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
      1934





For
the quarterly period ended March 31, 2009





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 [  ]





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





Indicate by check mark whether the
Registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company.  See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.





Large accelerated filer [  ]
Accelerated filer [  ] Non-accelerated filer [  ] Smaller
reporting company [X]


1





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





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.





Class
                
                Outstanding
      at April 30, 2009Class
      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, 2009(unaudited)
      and December 31, 2008
                  
                  5Condensed
      Consolidated Statement of Operations for the threemonths
      ended March 31, 2009 and 2008 (unaudited)
                  
                  6Condensed
      Consolidated Statement of Cash Flows for the three monthsended
      March 31, 2009 and 2008 (unaudited)
                  
                  7Notes
      to Unaudited Condensed Consolidated Financial Statements
      (unaudited)
                  
                  8Item
      2.
                  Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                  
                  26Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  
                  34Item
      4T.
                  Controls
      and Procedures
                  
                  35PART
      II.
                  OTHER
      INFORMATIONItem
      1.
                  Legal
      Proceedings
                  
                  35Item
      1A.
                  Risk
      Factors
                  
                  35Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  
                  40Item
      3.
                  Defaults
      Upon Senior Securities
                  
                  41Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  
                  41Item
      5.
                  Other
      Information
                  
                  41Item
      6.
                  Exhibits
                  
                  42Signatures
                  
                  43


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,
                    
                    
                    December
      31,2009
                    
                    
                    2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    7,679
                    
                    
                    $
                    15,077Restricted
      cash
                    
                    
                    29,708
                    
                    
                    
                    29,680Accounts
      receivable, less allowances of $460 and $588as
      of March 31, 2009 and December 31, 2008
                    
                    
                    15,848
                    
                    
                    
                    13,789Inventories
                    
                    
                    38,142
                    
                    
                    
                    35,814Prepaid
      expenses and other current assets
                    
                    
                    3,366
                    
                    
                    
                    3,922Total
      current assets
                    
                    
                    94,743
                    
                    
                    
                    98,282Property,
      plant and equipment, net
                    
                    
                    54,947
                    
                    
                    
                    56,520Deferred
      income taxes
                    
                    
                    8,098
                    
                    
                    
                    8,098Other
      assets, net
                    
                    
                    8,967
                    
                    
                    
                    8,967Total
      assets
                    
                    $
                    166,755
                    
                    
                    $
                    171,867LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
                    
                    $
                    6,424
                    
                    
                    $
                    7,132Accrued
      liabilities
                    
                    
                    14,424
                    
                    
                    
                    17,114Asbestos-related
      liabilities
                    
                    
                    48,759
                    
                    
                    
                    50,022Revolving
      credit loan
                    
                    
                    16,966
                    
                    
                    
                    13,994Deferred
      income taxes
                    
                    
                    6,533
                    
                    
                    
                    6,533Accrued
      taxes
                    
                    
                    88
                    
                    
                    
                    123Liabilities
      subject to compromise – current
                    
                    
                    4,997
                    
                    
                    
                    4,997Total
      current liabilities
                    
                    
                    98,191
                    
                    
                    
                    99,915Liabilities
      subject to compromise - long term
                    
                    
                    162,220
                    
                    
                    
                    161,503Total
      liabilities
                    
                    
                    260,411
                    
                    
                    
                    261,418STOCKHOLDERS’
      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 at  March 31,
      2009and
      December 31, 2008
                    
                    
                    47
                    
                    
                    
                    47Class
      B common stock, par value $0.01; 4,608,945 shares authorized, issued
      andoutstanding
      at March 31, 2009 and December 31, 2008
                    
                    
                    46
                    
                    
                    
                    46Additional
      paid-in capital
                    
                    
                    49,389
                    
                    
                    
                    49,386Retained
      deficit
                    
                    
                    (84,146
                    )
                    
                    
                    (80,038
                    )Accumulated
      other comprehensive loss
                    
                    
                    (51,179
                    )
                    
                    
                    (51,179
                    )(85,843
                    )
                    
                    
                    (81,738
                    )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares
      atMarch
      31, 2009 and December 31, 2008
                    
                    
                    7,813
                    
                    
                    
                    7,813Total
      stockholders’ deficit
                    
                    
                    (93,656
                    )
                    
                    
                    (89,551
                    )Total
      liabilities and stockholders’ equity (deficit)
                    
