-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MlMfx4iZkDX9SOwcw51G/+MPCfmuie8u4HNMjFc/KxkC1JTPXKaq4HbZXTJdJq+H x1hR/hIMT0sMjeue24PCLQ== 0001171520-03-000227.txt : 20030814 0001171520-03-000227.hdr.sgml : 20030814 20030813185723 ACCESSION NUMBER: 0001171520-03-000227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BILTRITE INC CENTRAL INDEX KEY: 0000004611 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 041701350 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04773 FILM NUMBER: 03842931 BUSINESS ADDRESS: STREET 1: 57 RIVER STREET CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 BUSINESS PHONE: 6172376655 MAIL ADDRESS: STREET 1: 57 RIVER STREET CITY: WELLESLEY HILLS STATE: MA ZIP: 02181 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN BILTRITE RUBBER CO INC DATE OF NAME CHANGE: 19730621 10-Q 1 d1242.txt AMERICAN BILTRITE INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 2003 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 (IRS Employer Identification No.) incorporation or organization) 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 is an accelerated filer (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 covered by this report. Title of Each Class Outstanding at August 8, 2003 - ------------------- ----------------------------- Common 3,441,551 shares AMERICAN BILTRITE INC. INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Condensed Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002..............3 Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2003 and 2002 (unaudited).............................................4 Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)..............5 Notes to Unaudited Consolidated Condensed Financial Statements.........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................20 Item 3. Quantitative and Qualitative Disclosures About Market Risk..29 Item 4. Controls and Procedures.....................................30 PART II. OTHER INFORMATION Item 1. Legal Proceedings...........................................31 Item 4. Submission of Matters to a Vote of Security Holders.........31 Item 6. Exhibits and Reports on Form 8-K............................31 Signature............................................................33 Index of Exhibits....................................................34 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN BILTRITE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands of dollars) June 30, December 31, 2003 2002 -------------------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 10,830 $ 20,161 Restricted cash 2,869 Accounts receivable, net 44,797 41,217 Inventories 95,042 94,878 Prepaid expenses and other current assets 17,517 21,108 --------- --------- TOTAL CURRENT ASSETS 171,055 177,364 Goodwill, net 11,300 11,300 Other assets 23,547 25,440 Property, plant and equipment, net 143,373 147,766 --------- --------- TOTAL ASSETS $ 349,275 $ 361,870 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 22,166 $ 25,684 Accrued expenses 65,701 77,672 Notes payable 32,100 15,276 Current portion of long-term debt 21,235 21,061 --------- --------- TOTAL CURRENT LIABILITIES 141,202 139,693 Long-term debt 104,113 104,210 Other liabilities 69,107 69,621 Noncontrolling interests 548 808 STOCKHOLDERS' EQUITY Common stock, par value $0.01-authorized 15,000,000 shares, issued 4,607,902 shares 46 46 Additional paid-in capital 19,548 19,548 Retained earnings 46,720 62,376 Accumulated other comprehensive loss (16,877) (19,300) Less cost of shares in treasury (15,132) (15,132) --------- --------- 34,305 47,538 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 349,275 $ 361,870 ========= ========= See accompanying notes to consolidated condensed financial statements. 3 AMERICAN BILTRITE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) (In thousands of dollars, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ------------------------------------------------ Net sales $ 105,815 $ 121,977 $ 209,774 $ 224,715 Interest and other income 1,612 1,255 2,176 1,727 --------- --------- --------- --------- 107,427 123,232 211,950 226,442 --------- --------- --------- --------- Costs and expenses: Cost of products sold 82,767 87,901 158,241 162,703 Selling, general and administrative expenses 29,129 29,090 58,066 56,474 Asset impairment 2,517 2,517 Interest expense 2,935 2,852 5,939 5,558 --------- --------- --------- --------- 117,348 119,843 224,763 224,735 --------- --------- --------- --------- EARNINGS (LOSS) BEFORE INCOME TAXES AND OTHER ITEMS (9,921) 3,389 (12,813) 1,707 Income tax 1,952 1,288 2,108 649 Noncontrolling interests (13) (456) (90) (188) --------- --------- --------- --------- EARNINGS (LOSS) BEFORE ACCOUNTING CHANGE (11,886) 1,645 (15,011) 870 Cumulative effect of accounting change (7,742) --------- --------- --------- --------- Net earnings (loss) $ (11,886) $ 1,645 $ (15,011) $ (6,872) ========= ========= ========= ========= Net earnings (loss) per common share before cumulative effect of accounting change, basic and diluted $ (3.45) $ .48 $ (4.36) $ .25 Cumulative effect of accounting change (2.25) --------- --------- --------- --------- Net earnings (loss) per common share, basic and diluted $ (3.45) $ .48 $ (4.36) $ (2.00) ========= ========= ========= ========= Weighted average number of common and equivalent shares outstanding 3,442 3,442 3,442 3,442 ========= ========= ========= ========= Dividends declared per common share $ .0625 $ .125 $ .1875 $ .25
See accompanying notes to consolidated condensed financial statements. 4 AMERICAN BILTRITE INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands of dollars) Six Months Ended June 30, 2003 2002 --------------------- OPERATING ACTIVITIES Net loss $(15,011) $ (6,872) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Depreciation and amortization 9,250 8,731 Deferred income taxes 1,927 2,119 Asset impairment 2,517 Cumulative effect of accounting change 7,742 Changes in operating assets and liabilities: Accounts receivable (2,769) (15,676) Inventories 2,697 199 Prepaid expenses and other assets 4,001 3,519 Accounts payable and accrued expenses (16,447) 7,971 Noncontrolling interests 90 188 Other (1,052) (1,886) -------- -------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (14,797) 6,035 INVESTING ACTIVITIES Investments in property, plant and equipment (4,092) (7,045) Proceeds from sales of short-term investments 1,416 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (4,092) (5,629) FINANCING ACTIVITIES Net short-term borrowings 15,624 4,217 Payments on long-term debt (576) (519) Net change in restricted cash (2,869) Dividends paid (645) (860) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 11,534 2,838 Effect of foreign exchange rates changes on cash (1,976) (1,006) -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,331) 2,238 Cash and cash equivalents at beginning of period 20,161 16,804 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,830 $ 19,042 ======== ======== See accompanying notes to consolidated condensed financial statements. 5 AMERICAN BILTRITE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 2003 Note A - Basis of Presentation The accompanying unaudited consolidated condensed financial statements which include the accounts of American Biltrite Inc. and its wholly-owned subsidiaries (and including, unless the context otherwise indicates, K&M Associates L.P., 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 and with 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, in 2003 the impairment charge related to Janus, and in 2002 the cumulative effect of the change in accounting for goodwill) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. As more fully discussed in Note E of Notes to Unaudited Consolidated Condensed Financial Statements, the Company's majority-owned subsidiary Congoleum Corporation ("Congoleum) is a party to a significant number of lawsuits stemming from its manufacture of asbestos-containing products and has announced its intention to seek confirmation of a pre-packaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") as part of its strategy to resolve this liability. The plan contemplated by Congoleum would permit shareholders, including ABI, to retain their existing equity interests in Congoleum. American Biltrite expects it would receive certain relief as may be afforded under section 524(g)(4) of the Bankruptcy Code from asbestos claims that derive from claims made against Congoleum, which claims are expected to be channeled to the Plan Trust. American Biltrite also expects it would make certain contributions and incur certain other obligations as part of Congoleum's plan. Because it maintains a controlling interest in Congoleum, ABI has continued to consolidate Congoleum's results, which included losses of $20.7 million and $16.1 million in excess of the carrying value of its investment in Congoleum at June 30, 2003 and December 31, 2002 respectively. For more information regarding Congoleum's and ABI's asbestos liabilities and plans for resolving those liabilities, please refer to Notes D and E of Notes to Unaudited Consolidated Condensed Financial Statements. In addition, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors that May Affect Future Results - The Company and its majority-owned subsidiary have significant asbestos liability and funding exposure, and the Company's and Congoleum's strategies for resolving this exposure may not be successful" for factors that could cause actual results to differ from Congoleum's and ABI's goals for resolving their asbestos liabilities. 6 Note A - Basis of Presentation (continued) The consolidated balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Certain amounts appearing in the prior period's consolidated condensed financial statements have been reclassified to conform to the current period's presentations. Note B - Accounting Principles Changes in Accounting Principles In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 provides that goodwill and intangible assets with indefinite lives will not be amortized, but rather will be tested for impairment on an annual basis. SFAS No. 142 was effective for the Company as of January 1, 2002. During the first quarter of 2002, the Company performed an impairment test of goodwill and concluded that there was impairment of goodwill related to both its wholly owned subsidiary Janus Flooring Corporation ("Janus Flooring") and its majority-owned subsidiary Congoleum. The Company compared the implied fair value of their goodwill to the carrying value of goodwill and determined that based on the fair value of both Congoleum and Janus Flooring, there should be no goodwill recorded. Congoleum recorded an impairment loss of $10.5 million during the first quarter of 2002 based on this change in accounting principle. American Biltrite's share, 55%, in this impairment loss resulted in a charge of $5.8 million plus a charge of $1.9 million for an impairment loss related to Janus Flooring goodwill for a total charge of $7.7 million during the first quarter of 2002. Recent Accounting Pronouncements In November 2002, the FASB issued Interpretation of Financial Standards (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, (the "Interpretation"), which expands on the accounting guidance of SFAS Nos. 5, 57 and 107 and incorporates without change the provisions of FIN No. 34, which is being superseded. The Interpretation will significantly change current practice in the accounting for and disclosure of guarantees. Guarantees meeting the characteristics described in the Interpretation are to be recognized at fair value and significant disclosure rules have been implemented even if the likelihood of the guarantor making payments is remote. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an effect on ABI's consolidated results of operations and financial position. 7 Note C - Inventories Inventories at June 30, 2003 and December 31, 2002 consisted of the following (in thousands): June 30, December 31, 2003 2002 -------- ---------- Finished goods $69,475 $66,341 Work-in-process 11,674 12,155 Raw materials and supplies 13,893 16,382 ------- ------- $95,042 $94,878 ======= ======= Note D - Commitments and Contingencies In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, product liability and other matters, as more fully described below. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts, and the matters may remain unresolved for several years. The Company records a liability for environmental remediation claims when it becomes probable that the Company 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 to reflect such revisions and progress. Liabilities of Congoleum comprise the substantial majority of the environmental and other liabilities reported on the Company's 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 consolidated financial statements, to the extent that Congoleum incurs a liability or expense, it will be reflected in ABI's consolidated financial statements. In addition, Congoleum has announced its intent to file a pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code as part of a plan to resolve its asbestos related liabilities. American Biltrite Inc. ABI is a co-defendant with many other manufacturers and distributors of asbestos containing products in approximately 1,207 pending claims involving approximately 2,744 individuals as of June 30, 2003. The claimants allege personal injury or death from exposure to asbestos or asbestos-containing products. Activity related to asbestos claims is as follows: 8 Note D - Commitments and Contingencies (continued) Six Months Ended Year Ended June 30, 2003 December 31, 2002 ------------------------------------ Beginning claims 884 464 New claims 433 528 Settlements (3) (11) Dismissals (107) (97) ------------------------------------ Ending claims 1,207 884 ==================================== The total indemnity costs incurred to settle claims during the six months ended June 30, 2003 and twelve months ended December 31, 2002 were $29,000 and $409,000, respectively, all of which were paid by ABI's insurance carriers, as were the related defense costs. The average indemnity cost per resolved claim was approximately $260 for the six months ended June 30, 2003 and $3,800 for the year ended December 31, 2002. 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 to defend and resolve current and reasonably anticipated future asbestos-related claims (not including claims asserted against Congoleum), based upon a strategy to actively defend or seek settlement for those claims in the normal course of business. Factors such as recent and historical settlement and trial results, 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. In 2002, the Company engaged an outside actuary to assist it in developing estimates of the Company's liability for resolving asbestos claims at December 31, 2002. The actuary estimated the range of liability for settlement of current claims pending and claims anticipated to be filed through 2008 was $8.5 million to $14.9 million. The Company believes no amount within this range is more likely than any other, and accordingly has recorded the minimum liability estimate of $8.5 million in its financial statements. The Company also believes that based on this minimum liability estimate, the corresponding amount of insurance probable of recovery is $8.5 million at December 31, 2002 and June 30, 2003, which has been included in other assets. Due to the numerous variables and uncertainties, the Company does not believe that reasonable estimates can be developed of liabilities for claims beyond a five 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 Company reported in its December 31, 2002 Form 10-K that its goal was to resolve all of its pending and future asbestos related liabilities as part of Congoleum's anticipated plan of reorganization under Chapter 11 of the United States Bankruptcy Code. The Company now 9 Note D - Commitments and Contingencies (continued) anticipates that resolution of its asbestos related liabilities resulting from Congoleum's anticipated plan will be limited to liabilities derivative of claims asserted against Congoleum as may be afforded under Section 524(g)(4) of the Bankruptcy Code. ABI reported in its December 31, 2002 Form 10-K that it has been named as a Potentially Responsible Party ("PRP") within the meaning of the Federal Comprehensive Environmental Response Compensation and Liability Act, as amended ("CERCLA"), with respect to three sites located in three separate states. ABI also reported that it is potentially responsible for response and remediation costs with respect to three state-supervised sites. There have been no material developments relating to these sites during the three or six month periods ended June 30, 2003. A lawsuit was brought by Olin Corporation ("Olin"), the present owner of a former chemical plant site in Wilmington, Massachusetts (the "Olin Site"), which alleged that ABI and three defendants were liable for a portion of the site's soil and groundwater response and remediation costs at the site. A wholly-owned subsidiary of ABI owned and operated the Wilmington plant from 1959 to 1964 and for approximately one month during 1964, ABI held title to the property directly. In 2000, ABI and The Biltrite Corporation ("TBC") entered into a settlement agreement with Olin that resolved all claims and counterclaims among the parties. Under the terms of the agreement, ABI and TBC together paid Olin $4.1 million in settlement of their share of Olin's $18 million of alleged past response costs incurred through December 31, 1998. ABI and TBC also agreed to reimburse Olin for 21.7% of Olin's response costs incurred at the Olin Site after January 1, 1999, plus an annual reimbursement of $0.1 million for Olin's internal costs. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the costs that may be incurred by ABI in connection with this lawsuit and 37.5% of the amounts due under the settlement agreement with Olin. Additional expenditures, principally consisting of remediation and oversight costs, will be required to remediate the Olin Site. Olin has estimated that the total response costs for 2003 will be approximately $5.5 million. For costs beyond 2003, ABI has estimated the range to be between $13.3 million to $26.0 million. As of June 30, 2003, ABI has estimated its potential liability to Olin to be in the range of $2.5 million to $4.3 million before any recoveries from insurance and net of its right of reimbursement from TBC. The State of Maine Department of Environmental Protection has put the present owner of a former ABI plant on notice to clean up a dumpsite where there is exposed asbestos from sheet vinyl waste along with other hazardous substances. ABI is reviewing the condition of the site and its potential liability for its share of any clean-up costs. ABI believes, at this time, that the cost of site investigation, remediation, maintenance and monitoring at the site will be approximately $1 million. ABI has not yet entered a final cost sharing agreement with the current owner. Under an agreement between ABI and TBC, TBC is liable for 37.5% of the remediation costs, incurred by ABI at this site. 10 Note D - Commitments and Contingencies (continued) ABI has made demands against its insurance carriers to provide defense and indemnity for ABI's liabilities at the CERCLA sites, the Olin Site and the state supervised sites. An agreement was executed by ABI and its carriers regarding the payment of the defense costs for the Olin Site. ABI and its carriers continue to discuss ABI's remaining demands for insurance coverage for these sites. As of June 30, 2003, the Company has accrued $4.1 million for ABI's estimable and probable amounts for environmental-related contingencies described above. Additionally, the Company has recorded an asset related to insurance recoveries relating to those contingencies, net of reimbursements to certain PRP's, for approximately $0.9 million. Congoleum Congoleum is a defendant in a large number of asbestos-related lawsuits and has announced its intent to file a pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code. See Note E - "Congoleum Asbestos Liabilities and Planned Reorganization." 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 three other instances, although not named as a PRP, Congoleum has received a request for information. These pending proceedings currently relate to four disposal sites in New Jersey, Pennsylvania, Maryland, and Connecticut in which recovery from generators of hazardous substances is sought for the cost of cleaning up the contaminated waste sites. Congoleum's ultimate liability in connection with those other sites depends on many factors, including the volume of material contributed to the site, 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 from insurance. However, under CERCLA, and certain other laws, as a PRP, Congoleum can be held jointly and severally liable for all environmental costs associated with a site. The most significant exposure to which Congoleum has been named a PRP relates to a recycling facility site in Elkton, Maryland. 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; however, the groundwater remediation phase has not begun and the remedial investigation/feasibility study related to the groundwater remediation has not been approved. The PRP group estimated that future costs of groundwater remediation, based on engineering and consultant studies conducted, would be approximately $26 million. Congoleum's proportionate share, based on waste disposed at the site, is estimated to be approximately 5.8%. 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 self-guaranteed certain remediation funding sources and financial responsibilities. Estimated total clean-up costs, including capital outlays and future maintenance costs for soil and groundwater remediation are primarily based on engineering studies. 