UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC  20549
 
 FORM
10-Q
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31,
      2008oro
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from ________ to
_________
 
 Commission
File Number 1-13612
 
 CONGOLEUM
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 
 DELAWARE
              02-0398678(State
      or Other Jurisdiction of
              (IRS
      Employer Identification No.)Incorporation
      or Organization)
 
 3500
Quakerbridge Road
 P.O.
Box 3127
 Mercerville,
NJ  08619-0127
 (Address
of principal executive offices, including zip code)
 
 (609)
584-3000
 (Registrant's
telephone number, including area code)
 
 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 o
 
 Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company.  See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
 
 Large
accelerated filer o   Accelerated
filer o  
Non-accelerated filer o   Smaller
reporting company x
  1
  
 Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  YES o  NO x
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 
 Class
              
              Outstanding
      at April 30, 2008Class
      A Common Stock
              
              3,663,390Class
      B Common Stock
              
              4,608,945
  2
  CONGOLEUM
CORPORATION
 
 Index
 
 PagePART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements:Consolidated
      Balance Sheets as of March 31, 2008 (unaudited) and December 31,
      2007
              5Condensed
      Consolidated Statement of Operations for the three months ended March 31,
      2008 and 2007 (unaudited)
              6Condensed
      Consolidated Statement of Cash Flows for the three months ended March 31,
      2008 and 2007 (unaudited)
              7Notes
      to Unaudited Condensed Consolidated Financial Statements
      (unaudited)
              8Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              23Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              30Item
      T.
              Controls
      and Procedures
              30PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              31Item
      1A.
              Risk
      Factors
              31Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              36Item
      3.
              Defaults
      Upon Senior Securities
              36Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              36Item
      5.
              Other
      Information
              36Item
      6.
              Exhibits
              37Signatures
              38
 
  3
  Factors That May Affect
Future Results
 
 Some of
the information presented in or incorporated by reference in this report
constitutes "forward-looking statements," within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve risks, uncertainties and
assumptions. These statements can be identified by the use of the words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project” and
other words of similar meaning.  In particular, these include
statements relating to intentions, beliefs or current expectations concerning,
among other things, future performance, results of operations, the outcome of
contingencies such as bankruptcy and other legal proceedings, and financial
conditions.  These statements do not relate strictly to historical or
current facts.  These forward-looking statements are based on the
expectations of Congoleum Corporation (the “Company” or “Congoleum”), 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. Any or
all of these statements may turn out to be incorrect.  By their
nature, forward-looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that may or may not occur in the
future.  Any forward-looking statement made in this report speaks only
as of the date of such statement.  It is not possible to predict or
identify all factors that could potentially cause actual results to differ
materially from expected and historical results. Factors that could cause or
contribute to 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 "Risk Factors" and in the Company's other
filings with the Securities and Exchange Commission.
  4
  PART
I.     FINANCIAL INFORMATION
 
 Item
1.       Financial Statements
  CONGOLEUM
CORPORATION
  CONSOLIDATED
BALANCE SHEET
 (In
thousands, except per share amounts)
 
 March
      31,
                2008
              
              
              December
      31,
                2007(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              29,560
              
              
              $
              26,327Restricted
      cash
              
              
              6,557
              
              
              
              6,501Accounts
      receivable, less allowances of  $1,114 and $1,017 as of March
      31, 2008and
      December 31, 2007, respectively
              
              
              17,353
              
              
              
              14,162Inventories
              
              
              40,828
              
              
              
              35,182Prepaid
      expenses and other current assets
              
              
              3,127
              
              
              
              13,138Total
      current assets
              
              
              97,425
              
              
              
              95,310Property,
      plant and equipment, net
              
              
              59,885
              
              
              
              61,993Other
      assets, net
              
              
              15,318
              
              
              
              15,402Total
      assets
              
              $
              172,628
              
              
              $
              172,705LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
              
              $
              11,171
              
              
              $
              10,399Accrued
      liabilities
              
              
              18,212
              
              
              
              20,933Asbestos-related
      liabilities
              
              
              27,688
              
              
              
              31,207Revolving
      credit loan
              
              
              12,672
              
              
              
              10,551Deferred
      income taxes
              
              
              7,725
              
              
              
              7,725Accrued
      taxes
              
              
              1,044
              
              
              
              125Liabilities
      subject to compromise – current
              
              
              4,997
              
              
              
              4,997Total
      current liabilities
              
              
              83,509
              
              
              
              85,937Liabilities
      subject to compromise - long term
              
              
              133,891
              
              
              
              133,224Total
      liabilities
              
              
              217,400
              
              
              
              219,161STOCKHOLDERS’
      EQUITY (DEFICIT)Class
      A common stock, par value $0.01; 20,000,000 shares authorized;
      4,736,950shares
      issued and 3,663,390 shares outstanding as of March 31, 2008
      andDecember
      31, 2007
              
              
              47
              
              
              
              47Class
      B common stock, par value $0.01; 4,608,945 shares authorized, issued
      andoutstanding
      at March 31, 2008 and December 31, 2007
              
              
              46
              
              
              
              46Additional
      paid-in capital
              
              
              49,373
              
              
              
              49,368Retained
      deficit
              
              
              (63,738
              )
              
              
              (65,417
              )Accumulated
      other comprehensive loss
              
              
              (22,687
              )
              
              
              (22,687
              )(36,959
              )
              
              
              (38,643
              )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares at March
      31,2008
      and December 31, 2007
              
              
              7,813
              
              
              
              7,813Total
      stockholders’ equity (deficit)
              
              
              (44,772
              )
              
              
              (46,456
              )Total
      liabilities and stockholders’ equity (deficit)
              
              $
              172,628
              
              
              $
              172,705
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  5
  CONGOLEUM
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
 (In
thousands, except per share amounts)
 (Unaudited)
 
 Three
      Months EndedMarch
      31,2008
              
              
              2007Net
      sales
              
              $
              47,697
              
              
              $
              49,315Cost
      of sales
              
              
              36,824
              
              
              
              37,316Selling,
      general and administrative expenses
              
              
              9,132
              
              
              
              9,451Income
      from operations
              
              
              1,741
              
              
              
              2,548Other
      income (expense):Interest
      income
              
              
              1,128
              
              
              
              124Interest
      expense
              
              
              (197
              )
              
              
              (2,981
              )Other
      expense
              
              
              (64
              )
              
              
              (42
              )Income
      (loss) before income taxes
              
              
              2,608
              
              
              
              (351
              )Provision
      for income taxes
              
              
              929
              
              
              
              --Net
      income (loss)
              
              $
              1,679
              
              
              $
              (351
              )Net
      income (loss) per common shareBasic
      and Diluted
              
              $
              0.20
              
              
              $
              (0.04
              )Weighted
      average number of common shares outstanding:Basic
      and Diluted
              
              
              8,272,335
              
              
              
              8,272,335
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
 
  6
  CONGOLEUM
CORPORATION
 CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
 (Unaudited)
 
 Three
      Months EndedMarch
      31,2008
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              1,679
              
              
              $
              (351
              )Adjustments
      to reconcile net income (loss) to net cash
                provided
      by (used in)Operating
      activities:Depreciation
              
              
              2,576
              
              
              
              2,654Amortization
              
              
              97
              
              
              
              96Stock
      based compensation expense
              
              
              5
              
              
              
              5Changes
      in certain assets and liabilities:Accounts
      and notes receivable
              
              
              (3,191
              )
              
              
              (651
              )Inventories
              
              
              (5,646
              )
              
              
              (532
              )Prepaid
      expenses and other assets
              
              
              843
              
              
              
              461Proceeds
      from legal fee disgorgement
              
              
              9,168
              
              
              
              --Insurance
      recovery (net) for oven replacement
              
              
              --
              
              
              
              1,561Accounts
      payable
              
              
              772
              
              
              
              1,215Accrued
      liabilities
              
              
              (2,678
              )
              
              
              (1,168
              )Asbestos-related
      liabilities
              
              
              (3,575
              )
              
              
              (4,657
              )Other
              
              
              1,586
              
              
              
              (406
              )Net
      cash provided by (used in) operating activities
              
              
              1,637
              
              
              
              (1,773
              )Cash
      flows from investing activities:Capital
      expenditures
              
              
              (468
              )
              
              
              (384
              )Net
      cash (used in) investing activities
              
              
              (468
              )
              
              
              (384
              )Cash
      flows from financing activities:Net
      short-term borrowings
              
              
              2,121
              
              
              
              236Net
      change in restricted cash
              
              
              (56
              )
              
              
              873Net
      cash provided by financing activities
              
              
              2,065
              
              
              
              1,108Net
      increase (decrease) in cash and cash equivalents
              
              
              3,233
              
              
              
              (1,048
              )Cash
      and cash equivalents:Beginning
      of period
              
              
              26,327
              
              
              
              18,591End
      of period
              
              $
              29,560
              
              
              $
              17,543
 
 The
accompanying notes are an integral part of the condensed consolidated financial
statements.
  7
  CONGOLEUM
CORPORATION
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March
31, 2008
 (Unaudited)
 
 
 1.
              Basis
      of Presentation:
 
 The
accompanying unauditedcondensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with 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 and recurring
adjustments) considered necessary for a fair presentation of Congoleum
Corporation’s (the “Company” or “Congoleum”) condensed consolidated financial
position, results of operations and cash flows have been
included.  Operating results for the three month period ended March
31, 2008 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2008.  For further information, refer to
the consolidated financial statements and related footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2007.
 
 Based
upon the nature of the Company’s operations, facilities and management
structure, the Company considers its business to constitute a single segment for
financial reporting purposes.
 
 Certain
amounts appearing in the prior period’s condensed consolidated financial
statements have been reclassified to conform to the current period’s
presentation.
 