                    $
                    166,755
                    
                    
                    $
                    171,867





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
      31,2009
                            
                            
                            2008Net
      sales
                            
                            $
                            30,106
                            
                            
                            $
                            47,697Cost
      of sales
                            
                            
                            25,960
                            
                            
                            
                            36,824Selling,
      general and administrative expenses
                            
                            
                            8,250
                            
                            
                            
                            9,132(Loss)
      Income from operations
                            
                            
                            (4,104
                            )
                            
                            
                            1,741Other
      income /(expense):Interest
      income
                            
                            
                            2
                            
                            
                            
                            1,128Interest
      expense
                            
                            
                            (108
                            )
                            
                            
                            (197
                            )Other
      expense
                            
                            
                            118
                            
                            
                            
                            (64
                            )(Loss)
      income before income taxes
                            
                            
                            (4,092
                            )
                            
                            
                            2,608Provision
      for income taxes
                            
                            
                            15
                            
                            
                            
                            929Net
      (loss) income
                            
                            $
                            (4,107
                            )
                            
                            $
                            1,679Net
      (loss) income per common shareBasic
      and Diluted
                            
                            $
                            (0.50
                            )
                            
                            $
                            0.20Weighted
      average number of common shares outstanding:Basic
      and Diluted
                            
                            
                            8,272
                            
                            
                            
                            8,272





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
      31,2009
                                  
                                  
                                  2008Cash
      flows from operating activities:Net
      (loss) income
                                  
                                  $
                                  (4,107
                                  )
                                  
                                  $
                                  1,679Adjustments
      to reconcile net (loss) income to net cash (used in) provided
      byOperating
      activities:Depreciation
                                  
                                  
                                  2,432
                                  
                                  
                                  
                                  2,576Amortization
                                  
                                  
                                  --
                                  
                                  
                                  
                                  97Stock
      based compensation expense.
                                  
                                  
                                  2
                                  
                                  
                                  
                                  5Changes
      in certain assets and liabilities:Accounts
      and notes receivable
                                  
                                  
                                  (2,059
                                  )
                                  
                                  
                                  (3,191
                                  )Inventories
                                  
                                  
                                  (2,328
                                  )
                                  
                                  
                                  (5,646
                                  )Prepaid
      expenses and other assets
                                  
                                  
                                  556
                                  
                                  
                                  
                                  843Proceeds
      from legal fee disgorgement
                                  
                                  
                                  --
                                  
                                  
                                  
                                  9,168Accounts
      payable
                                  
                                  
                                  (708
                                  )
                                  
                                  
                                  772Accrued
      liabilities
                                  
                                  
                                  (2,661
                                  )
                                  
                                  
                                  (2,678
                                  )Asbestos-related
      liabilities
                                  
                                  
                                  (1,292
                                  )
                                  
                                  
                                  (3,575
                                  )Other
                                  
                                  
                                  682
                                  
                                  
                                  
                                  1,586Net
      cash (used in) provided by operating activities,
                                  
                                  
                                  (9,483
                                  )
                                  
                                  
                                  1,637Cash
      flows from investing activities:Capital
      expenditures
                                  
                                  
                                  (859
                                  )
                                  
                                  
                                  (468
                                  )Net
      cash (used in) investing activities
                                  
                                  
                                  (859
                                  )
                                  
                                  
                                  (468
                                  )Cash
      flows from financing activities:Net
      short-term borrowings
                                  
                                  
                                  2,972
                                  
                                  
                                  
                                  2,121Net
      change in restricted cash
                                  
                                  
                                  (28
                                  )
                                  
                                  
                                  (56
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  2,944
                                  
                                  
                                  
                                  2,065Net
      (decrease) increase in cash and cash equivalents
                                  
                                  
                                  (7,398
                                  )
                                  
                                  
                                  3,233Cash
      and cash equivalents:Beginning
      of period
                                  
                                  
                                  15,077
                                  
                                  
                                  
                                  26,327End
      of period
                                  
                                  $
                                  7,679
                                  
                                  
                                  $
                                  29,560





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, 2009


(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 ("GAAP") 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, 2009 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2009.  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,
2008.





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.