11 Note D - Commitments and Contingencies (continued) The outcome of these matters could result in significant expenses or judgments that could have a material adverse effect on the financial position of Congoleum. Other In addition to the matters referenced above and in Note E, in the ordinary course of their businesses, ABI and Congoleum become involved in lawsuits, administrative proceedings, product liability and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts, and the matters may remain unresolved for several years. Note E - Congoleum Asbestos Liabilities and Planned Reorganization On January 13, 2003, ABI's majority-owned subsidiary Congoleum announced that it had begun preliminary settlement negotiations with attorneys it believes represent the majority of plaintiffs with asbestos claims pending against it and that upon successful completion of these negotiations, it intends to seek confirmation of a pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code. On March 31, 2003, Congoleum reached an agreement in principle with attorneys representing more than 75% of the known present claimants with asbestos claims pending against Congoleum. The agreement in principle contemplates a Chapter 11 reorganization seeking confirmation of a pre-packaged plan that would leave trade and other unsecured nonasbestos creditors unimpaired and would resolve all pending and future asbestos claims against Congoleum, including any derivative liability of ABI and Congoleum's distributors that derive from claims asserted against Congoleum as may be afforded under Section 524(g)(4) of the Bankruptcy Code. Approval of an asbestos channeling injunction pursuant to section 524(g) of the Bankruptcy Code would require the supporting votes of at least 75% of the asbestos claimants with claims against Congoleum who vote on the plan. Resolution of Congoleum's asbestos liability through a pre-packaged reorganization plan is subject to various other conditions as well, including approval by the bankruptcy court. In furtherance of the agreement in principle, on April 10, 2003, Congoleum entered into a settlement agreement with various asbestos claimants (the "Claimant Agreement"). As contemplated by the Claimant Agreement, Congoleum also entered into a trust agreement (the "Collateral Trust Agreement") which established a trust (the "Collateral Trust") to distribute funds in accordance with the terms of the Claimant Agreement and a security agreement (the "Security Agreement") pursuant to which Congoleum granted the Collateral Trust a security interest in Congoleum's rights under its applicable insurance coverage and payments from its insurers for asbestos claims (the "Collateral"). The Claimant Agreement establishes a compensable disease valuation matrix (the "Matrix") and allows claimants who qualify and participate in the Claimant Agreement to settle their claim for the Matrix value secured in part (75%) by the security interest in the Collateral. The Collateral Trust Agreement provides for distribution of trust assets according to various requirements that give priority (subject to aggregate distribution limits) to participating claimants who had pre- 12 Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued) existing unfunded settlement agreements ("pre-existing settlement agreements") with Congoleum and participating claimants who qualify for payment under unfunded settlement agreements entered into by Congoleum with plaintiffs that have asbestos claims pending against Congoleum and which claims are scheduled for trial after the effective date of the Claimant Agreement but prior to the commencement of Congoleum's anticipated pre-packaged Chapter 11 reorganization case ("trial-listed settlement agreements"). Pursuant to the terms and conditions of the Claimant Agreement, Congoleum will settle claims pertaining to a pre-existing settlement agreement or trial-listed settlement agreement, which settled claims will be fully secured by the Collateral, and all other claims with claimants electing to participate on the terms and conditions of the Claimant Agreement, which settled claims will be partially secured by the Collateral in an amount equal to 75% of the settled value, with the remaining 25% of the settled value being unsecured. Congoleum expects that, under its pre-packaged Chapter 11 plan, a trust will be established upon consummation of Congoleum's confirmed pre-packaged Chapter 11 plan of reorganization (the "Plan Trust"). As contemplated by the Claimant Agreement and the Collateral Trust Agreement, upon consummation of the plan, and establishment of the Plan Trust, the assets in the Collateral Trust would be transferred to the Plan Trust. It is expected that the Plan Trust would fund the settlement of all pending and future asbestos claims (including any claims contemplated by the Claimant Agreement that are unsatisfied as of the confirmation of the plan of reorganization by the bankruptcy court) and protect Congoleum from future asbestos-related litigation by channeling all asbestos claims (including any claims contemplated by the Claimant Agreement that are unsatisfied as of the confirmation of the plan of reorganization by the bankruptcy court) to the Plan Trust pursuant to Section 524(g) of the Bankruptcy Code. It is expected that Congoleum's trade and other unsecured nonasbestos creditors would be unimpaired under its pre-packaged Chapter 11 plan and that its trade creditors would be paid in the ordinary course of business. ABI understands that Congoleum's goal is to finalize negotiations of a pre-packaged Chapter 11 plan of reorganization and begin soliciting acceptances for such plan by no later than August, 2003 and to commence its pre-packaged Chapter 11 case in September, 2003. After Congoleum has commenced its pre-packaged Chapter 11 case, it is expected that it would take another two to six months to confirm the plan and emerge from the process. ABI and Congoleum hope that Congoleum obtains confirmation of its plan by the end of 2003. Congoleum expects that its costs to effect this plan, consisting principally of legal and advisory fees and contributions to the Plan Trust will be approximately $21.3 million at a minimum, of which Congoleum spent $7.1 million during the first six months of 2003. It is expected that pursuant to Congoleum's anticipated pre-packaged Chapter 11 plan of reorganization, the Company would receive certain relief as may be afforded under section 524(g)(4) of the United States Bankruptcy Code of 1978, as amended, from asbestos claims that derive from claims made against Congoleum, which claims are expected to be channeled to the 13 Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued) trust established upon consummation of Congoleum's confirmed pre-packaged Chapter 11 plan of reorganization (the "Plan Trust"). The Company and Congoleum do not expect that any other asbestos claims that may be asserted against the Company would be channeled to the Plan Trust. Pursuant to the terms of Congoleum's anticipated pre-packaged Chapter 11 plan of reorganization, the Company expects to pledge all of the shares of Congoleum stock that it owns, together with any other equity interests and rights the Company may own or hold in Congoleum, as of the later of June 30, 2005 and the last trading day of the 90 consecutive trading day period commencing on the first anniversary of the effective date of Congoleum's confirmed pre-packaged Chapter 11 plan of reorganization (the "Principal Adjustment Date") pursuant to the terms of a pledge agreement (the "Pledge Agreement"), which pledge will serve as collateral securing Congoleum's obligations under a promissory note that Congoleum is expected to contribute to the Plan Trust (the "Congoleum Note"). The Company expects that the original principal amount of the Congoleum Note will be $2,738,234.75 (the "Original Principal Amount") and will be subject to increase as of the Principal Adjustment Date in an amount equal to the excess, if any, of the amount by which 51% of Congoleum's market capitalization as of the Principal Adjustment Date, based upon (subject to certain exceptions) the total number of shares of Congoleum's common stock outstanding as of such date multiplied by the average of the closing trading prices of Congoleum's Class A common stock for the 90 consecutive trading days ending on the Principal Adjustment Date, exceeds the Original Principal Amount (the "Additional Principal Amount"), plus any accrued but unpaid interest or other amounts that may be added to such principal amount pursuant to the terms of the Congoleum Note. The Company expects that interest on outstanding principal of the Congoleum Note will accrue at a rate of 9% per annum. The Company expects that interest on the Original Principal Amount will accrue and be payable quarterly and that interest on the Additional Principal Amount will accrue quarterly and be added to the Additional Principal Amount as additional principal. The Company expects that upon the earlier of August 1, 2008 and the date that all of Congoleum's 8 5/8% Senior Notes Due 2008 (the "Congoleum Senior Notes") are repaid in full, interest on the then outstanding Additional Principal Amount will then accrue and be payable quarterly. The Company further expects that all principal on the Congoleum Note then outstanding together with any accrued but unpaid interest will be payable in full by Congoleum on the tenth anniversary of the date of the Congoleum Note, subject to the right of the Plan Trust to accelerate all amounts then owed on the Congoleum Note following an uncured event of default under the Congoleum Note. The Company expects that events of default under the Congoleum Note would include the failure to pay interest and principal prior to the expiration of a 10-day grace period following the applicable due date, the occurrence of an event of default under the Indenture governing the Congoleum Senior Notes (the "Indenture"), the breach by Congoleum of any covenant or agreement contained in the Congoleum Note which remains uncured 30 days following notice by the Plan Trust to Congoleum and the Company of the breach and a material breach of the Pledge Agreement by the Company which remains uncured 30 days following notice by the Plan Trust to the Company and Congoleum of the breach. The Company expects 14 Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued) that the terms of the Congoleum Note would provide that, upon the occurrence of an event of default under the Congoleum Note, Congoleum and the Company would have 10 days from the date they receive notice that an event of default has occurred to cure the event of default. The Company further expects that the Congoleum Note would provide that, if the event of default remains uncured after the 10-day cure period, the aggregate outstanding principal amount of the Congoleum Note together with any accrued but unpaid interest thereon would become immediately due and payable by Congoleum if the event of default relates to an uncured event of default of the Indenture, and with regard to other events of default of the Congoleum Note, the Plan Trust may, upon notice to Congoleum and the Company, declare the aggregate outstanding principal amount of the Congoleum Note together with any accrued but unpaid interest thereon to be immediately due and payable by Congoleum. The Company further expects that the Plan Trust's rights to payment under the Congoleum Note will be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit facility, except that regularly scheduled interest payments under the Congoleum Note are expected to be payable by Congoleum so long as no default or event of default has occurred or is continuing under the Indenture or Congoleum's credit facility. The Company further expects that, in addition to the pledge of Congoleum stock and equity rights, as additional security under the Congoleum Note, the Congoleum Note, the Pledge Agreement and the anticipated terms of Congoleum's pre-packaged Chapter 11 plan of reorganization would also provide that the Plan Trust would not be obligated to pay the Company pursuant to any rights of indemnity that the Company may have against the Plan Trust for asbestos-related claims pursuant to Congoleum's pre-packaged Chapter 11 plan of reorganization or a certain Joint Venture Agreement from 1992 to which both the Company and Congoleum are parties to (as amended, the "Joint Venture Agreement") until after any amounts due and payable to the Plan Trust under the Congoleum Note have been paid in full to the Plan Trust. Until such time, any such payments that would otherwise have been payable to the Company pursuant to that right of indemnity, would be set aside by the Plan Trust and held in escrow by the Plan Trust for the Company's benefit and pledged by the Company as additional collateral securing Congoleum's obligations under the Congoleum Note until released from such escrow and paid to the Company, as further provided under Congoleum's anticipated pre-packaged Chapter 11 plan of reorganization, the Congoleum Note and the Pledge Agreement. The Company further expects that the Congoleum Note, the Pledge Agreement and Congoleum's pre-packaged Chapter 11 plan of reorganization would also provide that Congoleum would be prohibited from making any payments to the Company pursuant to any rights of indemnity that the Company may have against Congoleum for claims pursuant to the Joint Venture Agreement until after any amounts due and payable to the Plan Trust under the Congoleum Note have been paid in full to the Plan Trust. Until such time, any such payments that would otherwise have been payable to the Company pursuant to that right of indemnity, would be paid by Congoleum to the Plan Trust and the Plan Trust would set aside and hold in escrow such amounts for the Company's benefit and the Company will pledge such amounts as additional collateral securing Congoleum's obligations under the Congoleum Note until paid to the Company, as further 15 Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued) provided under Congoleum's anticipated pre-packaged Chapter 11 plan of reorganization, the Congoleum Note and the Pledge Agreement. The Company expects that it would be allowed to prepay the principal amount of the Congoleum Note, in whole but not in part, without any penalty or premium at any time following the Principal Adjustment Date and that any interest that may have accrued but not yet been paid at the time of any principal repayment would be due and payable at the time of the principal repayment. The Company expects that Congoleum would be obligated to repay the Company for any amounts paid by the Company pursuant to the Congoleum Note, which repayment obligation would be evidenced by a promissory note or notes to be issued by Congoleum to the Company. It is expected that any such note would have similar payment terms as those expected to be afforded to the Plan Trust with regard to the Congoleum Note, which rights of repayment are expected to be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable to the Plan Trust with regard to the Congoleum Note and with regard to amounts owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit facility, except that the right of full subordination with regard to the Congoleum Senior Notes and Congoleum's credit facility would contain an exception that would allow Congoleum to make regularly scheduled interest payments to the Company pursuant to any such note so long as no default or event of default has occurred or is continuing under the Indenture or Congoleum's credit facility. It is further expected that if the Company prepaid the Congoleum Note and the Company sold all or substantially all of the shares of Congoleum's stock held by the Company as of the Principal Adjustment Date during the three-year period following such date, the Company would be obligated to make a contribution to the Plan Trust if the equity value of Congoleum implied by the price paid to the Company for the shares of Congoleum's stock exceeded the greater of the Original Principal Amount or 51% of Congoleum's market capitalization as of the Principal Adjustment Date, based upon (subject to certain exceptions) the total number of shares of Congoleum's common stock outstanding as of such date multiplied by the average of the closing trading prices of Congoleum's Class A common stock for the 90 consecutive trading days ending on the Principal Adjustment Date. In such instance, it is expected that the Company would be obligated to pay to the Plan Trust an amount equal to 50% of such excess amount. Under the expected terms of Congoleum's pre-packaged Chapter 11 plan of reorganization, Congoleum would be obligated to repay the Company for any amounts paid by the Company to the Plan Trust pursuant to this obligation. In satisfaction of Congoleum's repayment obligation it would owe to the Company, it is expected that Congoleum would issue a promissory note to the Company in a principal amount equal to the amount of any such payments made by the Company plus any accrued but unpaid interest or other amounts that may be added to such principal amount pursuant to the terms of the promissory note which would be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable pursuant to the Congoleum Senior Notes and Congoleum's credit facility, except that regularly scheduled interest payments could be paid on such note so long as no default or event of default has occurred or is continuing under the Indenture or Congoleum's credit facility. 16 Note E - Congoleum Asbestos Liabilities and Planned Reorganization (continued) The Company further expects that it will make a cash contribution in the amount of $250,000 to the Plan Trust upon formation of the Plan Trust. The Company has previously disclosed that its goal was to have all current and future asbestos claims that may be asserted against it channeled to the Plan Trust. At the present time, Congoleum's pre-packaged Chapter 11 plan of reorganization will not provide relief to the Company for all asbestos claims that may be asserted against it and will not include an assignment of the Company 's insurance policies to the Plan Trust. The Company has not abandoned its goal of obtaining that relief at a future time if circumstances change so that the Company and Congoleum believe that the Company could attain the Company's desired channeling relief without posing significant risks to the success of Congoleum's plan of reorganization or the Company, its insurance coverage and its business. Both the Company and Congoleum, however, presently believe that it is unlikely that the Company will be successful in realizing its goal in this regard, and the Company is not actively pursuing this goal at this time. As previously discussed, under the expected terms of Congoleum's plan of reorganization, the Company would receive certain relief as may be afforded under section 524(g)(4) of the Bankruptcy Code from asbestos claims that derive from claims made against Congoleum, which claims are expected to be channeled to the Plan Trust. However, Congoleum and the Company do not expect that any other asbestos claims that may be asserted against the Company would be channeled to the Plan Trust. The Company and Congoleum also expect that the contributions the Company would make to the Plan Trust will differ from the contributions previously publicly disclosed that might be made by the Company if it were to receive its desired relief and are expected to consist of those items referred to above in this Note E. Note F - Comprehensive Income (Loss) The following table presents total comprehensive income (loss) for the three and six month periods ended June 30, 2003 and 2002 (in thousands):
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 -------- ------ -------- ------- Net earnings (loss) $(11,886) $1,645 $(15,011) $(6,872) Foreign currency translation adjustments 1,432 810 2,423 674 -------- ------ -------- ------- Total comprehensive income (loss) $(10,454) $2,455 $(12,588) $(6,198) ======== ====== ======== =======
Note G - Earnings (Loss) Per Share Earnings (loss) per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding. 17 Note H - Industry Segments Description of Products and Services The Company has four reportable segments: flooring products, tape products, jewelry and a Canadian division that produces flooring and rubber products. The flooring products segment includes Congoleum, which represents the majority of the Company's flooring products segment and Janus Flooring Corporation. Congoleum manufactures vinyl and vinyl composition floor coverings and sells them primarily through floor covering distributors to retailers, and to contractors for commercial and residential use. Janus Flooring Corporation manufacturers prefinished hardwood flooring. The Company has announced that it plans to sell or dispose of the Janus operation during the second half of 2003. The tape products segment consists of two production facilities in the United States, and finishing and sales facilities in Belgium and Singapore. The tape products segment manufactures paper, film, HVAC, electrical, shoe and other tape products for use in industrial and automotive markets. The jewelry segment consists of K&M Associates L.P., a national costume jewelry supplier to mass merchandisers and department stores. The Company's Canadian division produces flooring, rubber products, including materials used by footwear manufacturers, and other industrial products.
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---------------------- ----------------------- Net Sales Net sales to external customers: Flooring products* $ 57,348 $ 69,865 $ 112,927 $ 129,756 Tape products 20,856 22,447 40,225 41,717 Jewelry 16,998 19,312 37,272 34,078 Canadian division 10,613 10,353 19,350 19,164 --------- --------- --------- --------- Total net sales to external customers 105,815 121,977 209,774 224,715 --------- --------- --------- --------- Intersegment net sales: Flooring products 13 70 33 160 Tape products 39 38 72 76 Jewelry Canadian division 1,881 2,941 3,863 5,946 --------- --------- --------- --------- Total intersegment net sales 1,933 3,049 3,968 6,182 --------- --------- --------- --------- 107,748 125,026 213,742 230,897 Reconciling items Intersegment net sales (1,933) (3,049) (3,968) (6,182) --------- --------- --------- --------- Total consolidated net sales $ 105,815 $ 121,977 $ 209,774 $ 224,715 ========= ========= ========= ========= *includes Janus sales of $ 2,358 $ 1,951 $ 4,371 $ 3,993 ========= ========= ========= =========
18 Note H - Industry Segments (continued)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ------------------ ------------------- Segment (loss) profit Flooring products* $(9,956) $ 883 $(13,264) $ (645) Tape products 235 1,088 (200) 1,133 Jewelry (107) 1,697 1,580 1,843 Canadian division 40 322 (134) 518 ------- ------- -------- ------- Total segment (loss) profit (9,788) 3,990 (12,018) 2,849 Reconciling items Corporate items (58) (593) (748) (1,100) Intercompany loss (75) (8) (47) (42) ------- ------- -------- ------- Total consolidated (loss) before income taxes and other items $(9,921) $ 3,389 $(12,813) $ 1,707 ======= ======= ======== ======= *includes Janus loss of $(7,970) $ (391) $ (8,689) $ (973) ======= ======= ======== ======= June 30, December 31, 2003 2002 ------------------------ Segment assets Flooring products* $ 212,794 $ 226,339 Tape products 57,954 56,543 Jewelry 37,281 43,123 Canadian division 35,974 30,467 --------- --------- Total segment assets 344,003 356,472 Reconciling items Corporate items 21,412 19,420 Intersegment accounts receivable (15,931) (13,860) Intersegment profit in inventory (209) (162) --------- --------- Total consolidated assets $ 349,275 $ 361,870 ========= ========= *includes Janus assets of $ 6,532 $ 12,934 ========= =========
