| CONGOLEUM CORP ITEM 1A RISK FACTORS 11 Item 1A RISK FACTORS The Company has significant asbestos liability and funding exposure, and its proposed amended plan of reorganization may not be confirmed |
| As more fully set forth in Notes 1 and 17 of the Notes to Consolidated Financial Statements, which are included in this Annual Report on Form 10-K, the Company has significant liability and funding exposure for asbestos claims |
| Under the terms of the Eighth Plan, asbestos personal injury claimants voting to accept the plan would irrevocably consent or would be deemed to have irrevocably consented to the forbearance of any claim and lien rights under such settlement agreements |
| There can be no assurance that the Company will obtain approval to solicit acceptances for the Eighth Plan, that the Company will receive the acceptances necessary for confirmation of the Eighth Plan, that the Eighth Plan will not be modified further, that the Eighth Plan will receive necessary court approvals from the Bankruptcy Court or the Federal District Court, or that such approvals will be received in a timely fashion, that the Eighth Plan will be confirmed, or that the Eighth Plan, if confirmed, will become effective |
| In November 2005, the Bankruptcy Court denied a request to extend Congoleumapstas exclusive right to file a plan of reorganization and solicit acceptances thereof, and plans have been filed by an insurance company and the Official Committee of Bondholders |
| It is unclear whether any other person will attempt to propose a plan or what any such plan would provide or propose, and whether the Bankruptcy Court would approve a plan other than Congoleumapstas proposed plan |
| The Eighth Plan and any alternative plan of reorganization pursued by the Company or another plan proponent or confirmed by the Bankruptcy Court and the Federal District Court could materially differ from the description of the Eighth Plan contained in this Annual Report on Form 10-K Furthermore, the estimated costs and contributions to effect the Eighth Plan or an alternative plan could be significantly greater than currently estimated |
| Any plan of reorganization pursued by the Company will be subject to numerous conditions, approvals and other requirements, including Bankruptcy Court and Federal District Court approvals, and there can be no assurance that such conditions, approvals and other requirements will be satisfied or obtained |
| Confirmation of a plan of reorganization will depend on the Company obtaining exit financing to provide it with sufficient liquidity to fund obligations upon the plan becoming effective |
| If the Companyapstas cash flow from operations is materially less than anticipated, and/or if the costs in connection with seeking confirmation of the Eighth Plan or in connection with the Companyapstas New Jersey state court insurance coverage litigation discussed elsewhere in this report are materially more than anticipated, or if sufficient funds from insurance proceeds or other sources are not available at confirmation to reimburse coverage litigation costs as expected, the Company may be unable to obtain exit financing, when combined with net cash provided from operating activities, that would provide it with sufficient funds, which would likely result in the Company not being able to confirm an amended plan of reorganization or have such plan become effective |
| 11 Some additional factors that could cause actual results to differ from the Companyapstas goals for resolving its asbestos liability through an amended plan of reorganization include: (i) the future cost and timing of estimated asbestos liabilities and payments, (ii) the availability of insurance coverage and reimbursement from insurance companies that underwrote the applicable insurance policies for the Company for asbestos-related claims, (iii) the costs relating to the execution and implementation of any plan of reorganization pursued by the Company, (iv) timely reaching agreement with other creditors, or classes of creditors, that exist or may emerge, (v) satisfaction of the conditions and obligations under the Companyapstas outstanding debt instruments, (vi) the response from time to time of the lenders, customers, suppliers and other constituencies of the Company and American Biltrite Inc |
| ( "e ABI "e ), the majority stockholder of the Company, to the ongoing process arising from the Companyapstas strategy to settle its asbestos liability, (vii) the Companyapstas ability to maintain debtor-in-possession financing sufficient to provide it with funding that may be needed during the pendency of its Chapter 11 case and to obtain exit financing sufficient to provide it with funding that may be needed for its operations after emerging from the bankruptcy process, in each case, on reasonable terms, (viii) timely obtaining sufficient creditor and court approval (including the results of any relevant appeals) of any reorganization plan pursued by it and the court overruling any objections to the Companyapstas reorganization plan that may be filed, (ix) costs of, developments in and the outcome of insurance coverage litigation pending in New Jersey state court involving Congoleum and certain insurers, (x) the extent to which the Company is able to obtain reimbursement for costs of the coverage litigation, (xi) compliance with the Bankruptcy Code, including Section 524(g) and (xii) the possible adoption of another partyapstas plan of reorganization which may prove to be unfeasible |
| In any event, if the Company is not successful in obtaining sufficient creditor and court approval of its amended plan of reorganization, such failure would have a material adverse effect upon its business, results of operations and financial condition |
| In addition, there has been federal legislation proposed that, if adopted, would establish a national trust to provide compensation to victims of asbestos-related injuries and channel all current and future asbestos-related personal injury claims to that trust |
| Due to the uncertainties involved with the pending legislation, the Company does not know what effects any such legislation, if adopted, may have upon its business, results of operations or financial condition, or upon any plan of reorganization it may decide to pursue |
| To date, the Company has expended significant amounts pursuant to resolving its asbestos liability relating to its proposed amended plan of reorganization |
| To the extent any federal legislation is enacted, which does not credit the Company for amounts paid by the Company pursuant to its plan of reorganization or requires the Company to pay significant amounts to any national trust or otherwise, such legislation could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| As a result of the Companyapstas significant liability and funding exposure for asbestos claims, there can be no assurance that if it were to incur any unforecasted or unexpected liability or disruption to its business or operations it would be able to withstand that liability or disruption and continue as an operating company |
