debt borrowings is reduced to the amount of the borrowing base if that amount is lower.  The borrowing base is based upon eligible assets of the Company, including accounts receivables and inventory.  The Company's obligations under the Credit Agreement are secured by assets of the Company and its subsidiaries.  At June 30, 2009, the Company had $16.1 million and $8.0 million outstanding on its Revolver and Term Loan, respectively.


 
11

 

Note D – Financing Arrangements (continued)

Interest is payable monthly on borrowings under the Credit Agreement at rates based on a base interest rate plus an applicable margin for each type of loan, which varies depending on whether the loan is based on U.S., Canadian, or Eurodollar rate loans and which ranges from an applicable rate of two hundred basis points over U.S. and Canadian base rates to four hundred basis points over Eurodollar base rates for revolving debt loans and three hundred basis points over U.S. base rates and five hundred basis points over Eurodollar base rates for the Term Loan.  The Credit Agreement charges the Company a monthly unused borrowing line fee, at a rate equal to five-eighths of one percent (0.625%) per annum.  In addition, the Credit Agreement imposes a monthly letter of credit fee equal to four percent (4%) per annum for unused letter of credit availability.

The Credit Agreement contains customary bank covenants, including limitations on incurrence of debt and liens or other encumbrances on assets or properties, sale of assets, making of loans or investments, including paying dividends and redemptions of capital stock, the formation or acquisition of subsidiaries and transactions with affiliates.  The Credit Agreement requires the Company and the other borrowers and the guarantors to maintain, on a consolidated basis, a minimum fixed charge coverage ratio that increases from 0.8:1.0 to 1.0:1.0 over the term of the Credit Agreement.  The Credit Agreement also requires that the Company and the other borrowers and the guarantors to maintain, on a consolidated basis, a minimum amount of earnings before interest, taxes, depreciation, and amortization, as determined under, and for the periods specified in, the Credit Agreement.  The Company currently anticipates it will be able to comply with these covenants.  However, the Company had to receive covenant waivers on several occasions under its prior credit agreement or enter amendments to that agreement to address failures to satisfy covenants under that prior credit agreement, and it is possible that, in the future, the Company may need to obtain waivers for failures to satisfy its covenants under the Credit Agreement or enter amendments to the Credit Agreement to address any such failures or obtain replacement financing as a result.  There can be no assurance the Company would be successful in obtaining any such waiver, entering any such amendment or obtaining any such replacement financing.

Any waivers, amendments and/or replacement financing, if obtained, could result in significant cost to the Company.  If an event of default under the Credit Agreement were to occur, the lenders could cease to make borrowings available under the Revolver and require the Company to repay all amounts outstanding under the Credit Agreement.  If the Company were unable to repay those amounts due, the lenders could have their rights over the collateral exercised, which would likely have a material adverse effect on the Company’s business, results of operations or financial condition.


 
12

 

Note D – Financing Arrangements (continued)

On June 30, 2009, the Company also entered into accounts receivable financing agreements (the “FGI Financing Agreements”) with Faunus Group International (“FGI”).  Under the terms of the FGI Financing Agreements, the Company may offer to sell certain of its foreign accounts receivable to FGI during the term of the FGI Financing Agreements, up to a maximum amount outstanding at any time of $4.0 million in net amounts funded based upon an 80% advance rate. The Company will pay FGI a monthly collateral management fee equal to 0.66% of the average monthly balance of accounts purchased by FGI. In addition, FGI will charge the Company interest on the daily net funds employed at a rate equal to the greater of (i) 7.0% or (ii) 2.5% above FGI’s prime rate. The Company is obligated to maintain an average balance of net funded amounts of $1.2 million (or pay fees based on such a minimum), and FGI has the right to decline to purchase any accounts.