 The
financial statements of Congoleum Corporation (the “Company” or “Congoleum”)
have been prepared on a going concern basis, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.  Accordingly, the financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.  As described more fully below, there is substantial
doubt about the Company's ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.
 
 On
December 31, 2003, Congoleum filed a voluntary petition with the United States
Bankruptcy Court for the District of New Jersey (the “Bankruptcy Court”) (Case
No. 03-51524) seeking relief under Chapter 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") as a means to resolve claims asserted against it
related to the use of asbestos in its products decades ago.  During
2003, Congoleum had obtained the requisite votes of asbestos personal injury
claimants necessary to seek approval of a proposed, pre-packaged Chapter 11 plan
of reorganization. In January 2004, the Company filed its proposed plan of
reorganization and disclosure statement with the Bankruptcy Court. In November
2004, Congoleum filed a modified plan of reorganization and related documents
with the Bankruptcy Court (the "Fourth Plan") reflecting the result of further
negotiations with representatives of the Asbestos Claimants’ Committee (the
“ACC”), the Future Claimants’ Representative (the “FCR”) and other asbestos
claimant representatives. The Bankruptcy Court approved the disclosure statement
and plan voting procedures in December 2004 and Congoleum obtained the requisite
votes of asbestos personal injury claimants necessary to seek approval of
the
  8
  Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the “Plan Trust”) to pay asbestos claims against
Congoleum.  In July 2005, Congoleum filed an amended plan of
reorganization (the “Sixth Plan”) and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005.  In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn.  In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof.  In March 2006, Congoleum filed a new
amended plan of reorganization (the “Eighth Plan”).  In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, “CNA”), filed a plan of reorganization and the
Official Committee of Bondholders (the “Bondholders’ Committee”) (representing
holders of the Company’s 8 5/8% Senior Notes due August 1, 2008 (the “Senior
Notes”)) also filed a plan of reorganization.  In May 2006, the
Bankruptcy Court ordered all parties in interest in Congoleum’s reorganization
proceedings to participate in global mediation discussions.  Numerous
mediation sessions took place from June through September
2006.  During  the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with  the ACC, the FCR and the Company’s controlling
shareholder, American Biltrite, Inc. (“ABI”), on certain terms of an amended
plan of reorganization (the “Ninth Plan”), which Congoleum filed and proposed
jointly with the  ACC in August 2006.  CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization.  Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’
Committee reached agreement on the terms of a new amended plan (the “Tenth
Plan”), which Congoleum filed jointly with the ACC in September
2006.  Following the Bondholders’ Committee’s withdrawal of support
for CNA’s plan, CNA filed an amended plan of reorganization (the “CNA
Plan”).  In October 2006, Congoleum and the ACC jointly filed a
revised version of the Tenth Plan (the “Eleventh Plan”) which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement.   After extensive further mediation sessions, on
February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed a plan of reorganization (the “Joint Plan”).  The
Bankruptcy Court approved the disclosure statement for the Joint Plan in
February 2008, and the Joint Plan is being solicited in accordance with
court-approved voting procedures.  Various objections have been filed
to the Joint Plan, and a hearing has been scheduled for May 12, 2008 to hear
oral argument on summary judgment motions relating to certain of those
objections.  A confirmation hearing on the Joint Plan is scheduled for
June 26, 2008.
 
  9
  There can
be no assurance that the Joint Plan or any other plan will receive the
acceptances necessary for confirmation, that the Joint Plan will not be modified
further, that the Joint Plan or any other plan will receive necessary court
approvals from the Bankruptcy Court and the United States District Court for the
District of New Jersey (the "District Court"), or that such approvals will be
received in a timely fashion, that any plan will be confirmed, that any plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.
 
 For more
information regarding the Company’s asbestos liability and plan for resolving
that liability, please refer to Note 6.
 
 American
Institute of Certified Public Accountant Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7")
provides financial reporting guidance for entities that are reorganizing under
the Bankruptcy Code. The Company implemented this guidance in consolidated
financial statements for periods after December 31, 2003.
 
 Pursuant
to SOP 90-7, companies are required to segregate pre-petition liabilities that
are subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company’s liabilities at December 31, 2003
have been reclassified as liabilities subject to compromise. Obligations arising
post-petition, and pre-petition obligations that are secured, are not classified
as liabilities subject to compromise.
 
 Additional
pre-petition claims (liabilities subject to compromise) may arise due to the
rejection of executory contracts or unexpired leases, or as a result of the
allowance of contingent or disputed claims.
 
  10
  2.
              Recent
      Accounting Principles:
 
 Fair Value Measurements
 
 In September 2006, the FASB issued SFAS
No. 157, Fair Value
Measurements. SFAS No. 157 provides a common fair value hierarchy for
companies to follow in determining fair value measurements in the preparation of
financial statements and expands disclosure requirements relating to how such
fair value measurements were developed. SFAS No. 157 clarifies the principle
that fair value should be based on the assumptions that the marketplace would
use when pricing an asset or liability, rather than company-specific data. SFAS
No. 157 is effective for fiscal years beginning after November 15,
2007.  However, on February 12, 2008, the FASB issued Staff Position
157-2 which delays the effective date of SFAS No. 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. For
items within its scope, this Staff Position defers the effective date of SFAS
No. 157 to fiscal years beginning after November 15, 2008. The Company does not
believe that the adoption of SFAS No. 157 for its non-financial assets and
liabilities, effective January 1, 2009, will have a material impact to the
consolidated financial statements.  The Company adopted SFAS No. 157
effective January 1, 2008 for its financial assets and liabilities and this
adoption did not have a material impact to the consolidated financial statements
(See Note 6).
 
 3.
              Inventories:
 
 A summary of the major components of
inventories is as follows (in thousands):
 
 March
      31,
              
              
              December 31,2008
              
              
              2007Finished
      goods
              
              $
              33,460
              
              
              $
              28,445Work-in-process
              
              
              2,168
              
              
              
              1,108Raw
      materials and supplies
              
              
              5,200
              
              
              
              5,629Total
      inventories
              
              $
              40,828
              
              
              $
              35,182
  4.
              Income
      (Loss) Per Share
 
 Basic net
income (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the
period.  Diluted net income per share is calculated by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period, unless their effect is
anti-dilutive.
 
 5.
              Environmental
      and Other Liabilities
 
 The
Company records a liability for environmental remediation claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated.  As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at March 31, 2008 and December 31, 2007, are
not reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.2 million at March 31, 2008 and December
31, 2007, and are reflected in other non-current assets. Receivables for
expected insurance recoveries are recorded if the related carriers are solvent
and paying claims under a reservation of rights or under an obligation pursuant
to coverage in place or a settlement agreement.  Substantially all of
Congoleum’s recorded insurance asset for environmental matters is collectible
from a single carrier.
  11
  The
Company is named, together with a large number (in most cases, hundreds) of
other companies, as a potentially responsible party ("PRP") in pending
proceedings under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and similar state laws.  In
addition, in four other instances, although not named as a PRP, the Company has
received a request for information.  The pending proceedings relate to
eight disposal sites in New Jersey, Pennsylvania, and Maryland in which recovery
from generators of hazardous substances is sought for the cost of cleaning up
the contaminated waste sites.  The Company’s ultimate liability and
funding obligations in connection with those sites depends on many factors,
including the volume of material contributed to the site, the number of other
PRPs and their financial viability, the remediation methods and technology to be
used and the extent to which costs may be recoverable from
insurance.  However, under CERCLA and certain other laws, the Company,
as a PRP, can be held jointly and severally liable for all environmental costs
associated with a site.
 
 The most significant exposure for which
the Company has been named a PRP relates to a recycling facility site in Elkton,
Maryland (the “Galaxy / Spectron Superfund Site”). The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities.  Two removal actions were substantially complete as
of December 31, 1998 and a groundwater treatment system was installed
thereafter.  The Environmental Protection Agency (“EPA”) has selected
a remedy for the soil and shallow groundwater (“Operable Unit 1” or OU-1);
however, the remedial investigation/feasibility study related to the deep
groundwater (OU-2) has not been completed.  The PRP group, of which
the Company is a part, has entered into a Consent Decree to perform the remedy
for OU-1 and resolve natural resource damage claims. The Consent Decree also
requires the PRPs to perform the OU-2 remedy, assuming that the estimated cost
of the remedy is not more than $10 million.  If the estimated cost of
the OU-2 remedy is more than $10 million, the PRPs may decline to perform it or
they may elect to perform anyway. Cost estimates for the OU-1 and OU-2 work
combined (including natural resource damages) range between $22 million and $34
million, with the Company’s share ranging between approximately $1.0 million and
$1.6 million.  This assumes that all parties participate and that none
cash-out and pay a premium; those two factors may account for some fluctuation
in the Company’s share. Fifty percent (50%) of Congoleum’s share of the costs is
presently being paid by one of its insurance carriers, Liberty Mutual Insurance
Company, whose remaining policy limits for this claim are expected to cover
approximately $0.3 million in additional costs.  Congoleum expects to
fund the balance to the extent further insurance coverage is not
available.
 
 The
Company filed a motion before the Bankruptcy Court seeking authorization and
approval of the Consent Decree and related settlement agreements for the Galaxy
/ Spectron Superfund Site, as well authorization for Liberty Mutual Insurance
Company and the Company to make certain payments that have been invoiced to the
Company with respect to the Consent Decree and related settlement
agreements.  An order authorizing and approving the Consent Decree and
related settlement agreements was issued by the Bankruptcy Court in August
2006.
 
