eps3616.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 September 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 [   ]  (Do not check if a smaller reporting company)  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 November 13, 2009
     
Common Stock
 
3,441,531 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 September 30, 2009 (Unaudited) and December 31, 2008
1
       
   
Consolidating Condensed Balance Sheets – Liabilities and Stockholders’ Equity as of September 30, 2009 (Unaudited) and December 31, 2008
2
       
   
Consolidating Condensed Statements of Operations (Unaudited) For the Three Months Ended September 30, 2009 and 2008
3
       
   
Consolidating Condensed Statements of Operations (Unaudited) For the Nine Months Ended September 30, 2009 and 2008
4
       
   
Consolidating Condensed Statements of Cash Flows – Operating Activities (Unaudited) For the Nine Months Ended September 30, 2009 and 2008
5
       
   
Consolidating Condensed Statements of Cash Flows – Investing & Financing Activities (Unaudited) For the Nine Months Ended September 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
 
46
 
       
 
PART II.
 
 
OTHER INFORMATION
 
 
     
 
Item 1.
 
Legal Proceedings
 
47
 
       
 
Item 1A.
 
Risk Factors
 
47
 
       
 
Item 3.
 
Defaults Upon Senior Securities
 
58
 
       
 
Item 5.
 
Defaults Other Information
 
58
 
       
 
Item 6.
 
Exhibits
 
59
 
       
Signature
 
 
61
 
 

 
 

 

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
 
   
September 30,
2009
   
December 31, 
2008
   
September 30,
2009
   
December 31, 
2008
   
September 30,
2009
   
December 31, 
2008
   
September 30,
2009
   
December 31, 
2008
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
Assets
                                               
Current Assets:
                                               
Cash and cash equivalents
  $ 14,817     $ 18,072                 $ 14,069     $ 15,077     $ 748     $ 2,995  
Restricted cash
    30,770       29,680                   30,770       29,680                  
Short-term investments
    2,400       -                                   2,400       -  
Accounts receivable, net
    41,014       36,627     $ (454 )   $ (367 )     16,078       13,789       25,390       23,205  
Inventories
    59,843       79,082       (50 )     (89 )     24,503       35,814       35,390       43,357  
Taxes receivable
    806       1,334                                       806       1,334  
Prepaid expense & other current assets
    6,804       6,406                       3,570       3,922       3,234       2,484  
Total current assets
    156,454       171,201       (504 )     (456 )     88,990       98,282       67,968       73,375  
                                                                 
Property, plant & equipment, net
    82,854       88,466                       51,205       56,520       31,649       31,946  
                                                                 
Other assets:
                                                               
Insurance for asbestos-related liabilities
    13,509       13,509                                       13,509       13,509  
Other assets
    24,565       21,825       (109 )     (117 )     17,065       17,065       7,609       4,877  
      38,074       35,334       (109 )     (117 )     17,065       17,065       21,118       18,386  
                                                                 
Total assets
  $ 277,382     $ 295,001     $ (613 )   $ (573 )   $ 157,260     $ 171,867     $ 120,735     $ 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
 
   
September 30,
2009
   
December 31,
2008
   
September 30,
2009
   
December 31,
2008
   
September 30,
2009
   
December 31,
2008
   
September 30,
2009
   
December 31,
2008
 
   
(Unaudited)
         
(Unaudited)
         
(Unaudited)
         
(Unaudited)
       
Liabilities
                                               
Current liabilities:
                                               
Accounts payable
  $ 15,034     $ 16,298     $ (454 )   $ (366 )   $ 6,277     $ 7,472     $ 9,211     $ 9,192  
Accrued expenses
    31,736       31,880                       14,709       16,897       17,027       14,983  
Asbestos-related liabilities
    44,792       50,022                       44,792       50,022                  
Deferred income taxes
    6,533       6,533                       6,533       6,533                  
Notes payable
    25,427       32,747                       12,442       13,994       12,985       18,753  
Current portion of long-term debt
    1,447       5,611                                       1,447       5,611  
Liabilities subject to compromise
    4,997       4,997                       4,997       4,997                  
Total current liabilities
    129,966       148,088       (454 )     (366 )     89,750       99,915       40,670       48,539  
                                                                 
Long-term debt, less current portion
    7,378       1,112                                       7,378       1,112  
Asbestos-related liabilities
    13,563       13,563                                       13,563       13,563  
Other liabilities
    17,543       16,801                                       17,543       16,801  
Liabilities subject to compromise
    163,924       161,386       (109 )     (117 )     164,033       161,503                  
Total liabilities
    332,374       340,950       (563 )     (483 )     253,783       261,418       79,154       80,015  
                                                                 