 
The FGI Financing Agreement is for a term of 36 months and automatically renews for additional one year terms unless either party gives notice of non-renewal.  In addition, FGI may terminate the agreement upon a default by the Company.  The Company may terminate the agreement at any time by paying a $120 thousand termination fee.  The termination fee is not payable upon a termination by FGI or upon non-renewal.  At June 30, 2009, the Company had not factored any accounts receivable and, consequently, no amounts were due to FGI.

Note E – Other Liabilities

Other Liabilities at June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

   
June 30,
2009
   
December 31,
2008
 
             
Pension benefits
  $ 8,732     $ 8,185  
Environmental remediation and product related liabilities
    4,454       4,454  
Income taxes payable
    394       394  
Deferred income taxes
    90       131  
Other
    3,462       3,637  
                 
    $ 17,132     $ 16,801  

See Note F for Liabilities Subject to Compromise.


 
13

 

Note F – Liabilities Subject to Compromise

As a result of Congoleum’s Chapter 11 filing (see Notes A and I), pursuant to SOP 90-7, Congoleum is required to segregate pre-petition liabilities that are subject to compromise and report them separately on the consolidated balance sheet.  Liabilities that may be affected by a plan of reorganization are recorded at the amount of the expected allowed claims, even if they may be settled for lesser amounts.  Substantially all of Congoleum’s pre-petition debt is recorded at face value and is classified within liabilities subject to compromise.

Liabilities subject to compromise at June 30, 2009 and December 31, 2008 and included in ABI’s consolidated balance sheet at each such date were as follows (in thousands):

   
June 30,
2009
   
December 31,
2008
 
Current liability
           
Pre-petition other payables and accrued interest
  $ 4,997     $ 4,997  
Non-current
               
Debt (at face value)
    100,000       100,000  
Pension liability
    38,508       37,022  
Other post-retirement benefit obligation
    11,209       10,938  
Pre-petition other liabilities
    13,505       13,543  
      163,222       161,503  
Elimination – Payable to American Biltrite
    (109 )     (117 )
Total non-current liability
    163,113       161,386  
                 
Total liabilities subject to compromise
  $ 168,110     $ 166,383  

Additional pre-petition claims (which would be classified as liabilities subject to compromise) may arise due to the rejection by Congoleum of executory contracts or unexpired leases pursuant to the Bankruptcy Code, or as a result of the allowance by the Bankruptcy Court of contingent or disputed claims.


 
14

 

Note G – Pension Plans

The Company and Congoleum sponsor several noncontributory defined benefit pension plans covering most of their employees.  Benefits under the plans are based on years of service and employee compensation.  Amounts funded annually by the Company and Congoleum are actuarially determined using the projected unit credit and unit credit methods and are equal to or exceed the minimum required by government regulations.  Congoleum also maintains health and life insurance programs for retirees (reflected in the table below under the columns entitled "Other Benefits").

The table below summarizes the components of the net periodic benefit cost for the Company's and Congoleum's pension and other benefit plans during the three and six months ended June 30, 2009 and 2008 (in thousands):

   
Three Months Ended June 30,
 
   
2009
   
2008
 
   
Pension
   
Other
Benefits
   
Pension
   
Other
Benefits
 
Service cost
  $ 494     $ 57     $ 642     $ 56  
Interest cost
    1,646       161       1,652       144  
Expected return on plan assets
    (1,192 )     -       (1,719 )     -  
Recognized net actuarial loss
    1,102       16       384       15  
Amortization of prior service cost
    27       -       31       -  
                                 
Net periodic benefit cost
  $ 2,077     $ 234     $ 990     $ 215  

   
Six Months Ended June 30,
 
   
2009
   
2008
 
   
Pension
   
Other
Benefits
   
Pension
   
Other
Benefits
 
Service cost
  $ 988     $ 114     $ 1,284     $ 112  
Interest cost
    3,291       322       3,304       288  
Expected return on plan assets
    (2,383 )     -       (3,438 )     -  
Recognized net actuarial loss
    2,204       32       768       30  
Amortization of prior service cost
    54       -       62       -  
                                 