19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 forward-looking statements are based on the Company's (and its majority-owned subsidiary Congoleum's) expectations, as of the date of this report, of future events and the Company undertakes no obligation to update any of these forward-looking statements. Although the Company 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. Factors that could cause or contribute to the Company's actual results differing from its expectations include those factors discussed elsewhere in this report, including in the section of this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors That May Affect Future Results," in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and in the Company's other filings with the Securities and Exchange Commission. The Company's majority-owned subsidiary, Congoleum, is a defendant in a large number of asbestos-related lawsuits and has announced its intent to file a pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code as part of its strategy to resolve this liability. In addition, the Company is a defendant in a number of asbestos-related lawsuits as well. See Notes D and E of the Notes to Unaudited Consolidated Condensed Financial Statements, which are incorporated herein by reference. These matters may have a material adverse impact on the Company's or Congoleum's financial position and results of operations. Based on its pre-packaged bankruptcy strategy, ABI's consolidated subsidiary Congoleum has made provision in its financial statements for the minimum amount of the range of estimates for its contribution and costs to effect its plan to settle asbestos liabilities through a plan trust established pursuant to Section 524(g) of the Bankruptcy Code. Congoleum recorded a charge of $17.3 million in the fourth quarter of 2002 to increase its recorded liability to the estimated minimum of $21.3 million, of which Congoleum spent $7.1 million during the first six months of 2003. Actual amounts that will be contributed to the plan trust and costs for pursuing and implementing the plan of reorganization could be materially higher, which could have a material effect on ABI's consolidated results of operations. During the second quarter of 2003, the Company reassessed operations at its Toronto, Canada subsidiary, Janus Flooring Corporation, a manufacturer of prefinished hardwood flooring, and decided to exit this business before the end of 2003 due to its history of operating losses. The Company acquired Janus Flooring Corporation in 2000 intending it to serve as a strategic addition to the flooring product business. Included in second quarter 2003 results of operations are total charges of $8.5 million consisting primarily of $3.0 million to reduce inventories to net realizable value, $0.5 million in accounts receivable allowances, a $2.5 million asset impairment charge related to machinery and equipment and a $1.9 million income tax provision to write off deferred tax assets deemed not probable of recovery. 20 Results of Operations Net sales for the second quarter of 2003 were $105.8 million compared to $122.0 million in the second quarter of 2002, a decrease of $16.2 million or 13.3%. Net sales for the first six months of 2003 were $209.8 million, down $14.9 million or 6.6% from the first half of 2002. The decrease in sales for both the second quarter and six months of 2003 was primarily due to Congoleum which experienced continued weakness in the manufactured housing and home center channels while sales in the first half of 2002 benefited from initial shipments of do-it-yourself tile to a major home center and an increase in inventory level by a large distributor. Jewelry segment revenues were down $2.3 million in the second quarter of 2003 compared to 2002 due to lower sales of Back to School Programs. Revenues at the Tape division were down slightly while revenues at the Canadian division were essentially unchanged from prior year levels. Cost of products sold as a percentage of net sales was 78.2% in the second quarter of 2003 versus 72.1% in the second quarter of 2002. For the six months ended June 30, 2003, cost of products sold as a percentage of net sales was 75.4% compared with 72.4% during the same period one year earlier. The $3.0 million charge to reduce Janus inventories to net realizable value had a significant negative impact on cost of sales percentage in both the second quarter and six months of 2003, accounting for approximately half the percentage increase. Operationally, all divisions of the Company experienced slightly lower margins in the second quarter and six months of 2003 caused by lower sales volume and cost pressures. Selling, general and administrative expenses as a percentage of net sales were 27.5% in the second quarter of 2003 compared to 23.8% in the second quarter of 2002. For the six months ended June 30, 2003, selling general and administrative expenses as a percentage of net sales were 27.7%, up from 25.1% in the first half of 2002. In absolute dollars, expenditures for selling, general and administrative expenses were essentially at the same levels at all divisions for both the second quarter and six months of 2003 and 2002 but resulted in higher percentages due to lower sales volume. The asset impairment charge of $2.5 million in the second quarter of 2003 was to write down to net realizable value of the plant and equipment at Janus Flooring given the anticipated disposition. Interest and other income for the three and six months ended June 30, 2003 increased from comparable year earlier periods primarily due to foreign exchange gains at the Canadian operations generated by the strengthening of the Canadian dollar. For the three months ended June 30, 2003, the Company had a net loss of $11.9 million versus net income of $1.6 million in the same period one year earlier. Substantially all of the loss in the second quarter of 2003 was due to the $8.5 million charge noted above for the discontinuance of Janus Flooring coupled with operating losses in the flooring segment. Other segments operated at near break even during the second quarter of 2003. For the first six months of 2003, net loss was $15.0 million versus net income before a required accounting change of $0.9 million in 2002. The Company's provision for tax expense in the second quarter of 2003 consists primarily of $1.9 million to establish a 100% valuation allowance against deferred taxes at Janus Flooring. Congoleum and Janus Flooring are not recognizing any tax related benefit on their losses. 21 The Company expects the charges recorded in the second quarter of 2003 will represent the substantial majority of the expenses to exit the Janus Flooring business. Future expenses in connection with the disposition, which will be reported as losses on discontinued operations, are currently anticipated to be approximately $2 million. The Company anticipates the disposition of Janus, net of future expenses, will generate $3 million to $5 million in cash. The disposition of Janus will not have a material effect on future consolidated net sales of American Biltrite. Liquidity and Capital Resources Cash and cash equivalents, including restricted cash and short term investments, declined $6.5 million in the first half of 2003 to $13.7 million, compared with an increase of $0.8 million in the first half of 2002, primarily due to settlement of accrued liabilities and accounts payable. Under the terms of its Revolving Credit Agreement, Congoleum's accounts receivable payments are deposited in an account assigned to its lender and the funds are used to pay down any loan balance. Restricted cash represents funds deposited in this account but not immediately available for reducing the loan balance. Working capital at June 30, 2003 was $29.9 million, down from $37.7 million at December 31, 2002. The ratio of current assets to current liabilities at June 30, 2003 was 1.21, down from 1.27 at December 31, 2002. Capital expenditures in the first half of 2003 were $4.1 million compared to $7.0 million for the first half of 2002. It is anticipated that capital spending for the full year 2003 will be in the range of $10 to $12 million. The Company has recorded provisions which it believes are adequate for environmental remediation and non-asbestos product-related liabilities, including provisions for testing for potential remediation of conditions at its own facilities. While the Company believes its estimate of the future amount of these liabilities is reasonable, that such amounts will be paid over a period of three to ten years and that the Company expects to have sufficient resources to fund such amounts, the actual timing and amount of such payments may differ significantly from the Company's assumptions. Although the effect of future government regulation could have a significant effect on the Company's costs, the Company is not aware of any pending legislation which would have a material adverse effect on its consolidated results of operations or financial position. There can be no assurances that such costs could be passed along to its customers. Cash requirements for capital expenditures, working capital, debt service and any share repurchases are expected to be financed from operating activities and borrowings under existing bank lines of credit, which are presently $67.6 million in the aggregate. At June 30, 2003, $32.1 million was outstanding under these lines and $1.8 million secured outstanding letters of credit. Effective as of June 30, 2003, two of the Company's debt agreements were amended to revise certain financial covenants measured as of that date to allow the Company to satisfy the covenants. The Company is in discussion with its lenders and expects to further amend these agreements by a required deadline of September 15, 2003. Failure to do so would result in an event of default under those agreements, which could result in the acceleration of payment by the Company of any amounts outstanding under those agreements. If that were to occur, no assurance can be given that we would have sufficient liquidity to repay our bank indebtedness in full or any of our other debts. The Company anticipates the further amendments will include granting its primary lenders a security interest in certain assets of the Company. 22 Under Congoleum's anticipated plan of reorganization, it is expected that certain rights that the Company may have to receive indemnification for claims under the plan of reorganization or the Joint Venture Agreement, subject to certain exceptions, will not be paid to the Company for so long as any obligations owed to the Plan Trust by Congoleum under the Congoleum Note remain outstanding. Instead, those amounts will be held in escrow by the Plan Trust and be pledged by the Company as collateral securing Congoleum's obligations under the Congoleum Note until paid to the Company pursuant to the terms of Congoleum's plan of reorganization, the Congoleum Note and the Pledge Agreement. To the extent the amounts that are subject to that escrow are material, that could have a material adverse affect on the Company's liquidity and capital resources since those escrowed amounts represent amounts that would have already been paid by the Company but not yet reimbursed to the Company to the extent they remain in escrow. In addition, the terms of the Congoleum plan of reorganization are expected to provide that the Company will no longer have certain other rights to receive indemnification under the Joint Venture Agreement or Congoleum's plan of reorganization for asbestos-related property damage claims. To the extent that the Company pays material amounts for asbestos-related property damage claims that the Company would have been entitled to be reimbursed for by Congoleum absent the provisions of Congoleum's plan of reorganization, that could have a material adverse effect on the Company's liquidity and capital resources. Furthermore, to the extent that the amount of any of the Company's indemnity claims against the Plan Trust are reduced to an amount less than the corresponding amount paid by the Company pursuant to the distribution procedures under the Company's plan of reorganization, that could have a material adverse effect on the Company's liquidity and capital resources. The Company did not declare a dividend for the third quarter of 2003. Future dividends, if any, will be determined by the Board of Directors based upon the financial performance and capital requirements of the Company, among other considerations. As previously discussed, ABI and Congoleum have significant liability exposure regarding asbestos-related claims. ABI expects that, based on its current claims experience, its insurance recoveries will fully cover its asbestos-related liability in the foreseeable future. To the extent ABI incurs liability for asbestos-related claims which turn out not to be recoverable from its insurance carriers (whether because the insurance carriers become insolvent or otherwise) or other persons, ABI's funding obligations with respect to those liabilities would increase. This increased funding obligation could have a material adverse effect upon ABI's liquidity and capital resources. In addition, Congoleum's pursuit of its anticipated pre-packaged Chapter 11 plan of reorganization will have a material adverse impact on Congoleum's liquidity and capital resources. Risk Factors That May Affect Future Results The Company and its majority-owned subsidiary Congoleum have significant asbestos liability and funding exposure, and the Company's and Congoleum's strategies for resolving this exposure may not be successful. 23 As more fully set forth in Notes A, D and E of Notes to Unaudited Consolidated Condensed Financial Statements, which are included in this report, the Company and its majority-owned subsidiary Congoleum have significant liability and funding exposure for asbestos personal injury claims. Congoleum has reached an agreement in principle with attorneys representing more than 75% of the known present claimants with asbestos claims pending against Congoleum. In furtherance of the agreement in principle, Congoleum entered into a settlement agreement with various asbestos claimants, which provides for a global settlement of more than 75% of the known asbestos personal injury claims pending against Congoleum. The agreement in principle also contemplates Congoleum pursuing a Chapter 11 reorganization seeking confirmation of a pre-packaged plan that would leave trade and other unsecured nonasbestos creditors unimpaired and would resolve all pending and future asbestos claims against Congoleum, including any derivative liability of the Company and Congoleum's distributors from claims asserted against Congoleum. Confirmation of an asbestos channeling injunction pursuant to section 524(g) of the Bankruptcy Code would require the supporting votes of at least 75% of the asbestos claimants with claims against Congoleum who vote on the plan, as well as a determination by the bankruptcy court that the plan has satisfied certain criteria under the Bankruptcy Code. There can be no assurance that the Company or Congoleum will be successful in realizing these goals in this regard or in obtaining the necessary votes, consents and approvals, or in implementing the desired plan terms. As a result, any settlement reached by Congoleum or the Company with their asbestos plaintiffs or plan of reorganization pursued by the Company or confirmed by a bankruptcy court could vary significantly from the description in this report (including descriptions incorporated by reference in this report), including the estimated costs and contributions to effect the contemplated plan of reorganization could be significantly greater than currently estimated. Any plan of reorganization pursued by Congoleum will be subject to numerous conditions, approvals and other requirements, including bankruptcy court approvals, and there can be no assurance that such conditions, approvals and other requirements will be satisfied or obtained or that there may not be delays, which could be significant in satisfying or obtaining them. Delays in obtaining the necessary supporting votes in favor of Congoleum's plan of reorganization, as well as any other delays in getting Congoleum's plan of reorganization approved by the bankruptcy court, could result in a proceeding that takes longer, and is more costly, than Congoleum has estimated. Furthermore, any such delay could result in Congoleum's pre-packaged plan of reorganization not being confirmed by the bankruptcy court or in the abandonment of the pre-packaged plan of reorganization in favor of a non-prepackaged plan of reorganization. If a pre-packaged plan of reorganization is abandoned in favor of a non-prepackaged plan of reorganization, Congoleum would likely incur significantly more costs due to the likely greater difficulty of negotiating a plan of reorganization with more impaired classes of creditors. Also, obtaining confirmation of a plan under those circumstances would likely take a considerable amount of time and effort in order for the various parties involved to negotiate a plan in light of their potentially conflicting interests. There can be no assurance that the terms of any non-prepackaged plan of reorganization would be as favorable to Congoleum, Congoleum's shareholders, including ABI, holders of Congoleum's Senior Notes and other nonasbestos related constituents as the expected terms of Congoleum's anticipated pre-packaged plan of reorganization. 24 Some additional factors that could cause actual results to differ from Congoleum's and the Company's goals for resolving asbestos liability by Congoleum pursuing a pre-packaged plan of reorganization bankruptcy filing include: (i) the future cost and timing of estimated asbestos liabilities and payments and availability of insurance coverage and reimbursement from insurance companies, which underwrote the applicable insurance policies for Congoleum and the Company, for asbestos-related claims and other costs relating to the execution and implementation of any plan of reorganization pursued by Congoleum, (ii) timely reaching agreement with other creditors, or classes of creditors, that exist or may emerge, (iii) the Company's and Congoleum's satisfaction of the conditions and obligations under their respective outstanding debt instruments, and amendment of those outstanding debt instruments, as necessary, to permit the contemplated note contribution and pledge in connection with Congoleum's pre-packaged plan of reorganization and to make certain financial covenants in those debt instruments less restrictive, (iv) the response from time-to-time of the Company's and Congoleum's lenders, customers, suppliers and other constituencies to the ongoing process arising from the strategy to settle asbestos liability, including Congoleum's ability to obtain debtor-in-possession financing from its current lender under its credit facility or from another lender, (v) timely obtaining sufficient creditor and court approval of any reorganization plan and (vi) compliance with the Bankruptcy Code, including section 524(g). As a result of Congoleum's significant liability and funding exposure for asbestos claims, there can be no assurance that if Congoleum 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. Any significant increase of the Company's asbestos liability and funding exposure would likely have a material adverse effect on the Company's business, operations and financial condition and possibly its ability to continue as a going concern. For further information regarding the Company's and Congoleum's asbestos liability, insurance coverage and strategies to resolve that asbestos liability, please see Notes A, D and E of Notes to Unaudited Consolidated Condensed Financial Statements, which are included in this report. The Company and its majority-owned subsidiary Congoleum may incur substantial liability for environmental claims and compliance matters. Due to the nature of the Company's and its majority-owned subsidiary Congoleum's businesses and certain of the substances which are or have been used, produced or discharged by them, the Company's and Congoleum's operations and facilities are subject to a broad range of federal, state, local and foreign legal and regulatory provisions relating to the environment, including those regulating the discharge of materials into the environment, the handling and disposal of solid and hazardous substances and wastes and the remediation of contamination associated with releases of hazardous substances at Company and Congoleum facilities and off-site disposal locations. The Company and Congoleum have historically expended substantial amounts for compliance with existing environmental laws or regulations, including environmental remediation costs at both third-party sites and Company and Congoleum-owned sites. The Company and Congoleum will continue to be required to expend amounts in the future because 25 of the nature of their prior activities at their facilities, to comply with existing environmental laws, and those amounts may be substantial. Although the Company and Congoleum expect that they would have sufficient resources to fund any such liabilities, there is no certainty that these amounts will not have a material adverse effect on their respective financial positions because, as a result of environmental requirements becoming increasingly strict, neither the Company nor Congoleum is able 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 or Congoleum to modify or curtail their operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company and its majority-owned subsidiary Congoleum, may incur substantial liability for other product and general liability claims. In the ordinary course of their businesses, the Company and its majority-owned subsidiary Congoleum become 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 Company's business, results of operations and financial condition if the Company or Congoleum, as applicable, is unable to successfully defend against or settle these matters and its insurance coverage is insufficient to satisfy any judgments against it or settlements relating to these matters or the Company or Congoleum, as applicable, is unable to collect insurance proceeds relating to these matters. The Company and its majority-owned subsidiary Congoleum are 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 Company and its majority-owned subsidiary Congoleum generally design and engineer their own products. Most of the raw materials required by the Company for its manufacturing operations are available from multiple sources; however, the Company does purchase some of its raw materials from a single source or supplier. Any significant delay in or disruption of the supply of raw materials could substantially increase the Company's cost of materials, require product reformulation or require qualification of new suppliers, any one or more of which could materially adversely affect the Company's business, results of operations or financial condition. The Company's majority-owned subsidiary Congoleum, does not have readily available alternative sources of supply for specific designs of transfer print paper, which are produced utilizing print cylinders engraved to Congoleum's specifications. Although Congoleum does not anticipate any loss of this source of supply, replacement could take a considerable period of time and interrupt production of certain products, which could have a material adverse affect on the Company's business, results of operations or financial condition. 26 The Company and its majority-owned subsidiary Congoleum operate in highly competitive markets and some of their competitors have greater resources, and in order to be successful, the Company and Congoleum must keep pace with and anticipate changing customer preferences. The market for the Company's and its majority-owned subsidiary Congoleum's products and services is highly competitive. Some of their respective competitors have greater financial and other resources and access to capital. Furthermore, to the extent any of the Company's or Congoleum's competitors make a filing under Chapter 11 of the Bankruptcy Code and emerge from bankruptcy as a continuing operating company that has shed much of their pre-filing liabilities, those competitors could have a cost competitive advantage over Congoleum. In addition, in order to maintain their competitive positions, the Company and Congoleum may need to make substantial investments in their businesses, including, as applicable, product development, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for their products and in the loss of market share for their products. Moreover, due to the competitive nature of their industries, they may be commercially restricted from raising or even maintaining the sales prices of their products, which could result in the incurrence of significant operating losses if their expenses were to increase or otherwise represent an increased percentage of sales. The markets in which the Company and Congoleum compete are characterized by frequent new product introductions and changing customer preferences. There can be no assurance that the Company's and Congoleum's existing products and services will be properly positioned in the market or that the Company and Congoleum will be able to introduce new or enhanced products or services into their respective markets on a timely basis, or at all, or that those new or enhanced products or services will receive customer acceptance. The Company's and Congoleum's failure to introduce new or enhanced products or services on a timely basis, keep pace with industry or market changes or effectively manage the transitions to new products, technologies or services could have a material adverse effect on the Company's business, results of operations or financial condition. The Company and its majority-owned subsidiary Congoleum are subject to general economic conditions and conditions specific to their respective industries. The Company and its majority-owned subsidiary Congoleum are subject to the effects of general economic conditions. A sustained general economic slowdown could have serious negative consequences for the Company's business, results of operations and financial condition. Moreover, their businesses are affected by the economic factors that affect their respective industries. The Company and its majority-owned subsidiary Congoleum could realize shipment delays, depletion of inventory and increased production costs resulting from unexpected disruptions of operations at any of the Company's or Congoleum's facilities. 