Equity
                                                               
Common stock
    46       46       (94 )     (93 )     94       93       46       46  
Additional paid-in capital
    19,899       19,749       (49,393 )     (49,386 )     49,393       49,386       19,899       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
    (51,060 )     (53,250 )     6,111       6,110       (51,179 )     (51,179 )     (5,992 )     (8,181 )
(Deficit) retained earnings
    (6,519 )     1,803       38,651       35,466       (87,018 )     (80,038 )     41,848       46,375  
Total stockholders’ (deficit) equity of controlling interests
    (52,766 )     (46,784 )     3,088       (90 )     (96,523 )     (89,551 )     40,669       42,857  
Noncontrolling interests
    (2,226 )     835       (3,138 )                             912       835  
Total (deficit) equity
    (54,992 )     (45,949 )     (50 )     (90 )     (96,523 )     (89,551 )     41,581       43,692  
 
Total liabilities and equity
  $ 277,382     $ 295,001     $ (613 )   $ (573 )   $ 157,260     $ 171,867     $ 120,735     $ 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 September 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
  $ 83,883     $ 97,351     $ -     $ -     $ 37,359     $ 46,085     $ 46,524     $ 51,266  
                                                                 
Cost of products sold
    65,234       75,330       (310 )     (377 )     31,871       37,765       33,673       37,942  
Selling, general & administrative expenses
    19,602       21,269                       7,208       7,768       12,394       13,501  
Asbestos-related reorganization charges
    -       11,491                       -       11,491                  
(Loss) income from operations
    (953 )     (10,739 )     310       377       (1,720 )     (10,939 )     457       (177 )
Other income (expense)
                                                               
Interest income
    11       64                       8       49       3       15  
Interest expense
    (292 )     (360 )                     -       (43 )     (292 )     (317 )
Other income (expense)
    139       (945 )     (300 )     (360 )     (182 )     (377 )     621       (208 )
      (142 )     (1,241 )     (300 )     (360 )     (174 )     (371 )     332       (510 )
(Loss) income before taxes
    (1,095 )     (11,980 )     10       17       (1,894 )     (11,310 )     789       (687 )
Provision for (benefit from) income taxes
    324       (1,631 )                     35       (1,185 )     289       (446 )
Net (loss) income
    (1,419 )     (10,349 )     10       17       (1,929 )     (10,125 )     500       (241 )
Noncontrolling interests
    743       (17 )     867                               (124 )     (17 )
(Loss) income from continuing operations
    (676 )     (10,366 )     877       17       (1,929 )     (10,125 )     376       (258 )
Discontinued operation
    -       -                                       -       -  
Net (loss) income attributable to controlling interests
  $ (676 )   $ (10,366 )   $ 877     $ 17     $ (1,929 )   $ (10,125 )   $ 376     $ (258 )

   
Basic and Diluted
 
   
2009
   
2008
 
Loss from continuing operations per common share
  $ (0.20 )   $ (3.01 )
Discontinued operation
    -       -  
Net loss attributable to controlling interests per common share
  $ (0.20 )   $ (3.01 )
                 
Weighted average number of common and equivalent shares outstanding
    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 Nine Months Ended September 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
  $ 235,266     $ 294,347     $ -     $ -     $ 106,815     $ 140,948     $ 128,451     $ 153,399  
                                                                 
Cost of products sold
    186,338       225,600       (813 )     (1,077 )     90,690       111,866       96,461       114,811  
Selling, general & administrative expenses
    59,223       67,234                       22,907       26,138       36,316       41,096  
Asbestos-related reorganization charges
    -       11,491                       -       11,491                  
(Loss) income from operations
    (10,295 )     (9,978 )     813       1,077       (6,782 )     (8,547 )     (4,326 )     (2,508 )
Other income (expense)
                                                               
Interest income
    16       1,427                       3       1,241       13       186  
Interest expense
    (945 )     (1,679 )                     (200 )     (240 )     (745 )     (1,439 )
Other (expense) income
    125       (858 )     (774 )     (1,059 )     49       (791 )     850       992  
      (804 )     (1,110 )     (774 )     (1,059 )     (148 )     210       118       (261 )
(Loss) income before taxes
    (11,099 )     (11,088 )     39       18       (6,930 )     (8,337 )     (4,208 )     (2,769 )
Provision for (benefit from) income taxes
    292       (549 )                     50       (103 )     242       (446 )
Net (loss) income
    (11,391 )     (10,539 )     39       18       (6,980 )     (8,234 )     (4,450 )     (2,323 )
Noncontrolling interests
    3,061       50       3,138       -                       (77 )     50  
(Loss) income from continuing operations
    (8,330 )     (10,489 )     3,177       18       (6,980 )     (8,234 )     (4,527 )     (2,273 )
Discontinued operation
    -       1,025                                       -       1,025  
Net (loss) income attributable to controlling interests
  $ (8,330 )   $ (9,464 )   $ 3,177     $ 18     $ (6,980 )   $ (8,234 )   $ (4,527 )   $ (1,248 )