Congoleum's
financial statements (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 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 ("ACC"), the Future Claimants' Representative (the
"FCR") and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan





8


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 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 of
reorganization (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


9
  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, in February 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 was solicited in
accordance with court-approved voting procedures.  Various objections
to the Joint Plan were filed, and in May 2008 the Bankruptcy Court heard oral
argument on summary judgment motions relating to certain of those objections. In
June 2008, the Bankruptcy Court issued a ruling that the Joint Plan was not
legally confirmable, and issued an Order to Show Cause why the case should not
be converted or dismissed pursuant to 11 U.S.C. § 1112.  Following a
further hearing in June 2008, the Bankruptcy Court issued an opinion that
vacated the Order to Show Cause and instructed the parties to propose a
confirmable plan by the end of calendar year 2008. Following further negotiations, the
Bondholders’ Committee, the ACC, the FCR, representatives of holders of
pre-petition settlements and Congoleum reached an agreement in principle which
the Company believes addresses the issues raised by the Bankruptcy Court in the
ruling on the Joint Plan and in the court's prior decisions.  A term sheet
describing the proposed material terms of a new plan of reorganization (the
“Amended Joint Plan”) and a settlement of avoidance litigation with respect to
pre-petition claim settlement (the “Litigation Settlement”) was signed by the
parties to the agreement and filed with the Bankruptcy Court in August 2008 and
reported by Congoleum on Form 8-K filed on August 15, 2008, and incorporated by
reference herein.  Certain insurers and a large bondholder filed
objections to the Litigation Settlement and/or reserved their rights to object
to confirmation of the Amended Joint Plan.  The Bankruptcy Court
approved the Litigation Settlement following a hearing in October 2008, but the
court reserved until a later date a determination of whether the settlement
meets the standards required for confirmation of a plan of
reorganization.  The Amended Joint Plan was filed with the Bankruptcy
Court in November 2008.  In January 2009, certain insurers filed a
motion for summary judgment seeking denial of confirmation of the Amended Joint
Plan on several discrete issues, and a hearing was held on February 5,
2009.  On February 26, 2009, the Bankruptcy Court rendered an opinion
denying confirmation of the Amended Joint Plan.  Pursuant to the
opinion, the Bankruptcy Court entered the order dismissing Congoleum’s
bankruptcy case, (the “Order of Dismissal”). On March 3, 2009, an order was
entered by the Bankruptcy Court granting a stay of the Order of Dismissal
pending entry of a final non-appealable decision affirming the Order of
Dismissal.





On February 27, 2009, Congoleum and the
Bondholders’ Committee appealed the Order of Dismissal and the summary judgment
ruling (the “Summary Judgment Ruling”) denying plan confirmation to the U.S.
District Court for the District of New Jersey (the “District
Court”).  Appeal proceedings are underway before the District
Court.





10


There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the District Court, that
the District Court will reverse the Order of Dismissal or Summary Judgment
Ruling, or that such approvals and appellate decisions 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 its 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.





11


2.
            RecentAccounting
      Principles:





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 is in the process of evaluating the impact of
SFAS No. 157 on its non-recurring fair value measurements.  The
Company adopted SFAS No. 157 on January 1, 2008 for its financial assets and
liabilities measured at fair value on a recurring basis.  The partial
adoption of SFAS No. 157 for financial assets and liabilities did not have a
material impact on the Company's consolidated financial statements.





3.           Inventories:





A summary of the major components of
inventories is as follows (in thousands):





March
      31,
                
                
                December 31,2009
                
                
                2008Finished
      goods
                
                $
                31,749
                
                
                $
                30,203Work-in-process
                
                
                2,625
                
                
                
                852Raw
      materials and supplies
                
                
                3,768
                
                
                
                4,759Total
      inventories
                
                $
                38,142
                
                
                $
                35,814





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.


12





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, 2009 and December 31, 2008, are
not reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.1 million at March 31, 2009 and December
31, 2008, 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.





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.


13


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.