27 The Company's and its majority-owned subsidiary Congoleum's businesses depend upon their ability to timely manufacture and deliver products that meet the needs of their customers and the end users of their products. If the Company or Congoleum 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 Company's business, results of operations and financial condition. The Company and its majority-owned subsidiary Congoleum offer limited warranties on their products which could result in the Company or Congoleum incurring significant costs as a result of warranty claims. The Company and its majority-owned subsidiary Congoleum offer a limited warranty on many of their 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, Congoleum 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 or Congoleum were to incur a significant number of warranty claims, the resulting warranty costs could be substantial. The Company and its majority-owned subsidiary Congoleum rely on a small number of customers and distributors for a significant portion of their sales or to sell their products. The Company's tape and flooring divisions principally sell their products through distributors. Sales to five unaffiliated customers accounted for approximately 25% of the Company's tape division's net sales for the year ended December 31, 2002 and 27% of its net sales for the year ended December 31, 2001. The loss of two or more of those customers could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's majority-owned subsidiary Congoleum principally sells its products through distributors. While most of Congoleum's distributors have marketed Congoleum's products for many years, replacements are necessary periodically to maintain the strength of Congoleum's distribution network. Although Congoleum 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 Company's business, results of operations, and financial condition. Congoleum derives a significant percentage of its sales from two of its distributors. These two distributors accounted for approximately 59% of Congoleum's net sales for the year ended December 31, 2002 and 48% of Congoleum's net sales for the year ended December 31, 2001. The Company's subsidiary K&M Associates L.P. sells its products through its own direct sales force and, indirectly, through a wholly owned subsidiary and through third-party sales representatives. Three of K&M Associates L.P.'s customers accounted for approximately 75% of its 28 net sales for the year ended December 31, 2002 and 74% of its net sales for the year ended December 31, 2001. The loss of K&M Associates L.P.'s largest customer would likely have a material adverse effect on the Company's business, results of operations and financial condition. The Company and its majority-owned subsidiary Congoleum depend on key executives to run their businesses, and the loss of any of these executives would likely harm the Company's business. The Company and its majority-owned subsidiary Congoleum depend on key executives to run their businesses. In particular, the same persons that serve as key executives at the Company also serve as key executives at Congoleum. The Company's future success will depend largely upon the continued service of these key executives, none of whom have an employment contract with the Company or Congoleum, as applicable, and may terminate their employment at any time without notice. Although certain key executives of the Company and Congoleum are, directly or indirectly, large shareholders of the Company or Congoleum, and thus are less likely to terminate their employment, the loss of any key executive, or the failure by the key executive to perform in his current position, could have a material adverse effect on the Company's business, results of operations and financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this interest rate market risk exposure to be material to its financial condition or results of operations. The Company invests primarily in highly liquid debt instruments with strong credit ratings and short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. The substantial majority of the Company's outstanding consolidated long-term debt as of June 30, 2003 consisted of indebtedness with a fixed rate of interest, which is not subject to change based upon changes in prevailing market interest rates. The Company operates internationally, principally in Canada, Europe and the Far East, giving rise to exposure to market risks from changes in foreign exchange rates. Foreign currency exchange rate movements also affect the Company's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. For foreign currency exposures existing at June 30, 2003, a 10% unfavorable movement in currency exchange rates in the near term would not materially affect ABI's consolidated operating results, financial position or cash flows. The Company does not currently use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates, foreign currency exchange rates, commodity prices or equity prices and does not hold any instruments for trading purposes. 29 Item 4: Controls and Procedures a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. (b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 30 PART II OTHER INFORMATION Item 1. Legal Proceedings The information contained in Note D "Commitments and Contingencies" and Note E " Congoleum Asbestos Liabilities and Planned Reorganization" of the Notes to Unaudited Consolidated Condensed Financial Statements are incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders held on May 7, 2003, the following action was taken: Three nominees were elected as Class I Directors who will hold office until the Annual Meeting of Stockholders in 2006 and until their successors are duly elected and qualify. Withheld From Name Votes For All Nominees ---- --------- ------------ Gilbert K. Gailius 2,712,806 124,289 Frederick H. Joseph 2,755,486 81,609 Richard G. Marcus 2,712,486 124,609 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Restated Certificate of Incorporation (2) 3.2 By-Laws, amended and restated as of March 13, 1991 (1) 10.1 Settlement Agreement Between Congoleum and Various Asbestos Claimants dated April 10, 2003 10.1.1 First Amendment to Settlement Agreement Between Congoleum and Various Asbestos Claimants dated June 6, 2003 10.2 Collateral Trust Agreement, dated April 16, 2003, by and between Congoleum, Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust, and Wilmington Trust Company, solely in its capacity as Delaware Trustee of the Collateral Trust 31 10.2.1 First Amendment to Collateral Trust Agreement, dated June 6, 2003, by and between Congoleum, Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust, and Wilmington Trust Company, solely in its capacity as Delaware Trustee of the Collateral Trust 10.3 Security Agreement, dated April 16, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 10.3.1 Second Security Agreement, dated April 17, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 10.3.2 Termination Agreement, dated June 6, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 10.3.3 Superceding Security Agreement, dated June 11, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 31.1 Certification of CEO 31.2 Certification of CFO 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (2) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (b) Reports on Form 8-K On April 1, 2003, the Company filed a Current Report on Form 8-K, dated the same date, under Item 5, announcing that its majority-owned subsidiary Congoleum Corporation had reached an agreement in principle to settle its asbestos claims and furnished the Current Report on Form 8-K, under Item 12, relating to the Company's press release dated March 31, 2003 announcing its financial results for the year-ended December 31, 2002. 32 On May 16, 2003, the Registrant furnished a Current Form 8-K, dated the same date, under Item 12, relating to the Company's press release dated May 14, 2003 announcing its financial results for the fiscal quarter ended March 31, 2003 and declaring a dividend. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN BILTRITE INC. ---------------------- (Registrant) Date: August 13, 2003 BY: /s/ Howard N. Feist III -------------------------------- Howard N. Feist III Vice President-Finance (Duly Authorized Officer and Principal Financial and Accounting Officer) 33 INDEX OF EXHIBITS Exhibit No. Description - ----------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation (2) 3.2 By-Laws, amended and restated as of March 13, 1991(1) 10.1 Settlement Agreement Between Congoleum and Various Asbestos Claimants dated April 10, 2003 10.1.1 First Amendment to Settlement Agreement Between Congoleum and Various Asbestos Claimants dated June 6, 2003 10.2 Collateral Trust Agreement, dated April 16, 2003, by and between Congoleum, Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust, and Wilmington Trust Company, solely in its capacity as Delaware Trustee of the Collateral Trust 10.2.1 First Amendment to Collateral Trust Agreement, dated June 6, 2003, by and between Congoleum, Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust, and Wilmington Trust Company, solely in its capacity as Delaware Trustee of the Collateral Trust 10.3 Security Agreement, dated April 16, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 10.3.1 Second Security Agreement, dated April 17, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 10.3.2 Termination Agreement, dated June 6, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 34 10.3.3 Superceding Security Agreement, dated June 11, 2003, by and between Congoleum and Arthur J. Pergament, solely in his capacity as the Collateral Trustee of the Collateral Trust 31.1 Certification of CEO 31.2 Certification of CFO 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. --------------------------- (1) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (2) Incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 35 EX-10.1 3 ex10-1.txt Exhibit 10.1 SETTLEMENT AGREEMENT BETWEEN CONGOLEUM CORPORATION AND VARIOUS ASBESTOS CLAIMANTS This settlement agreement (the "Claimant Agreement") is entered into by, between and among Congoleum Corporation, its predecessors, successors, distributors and assigns (collectively, "Congoleum"), and the Participating Asbestos Claimants (as defined below), by and through representative plaintiffs' counsel, Perry Weitz, Esq. and Joseph F. Rice, Esq. ("Claimants' Counsel"). RECITALS WHEREAS, numerous individuals have asserted asbestos-related bodily injury claims against Congoleum (each an "Asbestos Claimant" and collectively, the "Asbestos Claimants"), each alleging exposure to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum otherwise may have legal liability (the "Asbestos Claims"), and it is anticipated that additional asbestos-related bodily injury claims will continue to be asserted against Congoleum; and WHEREAS, Congoleum is unable to meet its liability with respect to the Asbestos Claims absent prompt payment from its insurers of their obligations under the Policies, (as defined in the Collateral Trust Agreement referenced to below); and WHEREAS, Congoleum believes that substantial insurance coverage is available under the Policies for asbestos-related bodily injury claims and Congoleum intends vigorously to pursue such insurance coverage; and WHEREAS, Congoleum, contemporaneously herewith, is executing an agreement, titled Collateral Trust Agreement, establishing a trust (the "Collateral Trust") for, among other lawful purposes not inconsistent with this Claimant Agreement, distributing certain proceeds of the Policies in accordance with the Collateral Trust Agreement and this Claimant Agreement; and WHEREAS, Congoleum, contemporaneously herewith, is executing an agreement titled Security Agreement ("Security Agreement"), granting to the Collateral Trust a present and continuing security interest in Congoleum's rights to receive payment under and in certain insurance proceeds relating to the Policies; and WHEREAS, Congoleum entered into settlement agreements prior to this Claimant Agreement to resolve certain Asbestos Claims, under which some or all of the consideration has yet to be paid (the "Pre-Existing Settlement Agreements"); and WHEREAS, Congoleum may enter into additional settlement agreements to resolve certain Asbestos Claims that are scheduled for trial prior to the commencement of an anticipated chapter 11 reorganization case for Congoleum in an aggregate amount not to exceed $15,000,000.00 (the "Trial-Listed Settlement Agreements"); and WHEREAS, Congoleum and Claimants' Counsel, on behalf of Participating Asbestos Claimants (as defined below), wish to resolve and settle, in the amounts set forth in the compensable disease matrix attached hereto as Appendix A ("Compensable Disease Matrix"), all of the Asbestos Claims asserted by Asbestos Claimants who qualify as Participating Asbestos Claimants (as defined below) and to secure, in part, payment of the amounts for which such Asbestos Claims are settled by the grant of a security interest in the Collateral (as defined in the Security Agreement); and WHEREAS, Congoleum wishes to settle the Asbestos Claims asserted by Asbestos Claimants in order to attain certainty as to its asbestos-related liability to Participating Asbestos Claimants so that it may concentrate its attention on the operation of its business; and 2 WHEREAS, Congoleum anticipates that it will commence a reorganization case under chapter 11 of the U.S. Bankruptcy Code; and WHEREAS, Congoleum intends to incorporate the terms of this Claimant Agreement in a "pre-packaged" plan of reorganization that Congoleum shall seek to confirm in its anticipated chapter 11 case (assuming the requisite acceptances are obtained). NOW, THEREFORE, in consideration of the mutual covenants below contained and intending to be legally bound hereby, Congoleum and each of the Asbestos Claimants agree as follows: AGREEMENT I. ASBESTOS CLAIM SETTLEMENT AND QUALIFICATION A. Upon the terms and conditions herein, Congoleum and each Asbestos Claimant who submits the information and documentation satisfactory to the Claims Reviewer (as defined below) as required under Section I.B (such Asbestos Claimant, together with any successor or assign, a "Participating Asbestos Claimant"), hereby compromise and settle the Asbestos Claim of such Participating Asbestos Claimant. The amount for which an Asbestos Claim is liquidated, compromised and settled (the "Participating Asbestos Claimant's Settlement Amount") shall be the respective amount set forth in the Compensable Disease Matrix applicable to the particular Participating Asbestos Claimant's disease category. B. To qualify as a Participating Asbestos Claimant, each Asbestos Claimant, or his counsel, must 1. On or before May 15, 2003, submit in an electronic form reasonably satisfactory to the Claims Reviewer the following documents and 3 information in form and substance satisfactory to the Claims Reviewer: (1) the Asbestos Claimant's name and social security number; (2) the Asbestos Claimant's alleged disease or injury; (3) a statement that his or her Asbestos Claim was filed in a court of competent jurisdiction on or before the Effective Date (as defined below); and (4) a statement that the Asbestos Claimant is interested in participating in this Claimant Agreement; and 2. On or before July 1, 2003, submit in writing the following documents and information in form and substance satisfactory to the Claims Reviewer: (1) evidence of bodily injury, sickness or disease consistent with the terms and meaning of the Compensable Disease Matrix however, if such Asbestos Claimant was qualified as a Participating Category D Claimant under the Settlement Agreement Between ACandS, Inc. and Various Asbestos Claimants, dated April 17, 2002 (the "ACandS Claimant Agreement"), a notice indicating that the claimant will rely upon the evidence submitted to the Claims Reviewer in connection with the ACandS Claimant Agreement will satisfy this requirement; (2) a verified statement that the Asbestos Claimant was exposed to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum has legal liability; (3) a claim form that will indicate the Asbestos Claimant's name, address, social security number, exposure date and diagnosis date; (4) proof that the Asbestos Claimant had filed a claim in a court of competent jurisdiction against Congoleum on or before the Effective Date (as defined below); and (5) a release in the form of Appendix B hereto or another form acceptable to Congoleum (collectively "Claim Documentation"). Asbestos Claimants should note that if they were qualified under the ACandS Claimant Agreement as a Non-Malignant Participating Category D Claimant, reliance on the submission in connection with the ACandS Claimant Agreement will mean qualification here as a Level 1 Non-Malignant disease category pursuant to the attached Compensable Disease Matrix. 4 3. If the Asbestos Claimant's claim was first filed after January 13, 2003, the Asbestos Claimant shall submit a sworn affidavit or other evidence satisfactory to the Claims Reviewer in order to satisfy the requirements of I.B.2.(2). C. A claims reviewer (the "Claims Reviewer") shall review the Claim Documentation provided by an Asbestos Claimant and shall notify the Collateral Trustee (as defined below) in writing that a particular Asbestos Claimant has satisfied the Claim Documentation requirements. The Claims Reviewer shall provide Congoleum and Claimants' Counsel with a copy of any such notices provided to the Collateral Trustee. The initial Claims Reviewer shall be the Kenesis Group. Should the Claims Reviewer identify deficiencies in the Claim Documentation submitted by an Asbestos Claimant, the Claims Reviewer shall notify Claimants' Counsel of such deficiencies. Any Asbestos Claimant who is subject to a notice of Claim Documentation deficiency shall have a period of sixty (60) days from the date of mailing of notice of deficiency to remedy such deficiencies. The Claims Reviewer and the Asbestos Claimant shall confer in good faith for fifteen (15) days in order to resolve such deficiencies. If the deficiencies identified by the Claims Reviewer are not remedied within the fifteen (15) day meet and confer period, such Asbestos Claimant will not become a Participating Asbestos Claimant and such Asbestos Claimant will be allowed to withdraw its claim. D. Any Asbestos Claimant may appeal a disallowance pursuant to Section I.C. by having the court in which the claim is pending determine on summary judgment basis whether the documentation satisfies the standards of allowance, and no appeal of the court's determination shall be allowed. Congoleum, Claimants' Counsel or the Plan Trustee may oppose the Asbestos Claimant's appeal. 5 E. As to any Asbestos Claimant who submits Claim Documentation on or before May 20, 2003, the Claims Reviewer will mail any notice of deficiencies in Claim Documentation within forty (40) days after receipt of the Claims Documentation. As to any Asbestos Claimant who submits Claim Documentation after May 20, 2003, the Claims Reviewer will mail any notice of deficiencies in Claim Documentation within sixty (60) days after receipt of the Claims Documentation. If the Claims Reviewer does not mail notices of deficiencies within the time period set forth above to a particular Asbestos Claimant, that Asbestos Claimant's Claim Documentation shall be deemed satisfactory. F. Should the Claims Reviewer be unable or unwilling at any time to serve in the above-described capacity, Claimants' Counsel and Congoleum shall agree on an acceptable replacement. The Claims Reviewer shall provide periodic reports to Congoleum and Claimants' Counsel as they may reasonably request, at the expense of Congoleum. G. An Asbestos Claimant shall not qualify as a Participating Asbestos Claimant hereunder if the Asbestos Claimant's cause of action has been dismissed with prejudice by a court of competent jurisdiction on or before the Effective Date. H. Upon the Effective Date, a Participating Asbestos Claimant shall be deemed to have fully and finally liquidated, compromised and settled any and all of his or her Asbestos Claims in accordance with the terms of this Claimant Agreement. 6 II. SECURED RIGHTS OF Participating ASBESTOS CLAIMANTS A. On the Effective Date of this Claimant Agreement, Congoleum shall grant to the collateral trustee of the Collateral Trust (the "Collateral Trustee") for the benefit of each Participating Asbestos Claimant, a security interest (the "Security Interest") in the Collateral (as defined in the Security Agreement), as provided in and subject to the terms and conditions of the Security Agreement. B. The Security Interest shall secure an amount equal to seventy-five percent (75%) of the aggregate of all Participating Asbestos Claimants' Settlement Amounts (the "Secured Amount") as provided in the Collateral Trust Agreement and the Security Agreement. Congoleum's obligation to pay each Participating Asbestos Claimant its pro rata share of the Secured Amount shall be referred to herein as the "Secured Asbestos Claims." C. Until all of the Secured Asbestos Claims for all Participating Asbestos Claimants are paid in full, Congoleum shall evaluate, bring, prosecute, litigate, defend and settle any claim against its insurers to obtain Insurance Proceeds. Congoleum shall consult with Claimants' Counsel in order to retain a mutually acceptable counsel to prosecute any claim against its insurers to obtain Insurance Proceeds. Congoleum agrees to obtain the consent of Claimants' Counsel prior to entering into settlement of any claim against its insurers to obtain Insurance Proceeds, which consent shall not be unreasonably withheld, conditioned or delayed. III. TRUST ACCOUNT FOR Insurance PROCEEDS A. Payment of Secured Asbestos Claims shall be made from the Collateral Trust in accordance with the provisions of Section IV below and in accordance with the Collateral Trust Agreement. 7 B. Congoleum may qualify the Collateral Trust as a Qualified Settlement Fund, pursuant to Section 468B of the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder ("QSF"). C. It is the expectation of Congoleum and Participating Asbestos Claimants that the Secured Asbestos Claims shall be paid entirely out of the Insurance Proceeds (as defined in the Security Agreement). Until such time as the Secured Asbestos Claims have been paid in full, Congoleum shall direct that payment of all Insurance Proceeds be made to the Collateral Trust and, in the event Congoleum receives any Insurance Proceeds, Congoleum, no later than five (5) business days after its receipt of any Insurance Proceeds, shall remit such Insurance Proceeds to the Collateral Trust. IV. PAYMENT OF SECURED ASBESTOS CLAIMS A. The Collateral Trustee shall make payments to each Participating Asbestos Claimant up to the amount of such Participating Asbestos Claimant's Secured Asbestos Claim, by payment to the respective Claimants' Counsel for such Participating Asbestos Claimant, in accordance with the terms of the Collateral Trust Agreement. B. The portion of Congoleum's obligation to a Participating Asbestos Claimant to pay in excess of such Participating Asbestos Claimant's Secured Asbestos Claim shall constitute an unsecured claim (an "Unsecured Asbestos Claim"). Such an Unsecured Asbestos Claim shall be treated in accordance with the terms of a confirmed plan of reorganization in the event Congoleum files a chapter 11 case. If unpaid and if Congoleum does not commence a chapter 11 case within 24 months of the Effective Date, the Unsecured Asbestos Claim shall become immediately due and payable. 8 V. LITIGATION MORATORIUM Congoleum and each Asbestos Claimant that has submitted the documents and information pursuant to Section I.B.1 agree to a 150-day litigation moratorium, commencing from the Effective Date, during which such Asbestos Claimant shall not pursue any lawsuit or other legal process with respect to any claim against Congoleum or any parent, subsidiary, distributor, or affiliate of Congoleum other than the claims process set forth in Section I above. Congoleum and each such Asbestos Claimant agree to toll all time-related affirmative defenses (including statute of limitation defenses) applicable to the respective Asbestos Claims during the period of the 150-day litigation moratorium. VI. PAYMENT TO CLAIMANTS COUNSEL Promptly on or as soon as practicable after the Effective Date of this Claimant Agreement, Congoleum will pay $1,000,000 to each Claimants' Counsel ("Expense Payments"). Expense Payments will be used by Claimants' Counsel to pay all out-of-pocket expenses, reasonable professionals' fees and expenses, and other costs that Claimants' Counsel may have incurred or may incur (i) in connection with the negotiation and implementation of this Claimant Agreement and the related Collateral Trust Agreement and Security Agreement, (ii) in connection with the negotiation of a possible "pre-packaged" chapter 11 plan of reorganization for Congoleum, and/or (iii) in connection with due diligence investigations related to a possible chapter 11 plan of reorganization. VII. CONSTRUCTION, ENTIRE AGREEMENT, DURATION A. This Claimant Agreement was negotiated between the parties hereto at arm's length, with each party receiving advice from independent legal counsel. It is the intent of the parties that no part of this Claimant Agreement be construed against any other party because of the identity of the drafter. 