| For further information regarding the Companyapstas asbestos liability, insurance coverage and strategy to resolve its asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated Financial Statements, which are included in this Annual Report on Form 10-K 12 The Company may incur substantial liability for environmental, product and general liability claims in addition to asbestos-related claims, and its insurance coverage and its likely recoverable insurance proceeds may be substantially less than the liability incurred by the Company for these claims |
| Environmental Liabilities |
| Due to the nature of the Companyapstas business and certain of the substances which are or have been used, produced or discharged by the Company, the Companyapstas operations are subject to extensive federal, state and local laws and regulations relating to the generation, storage, disposal, handling, emission, transportation and discharge into the environment of hazardous substances |
| The Company has historically expended substantial amounts for compliance with existing environmental laws or regulations, including environmental remediation costs at both third-party sites and Company-owned sites |
| The Company will continue to be required to expend amounts in the future for costs related to prior activities at its facilities and third party sites, and for ongoing costs to comply with existing environmental laws; such amounts may be substantial |
| There is no certainty that these amounts will not have a material adverse effect on its business, results of operations and financial condition because, as a result of environmental requirements becoming increasingly strict, the Company is unable to determine the ultimate cost of compliance with environmental laws and enforcement policies |
| Moreover, in addition to potentially having to pay substantial amounts for compliance, future environmental laws or regulations may require or cause the Company to modify or curtail its operations, which could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| Product and General Liabilities |
| In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, 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 |
| These matters could have a material adverse effect on the Companyapstas business, results of operations and financial condition if the Company is unable to successfully defend against or settle these matters, its insurance coverage is insufficient to satisfy unfavorable judgments or settlements relating to these matters, or the Company is unable to collect insurance proceeds relating to these matters |
| The Company is dependent upon a continuous supply of raw materials from third party suppliers and would be harmed if there were a significant, prolonged disruption in supply or increase in its raw material costs |
| The Companyapstas business is dependent upon a continuous supply of raw materials from third party suppliers |
| The principal raw materials used by the Company in its manufacture of sheet and tile flooring are vinyl resins, plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane and transfer print film |
| The Company purchases most of these raw materials from multiple sources |
| Although the Company has generally not had difficulty in obtaining its requirements for these materials, it has occasionally experienced significant price increases for some of these materials |
| During that period, there was a tight supply of specialty resins used in flooring, despite significant price increases, due to several factors, including an explosion at a large resin plant in 2004 that destroyed the plant, the decision by another major supplier to exit the business, and the effect of hurricanes in 2005 |
| Although the Company has been able to obtain sufficient supplies of specialty resin and other raw materials, there can be no assurances that it may not experience difficulty in the future, particularly if global supply conditions deteriorate, which could have a material adverse effect on profit margins |
| 13 The Company believes that suitable alternative suppliers are generally available for substantially all of its raw material requirements, although quantities of certain materials available from alternative suppliers may be in limited supply and production trials may be required to qualify new materials for use |
| The Company does not have readily available alternative sources of supply for specific designs of transfer print film, which are produced utilizing print cylinders engraved to the Companyapstas specifications |
| Although no loss of this source of supply is anticipated, replacement could take a considerable period of time and interrupt production of some of the Companyapstas products |
| In an attempt to protect against this risk of loss of supply, the Company maintains a raw material inventory and continually seeks to develop new sources which will provide continuity of supply for its raw material requirements |
| However, there is no certainty that the Companyapstas maintenance of its raw material inventory or its ongoing efforts to develop new sources of supply would be successful in avoiding a material adverse effect on its business, results of operations and financial condition if it were to realize an extended interruption in the supply of its raw materials |
| In addition, the Company could incur significant increases in the costs of its raw materials |
| Although the Company generally attempts to pass on increases in the costs of its raw materials to its customers, the Companyapstas ability to do so is, to a large extent, dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for its products |
| There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered |
| During those periods of time, there could be a material adverse effect on the Companyapstas business, results of operations and financial condition |
| The Company operates in a highly competitive flooring industry and some of its competitors have greater resources and broader distribution channels than the Company |
| The market for the Companyapstas products is highly competitive |
| The Company encounters competition from three other manufacturers in North America and, to a lesser extent, foreign manufacturers |
| Some of the Companyapstas competitors have greater financial and other resources and access to capital than the Company |
| Furthermore, like the Company, one of the Companyapstas major competitors has sought protection under Chapter 11 of the Bankruptcy Code |
| When such competitor emerges from bankruptcy as a continuing operating company it may have shed much of its pre-filing liabilities and have a competitive cost advantage over the Company as a result of having shed those liabilities |