Net periodic benefit cost
  $ 4,154     $ 468     $ 1,980     $ 430  


 
15

 

Note G – Pension Plans (continued)

The weighted average assumptions used to determine net periodic benefit cost for the three and six months ended June 30, 2009 and 2008 were as follows:

 
2009
 
2008
 
Pension
 
Other
Benefits
 
Pension
 
Other
Benefits
               
Discount rate
5.75% - 7.50%
 
6.00%
 
5.50% - 6.00%
 
6.00%
Expected long-term return on plan assets
7.00%
 
 
7.00% - 7.50%
 
Rate of compensation increase
3.00% - 4.00%
 
 
4.00% - 5.00%
 

Note H - Commitments and Contingencies

The Company and Congoleum are subject to federal, state and local environmental laws and regulations, and certain legal and administrative claims are pending or have been asserted against the Company and Congoleum.  Among these claims, the Company and Congoleum are separately a named party in several actions associated with waste disposal sites. These actions include possible obligations to remove or mitigate the effects on the environment of wastes deposited at various sites, including Superfund sites and certain of the Company’s and Congoleum’s owned and previously owned facilities.  The contingencies also include claims for personal injury and/or property damage.  The exact amount of such future cost and timing of payments are indeterminable due to such unknown factors as the magnitude of cleanup costs, the timing and extent of the remedial actions that may be required, the determination of the Company’s and Congoleum’s liability in proportion to other potentially responsible parties, the financial viability of other potentially responsible parties, and the extent to which costs may be recoverable from insurance.  Provisions in the financial statements have been recorded for the estimated probable loss associated with all known general and environmental contingencies for the Company and Congoleum. While the Company and Congoleum believe their estimate of the future amount of these liabilities is reasonable, and that they will be paid over a period of five to ten years, the timing and amount of such payments may differ significantly from the Company’s and Congoleum’s assumptions.  Although the effect of future government regulation could have a significant effect on the Company’s and Congoleum’s costs, the Company and Congoleum are not aware of any pending legislation that would have such an effect.  There can be no assurances that the costs of any future government regulations could be passed along to their customers.  Estimated insurance recoveries related to these liabilities are reflected in other non-current assets.

The Company and Congoleum record a liability for environmental remediation claims when it becomes probable that the Company or Congoleum, as applicable, will incur costs relating to a clean-up program or will have to make claim payments, and the costs or payments can be reasonably estimated. As assessments are revised and clean-up programs progress, these liabilities are adjusted as appropriate to reflect such revisions and progress.


 
16

 

Note H - Commitments and Contingencies (continued)

Liabilities of Congoleum comprise the substantial majority of the environmental and other liabilities reported on the Company’s consolidated balance sheet.  Due to the relative magnitude and wide range of estimates of these liabilities and the fact that recourse related to these liabilities is generally limited to Congoleum, these matters are discussed separately following matters for which ABI has actual or potential liability.  However, since ABI includes Congoleum in ABI’s consolidating financial statements, to the extent that Congoleum incurs a liability or expense, it will be reflected in ABI's consolidating financial statements.

American Biltrite Inc.

ABI is a co-defendant with many other manufacturers and distributors of asbestos containing products in approximately 1,257 pending claims involving approximately 1,812 individuals as of June 30, 2009.  The claimants allege personal injury or death from exposure to asbestos or asbestos-containing products.  Activity related to ABI's asbestos claims is as follows:

   
Six Months
Ended
June 30,
2009
   
Year Ended
December 31,
2008
 
             
Beginning claims
  1,269     1,360  
New claims
  113     356  
Settlements
  (11 )   (13 )
Dismissals
  (114 )   (434 )
             
Ending claims
  1,257     1,269  

The total indemnity costs incurred to settle claims during the six months ended June 30, 2009 and the year ended December 31, 2008 were $3.0 million and $0.9 million, respectively, all of which were paid by ABI's insurance carriers, as were the related defense costs.  ABI has first-layer excess umbrella policies with several insurers, which include coverage for the Company’s asbestos related liabilities (the “Umbrella Coverage”).