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




14




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, in
February 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 was
solicited in accordance with court-approved voting
procedures.  Various objections to the Joint Plan were filed, and in
May 2008 the Bankruptcy Court heard oral argument on summary judgment motions
relating to certain of those objections.  In June 2008, the Bankruptcy
Court issued a ruling that the Joint Plan was not legally confirmable, and
issued an Order to Show Cause why the case should not be converted or dismissed
pursuant to 11 U.S.C. § 1112.  Following a further hearing in June
2008, the Bankruptcy Court issued an opinion that vacated the Order to Show
Cause and instructed the parties to propose a confirmable plan by the end of
calendar year 2008.  Following further negotiations, the
Bondholders’ Committee, the ACC, the FCR, representatives of holders of
pre-petition settlements and Congoleum reached an agreement in principle which
the Company believes addresses the issues raised by the Bankruptcy Court in the
ruling on the Joint Plan and in the court's prior decisions.  A term sheet
describing the proposed material terms of the Amended Joint Plan and the
Litigation Settlement, was signed by the parties to the agreement and filed with
the Bankruptcy Court in August 2008 and reported by Congoleum on
a




15




Form 8-K filed on August 15, 2008 and
incorporated by reference herein.  Certain insurers and a large
bondholder filed objections to the Litigation Settlement and/or reserved their
rights to object to confirmation of the Amended Joint Plan.  The
Bankruptcy Court approved the Litigation Settlement following a hearing on
October 20, 2008, but the court reserved until a later date a determination of
whether the settlement meets the standards required for confirmation of a plan
of reorganization.   The Amended Joint Plan was filed with
the Bankruptcy Court in November 2008.  In January 2009, certain insurers filed
a motion for summary judgment seeking denial of confirmation of the Amended
Joint Plan, and a hearing was held on February 5, 2009.  On February
26, 2009, the Bankruptcy Court rendered an opinion denying confirmation of the
Amended Joint Plan.  Pursuant to the opinion, the Bankruptcy Court
entered the Order of Dismissal dismissing Congoleum’s bankruptcy case. On March
3, 2009, an order was entered by the Bankruptcy Court granting a stay of the
Bankruptcy Court’s Order of Dismissal pending entry of a final non-appealable
decision affirming the Order of Dismissal.





On February 27, 2009, Congoleum and the
Bondholders’ Committee appealed the Order of Dismissal and the Summary Judgment
ruling denying plan confirmation to the District Court. Appeal proceedings are
underway before the District Court.There can be no assurance that the
Amended Joint Plan or any subsequent plan of reorganization, if proposed, will
receive the acceptances necessary for confirmation, that any plan will not be
modified further, that any plan will receive necessary court approvals from the
Bankruptcy Court and the District Court, or that such approvals and appellate
decisions will be received in a timely fashion, that any plan will be confirmed,
that any plan, if confirmed, will become effective, or that Congoleum will
continue to earn sufficient funds to pay for continued proceedings with respect
to 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.





Although
there can be no assurances as to the terms of any future plan, the proposed
terms of the Amended Joint Plan provide that if the Amended Joint Plan is
approved by the Bankruptcy Court and accepted by the requisite creditor
constituencies, it would permit Congoleum to exit Chapter 11 free of
liability for existing and future asbestos claims as provided in the Amended
Joint Plan.  Under the proposed terms of the Amended Joint Plan, it is
contemplated that a Plan Trust
would be created that would assume the liability for Congoleum’s current and
future asbestos claims.  The Plan Trust would receive the proceeds of
various settlements Congoleum has reached with a number of insurance carriers
and would be assigned Congoleum’s rights under its remaining insurance policies
covering asbestos product liability.  The Plan Trust also would
receive 70% of the newly issued common stock in reorganized Congoleum when the
Amended Joint Plan takes effect (the “Trust Shares”) and $5 million in new 9.75%
senior secured notes maturing five years from issuance.


16




Holders of Congoleum’s $100 million in
8.625% Senior Notes due in August 2008 would receive on a pro rata basis $70
million in new 9.75% senior secured notes maturing five years from
issuance.  The new senior secured notes would be subordinated to the
working capital facility providing Congoleum’s financing upon exiting
reorganization.  In addition, holders of the $100 million in 8.625%
Senior Notes due in August 2008 would receive 30% 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 pre-petition
interest (which amounted to $3.6 million) would be satisfied by the new senior
secured notes and the common stock issued if the Amended Joint Plan takes
effect.




Under
the proposed terms of the Amended Joint Plan, existing Class A and Class B
common shares of Congoleum would be cancelled if the Amended Joint Plan takes
effect and holders of those shares would not receive anything on account of
their cancelled shares.