 The Company also accrues remediation
costs for certain of the Company’s owned facilities on an undiscounted basis.
The Company has entered into an administrative consent order with the New Jersey
Department of Environmental Protection and has established a remediation trust
fund of $100 thousand as financial assurance for certain remediation funding
obligations.  Estimated total cleanup costs of $1.3 million, including
capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.  Of this amount,
$0.3 million is included in current liabilities subject to compromise and $1.0
million is included in non-current liabilities subject to
compromise.
 
  12
  The Company anticipates that these
matters will be resolved over a period of years and that after application of
expected insurance recoveries, funding the costs will not have a material
adverse impact on the Company’s liquidity or financial position. However,
unfavorable developments in these matters could result in significant expenses
or judgments that could have a material adverse effect on the financial position
of the Company.
 
 6.
              Asbestos
      Liabilities
 
 Claims
Settlement and Chapter 11 Reorganization
 
 On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under Chapter 11 of the Bankruptcy Code
as a means to resolve claims asserted against it related to the use of asbestos
in its products decades ago.  During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum.  In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005.  In September 2005,
Congoleum learned that certain asbestos claimants were unwilling to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan and the Sixth Plan was subsequently withdrawn.  In November 2005,
the Bankruptcy Court denied a request to extend Congoleum’s exclusive right to
file a plan of reorganization and solicit acceptances thereof.  In
March 2006, Congoleum filed the Eighth Plan.  In addition, CNA filed a
plan of reorganization and the Bondholders’ Committee also filed a plan of
reorganization.  In May 2006, the Bankruptcy Court ordered all parties
in interest in Congoleum’s reorganization proceedings to participate in global
mediation discussions.  Numerous mediation sessions took place from
June through September 2006.  During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and
the
  13
  Company’s
controlling shareholder, ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC in August 2006.  CNA
and the Bondholders’ Committee jointly filed a new, competing plan in August
2006 and each withdrew its prior plan of reorganization.  Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders’ Committee reached agreement on the terms of the Tenth Plan, which
Congoleum filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement.   After extensive further mediation sessions, on
February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed the Joint Plan.  The Bankruptcy Court approved the
disclosure statement for the Joint Plan in February 2008, and the Joint Plan is
being solicited in accordance with court-approved voting
procedures.  Various objections have been filed to the Joint Plan, and
a hearing has been scheduled for May 12, 2008 to hear oral argument on summary
judgment motions relating to certain of those objections.  A
confirmation hearing on the Joint Plan is scheduled for June 26,
2008.
  If the
Joint Plan is approved by the Bankruptcy Court and accepted by the requisite
creditor constituencies, it will permit Congoleum to exit Chapter 11 free
of liability for existing or future asbestos claims.  Under the terms
of the Joint Plan, a trust will be
created that will assume the liability for Congoleum’s current and future
asbestos claims.  That trust will receive the proceeds of various
settlements Congoleum has reached with a number of insurance carriers, and will
be assigned Congoleum’s rights under its remaining policies covering asbestos
product liability.  The trust will also receive 50.1% of the newly
issued common stock in reorganized Congoleum when the Joint Plan takes effect
(the “Trust Shares”).
  Holders of Congoleum’s $100 million in
8.625% Senior Notes due in August 2008 will receive on a pro rata basis $80
million in new 9.75% senior secured notes that mature five years from
issuance.  The new senior secured notes will be subordinated to the
working capital facility that provides Congoleum’s financing upon exiting
reorganization.  In addition, holders of the $100 million in 8.625%
Senior Notes due in August 2008 will receive 49.9% of the common stock in
reorganized Congoleum.  Congoleum’s obligations for the $100 million
in 8.625% senior notes due in August 2008, including accrued interest (which
amounted to $3.6 million at December 31, 2007) will be satisfied by the new
senior secured notes and the common stock issued when the Joint Plan takes
effect.
   14
   Under the
terms of the Joint Plan, existing Class A and Class B common shares of Congoleum
will be cancelled when the plan takes effect and holders of those shares will
not receive anything on account of their cancelled shares.
  In
connection with the Joint Plan, Congoleum and certain parties have entered into
an agreement (the “Put/Call Agreement”).  Pursuant to the Put/Call
Agreement, for the first 60 days after the date the Joint Plan is effective (the
“Effective Date”), the Plan Trust may, at its sole option, elect to cause
participating holders of Senior Notes (the “Backstop Participants”) to purchase
all, but not less than all, of the Trust Shares for an aggregate purchase price
equal to $5.25 million. Similarly, for the first 90 days after the Effective
Date, the Backstop Participants will have the right to cause the Plan Trust to
sell all, but not less than all, of the Trust Shares to the Backstop
Participants for an aggregate purchase price equal to $7.5 million.
  There can
be no assurance that the Joint Plan or any other plan will receive the
acceptances necessary for confirmation, that the Joint Plan will not be modified
further, that the Joint Plan or any other plan will receive necessary court
approvals from the Bankruptcy Court and the District Court, or that such
approvals will be received in a timely fashion, that any plan will be confirmed,
that any plan, if confirmed, will become effective, or that there will be
sufficient funds to pay for continued litigation over any plan of
reorganization.  It also is unclear whether any other person might
successfully propose and confirm a plan or what any such plan, when confirmed,
would ultimately provide, and whether the Bankruptcy Court would approve such a
plan.  Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and District Court approvals, and there can be no assurance
that such conditions, approvals and other requirements will be satisfied or
obtained.
 
 In March
2004, the Bankruptcy Court approved the retention of Gilbert, Heintz &
Randolph LLP ("GHR") as special insurance counsel to the Company.  An
insurance company appealed the retention order.  In October 2005, the
United States Court of Appeals for the Third Circuit issued an opinion
disqualifying GHR from serving as counsel to Congoleum. As a result of the
federal appeals court decision on GHR's retention, in February 2006, the
Bankruptcy Court ordered GHR to disgorge all fees and certain expenses it was
paid by Congoleum.  In October 2006, Congoleum and GHR entered into a
settlement agreement (the “GHR Settlement”) under which GHR agreed to pay
Congoleum approximately $9.2 million plus accruing interest in full satisfaction
of the disgorgement order.  The obligation was secured by assets of
GHR and was to be made over time according to a formula based on GHR’s
earnings.  The Bankruptcy Court approved the GHR Settlement in April
2007. Congoleum received $9.2 million plus $1.0 million of accrued interest in
full satisfaction of the GHR Settlement in March 2008.
 
 In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491
million.  Participants in the Claimant Agreement signed releases
limiting their recourse against Congoleum to what they would receive from the
Plan Trust and Congoleum has therefore estimated its liability under the
Claimant Agreement as the cost of effecting the settlement through confirmation
of a plan of reorganization.  In addition, as a result of tabulating
ballots on the Fourth Plan, the Company is also aware of claims by claimants
whose claims were not determined under the Claimant Agreement but who have
submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.  It is also likely
that additional new claims will be asserted in connection with solicitation of
acceptances of the Joint Plan.  Congoleum does not believe it can
reasonably estimate the liability associated with claims that may be
pending.
 
  15
  During
the first three months of 2008, the Company paid $3.6 million in fees and
expenses related to implementation of its planned reorganization under Chapter
11 of the Bankruptcy Code and the Coverage Action (as herein-after defined)
litigation with certain insurance companies.  Based on the Joint Plan,
Congoleum has made provision in its financial statements for the minimum
estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in years
prior to 2007.  Based on the terms of the Joint Plan, in the fourth
quarter of 2007 Congoleum recorded an additional $41.3 million
charge.  Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that will not be collected under
the terms of the Joint Plan and $26.4 million was an additional provision for
estimated costs for the reorganization proceedings and the Coverage
Action.  In the fourth quarter of 2007 Congoleum also recorded a $41.0
million interest expense credit to reverse post-petition interest accrued on its
Senior Notes.  Terms of previous reorganization plans had provided,
among other things, for the payment of post-petition interest on the Senior
Notes and therefore Congoleum had continued to accrue such
interest.  Under the terms of the Joint Plan, the Senior Note holders
will not receive any post-petition interest.
 
 There
were no asbestos related property damage claims asserted against the Company at
the time of its bankruptcy filing.  The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company’s bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand.  It is
anticipated that any plan of reorganization will provide for payment of those
claims in full from certain insurance proceeds.
 
 Status
of Insurance Coverage
 
 During the period that Congoleum
produced asbestos-containing products, the Company purchased primary and excess
insurance policies providing in excess of $1 billion of coverage for general and
product liability claims. These policies did not contain asbestos exclusions.
Through August 2002, substantially all asbestos-related claims and defense costs
were paid through primary insurance coverage. In August 2002, the Company
received notice that its primary insurance limits had been paid in full. The
payment of limits in full by one of the primary insurance companies was based on
its contention that limits in successive policies were not cumulative for
asbestos claims and that Congoleum was limited to only one policy limit for
multiple years of coverage. Certain excess insurance carriers claimed that the
non-cumulation provisions of the primary policies were not binding on them and
that there remained an additional $13.0 million in primary insurance limits plus
related defense costs before their policies were implicated. There is insurance
coverage litigation currently pending in the New Jersey State Court between
Congoleum and its excess insurance carriers, and the guaranty funds and
associations for the State of New Jersey.  The litigation was
initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”).  In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in the Congoleum
primary policies (the "Spaulding Case") that the non-cumulation provisions are
invalid
  16
  under New
Jersey law and that the primary policies provide coverage for the full amount of
their annual limits for all successive policies.  Congoleum has
reached a settlement agreement (the “Liberty Settlement”) with the insurance
carrier whose policies contained the non-cumulation provisions, pursuant to
which the insurance carrier will pay Congoleum $15.4 million in full
satisfaction of the applicable policy limits, of which $14.5 million has been
paid to date.  Pursuant to the terms of the Security Agreement, the
Company is obligated to pay any insurance proceeds it receives under the Liberty
Settlement, net of any fees and expenses it may be entitled to deduct, to the
Collateral Trust or Plan Trust.  Payment of such fees and expenses are
subject to Bankruptcy Court order or approval.  As of December 31,
2002, the Company had already entered into settlement agreements with asbestos
claimants exceeding the amount of this previously disputed primary
coverage.  Based on these settlements, the Company contended that,
even allowing for annual limits of all primary policies, primary coverage was
exhausted and the excess policies triggered. The excess carriers have objected
to the reasonableness of several of these settlements,  and Congoleum
believes that they will continue to dispute the reasonableness of the
settlements and contend that their policies still are not implicated and will
dispute their coverage for that and other various reasons in ongoing coverage
litigation.
 