In addition to coverage available under the Umbrella Coverage, ABI has additional excess liability insurance policies that should provide further coverage if and when limits of certain policies within the Umbrella Coverage exhaust.  While ABI expects the Umbrella Coverage will result in the substantial majority of defense and indemnity for asbestos claims against ABI being paid by its insurance carriers for the foreseeable future, ABI may incur uninsured costs related to asbestos claims, and those costs could be material.  If ABI were to incur significant uninsured costs for asbestos claims, or its insurance carriers failed to fund insured costs for asbestos claims, such costs could have a material adverse impact on its liquidity, financial condition and results of operations.

 

 
17

 

Note H - Commitments and Contingencies (continued)

In general, governmental authorities have determined that asbestos-containing sheet and tile products are nonfriable (i.e., cannot be crumbled by hand pressure) because the asbestos was encapsulated in the products during the manufacturing process.  Thus, governmental authorities have concluded that these products do not pose a health risk when they are properly maintained in place or properly removed so that they remain nonfriable.  The Company has issued warnings not to remove asbestos-­containing flooring by sanding or other methods that may cause the product to become friable.

The Company estimates its liability for indemnity to resolve current and reasonably anticipated future asbestos-related claims (not including claims asserted against Congoleum), based upon a strategy to actively defend against and strategically settle those claims on a case-by-case basis.  Factors such as recent and historical settlement and trial results, the court dismissal rate of claims, the incidence of past and recent claims, the number of cases pending against it and asbestos litigation developments that may impact the exposure of the Company were considered in performing these estimates.  Changes in these factors could have a material impact on the Company’s liability.  For example, it is estimated that a 1 percentage point increase in the Company’s acceptance rate of mesothelioma claims results in a 21% increase in mesothelioma liability assuming all other variables remained constant.

The Company utilizes an actuarial study to assist it in developing estimates of the Company’s potential liability for resolving present and possible future asbestos claims.  Projecting future asbestos claim costs requires estimating numerous variables that are extremely difficult to predict, including the incidence of claims, the disease that may be alleged by future claimants, future settlement and trial results, future court dismissal rates for claims, and possible asbestos legislation developments.  Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens.  In light of these inherent uncertainties, the Company believes that six years is the most reasonable period over which to include future claims that may be brought against the Company for recognizing a reserve for future costs.  Due to the numerous variables and uncertainties, including the effect of Congoleum’s Chapter 11 case and any proposed plan of reorganization on the Company’s liabilities, the Company does not believe that reasonable estimates can be developed of liabilities for claims beyond a six year horizon.  The Company will continue to evaluate its range of future exposure, and the related insurance coverage available, and when appropriate, record future adjustments to those estimates, which could be material.

The estimated range of liability for settlement of current claims pending and claims anticipated to be filed through 2014 was $13.6 million to $44.0 million as of December 31, 2008.  The Company believes no amount within this range is more likely than any other, and accordingly has recorded a liability of $13.6 million as of June 30, 3009 in its financial statements which represents a probable and reasonably estimable amount for the future liability at the present time.  The Company also believes that based on this liability estimate, the corresponding amount of insurance probable of recovery is $13.5 million as of June 30, 2009, which has been included in


 
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Note H - Commitments and Contingencies (continued)

other assets.  The same factors that affect developing forecasts of potential indemnity costs for asbestos-related liabilities also affect estimates of the total amount of insurance that is probable of recovery, as do a number of additional factors.  These additional factors include terms of the Umbrella Coverage and additional excess liability insurance policies, the allocation of costs to those policies as applicable, and the financial viability of some of the insurance companies.  These amounts were based on currently known facts by ABI and a number of assumptions.  However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, and the continuing solvency of various insurance companies, as well as numerous uncertainties surrounding asbestos legislation in the United States, could cause the actual liability and insurance recoveries for the Company to be higher or lower than those projected or recorded.