   
Basic and Diluted
 
   
2009
   
2008
 
Loss from continuing operations per common share
  $ (2.42 )   $ (3.05 )
Discontinued operation
    -       0.30  
Net loss attributable to controlling interests per common share
  $ (2.42 )   $ (2.75 )
                 
Weighted average number of common and equivalent shares outstanding
    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 Nine Months Ended September 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
  $ (11,391 )   $ (9,514 )   $ 39     $ 18     $ (6,980 )   $ (8,234 )   $ (4,450 )   $ (1,298 )
Net income from discontinued operation
    -       (1,025 )                                     -       (1,025 )
(Loss) income from continuing operations
    (11,391 )     (10,539 )     39       18       (6,980 )     (8,234 )     (4,450 )     (2,323 )
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
                                                               
Depreciation and amortization
    10,453       11,686                       7,242       7,781       3,211       3,905  
Asbestos-related reorganization charges
    -       11,491                       -       11,491                  
Stock compensation expense
    157       107                       7       14       150       93  
Change in operating assets and liabilities:
                                                               
Accounts and notes receivable
    (3,782 )     34       80       247       (2,289 )     (1,809 )     (1,573 )     1,596  
Inventories
    21,353       (4,447 )     (39 )     (18 )     11,311       (1,548 )     10,081       (2,881 )
Prepaid expenses and other assets
    438       (1,499 )                     353       (946 )     85       (553 )
Proceeds from legal fees disgorgement
    -       9,168                       -       9,168                  
Accounts payable and accrued expenses
    (608 )     (4,318 )     (80 )     (247 )     (2,244 )     (5,209 )     1,716       1,138  
Asbestos-related expenses
    (6,317 )     (12,519 )                     (6,317 )     (12,519 )                
Other
    2,225       (358 )                     2,478       (137 )     (253 )     (221 )
Net cash provided (used) by operating activities of continuing operations
  $ 12,528     $ (1,194 )   $ -     $ -     $ 3,561     $ (1,948 )   $ 8,967     $ 754  

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 Nine Months Ended September 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
  $ (3,427 )   $ (3,749 )   $ -     $ -     $ (1,927 )   $ (2,746 )   $ (1,500 )   $ (1,003 )
Purchase of short-term investments
    (3,400 )     -                                       (3,400 )     -  
Proceeds from sale of short-term investments
    1,000       -                                       1,000       -  
                                                                 
Net cash used by investing activities
    (5,827 )     (3,749 )     -       -       (1,927 )     (2,746 )     (3,900 )     (1,003 )
                                                                 
Financing activities
                                                               
Net short-term borrowings (repayments)
    (7,676 )     (2,162 )                     (1,552 )     2,086       (6,124 )     (4,248 )
Payments on long-term debt
    (5,898 )     (1,320 ))                                     (5,898 )     (1,320 )
Proceeds from borrowings on long-term debt
    8,000       -                                       8,000       -  
Refinancing costs
    (2,110 )     -                                       (2,110 )     -  
Funding of letters of credit
    (714 )     -                                       (714 )     -  
Collection on Janus note receivable
    -       4,034                                       -       4,034  
Net change in restricted cash
    (1,090 )     38                       (1,090 )     38                  
Net cash (used) provided by financing activities
    (9,488 )     590       -       -       (2,642 )     2,124       (6,846 )     (1,534 )
Effect of foreign exchange rate changes on cash
    (468 )     800                                       (468 )     800  
Net decrease in cash
    (3,255 )     (3,553 )     -       -       (1,008 )     (2,570 )     (2,247 )     (983 )
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
  $ 14,817     $ 26,632     $ -     $ -     $ 14,069     $ 23,757     $ 748     $ 2,575  

See accompanying notes to consolidating condensed financial statements.