9 B. This Claimant Agreement constitutes a single integrated written contract expressing the entire agreement among the parties hereto. This Claimant Agreement supersedes any prior understandings and agreements between or among the parties with respect to the subject matter of the Claimant Agreement. There are no representations, agreements, arrangements or understandings between or among the parties, oral or written, relating to the subject matter of this Claimant Agreement that are not fully expressed herein. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in this written Claimant Agreement shall not be valid or binding. The failure or invalidation of any provision of this Claimant Agreement shall not in any way affect the validity, or performance of any party pursuant to, any other provision of this Claimant Agreement. C. The effective date of this Claimant Agreement shall be the date on which the Claimant Agreement has been signed and delivered by Congoleum and Claimants' Counsel ("Effective Date"). This Claimant Agreement shall have perpetual existence and may not be enlarged, modified or altered except by a written agreement signed by Congoleum and Claimants' Counsel. D. The signatory who has executed this Claimant Agreement on behalf of Congoleum expressly represents and warrants that he or she is fully authorized to sign on behalf of Congoleum for the purpose of duly binding Congoleum to this Claimant Agreement. The Claimant Agreement shall be binding upon the parties and their respective successors and assigns. 10 VIII. BANKRUPTCY OBLIGATIONS Congoleum shall incorporate substantially all of the material terms of this Claimant Agreement in any plan of reorganization that it may file or support in any chapter 11 case that Congoleum may commence as a debtor IX. AGREEMENT TO MEET AND CONFER To the extent any dispute arises over the application, interpretation or performance of this Claimant Agreement, Congoleum and Claimants' Counsel, on behalf of Participating Asbestos Claimants, agree to meet and confer for the purpose of attempting to resolve amicably any such dispute. To the extent any dispute cannot be resolved amicably by negotiation, Congoleum and Claimants' Counsel, on behalf of the Participating Asbestos Claimants, agree that they shall attempt to agree on an alternative dispute resolution mechanism before initiating any lawsuit; provided, however, that nothing contained herein shall obligate either Congoleum or Claimants' Counsel to agree to any alternative dispute resolution mechanism. X. NOTICES All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: 11 Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08619 (609) 584-3000 - Telephone No. (609) 584-3685 - Facsimile No. With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. 12 Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. XI. GOVERNING LAW All disputes concerning the validity, interpretation and application of the Claimant Agreement or the Appendices hereto, or any provision thereof, and disputes concerning issues within the scope of the Claimant Agreement shall be determined in accordance with the law of the State of Delaware, excluding any conflict of law provisions. XII. MISCELLANEOUS A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Claimant Agreement. 13 B. This Claimant Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Claimant Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Claimant Agreement. IN WITNESS WHEREOF, the parties have caused this Claimant Agreement to be duly executed this 10th day of April 2003. CONGOLEUM CORPORATION By /s/ Howard N. Feist III ------------------------- Title CFO ---------------------- PARTICIPATING ASBESTOS CLAIMANTS By Claimants' Counsel /s/ Perry Weitz ---------------------------- Perry Weitz, Esq. /s/ Joseph F. Rice ---------------------------- Joseph F. Rice, Esq. 14 EX-10.1.1 4 ex10-1_1.txt Exhibit 10.1.1 FIRST AMENDMENT TO SETTLEMENT AGREEMENT BETWEEN CONGOLEUM CORPORATION AND VARIOUS ASBESTOS CLAIMANTS This first amendment to the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants ("Amendment to the Claimant Agreement") is entered into by, between and among Congoleum Corporation, its predecessors, successors, distributors and assigns (collectively, "Congoleum"), and the Participating Asbestos Claimants, by and through representative plaintiffs' counsel, Perry Weitz, Esq. and Joseph F. Rice, Esq. ("Claimants' Counsel"). RECITALS WHEREAS, Congoleum and Participating Asbestos Claimants entered into an agreement titled Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants (the "Claimant Agreement") dated April 10, 2003; and WHEREAS, Congoleum and Participating Asbestos Claimants wish to extend the time within which Asbestos Claimants may accept the terms of the Claimant Agreement and agree to be bound by the Claimant Agreement and to extend the time for such Asbestos Claimants to be eligible to provide Claim Documentation and to qualify as a Participating Asbestos Claimant; and WHEREAS, Congoleum, the Collateral Trustee and the Delaware Trustee entered into the Collateral Trust Agreement pursuant to which a statutory trust under the Delaware Statutory Trust Act was created on April 17, 2003 (the "Collateral Trust Agreement"); and WHEREAS, Congoleum, the Collateral Trustee, and the Delaware Trustee, with the consent of Claimants' Counsel, contemporaneously herewith are executing that certain first amendment to the Collateral Trust Agreement (the "Amendment to the Collateral Trust Agreement"); and WHEREAS, on or about April 11, 2003 and April 17, 2003, respectively, Congoleum executed agreements titled "Security Agreement" and "Second Security Agreement" (collectively, the "Security Agreements") granting to the Collateral Trust a present and continuing security interest in certain insurance proceeds; and WHEREAS, Congoleum and the Collateral Trustee have contemporaneously herewith terminated the Security Agreements and entered into a subsequent security agreement ("Superceding Security Agreement") to eliminate any confusion as to the effective date of the grant of the Security Interest; and WHEREAS, the Parties desire to enter into this Amendment to the Claimant Agreement to confirm their agreement with respect to (i) the amendment of certain deadlines related to qualification as Participating Claimants; (ii) the termination of the Security Agreements; (iii) the execution of the Superceding Security Agreement; and (iv) certain other matters relating to the foregoing, as hereafter provided; NOW, THEREFORE, intending to be legally bound hereby, Congoleum and each of the Participating Asbestos Claimants agree that the Claimant Agreement shall be amended as follows: AGREEMENT 1. Section I.B.1 and I.B.2 of the Claimant Agreement shall be replaced in its entirety with: B. To qualify as a Participating Asbestos Claimant, each Asbestos Claimant, or his counsel, must 2 1. On or before July 1, 2003, submit in an electronic form reasonably satisfactory to the Claims Reviewer the following documents and information in form and substance satisfactory to the Claims Reviewer: (1) the Asbestos Claimant's name and social security number; (2) the Asbestos Claimant's alleged disease or injury; (3) for all cases filed after February 14, 2003, a statement by counsel of record that the claimant can comply with exposure requirements of the Agreement; (4) a statement that his or her Asbestos Claim was filed in a court of competent jurisdiction on or before July 1, 2003; and (5) a statement that the Asbestos Claimant is interested in participating in this Claimant Agreement; and 2. On or before August 15, 2003, submit in writing the following documents and information in form and substance satisfactory to the Claims Reviewer: (1) evidence of bodily injury, sickness or disease consistent with the terms and meaning of the Compensable Disease Matrix; however, if such Asbestos Claimant was qualified as a Participating Category D Claimant under the Settlement Agreement Between ACandS, Inc. and Various Asbestos Claimants, dated April 17, 2002 (the "ACandS Claimant Agreement"), a notice indicating that the claimant will rely upon the evidence submitted to the Claims Reviewer in connection with the ACandS Claimant Agreement will satisfy this requirement; (2) a statement swearing under penalty of perjury or witnessed by a notary, that the Asbestos Claimant was exposed to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum has legal liability; (3) a claim form that will indicate the Asbestos Claimant's name, social security number, exposure date and diagnosis date; (4) proof that the Asbestos Claimant had filed a claim in a court of competent jurisdiction against Congoleum on or before July 1, 2003; and (5) a release in the form 3 of Appendix B hereto or another form acceptable to Congoleum (collectively "Claim Documentation"). Asbestos Claimants should note that if they were qualified under the ACandS Claimant Agreement as a Non-Malignant Participating Category D Claimant, reliance on the submission in connection with the ACandS Claimant Agreement will mean qualification here as a Level 1 Non-Malignant disease category pursuant to the attached Compensable Disease Matrix. 2. Section I.E of the Claimant Agreement shall be replaced in its entirety with: E. As to any Asbestos Claimant who submits Claim Documentation on or before July 7, 2003, the Claims Reviewer will mail any notice of deficiencies in Claim Documentation within thirty (30) days after receipt of the Claims Documentation. As to any Asbestos Claimant who submits Claim Documentation after July 7, 2003, the Claims Reviewer will mail any notice of deficiencies in Claim Documentation within sixty (60) days after receipt of the Claims Documentation. If the Claims Reviewer does not mail notices of deficiencies within the time period set forth above to a particular Asbestos Claimant, that Asbestos Claimant's Claim Documentation shall be deemed satisfactory. 3. Sections II.A and II.B of the Claimant Agreement shall be replaced in their entirety with: II. SECURED RIGHTS OF PARTICIPATING ASBESTOS CLAIMANTS A. The Security Interest contemplated by the Superceding Security Agreement shall secure an amount equal to seventy-five percent (75%) of the aggregate of all Participating Asbestos Claimants' Settlement Amounts (the "Secured Amount") as provided in the Collateral Trust Agreement and the Superceding Security Agreement. Congoleum's obligation to pay each Participating Asbestos Claimant its pro rata share of the Secured Amount shall be referred to herein as the "Secured Asbestos Claims." 4 B. Until all of the Secured Asbestos Claims for all Participating Asbestos Claimants are paid in full, Congoleum shall evaluate, bring, prosecute, litigate, defend and settle any claim against its insurers to obtain Insurance Proceeds. Congoleum shall consult with Claimants' Counsel in order to retain a mutually acceptable counsel to prosecute any claim against its insurers to obtain Insurance Proceeds. Congoleum agrees to obtain the consent of Claimants' Counsel prior to entering into settlement of any claim against its insurers to obtain Insurance Proceeds, which consent shall not be unreasonably withheld, conditioned or delayed. 4. Section II.C of the Claimant Agreement shall be deleted. 5. The paragraph below shall be added to the Claimant Agreement as Section III.D: D. The beneficial interests in the Collateral Trust are not transferable or assignable, except as may be provided under operation of law or after the death of a Participating Asbestos Claimant pursuant to a will or the law applicable to the decendent's estate. The beneficial interests in the Collateral Trust shall not be evidenced by a separate certificate. Nothing in this paragraph III.D shall in any way restrict the ability of the Collateral Trust to transfer the Trust Assets (as defined in the Collateral Trust Agreement) to any trust established pursuant to a plan of reorganization for Congoleum under chapter 11 of the United States Bankruptcy Code. 5 6. Other than expressly provided for herein, the terms of the Claimant Agreement shall remain in full force and effect. 7. The Claimant Agreement and this Amendment to the Claimant Agreement (collectively, the "Agreements") constitute a single integrated written contract expressing the entire agreement among the parties hereto with respect to the subject matter hereof. The Agreements supercede any prior understandings and agreements between or among the parties with respect to the subject matter of the Agreements. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in the Agreements shall not be valid or binding. The failure or invalidation of any provision of the Agreements shall not in any way affect the validity or performance of any party pursuant to any other provision of the Agreements. 8. References in the Claimant Agreement, the Superceding Security Agreement, and the Collateral Trust Agreement to the "Claimant Agreement" shall be deemed references to the Agreements. 9. This Amendment to the Claimant Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Amendment to the Claimant Agreement. 6 IN WITNESS WHEREOF, the parties have caused this First Amendment to the Claimant Agreement to be duly executed this 6th day of June 2003. CONGOLEUM CORPORATION By /s/ Howard N. Feist --------------------------------- Title CFO ------------------------------ PARTICIPATING ASBESTOS CLAIMANTS By Claimants' Counsel -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 7 IN WITNESS WHEREOF, the parties have caused this First Amendment to the Claimant Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By --------------------------------- Title ------------------------------ PARTICIPATING ASBESTOS CLAIMANTS By Claimants' Counsel /s/ Perry Weitz -------------------------------- Perry Weitz, Esq. /s/ Joseph F. Rice -------------------------------- Joseph F. Rice, Esq. 7 EX-10.2 5 ex10-2.txt Exhibit 10.2 COLLATERAL TRUST AGREEMENT This irrevocable trust agreement (the "Collateral Trust Agreement") is entered into by and between Congoleum Corporation, a Delaware Corporation ("Congoleum"), Arthur J. Pergament, solely in his capacity as the Collateral Trustee hereunder (the "Collateral Trustee"), and Wilmington Trust Company, a Delaware banking corporation, solely in its capacity as Delaware Trustee hereunder ("Delaware Trustee") (the Collateral Trustee and Delaware Trustee are sometimes referred to herein as "Trustee" or collectively as the "Trustees") (Congoleum and the Trustees collectively, the "Parties"). RECITALS WHEREAS, numerous individuals have asserted asbestos-related bodily injury claims against Congoleum (each an "Asbestos Claimant" and collectively, the "Asbestos Claimants"), each alleging exposure to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum otherwise may have legal liability (the "Asbestos Claims"), and it is anticipated that additional asbestos-related bodily injury claims will continue to be asserted against Congoleum (collectively, the "Asbestos Actions"); and WHEREAS, Congoleum and certain Asbestos Claimants, contemporaneously herewith, are executing a settlement agreement, titled Settlement Agreement Between Congoleum Corporation and Various Asbestos Claimants (the "Claimant Agreement"); and WHEREAS, Congoleum entered into settlement agreements prior to the Claimant Agreement to resolve certain Asbestos Claims, under which some or all of the consideration has yet to be paid (the "Pre-Existing Settlement Agreements"); and WHEREAS, Congoleum may enter into additional settlement agreements to resolve certain Asbestos Claims that are scheduled for trial prior to the commencement of an anticipated chapter 11 reorganization case for Congoleum in an aggregate amount not to exceed $15,000,000.00 (the "Trial-Listed Settlement Agreements"); and WHEREAS, Congoleum, contemporaneously herewith, is executing an agreement titled Security Agreement ("Security Agreement"), granting to the Collateral Trust (as defined below) a present and continuing security interest in certain insurance proceeds; and WHEREAS, Congoleum, to the extent permissible under applicable law, intends that the Collateral Trust be characterized as a Qualified Settlement Fund pursuant to Section 468B of the Internal Revenue Code of 1986, as amended, and the Treasury regulations promulgated thereunder ("QSF"); and WHEREAS, Congoleum has asked the Trustees to act as the Collateral Trustee and the Delaware Trustee, as applicable, and the Trustees have agreed to accept this appointment under the terms hereof; and WHEREAS, the Parties desire to enter into this Collateral Trust Agreement to confirm their agreements with respect to (i) the establishment, maintenance, investment and disbursement of the Trust Assets (as defined below); and (ii) certain other matters relating to the foregoing, as hereafter provided. NOW, THEREFORE, the Parties hereby agree as follows: AGREEMENT I. Establishment of THE Collateral Trust A. Creation and Name. The Parties hereby create a trust known as the "Congoleum Collateral Trust," which is the "Collateral Trust" provided for and referred to in the Claimant Agreement. The Collateral Trustee may transact the business and affairs of the Collateral Trust in the name "Congoleum Collateral Trust." 2 B. Purpose. The purpose of the Collateral Trust is: (i) to hold security interests in the Collateral (as defined in the Security Agreement); (ii) to receive Insurance Proceeds (as defined in the Security Agreement); and (3) to pay amounts owed by Congoleum to various parties to Pre-Existing Settlement Agreements, Trial-Listed Settlement Agreements, and Claimant Agreement, and otherwise to meet the purposes and requirements stated in those agreements. II. Payment of Claims and Collateral Trust Administration A. Qualified Claims. Subject to the terms and conditions herein and in the Claimant Agreement, the following persons and entities shall be entitled to receive payment from the Collateral Trust in the following amounts: 1. An Asbestos Claimant as to which Congoleum notifies the Collateral Trustee in writing that such Asbestos Claimant who entered into a Pre-Existing Settlement Agreement or a Trial-Listed Settlement Agreement with Congoleum has satisfied the requirements to qualify for payment under the terms of the applicable Pre-Existing Settlement Agreement or Trial-Listed Settlement Agreement (an Asbestos Claimant who has qualified under either a Pre-Existing Settlement Agreement or a Trial-Listed Settlement Agreement shall be referred to herein as a "Qualified First Priority Claimant"). Such Qualified First Priority Claimant shall be paid the applicable amount specified in the notice of satisfaction of the requirements for payment provided by Congoleum to the Trustee (the "First Priority Settlement Amount"). First Priority Settlement Amounts shall be paid in the order in which such Asbestos Claimants become Qualified First Priority Claimants. Each Qualified First Priority Claimant's First Priority Settlement Amount shall be fully secured, and shall be reduced by the amount of all payments received by the Qualified First Priority Claimant from Congoleum, the Collateral Trust, or any successor trust. 3 2. An Asbestos Claimant as to which the Claims Reviewer (as defined below) notifies the Trustee in writing that an Asbestos Claimant has satisfied the requirements to qualify as a Participating Asbestos Claimant (as defined in the Claimant Agreement). Such Participating Asbestos Claimant shall have a secured claim (the "Asbestos Claimant's Secured Claim") equal to seventy-five percent (75%) of the Participating Asbestos Claimant's Settlement Amount (as defined in the Claimant Agreement). Each Asbestos Claimant's Secured Claim shall be reduced by the amount of all payments received by the Participating Asbestos Claimant from the Collateral Trust or any successor trust. 3. A claims-handling entity ("Claims Reviewer") as designated by Congoleum with the consent of Claimants' Counsel (as defined in the Claimant Agreement) shall be paid its fees and costs as agreed (the "Claims Handling Fee"). Congoleum shall be reimbursed by the Collateral Trust for all or part of the Claims Handling Fee paid by Congoleum. B. Payment of Qualified Claims. The Collateral Trustee shall make payments from the Trust Assets (as defined below) from time to time to the extent that the Collateral Trustee believes it is prudent in light of the funds available for distribution, the requirements of II.B.6 and II.F. below, and other factors, as follows: 1. The Collateral Trustee shall pay the Settlement Amounts owed to the Qualified First Priority Claimants in the order in which the Qualified First Priority Claimants become Qualified First Priority Claimants based upon notice from Congoleum. 4 2. Following the payment in full of the Qualified First Priority Claimants, the Collateral Trustee shall pay to the Claims Reviewer and/ or reimburse Congoleum for the Claims Handling Fee that has been paid by Congoleum to the Claims Reviewer. 3. Following the payment in full of the Claims Handling Fee, the Collateral Trustee shall pay subsequent distributions up to $200 million in total distributions to Participating Asbestos Claimants on a pro-rata basis in accordance with Section II.C in an amount not to exceed each Participating Asbestos Claimants' Secured Claim. 4. Following the payment of distributions aggregating $200 million to participating Asbestos Claimants, the Collateral Trustee shall pay all subsequent distributions as follows: a. Fifty percent (50%) to Participating Asbestos Claimants on a pro-rata basis in accordance with Section II.C in an amount not to exceed each Participating Asbestos Claimants' Secured Claim; and b. The remainder to a reserve account, which the Collateral Trustee shall maintain and hold until it is distributed pursuant to Section II.B.5 (the "Reserve"). 5. Upon or as soon as practicable after the establishment by Congoleum of a trust qualified as a QSF pursuant to a confirmed plan of reorganization in a case commenced by Congoleum as a debtor under chapter 11 of title 11 U.S.C., that preserves the rights of the beneficiaries hereunder and provides for the transfer of the Trust Assets, including the Reserve to a plan trust (the "Plan Trust"), the Collateral Trustee shall release the security interests granted by the Security Agreement and pay any remaining Trust Assets to the Plan Trust in accordance with the plan of reorganization. If no Plan Trust is established on or before the later of (a) three (3) years from the date of this Collateral Trust Agreement or (b) such time as all Participating Asbestos Claimants' Secured Claims are paid in full, the Collateral Trustee transfer any remaining Trust Assets, including the Reserve, to Congoleum. 5 6. Notwithstanding anything in this Collateral Trust Agreement to the contrary, from time to time the Collateral Trustee shall deduct from the Trust Assets and shall pay (a) such amounts as are reasonably necessary to pay Administrative Expenses (as defined below), and (b) any and all attorneys' fees or other professional fees, and related expenses and disbursements, incurred by or on behalf of Congoleum or any Congoleum successor in connection with the pursuit by Congoleum or any Congoleum successor of Congoleum's insurance coverage. C. Pro-Rata Distributions to Participating Asbestos Claimants. All distributions from the Collateral Trust to Participating Asbestos Claimants shall be allocated to individual Participating Asbestos Claimants by multiplying the aggregate amount of the distribution to be made by a fraction, the numerator of which is the unpaid amount of the Participating Asbestos Claimant's Secured Claim and the denominator of which is the total of all remaining unpaid Participating Asbestos Claimants' Secured Claims. D. Trust Assets. 1. In furtherance of the purposes of the Collateral Trust, the Collateral Trustee, on behalf of the Collateral Trust, shall receive and accept from Congoleum, or directly from Congoleum's liability insurers, Insurance Proceeds and other assets, if any, as designated in the Claimant Agreement (the "Trust Assets"). To the extent that the Collateral Trustee receives payments or other assets that are not properly Trust Assets, the Collateral Trustee shall promptly thereafter notify Congoleum and shall remit such payments or forward such assets to or as directed by Congoleum no later than five (5) business days after the receipt of such payments or assets. Interest and other investment income accrued on the Trust Assets shall become part of the Trust Assets. 