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 accrued 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 a settlement agreement with approximately 79,000 asbestos personal
injury claimants (the "Claimant Agreement"), which provides for an aggregate
settlement value of at least $466 million.  The Claimant Agreement,
along with a number of individually negotiated trial listed settlements with an
aggregate value of approximately $25 million, amount to settlements in excess of
$491 million.  As contemplated by the Claimant Agreement, Congoleum
also entered into agreements establishing a pre-petition trust (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
an Omnibus Avoidance Action and a Sealed Avoidance Action (collectively, the
“Avoidance Actions”) seeking to void the Claimant Agreement, individual
settlements and other pre-petition agreements, including voiding the security
interest granted to the Collateral Trust. In March 2006, Congoleum filed a
motion for summary judgment in the Omnibus Avoidance Action seeking to void the
Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006.  Subsequently, Congoleum filed
another summary judgment motion in the Omnibus Avoidance Action seeking a
determination that any security interests conveyed in connection with the
Claimant Agreement and the other pre-petition asbestos




17




settlement
agreements were ineffective and unenforceable. In July 2007, the Bankruptcy
Court ruled that the security interests in insurance collateral conveyed to the
settled claimants pre-bankruptcy were ineffective and unenforceable against
Congoleum’s insurance policies or the proceeds of those policies because the
attempts to create security interests were outside the scope of the Uniform
Commercial Code; nor could such security interests be considered to be a common
law pledge.  The Bankruptcy Court therefore granted summary judgment
in Congoleum’s favor on those counts of the Omnibus Avoidance Action which
sought to void these security interests.  In the event that the Order
of Dismissal is affirmed on appeal and becomes a final order, it is possible
that the Avoidance Actions would be dismissed and the lien avoidance ruling
would become a nullity.





During
the first quarter of 2009, the Company paid $1.3 million in fees and expenses
related to implementation of its planned reorganization under the Bankruptcy
Code and the Coverage Action.  Based on its reorganization plans,
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 would not have been collected
under the terms of the Joint Plan and are not expected to be collected under any
future plan, including the Amended Joint Plan, and $26.4 million was an
additional provision for estimated costs for the reorganization proceedings and
the Coverage Action (as defined below).  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 would not have received any post-petition interest and are
not expected to be collected under any future plan, including the Amended Joint
Plan. Following the ruling that the Joint Plan was unconfirmable and based on
the anticipated terms and anticipated timing of effectiveness of the Amended
Joint Plan, Congoleum recorded an additional charge of $11.5 million in the
third quarter of 2008 for costs to effect its reorganization.





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.


18


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 (the "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 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.  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 Plan
Trust.  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 the Coverage Action.





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


19
  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.





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 had
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.




20


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, the
U.S. Court of Appeals for the Third Circuit  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 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 sought,
among other things, to void the security interest granted to the Collateral
Trust and avoidance of the Claimant Agreement and certain individual
pre-petition settlements.)





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.





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
were otherwise protected.  The Company amended the Omnibus Avoidance
Action to seek the same relief requested in the Omnibus Objection.




21


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 and the matter remains pending.  A motion was filed to
amend further the complaint in the Omnibus Avoidance Action, but such complaint
was not filed as a result of the Litigation Settlement discussed
above.





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 the triggering 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 Joint Plan.  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 was appealed to the District Court.  Based on the
Litigation Settlement, which provides, in part, for the unwinding of the
Claimant Agreement and certain pre-petition settlements,
Congoleum  again sought to stay Phase 2 of the Coverage Action
trial, but after a hearing before the Bankruptcy Court, such stay was
denied.





The third and final phase of the
Coverage Action trial will address bad faith punitive damages, if
appropriate.





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, 2008 to March 31, 2009:





(In
      thousands)
                                          
                                          Balance
      at 12/31/2008
                                          
                                          
                                          Additions
      (Deletions)
                                          
                                          
                                          Spending
      Against Reserve
                                          
                                          
                                          Recoveries
                                          
                                          
                                          Balance
      at 3/31/2009ReservesCurrent
                                          
                                          $
                                          20,340
                                          
                                          
                                          
                                          --
                                          
                                          
                                          $
                                          (1,292
                                          )
                                          
                                          
                                          --
                                          
                                          
                                          $
                                          19,048ReceivablesCurrent
                                          
                                          
                                          (1,322
                                          )
                                          
                                          
                                          --
                                          
                                          
                                          
                                          --
                                          
                                          
                                          
                                          --
                                          
                                          
                                          