There can be no assurance that the Company’s accrued asbestos liabilities will approximate its actual asbestos-related settlement costs, or that it will receive the insurance recoveries which it has accrued.  The Company believes that it is reasonably possible that it will incur charges for resolution of asbestos claims in the future, which could exceed the Company’s existing reserves. The Company’s strategy remains to actively defend against and strategically settle its asbestos claims on a case-by-case basis.  The Company believes it has substantial insurance coverage to mitigate future costs related to this matter.

In the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, the Company disclosed various legal proceedings.  Material developments relating to those matters during the six month period ended on June 30, 2009 include those mentioned in the immediately following paragraphs.

Additional potential remediation costs have been identified related to the Olin Corporation site in Wilmington, Massachusetts (the “Olin Site”) and the Parcel A site owned by Miller Industries, Inc., in Lisbon Falls, Maine (the “Lisbon Falls Site”).  At the Olin Site, potential additional remediation costs of approximately $750 thousand had been identified at March 31, 2009 of which ABI’s estimated share would be approximately $163 thousand. In addition, the United States Environmental Protection Agency has indicated that it will be sending an invoice for annual oversight costs to Olin in the third quarter for approximately $200 thousand more than the Company had budgeted.  As of June  30, 2009, ABI has estimated its potential liability to Olin to be in the range of $4.1 million to $10.9 million after allocation for the annual reimbursement of $100 thousand for Olin’s internal costs and before any recovery from insurance and The Biltrite Corporation ("TBC").  Under a preexisting agreement between ABI and TBC, TBC is liable for 37.5% of these costs incurred by ABI.  These costs are expected to be paid out over approximately ten years.


 
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Note H - Commitments and Contingencies (continued)

At the Lisbon Falls Site, the cost of site investigation, remediation, maintenance and monitoring was estimated at December 31, 2008 to be between $1.3 million and $2.3 million.  The estimate had been revised as of March 31, 2009 by an environmental consultant to $2.0 million to $3.0 million because additional remediation may be necessary. Pursuant to ABI’s pre-existing agreement with TBC, TBC is liable for 37.5% of costs ABI incurs in connection with the Lisbon Falls Site.  Because there are other parties potentially responsible for the remediation costs and no cost allocation has been agreed upon, ABI’s estimated liability with regard to the Lisbon Falls Site is subject to future negotiation with the current owner of the property.

The Company entered into an administrative consent order with the New Jersey Department of Environmental Protection ( the NJDEP”) in 1993 under which the Company agreed to provide a remediation funding source for an environmental matter at a Company plant in New Jersey. Congoleum subsequently assumed that liability for the clean-up of the site as part of the Joint Venture Agreement between American Biltrite and Congoleum in 1993 but the NJDEP still holds the Company primarily liable.  The Company in prior years was able to provide a self guarantee to the NJDEP. In 2009, the Company was not able to qualify for a self-guarantee and thus the Company entered into a Remediation Trust Fund Agreement with Wells Fargo Bank whereby the Company funded the trust contemplated by that agreement with $348 thousand as financial assurance to the NJDEP to complete the remediation in the event that Congoleum and American Biltrite fail to perform the remediation at the New Jersey Site.  As of June 30, 2009, the funded amount was included in other non-current assets.

There have been no other material developments relating to the environmental sites or the other environmental matters described in ABI's Annual Report on Form 10-K during the six month period ended June 30, 2009.

Congoleum

Congoleum is a defendant in a large number of asbestos-related lawsuits and on December 31, 2003, filed a petition commencing a voluntary reorganization case under Chapter 11 of the Bankruptcy Code for purposes of resolving its asbestos-related liabilities.  See Note I.