6 2. So long as the Collateral Trust exists, the Collateral Trustee shall, from time to time, invest and reinvest the Trust Assets in accordance with the investment guidelines attached hereto as Appendix A (the "Investment Guidelines"). The Collateral Trustee shall have the right to liquidate any investment held, in order to provide funds necessary to make distributions of the Trust Assets pursuant to this Collateral Trust Agreement. Absent gross negligence or willful misappropriation, the Collateral Trustee shall not have any liability for any loss sustained as a result of any investment made pursuant to this Collateral Trust Agreement or as a result of any liquidation of any investment prior to its maturity. The Collateral Trustee shall have the power to exercise all rights with respect to the Collateral Trust's investments consistent with the Collateral Trustee's fiduciary duties to the Collateral Trust and in accordance with the Investment Guidelines. E. Grant of Security Interest. 1. Subject to the Claimant Agreement and the Security Agreement, the Collateral Trust shall have security interests in the Collateral (as defined in the Claimant Agreement and the Security Agreement). The Collateral Trustee shall have the power and authority to enforce the Collateral Trust's interest in the Collateral in accordance with the Collateral Trust Agreement, the Security Agreement, the Claimant Agreement, and applicable law. 7 2. Within ten (10) days following Congoleum's grant of the security interest, the Collateral Trustee shall take any and all actions that are necessary to establish and protect the security interest in the Collateral, including the filing of one or more UCC-1 financing statements. Congoleum agrees to execute and deliver promptly such financing statements and other documents, and do such other things, as the Collateral Trustee shall reasonably request, to effectuate the Collateral Trustee's actions hereunder, within three (3) business days of the Execution Date. F. Administrative Expenses. 1. The Collateral Trustee shall have the power to appoint such officers and hire such employees and engage such legal, financial, accounting, investment, auditing, forecasting and other professionals, service providers or consultants as the business of the Collateral Trust reasonably requires, and to delegate to such persons such powers and authorities as the fiduciary duties of the Collateral Trustee permits and as the Collateral Trustee deems necessary in order to carry out the terms of this Collateral Trust Agreement. The Collateral Trustee shall serve copies of statements and invoices for fees and expenses of the Collateral Trustee, prior to the payment of any such statements or invoices, upon the parties listed (the "Notice Parties"), and in the manner set out, in Section IV.F. Such statements or invoices may be paid by the Collateral Trustee unless, within ten (10) days after such service, any of the Notice Parties serves upon the Collateral Trustee and the other Notice Parties its objection to payment of all or part of such statement or invoice. The portion(s) of any statement or invoice with respect to which an objection is served may not be paid until the objection thereto is settled or is resolved in accordance with Section IV.L of this Collateral Trust Agreement. 8 2. The Collateral Trustee shall periodically estimate the funds that shall be necessary to pay administrative expenses incurred or expected to be incurred pursuant to the execution of the Collateral Trustee's duties ("Administrative Expenses"). Such Administrative Expenses shall include, without limitation, reasonable compensation of the Trustees and any and all Collateral Trust employees, payment of the reasonable fees of all professionals and consultants reasonably engaged by the Collateral Trust, and the reasonable expenses of operating and administering the Collateral Trust. Pursuant to Section II.B.6 of this Collateral Trust Agreement, the Collateral Trustee shall, from time to time, set aside from the Trust Assets amounts sufficient to pay the estimated Administrative Expenses ("Administrative Funds") and shall not use Administrative Funds for any other purpose, except as otherwise required by this Collateral Trust Agreement. In the event that the Administrative Funds are insufficient to pay all Administrative Expenses in full, the Collateral Trustee shall pay any unpaid Administrative Expenses from Trust Assets. III. The TrusteeS A. Appointment of the Trustees. 1. There shall be one (1) Collateral Trustee. The initial Collateral Trustee shall be Arthur J. Pergament. 2. So long as required by the Delaware Act, there shall be one (1) Delaware Trustee who or which shall be (i) a natural person who is a resident of the State of Delaware or (ii) if not a natural person, an entity which has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law. The initial Delaware Trustee shall be Wilmington Trust Company. 9 3. In the event of a vacancy in the position of either Trustee pursuant to Section III.B hereto or otherwise, the vacancy shall be filled by agreement of Congoleum and Claimants' Counsel or by order of a court of competent jurisdiction. Immediately upon the appointment of such a successor Trustee, all rights, titles, duties, powers and authority of the predecessor Trustee shall be vested in, and undertaken by, the successor Trustee without any further act. No successor Trustee shall be liable personally for any act or omission of his or her predecessor Trustee. B. Term of Service. 1. Each Trustee shall serve until the earlier of (a) his or her resignation pursuant to Section III.B.2 hereto, (b) his or her removal pursuant to Section III.B.3 hereto, or (c) the termination of the Collateral Trust pursuant to Section IV.C hereto. 2. Each Trustee may resign at any time by written notice to Congoleum and the Claimants' Counsel. Such notice shall specify a date when such resignation shall take effect, which shall not be less than ninety (90) days after the date such notice is given, absent the written consent of Congoleum to an earlier date. 3. Each Trustee may be removed with or without cause at any time by written notice signed by Congoleum and Claimants' Counsel. Upon any such removal, such removed Trustee shall be entitled to any reimbursement and indemnification set forth in this Collateral Trust Agreement which remains due and owing at the time of such removal. Such removal shall be effective when a successor Trustee is appointed pursuant to Section III.A.3 above and the successor Trustee has accepted the appointment in writing. 10 C. Duties and Powers of the Collateral Trustee. The Collateral Trustee is and shall act as a fiduciary to the Collateral Trust in accordance with the provisions of this Collateral Trust Agreement. The Collateral Trustee at all times shall administer the Collateral Trust and the Trust Assets to provide reasonable assurance that the Collateral Trust shall be in a financial position to maximize payment of all Qualified Claims. Subject to the limitations set forth in this Collateral Trust Agreement, the Collateral Trustee shall have the power to take any and all reasonable actions that, in the Collateral Trustee's judgment, are necessary or proper to fulfill the purposes of the Collateral Trust, including, without limitation, each power expressly granted in this Collateral Trust Agreement and any power reasonably incidental thereto. D. Liability of the Trustees. Each Trustee shall not be liable to the Collateral Trust, to any Asbestos Claimant, or to any other person except for such Trustee's own breach of trust committed in bad faith, or for gross negligence or willful misappropriation. E. Tax Duties of the Collateral Trustee. The Collateral Trustee shall cause a Federal Employer Identification Number ("FEIN") for the Collateral Trust to be obtained and shall cause the annual income tax returns to be filed on the basis of a December 31 year end. The Collateral Trustee shall take all steps necessary to ensure that all tax obligations of the Collateral Trust are satisfied and all tax obligations imposed upon the Collateral Trust are paid. To the extent necessary to satisfy this objective, the Collateral Trustee is hereby authorized, among other things, to (i) obtain a tax identification number for the Collateral Trust, (ii) communicate with the Internal Revenue Service and 11 state and local taxing authorities on behalf of the Collateral Trust, (iii) make payment of taxes on behalf of the Collateral Trust (which taxes will be paid out of the Trust Assets), (iv) file all applicable tax returns for the Collateral Trust to the extent permissible under applicable law, and (v) withhold taxes on payments made pursuant to this Collateral Trust Agreement as required by applicable law. To the extent permissible under applicable law, the Collateral Trustee shall jointly with Congoleum prepare and file a "relation-back election" under Treasury Regulation ss. 1.468B-1(j)(2)(ii), and shall otherwise cooperate with Congoleum in its efforts to cause the Collateral Trust to qualify as a QSF for federal income tax purposes. F. Compensation and Expenses of the Collateral Trustee. The Collateral Trustee shall receive compensation from the Collateral Trust for his or her service as Collateral Trustee in the amount of $195.00 per hour devoted to Collateral Trust business. The hourly rate of compensation payable to the Collateral Trustee hereunder shall be subject to adjustment periodically, with the consent of Claimants' Counsel (as defined in the Claimant Agreement) and Congoleum. The Collateral Trust shall reimburse the Collateral Trustee for all reasonable out-of-pocket costs and expenses incurred by the Collateral Trustee in connection with the performance of his or her duties hereunder. G. Reporting Duties of the Collateral Trustee. The Collateral Trustee shall submit to Congoleum and to Claimants' Counsel periodic reports as such parties shall reasonably request. Congoleum or Claimants' Counsel shall have the right to conduct from time to time a financial audit of the Collateral Trust at such party's own expense. H. Power to Act on Behalf of the Collateral Trust. The Collateral Trustee shall have the power to act on behalf of the Collateral Trust, including, without limitation, the power to: 12 1. initiate any judicial, administrative, arbitrative or other proceeding only with the consent of Claimant's Counsel, as representatives of the beneficiaries of the Trust, provided that if Claimant's Counsel withholds such consent, the Collateral Trustee may seek such consent from a court of competent jurisdiction; 2. be sued and participate, as a party or otherwise, in any judicial, administrative, arbitrative or other proceeding; 3. execute and deliver such instruments as the Collateral Trustee considers proper in administering the Collateral Trust; and 4. enter into such arrangements with third parties as is deemed by the Collateral Trustee to be necessary in carrying out the purposes of the Collateral Trust, provided such arrangements do not conflict with any other provision of this Collateral Trust Agreement or the Claimant Agreement. I. Delaware Trustee. Notwithstanding any other provision of this Collateral Trust Agreement, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties or responsibilities of the Collateral Trustee described in this Collateral Trust Agreement. The Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of chapter 38 of Title 12 of the Delaware Code, 12 Del. C. ss.ss. 3801 et seq. (the "Delaware Act"). J. Compensation and Expenses of the Delaware Trustee. The Delaware Trustee shall receive compensation from the Trust for its service as Delaware Trustee at the rates detailed in a mutually acceptable fee agreement. The fee agreement may be modified with the prior written consent of the Claimants' Counsel and Congoleum. The Trust shall reimburse the Delaware Trustee as a part of the 13 Administrative Expenses for all reasonable out-of-pocket costs and expenses incurred by the Delaware Trustee in connection with the performance of its duties hereunder, at the rates detailed in the fee agreement. To the extent that Congoleum pays any fees or costs to the Delaware Trustee on behalf of the Trust, the Trust shall promptly reimburse Congoleum for the fees and costs so paid as monies are available in the Trust. IV. GENERAL PROVISIONS A. Irrevocability. The Collateral Trust is irrevocable. B. Effective Date. This Collateral Trust Agreement shall be effective on the date on which both Parties have signed and delivered the Collateral Trust Agreement. C. Termination. The Collateral Trust shall terminate upon the earliest of: (i) the payment in full of all of the Participating Asbestos Claimant's Secured Claims and the distribution of all Trust Assets pursuant to the terms of this Collateral Trust Agreement; (ii) the distribution of all Trust Assets pursuant to the terms of this Collateral Trust Agreement and the Trustee's determination that no further steps to recover any assets subject to the Security Interest are commercially reasonable; (iii) the transfer of the Trust Assets to the Plan Trust pursuant to the terms of this Collateral Trust Agreement; or (iv) the payment of the Trust Assets to Congoleum pursuant to the terms of Section II.B.5. D. Amendments. The Trustee, with the unanimous consent of Congoleum and Claimants' Counsel, may modify and amend this Collateral Trust Agreement. Any modification made pursuant to this Section IV.D must be made in writing. 14 E. Incorporation by Reference. All terms and conditions contained in the Claimant Agreement shall be incorporated in this Agreement by reference. Capitalized terms not otherwise defined herein shall have the meanings accorded to them in the Claimant Agreement. F. Notices. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, New Jersey 08616 (609) 584-3000 - Telephone No. (609) 584-3655 - Facsimile No. With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph. LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. 15 Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Delaware Trustee: James J. McGinley Vice President and Sales Manager Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. 16 Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. G. Successors and Assigns. This Collateral Trust Agreement shall be binding upon the Parties and their respective successors and assigns. H. Entire Agreement. This Collateral Trust Agreement contains the complete and entire understanding of the Parties with respect to the subject matter hereof, and no changes shall be recognized as valid unless they are made in writing and signed by the parties as required by Section IV.D hereto. I. Headings. The headings used in this Collateral Trust Agreement are included for convenience only and neither constitute a portion of this Collateral Trust Agreement nor in any manner affect the construction of the provisions of this Collateral Trust Agreement. J. Invalidity; Illegality. The invalidity, illegality, or unenforceability of any provision of this Collateral Trust Agreement pursuant to a judicial or tribunal decree shall not affect the validity or enforceability of any other provision of this Collateral Trust Agreement, all of which shall remain in full force and effect. K. Governing Law. The Collateral Trust Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Delaware (excluding conflict of law rules), including all matters of construction, validity and performance; provided, however, that there shall not be applicable to the Collateral Trust, the Trustees or this Collateral Trust Agreement, any provisions of the laws (statutory or common) of the State of Delaware, other than the Delaware Act, pertaining to trusts that relate to or regulate, in a manner inconsistent with the terms hereof (i) the filing with any court or 17 governmental body or agency of trustee accounts or schedule of trustee fees and charges, (ii) affirmative requirements to post bonds for trustees, officers, agents, or employees of a trust, (iii) the necessity for obtaining court or other governmental approval concerning the acquisition holding or disposition of real personal property, (iv) fees or other sums payable to trustees, officers, agents, or employees of a trust, (v) the allocation of receipts and expenditures to income and principal, (vi) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding or investing trust assets, or (vii) the establishment of fiduciary or other standards or responsibilities or limitations on the acts or powers of trustees. L. Dispute Resolution. Any dispute arising out of or relating to this contract including the breach, termination or validity thereof shall be settled by arbitration in accordance with the CPR Rules for Non-Administered Arbitration in effect on the date of this Collateral Trust Agreement, by a sole arbitrator who shall be drawn from the CPR judicial list of distinguished neutrals. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The place of arbitration shall be Wilmington, Delaware. The arbitrator is not empowered to award damages in excess of compensatory damages and each party expressly waives and foregoes any right to punitive, exemplary or similar damages unless a statute requires that compensatory damages be increased in specified manner. The statute of limitations of the State of Delaware applicable to the commencement of a lawsuit shall apply to the commencement of arbitration hereunder. 18 M. Counterparts. This Collateral Trust Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Agreement. IN WITNESS WHEREOF, the parties have caused this Collateral Trust Agreement to be duly executed this 10th day of April 2003 CONGOLEUM CORPORATION By /s/ Howard N. Feist III ---------------------------- Title CFO ------------------------- COLLATERAL TRUSTEE By ---------------------------- Arthur J. Pergament DELAWARE TRUSTEE By ---------------------------- James J. McGinley Vice President and Sales Manager Wilmington Trust Company 19 M. Counterparts. This Collateral Trust Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Agreement. IN WITNESS WHEREOF, the parties have caused this Collateral Trust Agreement to be duly executed this 11th day of April 2003 CONGOLEUM CORPORATION By ---------------------------- Title ------------------------- COLLATERAL TRUSTEE By /s/ Arthur J. Pergament ---------------------------- Arthur J. Pergament DELAWARE TRUSTEE By ---------------------------- James J. McGinley Vice President and Sales Manager Wilmington Trust Company 19 M. Counterparts. This Collateral Trust Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Agreement. IN WITNESS WHEREOF, the parties have caused this Collateral Trust Agreement to be duly executed this 16th day of April 2003 CONGOLEUM CORPORATION By ---------------------------- Title ------------------------- COLLATERAL TRUSTEE By ---------------------------- Arthur J. Pergament DELAWARE TRUSTEE By /s/ JRH ---------------------------- James J. McGinley Vice President and Sales Manager Wilmington Trust Company 19 EX-10.2.1 6 ex10-2_1.txt Exhibit 10.2.1 FIRST AMENDMENT TO COLLATERAL TRUST AGREEMENT This first amendment to the Collateral Trust Agreement ("Amendment to the Collateral Trust Agreement") is entered into by and among Congoleum Corporation, a Delaware Corporation ("Congoleum"), Arthur J. Pergament, solely in his capacity as the Collateral Trustee hereunder (the "Collateral Trustee") and Wilmington Trust Company, a Delaware banking corporation, solely in its capacity as Delaware Trustee (the "Delaware Trustee") (Congoleum, the Collateral Trustee, and the Delaware Trustee, collectively, the "Parties"), with the consent of Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants. RECITALS WHEREAS Congoleum, the Collateral Trustee and the Delaware Trustee entered into the Collateral Trust Agreement pursuant to which a statutory trust under the Delaware Statutory Trust Act was created on April 17, 2003; and WHEREAS, Congoleum and various Asbestos Claimants executed a settlement agreement dated April 10, 2003, titled Settlement Agreement Between Congoleum Corporation and Various Asbestos Claimants (the "Claimant Agreement"); and WHEREAS, Congoleum and various Asbestos Claimants contemporaneously herewith are executing that certain first amendment to the Claimant Agreement (the "Amendment to the Claimant Agreement"); and WHEREAS, on or about April 11, 2003 and April 17, 2003, respectively, Congoleum executed agreements titled "Security Agreement" and "Second Security Agreement" (collectively, the "Security Agreements") granting to the Collateral Trust a present and continuing security interest in certain insurance proceeds; and WHEREAS, Congoleum and the Collateral Trustee contemporaneously herewith have terminated the Security Agreements by the means of the Termination Agreement and entered into a subsequent security agreement ("Superceding Security Agreement"); and WHEREAS, the Parties desire to enter into this Amendment to the Collateral Trust Agreement to confirm their agreement with respect to (i) the termination of the Security Agreements; (ii) the execution of the Superceding Security Agreement, (iii) certain technical corrections to the Collateral Trust Agreement; and (iv) certain other matters relating to the foregoing, as hereafter provided; and WHEREAS, Section IV.D. of the Collateral Trust Agreement authorizes the Trustee, with the unanimous consent of Congoleum and Claimants' Counsel to modify and amend the Collateral Trust Agreement. NOW, THEREFORE, the Parties hereby agree that the Collateral Trust Agreement shall be amended as follows: AGREEMENT 1. The paragraph below shall be added to the Claimant Agreement as Section I.C: C. Nontransferability of Beneficial Interests. The beneficial interests in the Collateral Trust are not transferable or assignable, except as may be provided under operation of law or after the death of an Asbestos Claimant pursuant to a will or the law applicable to decedent's estates. The beneficial interests in the Collateral Trust shall not be evidenced by a separate certificate. Nothing in this paragraph I.C shall in any way restrict the ability of the Collateral Trust to transfer the Trust Assets to any trust established pursuant to a plan of reorganization for Congoleum under chapter 11 of the United States Bankruptcy Code. 2 2. Sections II.E.1 and 2 of the Collateral Trust Agreement shall be replaced in their entirety with: E. Enforcement of Security Interest. The Collateral Trustee shall have the power and authority to enforce the Collateral Trust's interest in the Collateral in accordance with the Superceding Security Agreement and applicable law. 3. Sections IV.C and IV.D of the Collateral Trust Agreement shall be replaced in their entirety with: C. Termination. The Collateral Trust shall terminate upon the earliest of: (i) the payment in full of all of the Participating Asbestos Claimant's Secured Claims and the distribution of all Trust Assets pursuant to the terms of this Collateral Trust Agreement; (ii) the distribution of all Trust Assets pursuant to the terms of this Collateral Trust Agreement and the Collateral Trustee's determination that no further steps to recover any assets subject to the Security Interest are commercially reasonable; (iii) the transfer of the Trust Assets to the Plan Trust pursuant to the terms of this Collateral Trust Agreement; (iv) the payment of the Trust Assets to Congoleum pursuant to the terms of Section II.B.5; or (v) the expiration of any Perpetuities Period applicable to the Collateral Trust, provided that, to the extent permitted by applicable law, Congoleum directs that the Rule Against Perpetuities shall not apply to the Collateral Trust and that the Collateral Trust shall not be limited by a Perpetuities Period. "Perpetuities Period" shall mean the period (if any) defined by any applicable rule against perpetuities (the "Applicable Rule") within which interests in the Collateral Trust must vest in order 3 to be valid when created. The Perpetuities Period includes any period in gross permitted by the Applicable Rule, such as twenty-one (21) years. If the Perpetuities Period is defined with reference to a given date or the death of the last survivor of a class of individuals living on a given date (the "Measuring Lives"), the date shall be the date prescribed by the Applicable Rule and the Measuring Lives shall be the members of the class of persons living on that date who are authorized to receive any payment from the Collateral Trust prior to its termination. If the Applicable Rule applies differently to different kinds of Trust Assets, a direction to terminate the Collateral Trust upon the expiration of the Perpetuities Period shall be applied separately to the different kinds of property. If Trust Assets transferred to the Collateral Trustee at different times have different Perpetuities Periods, a direction to terminate the Collateral Trust upon the expiration of the Perpetuities Period shall be applied separately to the different Trust Assets, provided that (i) Trust Assets for which no sufficient record exists to determine the date of transfer shall be deemed for this purpose to have been transferred on the earliest possible date, and (ii) an insurance policy or the proceeds of an insurance policy shall be deemed transferred on the date the policy is acquired by the Collateral Trust regardless of the dates on which premiums are subsequently paid. If the Collateral Trust suspends the power of alienation or permits accumulations within the meaning of any Applicable Rule limiting the period for such suspension or accumulations then this provision shall apply to such suspension or accumulations as if they were non-vested interests. Upon the termination of the Collateral Trust pursuant to the application of any Perpetuities Period, the Collateral Trustee shall pay the remaining principal to Congoleum. 