 
6

 
 
AMERICAN BILTRITE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATING CONDENSED
FINANCIAL STATEMENTS
September 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 (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP 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 nine months ended September 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 U.S. GAAP 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. 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 N). 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"), and on august 17, 2009, the United States District Court for the District of New Jersey (the “District Court”) withdrew Congoleum’s chapter 11 case from the Bankruptcy Court and assumed authority over the proceedings. The accompanying consolidated financial statements include the results for Congoleum for all periods presented. Congoleum’s results include losses (including other comprehensive losses) of $93.4 million and $89.6 million in excess of the value of ABI’s investment in Congoleum at September 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 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. 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 trust that would be created on or after the date the District Court confirms a plan of reorganization containing terms currently proposed and by the effective date of that plan (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 District 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, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. On the effective date, the FASB Accounting Standards Codification became the source of authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to guidance issued by the Securities and Exchange Commission. This statement became effective for financial statements issued for interim and annual periods ending after September 15, 2009.

In May 2009, the FASB issued new accounting guidance that 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. The new accounting guidance was effective for interim and annual periods ending after June 15, 2009. In particular, the new accounting guidance established (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 the new accounting guidance did not have a material effect on the Company’s financial condition or results of operations. There were no events subsequent to September 30, 2009 and through our financial statement issuance date of November 13, 2009 requiring disclosure.


 
9

 

Note A - Basis of Presentation (continued)

On January 1, 2009, the Company adopted the FASB’s new accounting standards for the accounting and reporting of noncontrolling interests. The new accounting guidance 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 a 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 September 30, 2009 and December 31, 2008 consisted of the following (in thousands):
 

   
September 30,
2009
   
December 31,
2008
 
             
Finished goods
  $ 39,774     $ 56,262  
Work-in-process
    10,789       10,847  
Raw materials and supplies
    9,280       11,973  
                 
    $ 59,843     $ 79,082  


 
10

 

Note C – Accrued Expenses

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

   
September 30,
2009
   
December 31,
2008
 
             
Accrued advertising and sales promotions
  $ 15,401     $ 17,625  
Employee compensation and related benefits
    7,099       7,124  
Environmental matters
    1,140       815  
Royalties
    614       959  
Income taxes
    99       371  
Other
    7,383       4,986  
                 
    $ 31,736     $ 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) an $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 letter 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 September 30, 2009, the Company had $12.4 million and $7.7 million outstanding on its Revolver and Term Loan, respectively, and $7.5 million of availability under the Revolver.


 
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 Agreements are for a term of 36 months and automatically renew for additional one year terms unless either party gives notice of non-renewal. In addition, FGI may terminate the agreements upon a default by the Company. The Company may terminate the agreements 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.

The accounts receivable factored under the FGI Financing Agreements are factored with recourse. Accordingly, the factored receivables are included in accounts receivable on the balance sheet until invoice payment from the customer has been received, and the Company accounts for the transfer of these financial assets as secured borrowings. At September 30, 2009, the Company had $542 thousand payable to FGI, which has been recorded in notes payable.

Note E – Other Liabilities

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

   
September 30,
2009
   
December 31,
2008
 
             
Pension benefits
  $ 8,667     $ 8,185  
Environmental remediation and product related liabilities
    5,722       4,454  
Income taxes payable
    394       394  
Deferred income taxes
    131       131  
Other
    2,629       3,637  
                 
    $ 17,543     $ 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), 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. Prior to the fourth quarter of 2007, Congoleum’s accrued interest expense on its 8 5/8% Senior Notes due August 1, 2008 was also recorded in liabilities subject to compromise. In the fourth quarter of 2007, Congoleum also recorded a $41.0 million interest expense credit to reverse post-petition interest accrued on its Senior Notes. Terms of previous reorganization plans had provided for the payment of post-petition interest on the Senior Notes and therefore Congoleum had continued to accrue such interest. Under the terms of the Second Amended Joint Plan, the Senior Note holders will not receive any post-petition interest.

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

   
September 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
    39,335       37,022  
Other post-retirement benefit obligation
    11,339       10,938  
Pre-petition other liabilities
    13,359       13,543  
      164,033       161,503  
Elimination – Payable to American Biltrite
    (109 )     (117 )
Total non-current liability
    163,924       161,386  
                 
Total liabilities subject to compromise
  $ 168,921     $ 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 District 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 nine months ended September 30, 2009 and 2008 (in thousands):

   
Three Months Ended September 30,
 
   
2009
   
2008
 
   
Pension
   
Other
Benefits
   
Pension
   
Other
Benefits
 
Service cost
  $ 499     $ 57     $ 642     $ 56  
Interest cost
    1,658       161       1,652       144  
Expected return on plan assets
    (1,204 )     -       (1,719 )     -  
Recognized net actuarial loss
    1,101       16       384       15  
Amortization of prior service cost
    28       -       31       -  
                                 
Net periodic benefit cost
  $ 2,082     $ 234     $</