Congoleum is named, together with a large number (in most cases, hundreds) of other companies, as a PRP in pending proceedings under CERCLA and similar state laws.  In addition, in four other instances, although not named as a PRP, Congoleum has received a request for information.  The pending proceedings in which Congoleum is a named PRP currently relate to eight disposal sites in New Jersey, Pennsylvania and Maryland in which recovery from generators of hazardous substances is sought for the cost of cleaning up the contaminated waste sites.  Congoleum’s ultimate liability and funding obligations in connection with those other sites depends on many factors, including the volume of material contributed to the site by Congoleum, the number of other PRP’s and their financial viability, the remediation methods and technology to be used and the extent to which costs may be recoverable by Congoleum from relevant insurance policies.  However, under CERCLA and certain other laws, Congoleum, as a PRP, can be held jointly and severally liable for all environmental costs associated with a site.

 
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Note H - Commitments and Contingencies (continued)

The most significant exposure for which Congoleum has been named a PRP relates to a recycling facility site in Elkton, Maryland (the "Galaxy/Spectron Superfund Site").  The PRP group at this site is made up of 81 companies, substantially all of which are large, financially solvent entities.  Two removal actions were substantially complete as of December 31, 1998, and a groundwater treatment system was installed thereafter.  The United States Environmental Protection Agency has selected a remedy for the soil and shallow groundwater (Operable Unit 1 or OU-1); however, the remedial investigation/feasibility study related to the deep groundwater (Operational Unit 2 or OU-2) has not been completed.  The PRP group, of which Congoleum is a part, has entered into a consent decree to perform the remedy for OU-1 and resolve natural resource damage claims. The consent decree also requires the PRP group to perform the OU-2 remedy, assuming that the estimated cost of the remedy is not more than $10.0 million.  If the estimated cost of the OU-2 remedy is more than $10.0 million, the PRP group may decline to perform it or they may elect to perform it anyway. Cost estimates for the OU-1 and OU-2 work combined (including natural resource damages) range between $22 million and $34 million, with Congoleum’s share ranging between approximately $1.0 million and $1.6 million.  This assumes that all parties participate and that none cash-out and pay a premium; those two factors may account for some fluctuation in Congoleum’s share of the costs. Fifty percent (50%) of Congoleum’s share of the costs is presently being paid by one of its insurance carriers, Liberty Mutual Insurance Company, whose remaining policy limits for this claim are expected to cover approximately $300 thousand in additional costs.  Congoleum expects to fund the balance to the extent further insurance coverage is not available.

Congoleum filed a motion before the Bankruptcy Court seeking authorization and approval of the consent decree and related settlement agreements for the Galaxy/Spectron Superfund Site, as well as authorization for Liberty Mutual Insurance Company and Congoleum to make certain payments that have been invoiced to Congoleum with respect to the consent decree and related settlement agreements.  An order authorizing and approving the consent decree and settlement agreements was issued by the Bankruptcy Court in August 2006.

Congoleum also accrues remediation costs for certain of Congoleum’s owned facilities on an undiscounted basis.  Congoleum has entered into an administrative consent order with the New Jersey Department of Environmental Protection and has established a remediation trust fund of $100 thousand as financial assurance for certain remediation funding obligations.  Estimated total clean-up costs of $1.3 million for Congoleum’s expected portion of those remediation funding obligations, including capital outlays and future maintenance costs for soil and groundwater remediation, are primarily based on engineering studies.  Of this amount, $300 thousand was included in current liabilities subject to compromise and $1.0 million was included in non-current liabilities subject to compromise in ABI’s consolidated balance sheet as of June 30, 2009 and December 31, 2008.


 
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Note H - Commitments and Contingencies (continued)

At June 30, 2009 and December 31, 2008, Congoleum recorded a total of $4.4 million for estimated environmental liabilities, which liabilities were not reduced by the amount of expected insurance recoveries.  At June 30, 2009 and December 31, 2008, such estimated insurance recoveries are approximately $2.1 million.  Receivables for expected insurance recoveries are recorded if the related carriers are solvent and paying claims under a reservation of rights or under an obligation pursuant to coverage in place or a settlement agreement.  Substantially all of Congoleum’s recorded insurance assets for environmental matters are collectible from a single carrier.