                                          (1,322
                                          )Net Asbestos
      Liability
                                          
                                          $
                                          14,254
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          (1,292
                                          )
                                          
                                          
                                          
                                          
                                          
                                          $
                                          17,726Restricted
      CashInsurance
      Proceeds
                                          
                                          $
                                          29,683
                                          
                                          
                                          $
                                          28
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          29,711





22





The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2007 to March 31, 2008:





(In
      thousands)
                                          
                                          Balance
      at
                                            12/31/2007
                                          
                                          
                                          Additions
                                            (Deletions)
                                          
                                          
                                          Spending
                                            Against
                                            Reserve
                                          
                                          
                                          Recoveries
                                            From
                                            Insurance
                                          
                                          
                                          Balance
      at
                                            3/31/2008ReservesCurrent
                                          
                                          $
                                          24,744
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          (3,575
                                          )
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          21,169ReceivablesCurrent
                                          
                                          
                                          (10,490
                                          )
                                          
                                          
                                          --
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          9,168
                                          
                                          
                                          
                                          (1,322
                                          )Net
      Asbestos Liability (Asset)
                                          
                                          $
                                          14,254
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          (3,575
                                          )
                                          
                                          $
                                          9,168
                                          
                                          
                                          $
                                          19,847Restricted CashInsurance
      Proceeds
                                          
                                          $
                                          6,463
                                          
                                          
                                          $
                                          56
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          --
                                          
                                          
                                          $
                                          6,519





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 31,2009
                        
                        
                        2008Beginning
      balance
                        
                        $
                        1,476
                        
                        
                        $
                        1,806Accruals
                        
                        
                        739
                        
                        
                        
                        817Charges
                        
                        
                        (768
                        )
                        
                        
                        (862
                        )Ending
      balance
                        
                        $
                        1,447
                        
                        
                        $
                        1,761







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


23


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 Amended 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 31,2009
                                
                                
                                2008CurrentPre-petition
      other payables and accrued interest
                                
                                $
                                4,997
                                
                                
                                $
                                4,997Non-currentDebt
      (at face value)
                                
                                
                                100,000
                                
                                
                                
                                100,000Pension
      liability
                                
                                
                                37,631
                                
                                
                                
                                37,022Other
      post-retirement benefit obligation
                                
                                
                                11,063
                                
                                
                                
                                10,938Pre-petition
      other liabilities
                                
                                
                                13,526
                                
                                
                                
                                13,543Total
      liabilities subject to compromise
                                
                                $
                                167,217
                                
                                
                                $
                                166,500





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 31,2009
                  
                  
                  2008Accrued
      warranty, marketing and sales promotion
                  
                  $
                  10,271
                  
                  
                  $
                  13,167Employee
      compensation and related benefits
                  
                  
                  3,754
                  
                  
                  
                  3,349Other
                  
                  
                  399
                  
                  
                  
                  598Total
      accrued liabilities
                  
                  $
                  14,424
                  
                  
                  $
                  17,114





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, 2009 and December 31, 2008 (see Note 8).


24


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, 2009 and
2008 (in thousands):





Three Months
      Ended
                                
                                
                                Three Months
      EndedMarch 31,
      2009
                                
                                
                                March 31,
      2008Other
                                
                                
                                
                                
                                
                                OtherPension
                                
                                
                                Benefits
                                
                                
                                Pension
                                
                                
                                BenefitsComponents of Net Periodic Benefit
      Cost:Service
      cost
                                
                                $
                                307
                                
                                
                                $
                                57
                                
                                
                                $
                                381
                                
                                
                                $
                                56Interest
      cost
                                
                                
                                1,216
                                
                                
                                
                                161
                                
                                
                                
                                1,207
                                
                                
                                
                                144Expected
      return on plan assets
                                
                                
                                (863
                                )
                                
                                
                                --
                                
                                
                                
                                (1,198
                                )
                                
                                
                                --Recognized
      net actuarial loss
                                
                                
                                1,045
                                
                                
                                
                                16
                                
                                
                                
                                410
                                
                                
                                
                                15Amortization
      of transition obligation
                                
                                
                                --
                                
                                
                                
                                --
                                
                                
                                
                                --
                                
                                
                                
                                --Amortization
      of prior service cost
                                
                                
                                --
                                
                                
                                
                                --
                                
                                
                                