 The excess insurance carriers have
objected to the global settlement of the asbestos claims currently pending
against Congoleum as contemplated by the Claimant Agreement on the grounds that,
among other things, the negotiations leading to the settlement and the Claimant
Agreement violate provisions in their insurance policies, including but not
limited to the carriers' right to associate in the defense of the asbestos
cases, the duty of Congoleum to cooperate with the carriers and the right of the
carriers to consent to any settlement.  The excess insurance carriers
also contend the settlement terms in the Claimant Agreement are not fair or
reasonable and/or that the Claimant Agreement was not negotiated at arm’s length
or in good faith.  Additionally, certain insurers have argued that
Congoleum’s entering into the Claimant Agreement voids the insurance for the
underlying claims in their entirety.  Certain insurers also have
claimed that the Claimant Agreement voids their entire policy obligations.
Congoleum has disputed the allegations and contentions of the excess insurance
carriers. In November 2003, the State Court denied a motion for summary judgment
by the excess insurance carriers that the Claimant Agreement was not fair,
reasonable or in good faith, ruling that material facts concerning these issues
were in dispute.  In April 2004, the State Court denied motions for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent.  Congoleum has argued, among
other things, that it was entitled to enter into the Claimant Agreement and/or
the Claimant Agreement was binding on the excess insurance carriers because they
were in breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and / or the
Claimant Agreement was fair, reasonable and in good faith and/or there was and
is no prejudice to the excess insurance carriers from the Claimant Agreement
and/or the excess insurance carriers had breached their duties of good faith and
fair dealing.
 
 In August
2004, the State Court entered a case management order that divided the Coverage
Action trial into three phases.  A new judge was assigned to the case
in February 2005 and the schedule was modified as a result.
 
  17
  In
February 2005, the State Court ruled on a series of summary judgment motions
filed by various insurers.  The State Court denied a motion for
summary judgment filed by certain insurers, holding that there were disputed
issues of fact regarding whether the Claimant Agreement and other settlement
agreements between Congoleum and the claimants had released Congoleum and the
insurers from any liability for the asbestos bodily injury claims of the
claimants who signed the Claimant Agreement and the other settlement
agreements.
 
 The State
Court also denied another motion for summary judgment filed by various insurers
who argued that they did not have to cover the liability arising from the
Claimant Agreement because they had not consented to it.
 
 The State
Court granted summary judgment regarding Congoleum’s bad faith claims against
excess insurers (other than first-layer excess insurers), holding that the
refusal of these excess insurers to cover the Claimant Agreement was at least
fairly debatable and therefore not in bad faith.
 
 In March
2005, the Company filed a motion in the Bankruptcy Court asking the Bankruptcy
Court to vacate its prior order lifting the automatic stay in bankruptcy to
permit the Coverage Action to proceed.  The Company requested that the
Coverage Action proceedings be stayed until the Company has completed its plan
confirmation process in the Bankruptcy Court.  A hearing on the
Company’s motion was held in April 2005 and the motion was denied.
 
 The first phase of the Coverage Action
trial began in August 2005.  Phase 1 was limited to deciding whether
the insurers are obligated to provide coverage under the policies at issue in
this litigation for the asbestos claims settled under the terms of the global
Claimant Agreement.  Three months into the trial, in October 2005, a
federal appeals court ruled that GHR, which had been acting as the Company’s
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum.  As a result of
this ruling, with Bankruptcy Court approval, Congoleum retained the firm of
Covington & Burling to represent it as co-counsel with Dughi & Hewit in
the insurance coverage litigation and insurance settlement matters previously
handled by GHR.
 
 In the middle of Congoleum presenting
its case, in or about mid-November 2005 and early December 2005, certain
insurers filed motions for summary judgment on the grounds, inter alia, that the federal
appeals court decision regarding GHR and / or Congoleum’s filing of an Omnibus
Avoidance Action and a Sealed Avoidance Action (collectively, the "Avoidance
Actions") in the Bankruptcy Court, entitled them to judgment as a matter of law
on the Phase 1 issues.  Congoleum opposed the motions.  The
motions were argued in January 2006, and in March 2006 the State Court denied
the motions for summary judgment.  (The Avoidance Actions seek to void
the security interest granted to the Collateral Trust and the pre-petition
settlement.)
 
 Congoleum completed the presentation of
its case in April 2006.  Certain insurers moved for a directed verdict
in their favor during the first week of May 2006. Hearings of arguments on the
directed verdict motion took place in June 2006.  In July 2006 the
State Court denied the motion for a directed verdict.  The trial
resumed in September 2006.  Defendant insurers presented their case,
for the most part, through documents and deposition
designations.  Post-trial briefs were submitted by the parties in
November 2006.
 
  18
  In May 2007, the State Court issued a
decision ruling that Congoleum’s insurers have no coverage obligations under New
Jersey law for the Claimant Agreement.  In that ruling, the State
Court judge also cited trial testimony in his opinion that the releases (given
by claimants who signed the Claimant Agreement) were non-recourse to Congoleum
whether or not any claimant recovered insurance proceeds.  Based in
part upon that finding, Congoleum filed an objection (the “Omnibus Objection”)
in the Bankruptcy Court in June  2007 requesting that all
asbestos-related personal injury claims settled and / or liquidated (the
"Settled Claims") pursuant to either a pre-petition settlement agreement or the
Claimant Agreement be disallowed and expunged.  The Omnibus Objection
also requested in the event the Bankruptcy Court found that the holders of
Settled Claims retained viable tort claims with recourse against Congoleum, that
the Bankruptcy Court rescind the pre-petition settlement agreements and the
Claimant Agreement and the claims settled thereunder be disallowed and expunged
because, since the filing of Congoleum’s bankruptcy case, supervening events
have resulted in a substantial frustration of the purpose of those agreements.
The Bankruptcy Court heard arguments on the Omnibus Objection in July 2007 and
ruled that the Omnibus Objection should be heard in the context of an adversary
proceeding (a formal lawsuit) in order to insure that the Bankruptcy Court has
jurisdiction over all the affected claimants and that their due process rights
are otherwise protected.  The Company amended the Omnibus Avoidance
Action to seek the same relief requested in the Omnibus Objection.
 
 In
September 2007, Congoleum filed the Third Amended Complaint in the Omnibus
Avoidance Action adding new counts that encompass the subject matter and relief
requested in the Omnibus Objection. The Third Amended Complaint remains
pending.  In October 2007, Congoleum filed a motion for summary
judgment in the Omnibus Avoidance Action seeking a ruling that all of the
pre-petition settlement agreements, including the Claimant Agreement, were null
and void or should be rescinded.  Argument on the summary judgment
motion was heard in November 2007 and by opinion dated December 28, 2007, the
Bankruptcy Court denied the motion for summary judgment.  Congoleum
and the Bondholders' Committee have filed notice of appeal from this decision to
the District Court.
 
 The
second phase of the Coverage Action trial will address all coverage issues,
including but not limited to whether certain other trial listed settlements were
fair, reasonable and negotiated in good faith and covered by insurance as well
as trigger and allocation of asbestos losses to insurance
policies.  In February 2008, the State Court expanded the scope of
Phase 2 of the Coverage Action trial to include obligations of insurers with
respect to the settlement agreement in the Joint Plan with respect to the
Avoidance Actions. The State Court has entered a new case management order
scheduling further discovery. Congoleum sought to stay Phase 2 of the
Coverage Action trial because of the pendency of the solicitation and balloting
and scheduled confirmation hearing on the Joint Plan, but the Bankruptcy Court
denied the stay motion, which decision is being appealed to the District
Court.
 
 The third and final phase of the
Coverage Action trial will address bad faith punitive damages, if
appropriate.
 