Congoleum anticipates that these matters will be resolved over a period of years, and that after application of expected insurance recoveries, funding of the costs by Congoleum will not have a material adverse impact on Congoleum’s liquidity or financial position.  However, unfavorable developments in these matters could result in significant expenses or judgments that could have a material adverse effect on Congoleum’s and the Company’s business, results of operations or financial condition.
 
Other

In addition to the matters referenced above and in Note I, in the ordinary course of their businesses, the Company and Congoleum become involved in lawsuits and administrative proceedings in connection with product liability claims (in addition to asbestos related claims) 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.

Note I – Congoleum Asbestos Liabilities and Reorganization

On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted against it related to the use of asbestos in its products decades ago.  During 2003, Congoleum had obtained the requisite votes of asbestos personal injury claimants necessary to seek approval of a proposed, pre-packaged Chapter 11 plan of reorganization.  In January 2004, Congoleum filed its proposed plan of reorganization and disclosure statement with the Bankruptcy Court.  From that filing through 2007, several subsequent plans were negotiated with representatives of the Asbestos Claimants’ Committee (“ACC”), the Future Claimants’ Representative (“FCR”) and other asbestos claimant representatives.  In addition, an insurance company, Continental Casualty Company, and its affiliate, Continental Insurance Company (collectively, “CNA”), filed a plan of reorganization and the Official Committee of Bondholders (“Bondholders’ Committee”) (representing holders of Congoleum’s 8 5/8% Senior Notes due August 1, 2008 (the “Senior Notes”)) also filed a plan of reorganization.  In May 2006, the Bankruptcy Court ordered the principal parties in interest in Congoleum’s reorganization proceedings to participate in reorganization plan mediation discussions.  Several mediation sessions took place during 2006, culminating in two competing plans, one which Congoleum filed jointly with the ACC in



 
22

 

Note I – Congoleum Asbestos Liabilities and Reorganization (continued)

September 2006 (the “Tenth Plan”) and the other filed by CNA, both of which the Bankruptcy Court subsequently ruled were not confirmable as a matter of law.  In March 2007, Congoleum resumed global plan mediation discussions with the various parties seeking to resolve the issues raised in the Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July 2007, the FCR filed a plan of reorganization and proposed disclosure statement.  After extensive further mediation sessions, on February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed a joint plan of reorganization (the “Joint Plan”).  The Bankruptcy Court approved the disclosure statement for the Joint Plan in February 2008, and the Joint Plan was solicited in accordance with court-approved voting procedures.  Various objections to the Joint Plan were filed, and on May 12, 2008 the Bankruptcy Court heard oral argument on summary judgment motions relating to certain of those objections.  On June 6, 2008, the Bankruptcy Court issued a ruling that the Joint Plan was not legally confirmable, and issued an Order to Show Cause why the case should not be converted or dismissed pursuant to 11 U.S.C. § 1112.  Following a further hearing on June 26, 2008, the Bankruptcy Court issued an opinion that vacated the Order to Show Cause and instructed the parties to submit a confirmable plan by the end of calendar year 2008.  Following further negotiations, the Bondholders’ Committee, the ACC, the FCR, representatives of holders of pre-petition settlements and Congoleum reached an agreement in principle which the Company understands that Congoleum believed addressed the issues raised by the Bankruptcy Court in the ruling on the Joint Plan and in the court's prior decisions.  A term sheet describing the proposed material terms of a contemplated new plan of reorganization and a settlement of avoidance litigation with respect to pre-petition claim settlements (the “Litigation Settlement”) was entered into by those parties and was filed with the Bankruptcy Court on August 14, 2008.  Certain insurers and a large bondholder have filed objections to the Litigation Settlement and/or reserved their rights to object to confirmation of the contemplated new plan of reorganization.  The Bankruptcy Court approved the Litigation Settlement following a hearing on October 20, 2008, but the court reserved certain issues, including whether any plan of reorganization embodying the settlement meets the standards required for confirmation of a plan of reorganization.  On November 14, 2008, Congoleum, the ACC and the Bondholders’ Committee filed an amended joint plan of reorganization for Congoleum, et al. with the Bankruptcy Court (the “Amended Joint Plan”).  In January 2009, an insurer filed a motion for summary judgment seeking denial of confirmation of the Amended Joint Plan, and a hearing was held on February 5, 2009.  On February 26, 2009, the Bankruptcy Court rendered an opinion denying confirmation of the Amended Joint Plan.  Pursuant to the opinion, the Bankruptcy Court entered the Order of Dismissal dismissing Congoleum’s bankruptcy case (the “Order of Dismissal”).  On February 27, 2009, Congoleum and the Bondholders’ Committee appealed the Order of Dismissal to the U.S. District Court for the District of New Jersey, which appeal remains pending.  On March 3, 2009, an order was entered by the Bankruptcy Court granting a stay of the Bankruptcy Court’s Order of Dismissal pending a final non-appealable decision affirming the Order of Dismissal.  Under the terms of the Amended Joint Plan, ABI's ownership interest in Congoleum would be eliminated.  ABI expects its ownership interest in Congoleum would be eliminated under any alternate plan or outcome in Congoleum’s Chapter 11 case.