4 D. Amendments. The Collateral Trustee, with the unanimous consent of Congoleum and Claimants' Counsel, may modify and amend this Collateral Trust Agreement. Any modification made pursuant to this Section IV.D must be made in writing. The ability of the Collateral Trustee, Congoleum and Claimants' Counsel to amend this Collateral Trust Agreement in accordance with this Section IV.D shall not be restricted by any third party not a party hereto, including without limitation any Asbestos Claimant. Notwithstanding the foregoing or any other provision of this Collateral Trust Agreement, no modification or amendment to this Collateral Trust Agreement shall be effective to alter the rights or duties of the Delaware Trustee unless consented to in writing by the Delaware Trustee. 4. Other than expressly provided for herein, the terms of the Collateral Trust Agreement shall remain in full force and effect. 5. The Collateral Trust Agreement and this Amendment to the Collateral Trust Agreement (collectively, the "Agreements") constitute a single integrated written contract expressing the entire agreement among the parties hereto with respect to the subject matter hereof. The Agreements supercede any prior understandings and agreements between or among the parties with respect to the subject matter of the Agreements. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in the Agreements shall not be valid or binding. The failure or invalidation of any provision of the Agreements shall not in any way affect the validity or performance of any party pursuant to any other provision of the Agreements. 5 6. References in the Claimant Agreement, the Superceding Security Agreement and the Collateral Trust Agreement to the "Collateral Trust Agreement" shall be deemed references to the Agreements. 7. This Amendment to the Collateral Trust Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Amendment to the Collateral Trust Agreement. 6 IN WITNESS WHEREOF, the Parties have caused this Amendment to the Collateral Trust Agreement to be duly executed this 6th day of June 2003. CONGOLEUM CORPORATION By /s/ Howard N. Feist III --------------------------------- Title CFO ------------------------------ COLLATERAL TRUSTEE By --------------------------------- Arthur J. Pergament DELAWARE TRUSTEE By --------------------------------- Title ------------------------------ Wilmington Trust Company CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the execution of this Amendment to the Collateral Trust Agreement. -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 7 IN WITNESS WHEREOF, the Parties have caused this Amendment to the Collateral Trust Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By --------------------------------- Title ------------------------------ COLLATERAL TRUSTEE By /s/ Arthur J. Pergament --------------------------------- Arthur J. Pergament DELAWARE TRUSTEE By --------------------------------- Title ------------------------------ Wilmington Trust Company CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the execution of this Amendment to the Collateral Trust Agreement. -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 7 IN WITNESS WHEREOF, the Parties have caused this Amendment to the Collateral Trust Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By --------------------------------- Title ------------------------------ COLLATERAL TRUSTEE By --------------------------------- Arthur J. Pergament DELAWARE TRUSTEE By /s/ Rosemary Pantano --------------------------------- Title Assistant Vice President ------------------------------ Wilmington Trust Company CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the execution of this Amendment to the Collateral Trust Agreement. -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 7 IN WITNESS WHEREOF, the Parties have caused this Amendment to the Collateral Trust Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By --------------------------------- Title ------------------------------ COLLATERAL TRUSTEE By --------------------------------- Arthur J. Pergament DELAWARE TRUSTEE By --------------------------------- Title ------------------------------ Wilmington Trust Company CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the execution of this Amendment to the Collateral Trust Agreement. /s/ Perry Weitz -------------------------------- Perry Weitz, Esq. /s/ Joseph F. Rice -------------------------------- Joseph F. Rice, Esq. 7 EX-10.3 7 ex10-3.txt Exhibit 10.3 SECURITY AGREEMENT This security agreement ("Security Agreement") is entered into by and between Congoleum Corporation, a Delaware corporation ("Congoleum") and Arthur J. Pergament, solely in his capacity as the Collateral Trustee (the "Collateral Trustee") of the Collateral Trust created pursuant to the Collateral Trust Agreement (referenced to below). RECITALS WHEREAS, numerous individuals have asserted asbestos-related bodily injury claims against Congoleum (each an "Asbestos Claimant" and collectively, the "Asbestos Claimants"), each alleging exposure to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum otherwise may have legal liability (the "Asbestos Claims"), and it is anticipated that additional asbestos-related bodily injury claims will continue to be asserted against Congoleum; and WHEREAS, Congoleum is unable to meet its liability with respect to the Claims absent prompt payment from its insurers of their obligations under the Policies, (as defined below); and WHEREAS, Congoleum and certain Asbestos Claimants, contemporaneously herewith, are executing a settlement agreement, titled Settlement Agreement Between Congoleum Corporation and Various Asbestos Claimants (the "Claimant Agreement"); and WHEREAS, Congoleum entered into settlement agreements prior to the Claimant Agreement to resolve certain Asbestos Claims, under which some or all of the consideration has yet to be paid (the "Pre-Existing Settlement Agreements"); and WHEREAS, Congoleum may enter into additional settlement agreements to resolve certain Asbestos Claims that are scheduled for trial prior to the commencement of an anticipated chapter 11 reorganization case for Congoleum in an aggregate amount not to exceed $15,000,000.00 (the "Trial-Listed Settlement Agreements"); and WHEREAS, Congoleum, contemporaneously herewith, is executing an agreement, titled Collateral Trust Agreement, establishing a trust ("Collateral Trust") for, among other lawful purposes not inconsistent with the Claimant Agreement, distributing certain proceeds of the Policies in accordance with the Collateral Trust Agreement and the Claimant Agreement; and WHEREAS, Congoleum anticipates that it will commence a reorganization case under Chapter 11 of the U.S. Bankruptcy Code; and WHEREAS, Congoleum intends to incorporate the terms of the Claimant Agreement in a "pre-packaged" plan of reorganization that Congoleum shall seek to confirm in its anticipated Chapter 11 case (assuming the requisite acceptances are obtained). NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, Congoleum and Trustee agree as follows: AGREEMENT I. Definitions A. "Congoleum's Liabilities," whenever used in this Security Agreement, shall mean First Priority Settlement Amounts (as defined in the Collateral Trust Agreement), Asbestos Claimant's Secured Claims (as defined in the Claimant Agreement), the Claims Handling Fee (as defined in the Collateral Trust Agreement), and Administrative Expenses (as defined in the Collateral Trust Agreement). 2 II. Security Interest A. To secure the payment of Congoleum's Liabilities, Congoleum hereby grants to the Collateral Trustee, to the maximum extent possible under applicable law, a security interest in the following (collectively, the "Collateral"): 1. All of Congoleum's claims, causes of action and rights, whether now existing or hereafter arising, liquidated or unliquidated, disputed or undisputed, fixed or contingent, to receive payment from its insurers or to have monies expended by its insurers for its benefit to satisfy Asbestos Claims against it, net of any and all attorneys' fees or other professional fees and related expenses and disbursements incurred on or after January 1, 2003 by or on behalf of Congoleum or any Congoleum successor in connection with pursuit by Congoleum or any Congoleum successor of Congoleum's insurance coverage ("Congoleum Professional Fees, Disbursements and Expenses"), pursuant to the comprehensive general liability insurance policies issued to or on behalf of Congoleum and identified in Appendix A hereto (the "Policies"), whether by virtue of a coverage-in-place settlement, a buy-out of coverage, a judgment for declaratory relief or damages, or otherwise; and 2. Any proceeds, net of any and all Congoleum Professional Fees, Disbursements and Expenses, actually received by Congoleum or the Trustee from any of the above (collectively, the "Insurance Proceeds"). B. Congoleum hereby represents and warrants to the Collateral Trustee that Congoleum has the authority to grant a security interest in the Collateral to the Collateral Trustee as contemplated by and in a manner consistent with the terms of the grant of a security interest in the Collateral provided herein. 3 C. Congoleum shall execute and deliver to the Collateral Trustee substantially contemporaneous with the execution of this Agreement, and at any time or times hereafter at the request of the Collateral Trustee, all UCC-1 financing statements and renewal UCC-1 financing statements that the Collateral Trustee may request, in a form satisfactory to the Collateral Trustee to perfect and maintain the security interests granted herein by Congoleum to the Collateral Trustee and in order to consummate fully all of the transactions contemplated herein and under the Claimant Agreement. Congoleum agrees to execute and deliver promptly such financing statements and other documents, and do such other things, as the Collateral Trustee shall reasonably request, to effectuate the Collateral Trustee's rights hereunder. D. The security interests that are granted to the Collateral Trustee hereunder shall constitute at all times prior to payment in full of Congoleum's Liabilities valid perfected, choate security interests upon all of the Collateral described above. This Security Agreement is intended to be and shall constitute a continuing security agreement for Congoleum's Liabilities. E. Except with respect to certain Pre-Existing Settlement Agreements and Trial-Listed Settlement Agreements, Congoleum will not grant or create any subsequent or additional security interest in, or assign, any of the Collateral at any time that any of Congoleum's Liabilities are unpaid. Notwithstanding anything herein to the contrary, this Security Agreement will not prohibit Congoleum's assignment of any of the Collateral or grant of the security interest created herein to a trust created pursuant to a plan of reorganization 4 confirmed in any chapter 11 bankruptcy case commenced on Congoleum's behalf as long as such plan of reorganization preserves and maintains the rights of the beneficiaries of the Collateral Trust. F. Until all of the Secured Asbestos Claims for all Participating Asbestos Claimants are paid in full, Congoleum shall evaluate, bring, prosecute, litigate, defend and settle any claim against its insurers to obtain Insurance Proceeds. Congoleum shall consult with Perry Weitz and Joseph F. Rice (collectively, the "Claimants' Counsel") in order to retain a mutually acceptable counsel to prosecute any claim against its insurers to obtain Insurance Proceeds. Congoleum agrees to obtain the consent of Claimants' Counsel prior to entering into settlement of any claim against its insurers to obtain Insurance Proceeds, which consent shall not be unreasonably withheld, conditioned or delayed. III. LIABILITY OF THE COLLATERAL TRUSTEE The Collateral Trustee has no obligation to collect any account and shall not be liable for failure to collect any account or for any act or omission on the part of the Collateral Trustee or the Collateral Trustee' officers, agents or employees, except for the Collateral Trustee' own breach of trust committed in bad faith, or for gross negligence or willful misappropriation. IV. SUCCESSORS AND ASSIGNS This Security Agreement and all agreements, instruments and documents executed and delivered pursuant hereto or to consummate the transactions contemplated hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. V. CONSTRUCTION, ENTIRE AGREEMENT, DURATION A. This Security Agreement was negotiated between the parties hereto at arm's length, with each party receiving advice from independent legal counsel. It is the intent of the parties that no part of this Security Agreement be construed against any particular party because of the identity of the drafter. 5 B. This Security Agreement constitutes a single integrated written contract expressing the entire agreement among the parties hereto. This Security Agreement supersedes any prior understandings and agreements between or among the parties with respect to the subject matter of the Security Agreement. There are no representations, agreements, arrangements or understandings between or among the parties, oral or written, relating to the subject matter of this Security Agreement that are not fully expressed herein. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in this written Agreement shall not be valid or binding. The failure or invalidation of any provision of this Security Agreement shall not in any way affect the validity of, or performance of any party pursuant to, any other provision of this Security Agreement. C. The effective date of this Security Agreement shall be the date on which Congoleum and the Collateral Trustee have signed and delivered the Security Agreement (the "Effective Date"). Except as provided in Section VIII hereof, this Security Agreement shall have perpetual existence and may not be enlarged, modified or altered except by a written agreement signed by representatives of all of the parties hereto. VI. NOTICE A. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so 6 delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08616 (609) 584-3000 - Telephone No. (609) 584-3685 - Facsimile No. With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. 7 Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. VII. GOVERNING LAW All disputes concerning the validity, interpretation and application of the Security Agreement or the Appendix hereto, or any provision thereof, and disputes concerning issues within the scope of the Security Agreement shall be determined in accordance with the law of the State of Delaware, excluding any conflict of law provisions. 8 VIII. TERMINATION The security interests granted herein shall terminate upon the payment of all of Congoleum's Liabilities. Upon such termination, the Collateral Trustee will execute all appropriate documents to evidence the termination of the security interests. IX. MISCELLANEOUS A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Security Agreement. B. This Security Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Security Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Security Agreement. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed this 10th day of April 2003. CONGOLEUM CORPORATION By: /s/ Howard N. Feist III ---------------------------- Title: CFO ------------------------- COLLATERAL TRUSTEE By: ---------------------------- Arthur J. Pergament Title: ------------------------- 9 VIII. TERMINATION The security interests granted herein shall terminate upon the payment of all of Congoleum's Liabilities. Upon such termination, the Collateral Trustee will execute all appropriate documents to evidence the termination of the security interests. IX. MISCELLANEOUS A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Security Agreement. B. This Security Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Security Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Security Agreement. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed this 11th day of April 2003. CONGOLEUM CORPORATION By: ---------------------------- Title: ------------------------- COLLATERAL TRUSTEE By: /s/ Arthur J. Pergament ---------------------------- Arthur J. Pergament Title: CEO/Pergament Advisors ------------------------- 9 EX-10.3.1 8 ex10-3_1.txt Exhibit 10.3.1 SECOND SECURITY AGREEMENT This security agreement ("Security Agreement") is entered into by and between Congoleum Corporation, a Delaware corporation ("Congoleum") and Arthur J. Pergament, solely in his capacity as the Collateral Trustee (the "Collateral Trustee") of the Collateral Trust created pursuant to the Collateral Trust Agreement (referenced to below). RECITALS WHEREAS, numerous individuals have asserted asbestos-related bodily injury claims against Congoleum (each an "Asbestos Claimant" and collectively, the "Asbestos Claimants"), each alleging exposure to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum otherwise may have legal liability (the "Asbestos Claims"), and it is anticipated that additional asbestos-related bodily injury claims will continue to be asserted against Congoleum; and WHEREAS, Congoleum is unable to meet its liability with respect to the Claims absent prompt payment from its insurers of their obligations under the Policies, (as defined below); and WHEREAS, Congoleum and certain Asbestos Claimants, contemporaneously herewith, are executing a settlement agreement, titled Settlement Agreement Between Congoleum Corporation and Various Asbestos Claimants (the "Claimant Agreement"); and WHEREAS, Congoleum entered into settlement agreements prior to the Claimant Agreement to resolve certain Asbestos Claims, under which some or all of the consideration has yet to be paid (the "Pre-Existing Settlement Agreements"); and WHEREAS, Congoleum may enter into additional settlement agreements to resolve certain Asbestos Claims that are scheduled for trial prior to the commencement of an anticipated chapter 11 reorganization case for Congoleum in an aggregate amount not to exceed $15,000,000.00 (the "Trial-Listed Settlement Agreements"); and WHEREAS, Congoleum, contemporaneously herewith, is executing an agreement, titled Collateral Trust Agreement, establishing a trust ("Collateral Trust") for, among other lawful purposes not inconsistent with the Claimant Agreement, distributing certain proceeds of the Policies in accordance with the Collateral Trust Agreement and the Claimant Agreement; and WHEREAS, Congoleum anticipates that it will commence a reorganization case under Chapter 11 of the U.S. Bankruptcy Code; and WHEREAS, Congoleum intends to incorporate the terms of the Claimant Agreement in a "pre-packaged" plan of reorganization that Congoleum shall seek to confirm in its anticipated Chapter 11 case (assuming the requisite acceptances are obtained). NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, Congoleum and Trustee agree as follows: AGREEMENT I. Definitions A. "Congoleum's Liabilities," whenever used in this Security Agreement, shall mean First Priority Settlement Amounts (as defined in the Collateral Trust Agreement), Asbestos Claimant's Secured Claims (as defined in the Claimant Agreement), the Claims Handling Fee (as defined in the Collateral Trust Agreement), and Administrative Expenses (as defined in the Collateral Trust Agreement). 2 II. Security Interest A. To secure the payment of Congoleum's Liabilities, Congoleum hereby grants to the Collateral Trustee, to the maximum extent possible under applicable law, a security interest in the following (collectively, the "Collateral"): 1. All of Congoleum's claims, causes of action and rights, whether now existing or hereafter arising, liquidated or unliquidated, disputed or undisputed, fixed or contingent, to receive payment from its insurers or to have monies expended by its insurers for its benefit to satisfy Asbestos Claims against it, net of any and all attorneys' fees or other professional fees and related expenses and disbursements incurred on or after January 1, 2003 by or on behalf of Congoleum or any Congoleum successor in connection with pursuit by Congoleum or any Congoleum successor of Congoleum's insurance coverage ("Congoleum Professional Fees, Disbursements and Expenses"), pursuant to the comprehensive general liability insurance policies issued to or on behalf of Congoleum and identified in Appendix A hereto (the "Policies"), whether by virtue of a coverage-in-place settlement, a buy-out of coverage, a judgment for declaratory relief or damages, or otherwise; and 2. Any proceeds, net of any and all Congoleum Professional Fees, Disbursements and Expenses, actually received by Congoleum or the Trustee from any of the above (collectively, the "Insurance Proceeds"). 3 B. Congoleum hereby represents and warrants to the Collateral Trustee that Congoleum has the authority to grant a security interest in the Collateral to the Collateral Trustee as contemplated by and in a manner consistent with the terms of the grant of a security interest in the Collateral provided herein. C. Congoleum shall execute and deliver to the Collateral Trustee substantially contemporaneous with the execution of this Agreement, and at any time or times hereafter at the request of the Collateral Trustee, all UCC-1 financing statements and renewal UCC-1 financing statements that the Collateral Trustee may request, in a form satisfactory to the Collateral Trustee to perfect and maintain the security interests granted herein by Congoleum to the Collateral Trustee and in order to consummate fully all of the transactions contemplated herein and under the Claimant Agreement. Congoleum agrees to execute and deliver promptly such financing statements and other documents, and do such other things, as the Collateral Trustee shall reasonably request, to effectuate the Collateral Trustee's rights hereunder. D. The security interests that are granted to the Collateral Trustee hereunder shall constitute at all times prior to payment in full of Congoleum's Liabilities valid perfected, choate security interests upon all of the Collateral described above. This Security Agreement is intended to be and shall constitute a continuing security agreement for Congoleum's Liabilities. E. Except with respect to certain Pre-Existing Settlement Agreements and Trial-Listed Settlement Agreements, Congoleum will not grant or create any subsequent or additional security interest in, or assign, any of the Collateral at any time that any of Congoleum's Liabilities are unpaid. Notwithstanding anything herein to the contrary, this Security Agreement will not prohibit Congoleum's assignment of any of the Collateral or grant of the security interest created herein to a trust created pursuant to a plan of reorganization confirmed in any chapter 11 bankruptcy case commenced on Congoleum's behalf as long as such plan of reorganization preserves and maintains the rights of the beneficiaries of the Collateral Trust. 