  19
  Amounts
Recorded in Financial Statements
 
 The table below provides an analysis of
changes in the Company’s asbestos reserves and insurance receivables from
December 31, 2007 to March 31, 2008:
 
 (In
      thousands)
              
              Balance
      at
                12/31/2007
              
              
              Additions
                (Deletions)
              
              
              Spending
      Against
                Reserve
              
              
              Recoveries
              
              
              Balance
      at
                3/31/2008ReservesCurrent
              
              $
              24,744
              
              
              $
              --
              
              
              $
              (3,575
              )
              
              $
              --
              
              
              $
              21,169ReceivablesCurrent
              
              
              (10,490
              )
              
              
              --
              
              
              
              
              
              
              
              9,168
              
              
              
              (1,322
              )Net Asbestos
      Liability
              
              $
              14,254
              
              
              $
              --
              
              
              $
              (3,575
              )
              
              $
              9,168
              
              
              $
              19,847Restricted
      CashInsurance
      Proceeds
              
              $
              6,463
              
              
              $
              56
              
              
              $
              --
              
              
              $
              --
              
              
              $
              6,519
 
 The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2006 to March 31, 2007:
 
 (In
      thousands)
                  
                  Balance
      at
                    12/31/2006
                  
                  
                  Additions
                    (Deletions)
                  
                  
                  Spending
                    Against
                    Reserve
                  
                  
                  Recoveries
                    From
                    Insurance
                  
                  
                  Balance
      at
                    3/31/2007ReservesCurrent
                  
                  $
                  7,800
                  
                  
                  $
                  --
                  
                  
                  $
                  (3,654
                  )
                  
                  $
                  --
                  
                  
                  $
                  4,146ReceivablesCurrent
                  
                  
                  (21,813
                  )
                  
                  
                  --
                  
                  
                  $
                  (1,003
                  )
                  
                  
                  
                  
                  
                  
                  (22,816
                  )Net
      Asbestos Liability (Asset)
                  
                  $
                  (14,013
                  )
                  
                  $
                  --
                  
                  
                  $
                  (4,657
                  )
                  
                  $
                  --
                  
                  
                  $
                  (18,670
                  )Restricted
      CashInsurance
      Proceeds
                  
                  $
                  6,149
                  
                  
                  $
                  77
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  6,226
 
  20
  7.
              Product
      Warranties
 
 The Company provides product warranties
for specific product lines and accrues for estimated future warranty cost in the
period in which the revenue is recognized.  The following table sets
forth activity in the Company’s warranty reserves (in thousands):
 
 Three
      months Ended
                March
      31,2008
              
              
              2007Beginning
      balance
              
              $
              1,806
              
              
              $
              1,953Accruals
              
              
              817
              
              
              
              660Charges
              
              
              (862
              )
              
              
              (767
              )Ending
      balance
              
              $
              1,761
              
              
              $
              1,846
 
 8.
              Liabilities
      Subject to Compromise
 
 As a result of the Company’s Chapter 11
filing (see Notes 1 and 6), pursuant to SOP 90-7, the Company is required to
segregate pre-petition liabilities that are subject to compromise and report
them separately on the consolidated balance sheet.  Liabilities that
may be affected by a plan of reorganization are recorded at the amount of the
expected allowed claims, even if they may be settled for lesser
amounts.  Substantially all of the Company’s pre-petition debt is
recorded at face value and is classified within liabilities subject to
compromise.  Prior to the fourth quarter of 2007, the Company’s
accrued interest expense on its Senior Notes was also recorded in liabilities
subject to compromise.  In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Joint Plan, the
Senior Note holders will not receive any post-petition interest.
 
 Liabilities
subject to compromise are as follows (in thousands):
 
 March 31,
              
              
              December
      31,2008
              
              
              2007CurrentPre-petition
      other payables and accrued interest
              
              $
              4,997
              
              
              $
              4,997Non-currentDebt
      (at face value)
              
              
              100,000
              
              
              
              100,000Pension
      liability
              
              
              11,527
              
              
              
              10,772Other
      post-retirement benefit obligation
              
              
              9,449
              
              
              
              9,337Pre-petition
      other liabilities
              
              
              12,915
              
              
              
              13,115Total
      liabilities subject to compromise
              
              $
              138,888
              
              
              $
              138,221
 
  21
  Additional pre-petition claims
(liabilities subject to compromise) may arise due to the rejection of executory
contracts or unexpired leases, or as a result of the allowance of contingent or
disputed claims.
 
 9.         Accrued
Liabilities
 
 A summary
of the significant components of accrued liabilities consists of the following
(in thousands):
 
 March
      31,
              
              
              December
      31,2008
              
              
              2007Accrued
      warranty, marketing and sales promotion
              
              $
              12,326
              
              
              $
              16,637Employee
      compensation and related benefits
              
              
              3,978
              
              
              
              3,584Other
              
              
              1,908
              
              
              
              712Total
      accrued liabilities
              
              $
              18,212
              
              
              $
              20,933
 
 As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of March
31, 2008 and December 31, 2007 (see Note 8).
 
 10.
              Pensions
      and Other Postretirement Plans
 
 The
Company sponsors several non-contributory defined benefit pension plans covering
most of the Company’s employees.  Benefits under the plans are based
on years of service and employee compensation.  Amounts funded
annually by the Company are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations.  The Company also maintains health and life
insurance programs for retirees (reflected in the table below in “Other
Benefits”).
 
 The
following summarizes the components of the net periodic benefit cost for the
Pension and Other Benefit Plans for the three months ended March 31, 2008 and
2007 (in thousands):
 
 Three Months
      Ended
              
              
              Three Months
      EndedMarch 31,
      2008
              
              
              March 31,
    2007Other
              
              
              
              
              
              OtherPension
              
              
              Benefits
              
              
              Pension
              
              
              BenefitsComponents of Net Periodic Benefit
      Cost:Service
      cost
              
              $
              381
              
              
              $
              56
              
              
              $
              366
              
              
              $
              53Interest
      cost
              
              
              1,207
              
              
              
              144
              
              
              
              1,206
              
              
              
              142Expected
      return on plan assets
              
              
              (1,198
              )
              
              
              --
              
              
              
              (1,146
              )
              
              
              --Recognized
      net actuarial loss
              
              
              410
              
              
              
              15
              
              
              
              349
              
              
              
              18Amortization
      of transition obligation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Amortization
      of prior service cost
              
              
              6
              
              
              
              --
              
              
              
              11
              
              
              
              3Net periodic benefit
      cost
              
              $
              805
              
              
              $
              215
              
              
              $
              786
              
              
              $
              216
 
  22
  The weighted average assumptions used to
determine net periodic benefit cost were as follows:
 
 March 31,
    2008
              
              March 31, 2007Other
              
              
              
              OtherPension
              
              Benefits
              
              Pension
              
              BenefitsDiscount
      rate
              6.00%
              
              6.00%
              
              6.00%
              
              6.00%Expected
      long-term return on plan  assets
              7.00%
              
              --
              
              7.00%
              
              --Rate of
      compensation increase
              5.00%
              
              --
              
              5.00%
              
              --
 
 Item
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The following discussion should be read
in conjunction with the Unaudited Condensed Consolidated Financial Statements
and notes thereto contained in Item 1 of Part I of this Quarterly Report on Form
10-Q.
 
 Results
of Operations
 
 The Company’s business is cyclical and
is affected by the same economic factors that affect the remodeling and housing
industries in general, including the availability of credit, consumer
confidence, changes in interest rates, market demand and general economic
conditions.
 
 In addition to external economic
factors, the Company’s results are sensitive to sales and manufacturing volume,
competitors’ pricing, consumer preferences for flooring products, raw material
costs and the mix of products sold.  The manufacturing process is
capital intensive and requires substantial investment in facilities and
equipment.  The cost of operating these facilities generally does not
vary in direct proportion to production volume and, consequently, operating
results fluctuate disproportionately with changes in sales volume.
 
 On December 31, 2003, Congoleum filed a
voluntary petition with the Bankruptcy Court (Case No. 03-51524) seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted
against it related to the use of asbestos in its products decades
ago.  During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum.  In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations,
as
  23
  well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005.  In September 2005,
Congoleum learned that certain asbestos claimants were unwilling to agree to
forbear from exercising their security interest as contemplated by the Sixth
Plan and the Sixth Plan was subsequently withdrawn.  In November 2005,
the Bankruptcy Court denied a request to extend Congoleum’s exclusive right to
file a plan of reorganization and solicit acceptances thereof.  In
March 2006, Congoleum filed the Eighth Plan.  In addition, CNA filed a
plan of reorganization and the Bondholders’ Committee also filed a plan of
reorganization.  In May 2006, the Bankruptcy Court ordered all parties
in interest in Congoleum’s reorganization proceedings to participate in global
mediation discussions.  Numerous mediation sessions took place from
June through September 2006.  During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and the Company’s
controlling shareholder, ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC in August 2006.  CNA
and the Bondholders’ Committee jointly filed a new, competing plan in August
2006 and each withdrew its prior plan of reorganization.  Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders’ Committee reached agreement on the terms of the Tenth Plan, which
Congoleum filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure statement.
After extensive further mediation sessions, on February 5, 2008, the FCR, the
ACC, the Bondholders’ Committee and Congoleum jointly filed the Joint
Plan.  The Bankruptcy Court approved the disclosure statement for the
Joint Plan in February 2008, and the Joint Plan is being solicited in accordance
with court-approved voting procedures.  Various objections have been
filed to the Joint Plan, and a hearing has been scheduled for May 12, 2008
to hear oral argument on summary judgment motions relating to certain of those
objections.  A confirmation hearing on the Joint Plan is scheduled for
June 26, 2008.
 
 There can
be no assurance that the Joint Plan or any other plan will receive the
acceptances necessary for confirmation, that the Joint Plan will not be modified
further, that the Joint Plan or any other plan will receive necessary court
approvals from the Bankruptcy Court and the District Court, or that such
approvals will be received in a timely fashion, that any plan will be confirmed,
that any plan, if confirmed, will become effective, or that there will be
sufficient funds to pay for continued litigation over any plan of
reorganization.  It also is unclear whether any other person might
successfully propose and confirm a plan or what any such plan, when confirmed,
would ultimately provide, and whether the Bankruptcy Court would approve such a
plan.  Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and District Court approvals, and there can be no assurance
that such conditions, approvals and other requirements will be satisfied or
obtained.
 
  24
  Congoleum is presently involved in
litigation with certain insurance carriers related to disputed insurance
coverage for asbestos related liabilities, and certain insurance carriers, as
noted above, have filed various objections to the Joint Plan and are expected to
file objections to any future plan.  Certain other parties have also
filed various objections to the Joint Plan and may file objections to any future
plan.
 