 
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Note I – Congoleum Asbestos Liabilities and Reorganization (continued)

Under the terms of the Amended Joint Plan, a trust would be created that would assume the liability for Congoleum’s current and future asbestos claims (the “Plan Trust”).  That trust would receive the proceeds of various settlements Congoleum has reached with a number of insurance carriers and would be assigned Congoleum’s rights under its remaining policies covering asbestos product liability.  The trust would also receive 70% of the newly issued common stock of reorganized Congoleum when the plan takes effect and $5 million in new 9.75% senior secured notes that mature five years from issuance.

Holders of Congoleum’s Senior Notes would receive on a pro rata basis $70 million in new 9.75% senior secured notes that mature five years from issuance.  The new senior secured notes would be subordinated to the working capital facility that provides Congoleum’s financing upon exiting reorganization.  In addition, holders of the Senior Notes would receive 30% of the newly issued common stock of reorganized Congoleum.  Congoleum’s obligations for the Senior Notes, including interest accrued as of the date of the bankruptcy filing of $3.6 million, would be satisfied by the new senior secured notes and the common stock issued when the Joint Plan took effect.

Under the terms of the Amended Joint Plan, existing Class A and Class B common stock of Congoleum would be cancelled when the plan took effect and holders of those shares, including ABI, would not receive anything on account of their cancelled shares.

The Amended Joint Plan also includes certain terms that would govern an intercompany settlement and ongoing intercompany arrangements among American Biltrite and its subsidiaries and reorganized Congoleum which would be effective when the Amended Joint Plan takes effect and would have a term of two years.  Those intercompany arrangements include the provision of management services by American Biltrite to reorganized Congoleum and other business relationships substantially consistent with their traditional relationships.  The Amended Joint Plan provides that the final terms of the intercompany arrangements among American Biltrite and its subsidiaries and reorganized Congoleum would be memorialized in a new agreement to be entered into by reorganized Congoleum and American Biltrite in form and substance mutually agreeable to the Bondholders’ Committee, the ACC and American Biltrite. Expiration or termination of these existing arrangements, failure to reach definitive agreement on final terms of future arrangements, or failure to consummate such arrangements in connection with the effectiveness of a plan of reorganization for Congoleum could have a material adverse impact on the business relationships between ABI and Congoleum, and ABI’s business, operations and financial condition.