4 F. Until all of the Secured Asbestos Claims for all Participating Asbestos Claimants are paid in full, Congoleum shall evaluate, bring, prosecute, litigate, defend and settle any claim against its insurers to obtain Insurance Proceeds. Congoleum shall consult with Perry Weitz and Joseph F. Rice (collectively, the "Claimants' Counsel") in order to retain a mutually acceptable counsel to prosecute any claim against its insurers to obtain Insurance Proceeds. Congoleum agrees to obtain the consent of Claimants' Counsel prior to entering into settlement of any claim against its insurers to obtain Insurance Proceeds, which consent shall not be unreasonably withheld, conditioned or delayed. III. LIABILITY OF THE COLLATERAL TRUSTEE The Collateral Trustee has no obligation to collect any account and shall not be liable for failure to collect any account or for any act or omission on the part of the Collateral Trustee or the Collateral Trustee' officers, agents or employees, except for the Collateral Trustee' own breach of trust committed in bad faith, or for gross negligence or willful misappropriation. IV. SUCCESSORS AND ASSIGNS This Security Agreement and all agreements, instruments and documents executed and delivered pursuant hereto or to consummate the transactions contemplated hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. V. CONSTRUCTION, ENTIRE AGREEMENT, DURATION A. This Security Agreement was negotiated between the parties hereto at arm's length, with each party receiving advice from independent legal counsel. It is the intent of the parties that no part of this Security Agreement be construed against any particular party because of the identity of the drafter. 5 B. This Security Agreement constitutes a single integrated written contract expressing the entire agreement among the parties hereto. This Security Agreement supersedes any prior understandings and agreements between or among the parties with respect to the subject matter of the Security Agreement. There are no representations, agreements, arrangements or understandings between or among the parties, oral or written, relating to the subject matter of this Security Agreement that are not fully expressed herein. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in this written Agreement shall not be valid or binding. The failure or invalidation of any provision of this Security Agreement shall not in any way affect the validity of, or performance of any party pursuant to, any other provision of this Security Agreement. C. The effective date of this Security Agreement shall be the date on which Congoleum and the Collateral Trustee have signed and delivered the Security Agreement (the "Effective Date"). Except as provided in Section VIII hereof, this Security Agreement shall have perpetual existence and may not be enlarged, modified or altered except by a written agreement signed by representatives of all of the parties hereto. VI. NOTICE A. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, 6 registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08616 (609) 584-3000 - Telephone No. (609) 584-3685 - Facsimile No. With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. 7 Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. VII. GOVERNING LAW All disputes concerning the validity, interpretation and application of the Security Agreement or the Appendix hereto, or any provision thereof, and disputes concerning issues within the scope of the Security Agreement shall be determined in accordance with the law of the State of Delaware, excluding any conflict of law provisions. 8 VIII. TERMINATION The security interests granted herein shall terminate upon the payment of all of Congoleum's Liabilities. Upon such termination, the Collateral Trustee will execute all appropriate documents to evidence the termination of the security interests. IX. MISCELLANEOUS A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Security Agreement. B. This Security Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Security Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Security Agreement. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed this 17th day of April 2003. CONGOLEUM CORPORATION By: /s/ Howard N. Feist III --------------------------------------- Title: CFO ------------------------------------- COLLATERAL TRUSTEE By: --------------------------------------- Arthur J. Pergament Title: ------------------------------------- 9 EX-10.3.2 9 ex10-3_2.txt Exhibit 10.3.2 TERMINATION AGREEMENT This termination agreement ("Termination Agreement") is entered into by and between Congoleum Corporation, a Delaware corporation ("Congoleum") and Arthur J. Pergament, solely in his capacity as the Collateral Trustee (the "Collateral Trustee") of the Collateral Trust created pursuant to the Collateral Trust Agreement (referenced to below). RECITALS WHEREAS, Congoleum and the Collateral Trustee entered into a Security Agreement on or about April 11, 2003 (the "Security Agreement"), a true and correct copy of which is attached hereto as Exhibit "A"; and WHEREAS, Congoleum entered into a Second Security Agreement on or about April 17, 2003 (the "Second Security Agreement"), a true and correct copy of which is attached hereto as Exhibit "B"; and WHEREAS, Congoleum and the Collateral Trustee have agreed to terminate the Security Agreement, the Second Security Agreement, and any security interest created thereunder and all the Collateral Trustee's rights thereunder; and WHEREAS, Congoleum and the Collateral Trustee have agreed to terminate all UCC -1 Financing Statements filed in respect of the security interests granted under the Security Agreement, the Second Security Agreement, or otherwise; and NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, Congoleum and Collateral Trustee agree as follows: AGREEMENT 1. Congoleum and the Collateral Trustee hereby terminate the Security Agreement, the Second Security Agreement, and all rights and interests granted thereunder are null and void effective as of the date hereof. 2. Within five (5) business days of the execution of this Termination Agreement, the Collateral Trustee shall execute and file UCC-3 Termination Statements in all jurisdictions in which UCC-1 Financing Statements were filed in respect of the Security Agreement and the Second Security Agreement. 3. The Collateral Trustee shall deliver to Congoleum promptly such UCC-3 Termination Statements and take such other action or refrain from taking any other action as Congoleum may request to effectuate the termination of the Security Agreement, the Second Security Agreement, and the perfection of any security interest granted to the Collateral Trust thereunder or otherwise. 4. Successors and Assigns. This Termination Agreement and all agreements, instruments and documents executed and delivered pursuant hereto or to consummate the transactions contemplated hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. 5. Construction. This Termination Agreement was negotiated between the parties hereto at arm's length, with each party receiving advice from independent legal counsel. It is the intent of the parties that no part of this Termination Agreement be construed against any particular party because of the identity of the drafter. This Termination Agreement supersedes any prior understandings and agreements between or among the parties with respect to the subject matter of the Security Agreement and the Second Security Agreement. 2 6. Effective Date. The effective date of this Termination Agreement shall be the date on which Congoleum and the Collateral Trustee have signed and delivered the Termination Agreement. 7. Notice. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08616 (609) 584-3000 - Telephone No. (609) 584-3685 - Facsimile No. 3 With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. 4 8. Governing Law. All disputes concerning the validity, interpretation and application of the Termination Agreement or any provisions thereof, and disputes concerning issues within the scope of the Termination Agreement shall be determined in accordance with the law of the State of Delaware, excluding any conflict of law provisions. 9. Miscellaneous. A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Termination Agreement. B. This Termination Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Termination Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Termination Agreement. 5 IN WITNESS WHEREOF, the parties have caused this Termination Agreement to be duly executed this 6th day of June 2003. CONGOLEUM CORPORATION By: /s/ Howard N. Feist III --------------------------------------- Title: CFO ------------------------------------- COLLATERAL TRUSTEE By: --------------------------------------- Arthur J. Pergament Title: _____________________________________ CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the Collateral Trustee's execution of this Termination Agreement. -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 6 IN WITNESS WHEREOF, the parties have caused this Termination Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By: --------------------------------------- Title: ------------------------------------- COLLATERAL TRUSTEE By: /s/ Arthur J. Pergament --------------------------------------- Arthur J. Pergament Title: _____________________________________ CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the Collateral Trustee's execution of this Termination Agreement. -------------------------------- Perry Weitz, Esq. -------------------------------- Joseph F. Rice, Esq. 6 IN WITNESS WHEREOF, the parties have caused this Termination Agreement to be duly executed this ___ day of June 2003. CONGOLEUM CORPORATION By: --------------------------------------- Title: ------------------------------------- COLLATERAL TRUSTEE By: --------------------------------------- Arthur J. Pergament Title: _____________________________________ CONSENT: By their signatures below, Claimants' Counsel, as designated in the Settlement Agreement Between Congoleum Corporation And Various Asbestos Claimants, indicate their consent to the Collateral Trustee's execution of this Termination Agreement. /s/ Perry Weitz -------------------------------- Perry Weitz, Esq. /s/ Joseph F. Rice -------------------------------- Joseph F. Rice, Esq. 6 EX-10.3.3 10 ex10-3_3.txt Exhibit 10.3.3 SUPERCEDING SECURITY AGREEMENT This security agreement ("Security Agreement") is entered into by and between Congoleum Corporation, a Delaware corporation ("Congoleum") and Arthur J. Pergament, solely in his capacity as the Collateral Trustee (the "Collateral Trustee") of the Collateral Trust created pursuant to the Collateral Trust Agreement (referenced to below). RECITALS WHEREAS, numerous individuals have asserted asbestos-related bodily injury claims against Congoleum (each an "Asbestos Claimant" and collectively, the "Asbestos Claimants"), each alleging exposure to an asbestos-containing product manufactured, sold, or distributed by Congoleum or for which Congoleum otherwise may have legal liability (the "Asbestos Claims"), and it is anticipated that additional asbestos-related bodily injury claims will continue to be asserted against Congoleum; and WHEREAS, Congoleum is unable to meet its liability with respect to the Claims absent prompt payment from its insurers of their obligations under the Policies, (as defined below); and WHEREAS, Congoleum and certain Asbestos Claimants, on or about April 10, 2003, executed a settlement agreement, titled Settlement Agreement Between Congoleum Corporation and Various Asbestos Claimants (as amended, the "Claimant Agreement"); and WHEREAS, Congoleum entered into settlement agreements prior to the Claimant Agreement to resolve certain Asbestos Claims, under which some or all of the consideration has yet to be paid (the "Pre-Existing Settlement Agreements"); and WHEREAS, Congoleum may enter into additional settlement agreements to resolve certain Asbestos Claims that are scheduled for trial prior to the commencement of an anticipated chapter 11 reorganization case for Congoleum in an aggregate amount not to exceed $15,000,000.00 (the "Trial-Listed Settlement Agreements"); and WHEREAS, Congoleum, on or about April 10, 2003, executed an agreement, titled Collateral Trust Agreement (as amended, the "Collateral Trust Agreement"), establishing a trust ("Collateral Trust") for, among other lawful purposes not inconsistent with the Claimant Agreement, distributing certain proceeds of the Policies in accordance with the Collateral Trust Agreement and the Claimant Agreement; and WHEREAS, Congoleum anticipates that it will commence a reorganization case under chapter 11 of the U.S. Bankruptcy Code; and WHEREAS, Congoleum intends to incorporate the terms of the Claimant Agreement in a "pre-packaged" plan of reorganization that Congoleum shall seek to confirm in its anticipated chapter 11 case (assuming the requisite acceptances are obtained). NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, Congoleum and Trustee agree as follows: AGREEMENT I. Definitions A. "Congoleum's Liabilities," whenever used in this Security Agreement, shall mean First Priority Settlement Amounts (as defined in the Collateral Trust Agreement), Asbestos Claimant's Secured Claims (as defined in the Claimant Agreement), the Claims Handling Fee (as defined in the Collateral Trust Agreement), and Administrative Expenses (as defined in the Collateral Trust Agreement). 2 II. Security Interest A. To secure the payment of Congoleum's Liabilities, Congoleum hereby grants to the Collateral Trustee, to the maximum extent possible under applicable law, a security interest in the following (collectively, the "Collateral"): 1. All of Congoleum's claims, causes of action and rights, whether now existing or hereafter arising, liquidated or unliquidated, disputed or undisputed, fixed or contingent, to receive payment from its insurers or to have monies expended by its insurers for its benefit to satisfy Asbestos Claims against it, net of any and all attorneys' fees or other professional fees and related expenses and disbursements incurred on or after January 1, 2003 by or on behalf of Congoleum or any Congoleum successor in connection with pursuit by Congoleum or any Congoleum successor of Congoleum's insurance coverage ("Congoleum Professional Fees, Disbursements and Expenses"), pursuant to the comprehensive general liability insurance policies issued to or on behalf of Congoleum and identified in Appendix A hereto (the "Policies"), whether by virtue of a coverage-in-place settlement, a buy-out of coverage, a judgment for declaratory relief or damages, or otherwise; and 2. Any proceeds, net of any and all Congoleum Professional Fees, Disbursements and Expenses, actually received by Congoleum or the Trustee from any of the above (collectively, the "Insurance Proceeds"). 3 B. Congoleum hereby represents and warrants to the Collateral Trustee that Congoleum has the authority to grant a security interest in the Collateral to the Collateral Trustee as contemplated by and in a manner consistent with the terms of the grant of a security interest in the Collateral provided herein. C. Congoleum shall execute and deliver to the Collateral Trustee substantially contemporaneous with the execution of this Agreement, and at any time or times hereafter at the request of the Collateral Trustee, all UCC-1 financing statements and renewal UCC-1 financing statements that the Collateral Trustee may request, in a form satisfactory to the Collateral Trustee to perfect and maintain the security interests granted herein by Congoleum to the Collateral Trustee and in order to consummate fully all of the transactions contemplated herein and under the Claimant Agreement. Congoleum agrees to execute and deliver promptly such financing statements and other documents, and do such other things, as the Collateral Trustee shall reasonably request, to effectuate the Collateral Trustee's rights hereunder. D. The security interests that are granted to the Collateral Trustee hereunder shall constitute at all times prior to payment in full of Congoleum's Liabilities valid perfected, choate security interests upon all of the Collateral described above. This Security Agreement is intended to be and shall constitute a continuing security agreement for Congoleum's Liabilities. E. Except with respect to certain Pre-Existing Settlement Agreements and Trial-Listed Settlement Agreements, Congoleum will not grant or create any subsequent or additional security interest in, or assign, any of the Collateral at any time that any of Congoleum's Liabilities are unpaid. Notwithstanding anything herein to the contrary, this Security Agreement will not prohibit Congoleum's assignment of any of the Collateral or grant of the security interest created herein to a trust created pursuant to a plan of reorganization confirmed in any chapter 11 bankruptcy case commenced on Congoleum's behalf as long as such plan of reorganization preserves and maintains the rights of the beneficiaries of the Collateral Trust. 4 F. Until all of the Secured Asbestos Claims for all Participating Asbestos Claimants are paid in full, Congoleum shall evaluate, bring, prosecute, litigate, defend and settle any claim against its insurers to obtain Insurance Proceeds. Congoleum shall consult with Perry Weitz and Joseph F. Rice (collectively, the "Claimants' Counsel") in order to retain a mutually acceptable counsel to prosecute any claim against its insurers to obtain Insurance Proceeds. Congoleum agrees to obtain the consent of Claimants' Counsel prior to entering into settlement of any claim against its insurers to obtain Insurance Proceeds, which consent shall not be unreasonably withheld, conditioned or delayed. III. LIABILITY OF THE COLLATERAL TRUSTEE The Collateral Trustee has no obligation to collect any account and shall not be liable for failure to collect any account or for any act or omission on the part of the Collateral Trustee or the Collateral Trustee' officers, agents or employees, except for the Collateral Trustee' own breach of trust committed in bad faith, or for gross negligence or willful misappropriation. IV. SUCCESSORS AND ASSIGNS This Security Agreement and all agreements, instruments and documents executed and delivered pursuant hereto or to consummate the transactions contemplated hereunder shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto. 5 V. CONSTRUCTION, ENTIRE AGREEMENT, DURATION A. This Security Agreement was negotiated between the parties hereto at arm's length, with each party receiving advice from independent legal counsel. It is the intent of the parties that no part of this Security Agreement be construed against any particular party because of the identity of the drafter. B. This Security Agreement constitutes a single integrated written contract expressing the entire agreement among the parties hereto. This Security Agreement supersedes any prior understandings and agreements between or among the parties with respect to the subject matter of the Security Agreement. There are no representations, agreements, arrangements or understandings between or among the parties, oral or written, relating to the subject matter of this Security Agreement that are not fully expressed herein. Any statements, promises or inducements, whether made by any party or any agents of any party, that are not contained in this written Agreement shall not be valid or binding. The failure or invalidation of any provision of this Security Agreement shall not in any way affect the validity of, or performance of any party pursuant to, any other provision of this Security Agreement. C. The effective date of this Security Agreement shall be the date on which Congoleum and the Collateral Trustee have signed and delivered the Security Agreement (the "Effective Date"). Except as provided in Section VIII hereof, this Security Agreement shall have perpetual existence and may not be enlarged, modified or altered except by a written agreement signed by representatives of all of the parties hereto. 6 VI. NOTICE A. All notices hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes (if mailed) three (3) calendar days after being deposited, postage prepaid, in the United States Mail, registered or certified mail, or (if delivered by express courier) one (1) business day after being delivered to such courier, or (if delivered in person or via facsimile with faxed confirmation) the same day as delivery if delivered on a business day before 4:30 p.m. EST or EDT (as applicable) or if not so delivered, on the next succeeding business day, except with respect to notices issued to the Collateral Trustee, such notices shall be deemed received on the date actually received by the Collateral Trustee. Notice to the Claimants' Counsel shall be deemed notice to each Asbestos Claimant. Notices shall be addressed as follows: Congoleum: Roger Marcus Congoleum Corporation 3500 Quakerbridge Road P.O. Box 3127 Mercerville, NJ 08616 (609) 584-3000 - Telephone No. (609) 584-3685 - Facsimile No. With copies to: Bette Orr, Esq. Gilbert, Heintz & Randolph LLP 1100 New York Avenue 7th Floor Washington, DC 20005 (202) 772-2200 - Telephone No. (202) 772-3333 - Facsimile No. Norman L. Pernick, Esq. Saul Ewing LLP 222 Delaware Avenue Suite 1200 Wilmington, DE 19899 (302) 421-6800 - Telephone No. (302) 421-6813 - Facsimile No. 7 Mark Chehi, Esq. Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000 - Telephone No. (302) 651-3001 - Facsimile No. Collateral Trustee: Arthur Pergament Pergament Advisors 950 Third Avenue, 3rd Floor New York, NY 10022 (212) 754-7913 (212) 994-6229 Claimants' Counsel: Perry Weitz, Esq. Weitz & Luxenberg 180 Maiden Lane New York, NY 10038 (212) 558-5500 - Telephone No. (212) 344-5461 - Facsimile No. Joseph F. Rice, Esq. 28 Bridgeside Boulevard P.O. Box 1792 Mt. Pleasant, SC 29464 (843) 216-9000 - Telephone No. (843) 216-9290 - Facsimile No. VII. GOVERNING LAW All disputes concerning the validity, interpretation and application of the Security Agreement or the Appendix hereto, or any provision thereof, and disputes concerning issues within the scope of the Security Agreement shall be determined in accordance with the law of the State of Delaware, excluding any conflict of law provisions. 8 VIII. TERMINATION The security interests granted herein shall terminate upon the payment of all of Congoleum's Liabilities. Upon such termination, the Collateral Trustee will execute all appropriate documents to evidence the termination of the security interests. IX. MISCELLANEOUS A. Each party shall take such steps and shall execute such documents as reasonably may be necessary or proper to effectuate the purpose and intent of this Security Agreement. B. This Security Agreement shall be executed in duplicate originals and signed by or on behalf of the parties hereto. C. This Security Agreement may be executed in any number of counterparts. Each of such counterparts for all purposes shall be deemed to be an original, and all such counterparts together shall constitute but one and the same Security Agreement. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be duly executed this 11th day of June 2003. CONGOLEUM CORPORATION By: /s/ Howard N. Feist III ---------------------------------------- Title: CFO -------------------------------------- COLLATERAL TRUSTEE By: /s/ Arthur J. Pergament ---------------------------------------- Arthur J. Pergament Title: ______________________________________ 9 EX-31.1 11 ex31-1.txt Exhibit 31.1 Certification of Chief Executive Officer I, Roger S. Marcus, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Biltrite Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Roger S. Marcus ------------------- Roger S. Marcus Chief Executive Officer 2 EX-31.2 12 ex31-2.txt Exhibit 31.2 Certification of Chief Financial Officer I, Howard N. Feist III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of American Biltrite Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Howard N. Feist III ----------------------- Howard N. Feist III Chief Financial Officer 2 EX-32.1 13 ex32-1.txt Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report on Form 10-Q of American Biltrite Inc. (the "Company") for the quarterly period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Roger S. Marcus, as Chief Executive Officer of the Company, and Howard N. Feist III, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Roger S. Marcus - ------------------- Name: Roger S. Marcus Title: Chief Executive Officer Date: August 13, 2003 /s/ Howard N. Feist III - ----------------------- Name: Howard N. Feist III Title: Chief Financial Officer Date: August 13, 2003 A signed original of this written statement required by Section 906 has been provided to American Biltrite Inc. and will be retained by American Biltrite Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----