 In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million.  As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum’s rights under its applicable insurance coverage and
payments from Congoleum’s insurers for asbestos claims.  In December
2005, Congoleum commenced the Avoidance Actions seeking to void the security
interest granted to the Collateral Trust and such pre-petition
settlements.  Following summary judgment hearings, the Bankruptcy
Court has rendered decisions that the grant of the security interest was not
valid but denying motions to avoid the settlements; certain of these decisions
are under appeal.  The terms of the Joint Plan provide for a
settlement of litigation related to the Avoidance Actions.  However,
at this time, it is not possible to estimate how that settlement may affect the
nominal liability.  In addition, as a result of tabulating ballots on
the Fourth Plan, the Company is also aware of claims by claimants whose claims
were not determined under the Claimant Agreement but who have submitted claims
with a value of approximately $512 million based on the settlement values
applicable in the Sixth Plan.  It is also likely that additional new
claims will be asserted in connection with solicitation of acceptances of the
Joint Plan.  Congoleum does not believe it can reasonably estimate the
liability associated with claims that may be pending.
 
 During
the first three months of 2008, Congoleum paid $3.6 million in fees and expenses
related to implementation of its planned reorganization under Chapter 11 of the
Bankruptcy Code and the Coverage Action. Based on the Joint Plan, Congoleum has
made provision in its financial statements for the minimum estimated cost to
effect its plan to settle asbestos liabilities through confirmation of a plan
that complies with section 524(g) of the Bankruptcy Code. Congoleum recorded
charges aggregating approximately $51.3 million in years prior to
2007.  Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge.  Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that will not be collected under the terms of the Joint Plan
and $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and the Coverage Action.  In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes.  Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest.  Under the terms of the Joint
Plan, the Senior Note holders will not receive any post-petition
interest.
 
 Costs for
pursuing and implementing the Joint Plan or any plan of reorganization could be
materially higher than currently recorded or previously
estimated.  Delays in proposing, filing or obtaining approval of the
Joint Plan, or the proposal or solicitation of additional plans by other parties
could result in a proceeding that takes longer and is more costly than the
Company has previously estimated.  The Company may experience and
therefore record significant additional charges in connection with its
reorganization proceedings.
 
  25
  For more
information regarding the Company’s asbestos liability and plan for resolving
that liability, please refer to Notes 1 and 17 of the Notes to Consolidated
Financial Statements contained in Item 8 of the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2007 filed with the Securities and
Exchange Commission.  In addition, please refer to “Risk Factors – The
Company has significant asbestos liability and funding exposure," contained in
Part II, Item 1A, of this Quarterly Report on Form 10-Q,  for a
discussion of certain factors that could cause actual results to differ from the
Company’s goals for resolving its asbestos liability through a plan of
reorganization.  Readers should also refer to the Disclosure Statement
with respect to the Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code of the Futures Representative, the Debtors, the Official
Asbestos Claimants’ Committee and the Official Committee of Bondholders for
Congoleum Corporation, et al., dated as of February 5, 2008, a copy of which has
been filed as an exhibit to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 filed with the Securities and Exchange
Commission.
 
 Three Months
                Ended
                March 31,
    2008
              
              
              
              
              
              Three Months
                Ended
                March 31,
    2007(In
      thousands of dollars)Net
      sales
              
              $
              47,697
              
              
              
              
              
              $
              49,315Cost
      of sales
              
              
              36,824
              
              
              
              
              
              
              37,316Gross
      profit
              
              
              10,873
              
              
              22.8
              %
              
              
              11,999
              
              
              24.3
              %Selling,
      general & administrative expenses
              
              
              9,132
              
              
              19.1
              %
              
              
              9,451
              
              
              19.2
              %Operating  income
              
              
              1,741
              
              
              
              
              
              
              2,548Interest
      income (expense), net
              
              
              931
              
              
              
              
              
              
              (2,857
              )Other
      (expense) income, net
              
              
              (64
              )
              
              
              
              
              
              42Income
      (loss) before taxes
              
              
              2,608
              
              
              
              
              
              
              (351
              )Provision
      for income taxes
              
              
              929
              
              
              
              
              
              
              --Net
      income (loss)
              
              $
              1,679
              
              
              
              
              
              $
              (351
              )
 
 Net sales
for the three months ended March 31, 2008 totaled $47.7 million as compared to
$49.3 million for the three months ended March 31, 2007, down $1.6 million or
3.3%. The decrease is primarily attributable to weakness in the new housing
market coupled with continued softness in the general retail environment for
flooring products. This was partially offset by increased selling prices
instituted in the second quarter of last year and the continued growth of sales
of the Duraproduct line.
 
 Gross
profit for the three months ended March 31, 2008 totaled $10.9 million, or 22.8%
of net sales, compared to $12.0 million or 24.3% of net sales for the three
months ended March 31, 2007. Gross profit dollars decreased from year earlier
levels because of lower sales and the decline in gross profit as a percentage of
sales resulted from increased raw material costs and the impact of lower
production volumes over which to spread fixed manufacturing costs, partially
offset by the price increases and lower plant costs reflecting improved
efficiencies and cost reduction programs implemented.
 
  26
  Selling,
general and administrative expenses were $9.1 million for the three months ended
March 31, 2008 compared to $9.5 million for the three months ended March 31,
2007.  Lower merchandising and sales support costs ($0.1 million)
coupled with lower compensation and related benefit costs ($0.2 million) were
the primary drivers for the decrease in expenses.  As a percent of net
sales, selling, general and administrative costs were 19.1% for the three months
ended March 31, 2008 compared to 19.2% for the same period last
year.
 
 Income from operations was $1.7 million
for the three months ended March 31, 2008 compared to $2.5 million for the three
months ended March 31, 2007, reflecting the lower sales and gross margin,
partially offset by reduced selling, general and administrative
expenses.
 
 Interest income (expense), net was $931
thousand income for the three months ended March 31, 2008 compared with $2.9
million expense for the same period one year earlier.  Interest
expense for the three months ended March 31, 2007 included $3.0 million of
interest expense on Congoleum’s 8 5/8% Senior Notes.  Based on the
terms of the Joint Plan, accrued interest on the Senior Notes was reversed in
the fourth quarter of 2007 and was not accrued in the first quarter of
2008.  In addition, interest income (expense), net for the three
months ended March 31, 2008 includes $1.0 million in interest income received as
part of a disgorgement fee settlement for legal expenses.
 
 The
provision for income taxes was $0.9 million for the quarter ending March 31,
2008, and $0.0 as of March 31, 2007.  The full year effective tax rate
is expected to approximate the statutory rate of 34%.
 
 Liquidity
and Capital Resources
 
 The
Unaudited Condensed Consolidated Financial Statements of the Company have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  Accordingly, the Unaudited Condensed Consolidated Financial
Statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.  As described more
fully in the Notes to Unaudited Condensed Consolidated Financial Statements
contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, there is
substantial doubt about the Company's ability to continue as a going concern
unless it obtains relief from its substantial asbestos liabilities through a
successful reorganization under Chapter 11 of the Bankruptcy Code.
 
 On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy
Code.  See Notes 1 and 6 of the Notes to Unaudited Condensed
Consolidated Financial Statements, contained in Part I, Item 1 of this Quarterly
Report on Form 10-Q, for a discussion of the Company’s bankruptcy proceedings.
These matters continue to have a material adverse impact on liquidity and
capital resources.  During the first three months of 2008, the Company
paid $3.6 million in fees and expenses related to reorganization proceedings
under Chapter 11 and litigation with certain insurance
companies.  Furthermore at March 31, 2008 the Company had incurred but
not paid approximately $10.0 million in additional fees and expenses for
services rendered through that date.
 
  27
  Based on
the Joint Plan, Congoleum has made provision in its financial statements for the
minimum estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in years
prior to 2007.  Based on the terms of the Joint Plan, in the fourth
quarter of 2007 Congoleum recorded an additional $41.3 million
charge.  Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that will not be collected under
the terms of the Joint Plan and $26.4 million was an additional provision for
estimated costs for the reorganization proceedings and the Coverage
Action.  In the fourth quarter of 2007 Congoleum also recorded a $41.0
million interest expense credit to reverse post-petition interest accrued on its
Senior Notes.  Terms of previous reorganization plans had provided,
among other things, for the payment of post-petition interest on the Senior
Notes and therefore Congoleum had continued to accrue such
interest.  Under the terms of the Joint Plan, the Senior Note holders
will not receive any post-petition interest.
 
 In
February 2006, the Bankruptcy Court ordered GHR to disgorge all fees and certain
expenses it was paid by Congoleum.  In October 2006, Congoleum and GHR
entered into the GHR Settlement under which GHR was to pay Congoleum
approximately $9.2 million plus accruing interest in full satisfaction of the
disgorgement order.  The obligation was secured by assets of GHR and
was to be made over time according to a formula based on GHR’s
earnings.  The Bankruptcy Court approved the GHR Settlement in April
2007.  Congoleum received $9.2 plus $1.0 million of accrued interest
in full satisfaction of the GHR Settlement in March 2008.
 
 Unrestricted cash and cash equivalents,
including short-term investments at March 31, 2008, were $29.6 million, an
increase of $3.2 million from December 31, 2007.  Under the terms of
its revolving credit agreement, payments on the Company’s accounts receivable
are deposited in an account assigned by the Company to its lender and the funds
in that account are used by the lender to pay down any loan
balance.  There were no funds deposited in this account at March 31,
2008 and December 31, 2007.  Additionally, $6.6 million remaining from
a $14.5 million settlement received in August 2004 from an insurance carrier,
which is subject to a court order, is included as restricted cash at March 31,
2008.  The Company expects to contribute these funds, less any amounts
withheld pursuant to reimbursement arrangements, to the Plan
Trust.  Working capital was $13.9 million at March 31, 2008, up from
$9.4 million at December 31, 2007.  The ratio of current assets to
current liabilities was 1.2 to 1.0 at March 31, 2008 and 1.1 to 1.0 at December
31, 2007, respectively.  Net cash provided by operations during the
three months ended March 31, 2008 was $1.6 million, as compared to net cash used
in operations of $1.8 million during the three months ended March 31, 2007. The
GHR settlement of $9.2 million offset cash used in operations of $7.5 million
for the three months ended March 2008.
 