| In addition, in order to maintain its competitive position, the Company may need to make substantial investments in its business, including its product development, manufacturing facilities, distribution network and sales and marketing activities |
| Competitive pressures may also result in decreased demand for the Companyapstas products and in the loss of the Companyapstas market share for its products |
| Moreover, due to the competitive nature of the Companyapstas industry, the Company may be commercially restricted from raising or even maintaining the sales prices of its products, which could result in the Company incurring significant operating losses if its expenses were to increase or otherwise represent an increased percentage of the Companyapstas sales |
| 14 The Companyapstas business is subject to general economic conditions and conditions specific to the remodeling and housing industries |
| The Company is subject to the effects of general economic conditions |
| A sustained general economic slowdown could have serious negative consequences for the Companyapstas business, results of operations and financial condition |
| Moreover, the Companyapstas business is cyclical and is affected by the economic factors that affect the remodeling and housing industries in general and the manufactured housing industry specifically, including the availability of credit, consumer confidence, changes in interest rates, market demand and general economic conditions |
| The Company could realize shipment delays, depletion of inventory and increased production costs resulting from unexpected disruptions of operations at any of the Companyapstas facilities |
| The Companyapstas business depends upon its ability to timely manufacture and deliver products that meet the needs of its customers and the end users of the Companyapstas products |
| If the Company were to realize an unexpected, significant and prolonged disruption of its operations at any of its facilities, including disruptions in its manufacturing operations, it could result in shipment delays of its products, depletion of its inventory as a result of reduced production and increased production costs as a result of taking actions in an attempt to cure the disruption or carry on its business while the disruption remains |
| Any resulting delay, depletion or increased production cost could result in increased costs, lower revenues and damaged customer and product end user relations, which could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| The Company offers limited warranties on its products which could result in the Company incurring significant costs as a result of warranty claims |
| The Company offers a limited warranty on all of its products against manufacturing defects |
| In addition, as a part of its efforts to differentiate mid- and high-end products through color, design and other attributes, the Company offers enhanced warranties with respect to wear, moisture discoloration and other performance characteristics, which generally increase with the price of such products |
| If the Company were to incur a significant number of warranty claims, the resulting warranty costs could be substantial |
| The Company is heavily dependent upon its distributors to sell the Companyapstas products and the loss of a major distributor of the Company could have a material adverse effect on the Companyapstas business, results of operations and financial condition |
| The Company currently sells its products through approximately 15 distributors providing approximately 86 distribution points in the United States and Canada, as well as directly to a limited number of mass market retailers |
| The Company considers its distribution network very important to maintaining its competitive position |
| Although the Company has more than one distributor in some of its distribution territories and actively manages its credit exposure to its distributors, the loss of a major distributor could have a materially adverse impact on the Companyapstas business, results of operations and financial condition |
| The Company derives a significant percentage of its sales from two of its 15 distributors, LaSalle-Bristol Corporation and Mohawk Industries, Inc |
| LaSalle-Bristol Corporation serves as the Companyapstas manufactured housing market distributor, and Mohawk Industries, Inc |
| serves as its retail market distributor |
| These two distributors accounted for 67prca of the Companyapstas net sales for the year ended December 31, 2005 and 70prca of the Companyapstas net sales for the year ended December 31, 2004 |
| Stockholder votes are controlled by ABI; our interests may not be the same as ABIapstas interests |
| ABI owns a majority (approximately 55prca as of December 31, 2005) of the outstanding shares of the Companyapstas common stock, representing a 68dtta3prca voting interest |
| As a result, ABI can elect all of the Companyapstas directors and can control the vote on all matters, including determinations such as: approval of mergers or other business combinations, sales of all or substantially all of the Companyapstas assets, any matters submitted to a vote of the Companyapstas stockholders, issuance of any additional common stock or other equity securities, incurrence of debt other than in the ordinary course of business, the selection and tenure of the Companyapstas Chief Executive Officer, payment of dividends with respect to common stock or other equity securities and other matters that might be favorable to ABI ABIapstas ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for the Companyapstas common stock |
| In addition, certain officers of Congoleum are officers of ABI and members of the family group that owns a controlling interest in ABI Possible future sales of shares by ABI could adversely affect the market for our stock |
| ABI may sell shares of the Companyapstas common stock in compliance with the federal securities laws |
| By virtue of ABIapstas current control of Congoleum, ABI could sell large amounts of shares of the Companyapstas common stock by causing the Company to file a registration statement that would allow them to sell shares more easily |
| In addition, ABI could sell shares of the Companyapstas common stock without registration |
| Although the Company can make no prediction as to the effect, if any, that such sales would have on the market price of the Companyapstas common stock, sales of substantial amounts of the Companyapstas common stock, or the perception that such sales could occur, could adversely affect the market price of the Companyapstas common stock |
| If ABI sells or transfers shares of the Companyapstas common stock as a block, another person or entity could become the Companyapstas controlling stockholder |