 Capital expenditures for the three
months ended March 31, 2008 totaled $0.5 million.  The Company is
currently planning capital expenditures of approximately $6.5 million in 2008
and between $5.0 million and $7.0 million in 2009, primarily for maintenance and
improvement of plants and equipment, which it expects to fund with cash from
operations and credit facilities.
 
  28
  In January 2004, the Bankruptcy Court
authorized entry of a final order approving Congoleum’s debtor-in-possession
financing, which replaced its pre-petition credit facility on substantially
similar terms. The debtor-in-possession financing agreement (as amended and
approved by the Bankruptcy Court to date) provides a revolving credit facility
expiring on the earlier of (i) June 30, 2008 and (ii) the date the plan of
reorganization in Congoleum's bankruptcy cases as confirmed by the Bankruptcy
Court becomes effective.  Total borrowing under the facility may not
exceed $30.0 million. Interest is based on 0.25% above the prime
rate.  This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization (“EBITDA”).  It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
the Company to borrow from the facility. The Company was in compliance with
these covenants at March 31, 2008. Borrowings under this facility are
collateralized by inventory and receivables.  At March 31, 2008, based
on the level of receivables and inventory, $27.0 million was available under the
facility, of which $2.2 million was utilized for outstanding letters of credit
and $12.6 million was utilized by the revolving loan.  The Company
anticipates that its debtor-in-possession financing facility (including
anticipated extensions thereof) together with cash from operations will provide
it with sufficient liquidity to operate during 2008 while under Chapter 11
protection.  There can be no assurances that the Company will continue to
be in compliance with the required covenants under this facility or that the
debtor-in-possession facility (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time.
 For a plan of reorganization to be confirmed, the Company will need to
obtain and demonstrate the sufficiency of exit financing.  The Company
cannot presently determine the terms of such financing, nor can there be any
assurances of its success obtaining it.
 
 In addition to the provision for
asbestos litigation discussed previously, the Company has also recorded what it
believes are adequate provisions for environmental remediation and
product-related liabilities (other than asbestos-related claims), including
provisions for testing for potential remediation of conditions at its own
facilities. The Company is subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company.  Among these claims, the
Company is a named party in several actions associated with waste disposal sites
(more fully discussed in Note 5 of the Notes to Unaudited Condensed Consolidated
Financial Statements contained in Part I, Item 1 of this Quarterly Report on
Form 10-Q).  These actions include possible obligations to remove or
mitigate the effects on the environment of wastes deposited at various sites,
including Superfund sites and certain of the Company’s owned and previously
owned facilities.  The contingencies also include claims for personal
injury and/or property damage.  The exact amount of such future cost
and timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of the Company’s liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance.  The Company has recorded provisions in
its financial statements for the estimated probable loss associated with all
known general and environmental contingencies. While the Company believes its
estimate of the future amount of these liabilities is reasonable, and that they
will be paid over a period of five to ten years, the timing and amount of such
payments may differ significantly from 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 reasonably have such an
effect.  There can be no assurances that the costs of any future
government regulations could be passed along to its
customers.  Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.
 
  29
  The outcome of these environmental
matters could result in significant expenses incurred by or judgments assessed
against the Company.
 
 The Company's principal sources of
capital are net cash provided by operating activities and borrowings under its
financing agreement. The Company believes that its existing cash (including
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2008.  Congoleum’s ability to emerge from Chapter 11
will depend on obtaining sufficient exit financing to settle administrative
expenses of the reorganization and any other related obligations, and to provide
adequate future liquidity.
 
 
 Item
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Not applicable.
 
 Item
      T.
              CONTROLS
      AND PROCEDURES
 
 (a)
              Evaluation of Disclosure
      Controls and Procedures.The Company’s management, with
      the participation of the Company’s Chief Executive Officer, or CEO, and
      Chief Financial Officer, or CFO, evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended) as of March 31, 2008.  Based on this evaluation, the
      Company’s CEO and CFO concluded that, as of March 31, 2008 the Company’s
      disclosure controls and procedures were effective, in that they provide
      reasonable assurance that information required to be disclosed by the
      Company in the reports that it files or submits under the Securities
      Exchange Act of 1934, as amended, is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and is accumulated and communicated to the
      Company’s management, including the Company’s CEO and CFO, as appropriate
      to allow timely decisions regarding required
  disclosure.
 
 (a)
              Changes in Internal Control
      Over Financial Reporting.There have not been any changes in the
      Company’s internal controls over financial reporting during the last
      quarter covered by this Quarterly Report on Form 10-Q 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 5, “Environmental and Other Liabilities”,
      and Note 6, “Asbestos Liabilities”, of the Notes to Unaudited Condensed
      Consolidated Financial Statements is incorporated herein by
      reference.
 
 Item
1A.   Risk Factors:
 
 The Company has significant asbestos
liability and funding exposure.
 
 As more fully set forth in Notes 1 and
17 of the Notes to Consolidated Financial Statements, which are included in the
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed
with the Securities and Exchange Commission, the Company has significant
liability and funding exposure for asbestos claims.  The Company has
entered into settlement agreements with various asbestos claimants totaling in
excess of $491 million.
 
 There can be no assurance that the
Joint Plan or any other plan will receive the acceptances necessary for
confirmation, that the Joint Plan will not be modified further, that the Joint
Plan or any other plan will receive necessary court approvals from the
Bankruptcy Court and the District Court, or that such approvals will be received
in a timely fashion, that any plan will be confirmed, that any plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.
 
 Confirmation of any plan of
reorganization will depend on the Company obtaining exit financing to provide it
with sufficient liquidity to fund obligations upon the plan becoming
effective.  If the Company’s cash flow from operations is materially
less than anticipated, and/or if the costs in connection with seeking
confirmation of the Joint Plan or any other plan of reorganization or in
connection with the Coverage Action discussed elsewhere in this
Quarterly  Report on Form 10-Q are materially more than anticipated,
the Company may be unable to obtain exit financing which, when combined with net
cash provided from operating activities, would provide it with sufficient
funds.  Such a circumstance would likely result in the Company not
being able to confirm the Joint Plan or have such plan become
effective.
 
 Some additional factors that could
cause actual results to differ from the Company's goals for resolving its
asbestos liability through an amended plan of reorganization  include:
(i) the future cost and timing of estimated asbestos liabilities and payments,
(ii) the availability of insurance coverage and reimbursement from insurance
companies that underwrote the applicable insurance policies for the Company for
asbestos-related claims, (iii) the costs relating to the execution and
implementation of any plan of reorganization pursued by the Company, (iv)
timely  agreement with other creditors, or classes of creditors, that
exist or may emerge, (v) satisfaction of the conditions and obligations under
the Company's outstanding debt instruments, (vi) the response
  31
  from time
to time of the lenders, customers, suppliers and other constituencies of the
Company and ABI to the ongoing process arising from the Company's strategy to
settle its asbestos liability, (vii) the Company's ability to maintain
debtor-in-possession financing sufficient to provide it with funding that may be
needed during the pendency of its Chapter 11 case and to obtain exit financing
sufficient to provide it with funding that may be needed for its operations
after emerging from the bankruptcy process, in each case, on reasonable terms,
(viii) timely creditor and court approval (including the results of any relevant
appeals) of any reorganization plan pursued by the Company and the court
overruling  any  objections  to the
Company's  reorganization plan that may be filed, (ix) costs of,
developments in and the outcome of insurance coverage litigation pending in the
State Court involving Congoleum and certain insurers, (x) compliance with the
Bankruptcy Code, including Section 524(g), and (xi) the possible adoption of
another party's plan of reorganization which may prove to be unfeasible. In any
event, if the Company is not successful in obtaining sufficient creditor and
court approval of the Joint Plan, such failure could have a material adverse
effect upon its business, results of operations and financial
condition.
 
 For further information regarding the
Company’s asbestos liability, insurance coverage and strategy to resolve its
asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated
Financial Statements, which are included in the Annual Report on Form 10-K for
the fiscal year ended December 31, 2007 filed with the Securities and Exchange
Commission.
 
 Under
the Joint Plan, if effective, holders of existing equity securities will receive
nothing on account of their interests.
 
 Under the
terms of the Joint Plan, existing Class A and Class B common shares of Congoleum
will be cancelled when the plan takes effect and holders of those shares will
not receive anything on account of their cancelled shares.
  The
Company’s common stock is thinly traded, which will affect a stockholder’s
ability to sell the Company’s stock or the price for which it can be sold; the
Company's common stock will be cancelled if the Joint Plan is confirmed and
becomes effective.
  There has been and may continue to be,
at least for the immediate future, a limited public market for the Company’s
common stock. The Company’s Class A common stock was delisted by the American
Stock Exchange ("Amex") on February 19, 2008 because it did not meet Amex
listing standards for share value, share price and aggregate market
capitalization. From February 19, 2008, the Company’s common stock has not been
listed on any securities exchange or on an automated dealer quotation system.
Accordingly, there is a limited trading market for our shares. Under the terms
of the Joint Plan, if confirmed and effective, the Company's common stock will
be cancelled.
  The
Company may incur substantial liability for environmental, product and general
liability claims in addition to asbestos-related claims, and its insurance
coverage and its likely recoverable insurance proceeds may be substantially less
than the liability incurred by the Company for these claims.
 
 Environmental
Liabilities.  Due to the nature of the Company's business and certain
of the substances which are or have been used, produced or discharged by the
Company, the Company's operations are subject to extensive federal, state and
local laws and regulations relating to the
  32
  generation,
storage, disposal, handling, emission, transportation and discharge into the
environment of hazardous substances. The Company has historically expended
substantial amounts for compliance with existing environmental laws and
regulations, including environmental remediation costs at both third-party sites
and Company-owned sites.  The Company will continue to be required to
expend amounts in the future for costs related to prior activities at its
facilities and third party sites, and for ongoing costs to comply with existing
environmental laws and such amounts may be substantial. There is no certainty
that these amounts will not have a material adverse effect on its business,
results of operations and financial condition because, as a result of
environmental requirements becoming increasingly strict, the Company is unable
to determine the ultimate cost of compliance with environmental laws and
enforcement policies.  Moreover, in addition to potentially having to
pay substantial amounts for compliance, future environmental laws and
regulations may require or cause the Company to modify or curtail its
operations, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
 Product and General
Liabilities.  In the ordinary course of its business, the Company
becomes involved in lawsuits, administrative proceedings, product liability
claims (in addition to asbestos-related claims) and other matters.  In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several
years.  These matters could have a material adverse effect on the
Company's business, results of operations and financial condition if the Company
is unable to successfully defend against or settle these matters, its insurance
coverage is insufficient to satisfy unfavorable judgments or settlements
relating to these matters, or the Company is unable to collect insurance
proceeds relating to these matters.
 
 The
Company is dependent upon a continuous supply of raw materials from third party
suppliers and would be harmed if there were a significant, prolonged disruption
in supply or increase in its raw material costs.
 
 The Company’s business is dependent upon
a continuous supply of raw materials from third party
suppliers.The principal raw materials used by the Company in
its manufacture of sheet and tile flooring are vinyl resins, plasticizers,
latex, limestone, stabilizers, cellulose paper fibers, urethane and transfer
print film.  The Company purchases most of these raw materials from
multiple sources.  Although the Company has generally not had
difficulty in obtaining its requirements for these materials, it has
periodically experienced significant price increases for some of these
materials.  Although the Company has been able to obtain sufficient
supplies of specialty resin and other raw materials, there can be no assurances
that it may not experience difficulty in the future, particularly if global
supply conditions deteriorate, which could have a material adverse effect on
profit margins.
 
 The Company believes that suitable
alternative suppliers are generally available for substantially all of its raw
material requirements, although quantities of certain materials available from
alternative suppliers may be in limited supply and production trials may be
required to qualify new materials for use.  The Company does not have
readily available alternative sources of supply for specific designs of transfer
print film, which are produced utilizing print cylinders engraved to the
Company's specifications. Although no loss of this source of supply is
anticipated, replacement could take a considerable period of time and interrupt
production of some of the Company's products.  In an attempt to
protect against this risk of loss of supply, the Company maintains a raw
material inventory and continually seeks to develop new sources which will
provide continuity of supply for its raw material requirements.
 
  33
  In addition, the Company could incur
significant increases in the costs of its raw materials due to market
conditions, energy costs, and other factors.  Although the Company
generally attempts to pass on increases in the costs of its raw materials to its
customers, the Company’s ability to do so is, to a large extent, dependent upon
the rate and magnitude of any increase, competitive pressures and market
conditions for its products.  There have been in the past, and may be
in the future, periods of time during which increases in these costs cannot be
recovered.
 
 The  Company
operates in a highly competitive flooring industry
and some of its competitors have greater
resources and broader distribution channels than the
Company.
 
 The market for the Company's products
is highly competitive. The Company encounters competition from three other
manufacturers in North America and, to a lesser extent, foreign
manufacturers.  Some of
the Company's competitors have greater financial and other resources and access
to capital than the Company.Furthermore, one of the Company's
major competitors has successfully confirmed a plan of reorganization under
Chapter 11 of the Bankruptcy Code. Having shed much of its pre-filing asbestos
and other liabilities, that competitor may have a competitive cost advantage
over the Company.  In addition, in order to maintain its competitive
position, the Company may need to make substantial investments in its business,
including its product development, manufacturing facilities, distribution
network and sales and marketing activities. Competitive pressures may also
result in decreased demand for the Company's products and in the loss of the
Company's market share for its products.  Moreover, due to the
competitive nature of the Company's industry, the Company may be commercially
restricted from raising or even maintaining the sales prices of its products,
which could result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increased percentage of the
Company's sales.
 
 The
Company’s business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.
 
 The Company is subject to the effects
of general economic conditions.  A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition.  Moreover, the Company's business
is cyclical and is affected by the economic factors that affect the remodeling
and housing industries in general and the manufactured housing industry
specifically, including the availability of credit, consumer confidence, changes
in interest rates, market demand and general economic conditions.  The
Company has experienced a significant decline in sales as a result of weakness
in the housing market and general economy.  The Company may experience
further sales declines resulting from continued deterioration in the housing
market.
  34
  The
Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company's facilities.
 
 The Company's business depends upon its
ability to timely manufacture and deliver products that meet the needs of its
customers and the end users of the Company's products. If the Company were to
realize an unexpected, significant and prolonged disruption of its operations at
any of its facilities, including disruptions in its manufacturing operations, it
could result in shipment delays of its products, depletion of its inventory as a
result of reduced production and increased production costs as a result of
taking actions in an attempt to cure the disruption or carry on its business
while the disruption remains.  Any resulting delay, depletion or
increased production cost could result in increased costs, lower revenues and
damaged customer and product end user relations, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
 The
Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.
 
 The Company offers a limited warranty
on all of its products against manufacturing defects.  In addition, as
a part of its efforts to differentiate mid- and high-end products through color,
design and other attributes, the Company offers enhanced warranties with respect
to wear, moisture discoloration and other performance characteristics, which
generally increase with the price of such products.  If the Company
were to incur a significant number of warranty claims, the resulting warranty
costs could be substantial.
 
 The
Company is heavily dependent upon its distributors to sell the Company's
products and the loss of a major distributor could have a material adverse
effect on the Company's business, results of operations and financial
condition.
 
 The Company currently sells its
products through approximately 13 distributors providing approximately 51
distribution points in the United States and Canada, as well as directly to a
limited number of mass market retailers.  The Company considers its
distribution network very important to maintaining its competitive position.
Although the Company has more than one distributor in some of its distribution
territories and actively manages its credit exposure to its distributors, the
loss of a major distributor could have a material adverse impact on the
Company's business, results of operations and financial condition. The Company
derives a significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc. LaSalle-Bristol
Corporation serves as the Company's manufactured housing market distributor, and
Mohawk Industries, Inc. serves as its retail market
distributor.  These two distributors accounted for approximately 64%
and 65% of the Company's net sales for the three months ended March 31, 2008 and
2007, respectively.
 
  35
  Stockholder votes are
controlledby ABI; Congoleum’s interests may not
be the same as ABI’s interests.
 
 ABI owns a majority (approximately 55%
as of March 31, 2008) of the outstanding shares of the Company’s common stock,
representing a 69.4% voting interest.  As a result, ABI can elect all
of the Company’s directors and can control the vote on all matters that require
Shareholder or Board of Director approval.  In addition, certain
officers of Congoleum are officers of ABI and members of the family group that
owns a controlling interest in ABI.
 
 
 Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds:
 
 None
 
 
 Item 3.   Defaults Upon Senior
Securities:
 
 On August
3, 1998, the Company issued $100 million of the Senior Notes priced at 99.505%
to yield 8.70%. The Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after August 1, 2003 at predetermined
redemption prices (ranging from 104% to 100%), plus accrued and unpaid interest
to the date of redemption. The indenture governing the Senior Notes includes
certain restrictions on additional indebtedness and uses of cash, including
dividend payments.  The commencement of the Chapter 11 proceedings
constituted an event of default under the indenture governing the Senior
Notes.  During 2003, the Company and the trustee under the indenture
governing the Senior Notes amended the indenture, and sufficient note holders
consented, to explicitly permit the Company to take steps in connection with
preparing and filing its prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code.  The amount of accrued interest on the Senior
Notes that was not paid as of the bankruptcy filing on December 31, 2003 was
approximately $3.6 million. The accrued pre-petition interest and the principal
amount of the Senior Notes are included in “Liabilities Subject to Compromise”
(see Note 8 of the Notes to Consolidated Financial Statements continued in Part
I, Item 1, of this Quarterly Report on Form 10-Q) as of March 31,
2008.  During 2007, the Company reversed all accrued post-petition
interest on the Senior Notes to reflect the terms of the Joint
Plan.
 
 
 Item
4.   Submission of Matters to a Vote of Security
Holders:
 
 None.
 
 
 Item
5.   Other Information:
 
 None.
  36
  Item
6.   Exhibits:
 
 Exhibit
                Number
              Exhibits31.1
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive
    Officer31.2
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial
    Officer32.1
              Section
      1350 Certification of the Chief Executive Officer.32.2
              Section
      1350 Certification of the Chief Financial Officer.99.1
              Agreement
      for Claim Determination between the Liquidator of The Protective National
      Insurance Company of Omaha and Congoleum Corporation dated February 18,
      2008.
 
  37
  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.
 
 CONGOLEUM
CORPORATION
 (Registrant)
 
 
 Date:
      May 9, 2008
              By:
              /s/Howard N. Feist
      IIIHoward
      N. Feist IIIChief
      Financial Officer(Duly
      Authorized Officer andPrincipal
      Financial & Accounting Officer)
 
  38
  
 Exhibit
Index
 
 
 Exhibit
                Number
              Exhibits31.1
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive
    Officer31.2
              Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial
    Officer32.1
              Section
      1350 Certification of the Chief Executive Officer.32.2
              Section
      1350 Certification of the Chief Financial Officer.99.1
              Agreement
      for Claim Determination between the Liquidator of The Protective National
      Insurance Company of Omaha and Congoleum Corporation dated February 18,
      2008.
 
  39