                                6
                                
                                
                                
                                --Net periodic benefit
      cost
                                
                                $
                                1,705
                                
                                
                                $
                                234
                                
                                
                                $
                                805
                                
                                
                                $
                                215





The weighted average assumptions used to
determine net periodic benefit cost were as follows:





March
      31, 2009
                
                
                March
      31, 2008Other
                
                
                
                
                
                OtherPension
                
                
                Benefits
                
                
                Pension
                
                
                BenefitsDiscount
      rate
                
                
                5.75
                %
                
                
                5.75
                %
                
                
                6.00
                %
                
                
                6.00
                %Expected
      long-term return on plan  assets
                
                
                7.00
                %
                
                
                --
                
                
                
                7.00
                %
                
                
                --Rate of
      compensation increase
                
                
                3.00
                %
                
                
                --
                
                
                
                5.00
                %
                
                
                --





25


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.  Economic conditions
experienced in 2008 had a significant negative impact on the Company’s sales and
results of operations, and those effects are likely to continue in
2009.





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 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


26


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, in
February 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 was solicited
in accordance with court-approved voting procedures.  Various
objections to the Joint Plan were filed, and in May 2008 the Bankruptcy Court
heard oral argument on summary judgment motions relating to certain of those
objections.  In June 2008, the Bankruptcy Court issued a ruling that
the Joint Plan was not legally confirmable, and issued an Order to Show Cause
why the case should not be converted or dismissed pursuant to 11 U.S.C. §
1112.  Following a further hearing in June 2008, the Bankruptcy Court
issued an opinion that vacated the Order to Show Cause and instructed the
parties to propose a confirmable plan by the end of calendar year 2008. Following further negotiations, the
Bondholders’ Committee, the ACC, the FCR, representatives of holders of
pre-petition settlements and Congoleum reached an agreement in principle which
the Company believes addresses the issues raised by the Bankruptcy Court in the
ruling on the Joint Plan and in the court's prior decisions.  A term sheet
describing the Amended Joint Plan and the Litigation Settlement was signed by
the parties to the agreement and filed with the Bankruptcy Court in August 2008
and reported by Congoleum on Form 8-K on August 15, 2008 and incorporated herein
by reference.  Certain insurers and a large bondholder filed
objections to the Litigation Settlement and/or reserved their rights to object
to confirmation of the Amended Joint Plan.




27




The Bankruptcy Court approved the
Litigation Settlement following a hearing in October 2008, but the court
reserved until a later date a determination of whether the settlement meets the
standards required for confirmation of a plan of reorganization the Amended
Joint Plan was filed with the Bankruptcy Court in November 2008. In January
2009, certain insurers filed a motion for summary judgment seeking denial of
confirmation of the Amended Joint Plan on several discrete issues, and a hearing
was held on February 5, 2009.  On February 26, 2009, the Bankruptcy
Court rendered an opinion denying confirmation of the Amended Joint
Plan.  Pursuant to the opinion, the Bankruptcy Court entered the Order
of Dismissal dismissing Congoleum’s bankruptcy case. On March 3, 2009, an order
was entered by the Bankruptcy Court granting a stay of the Order of Dismissal
pending entry of a final non-appealable decision affirming the Order of
Dismissal.





On February 27, 2009, Congoleum and the
Bondholders’ Committee appealed the Order of Dismissal and the summary judgment
ruling denying plan confirmation to the District Court. Appeal proceedings are
underway before the District Court.   See Notes 1 and 17 of the
Notes to Consolidated Financial Statements, which are contained in Item 8 of
this Annual Report on Form 10-K.





There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the District Court, that
the District Court will reverse the Order of Dismissal or the Summary Judgment
Ruling,  or that such approvals and appellate decisions 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.





Congoleum
is presently involved in litigation with certain insurance carriers related to
disputed insurance coverage for asbestos related liabilities, and certain
insurance carriers filed various objections to Congoleum’s previously proposed
plans of reorganization and related matters and are expected to file objections
to any future plan.  Certain other parties have also filed various
objections to Congoleum’s previously proposed plans of reorganization 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




28




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 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 Amended 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.  Additional new claims may be asserted
in connection with solicitation of acceptances of any future
plan.  Congoleum does not believe it can reasonably estimate the
liability associated with claims that may be pending.





During
the first quarter of 2009, the Company paid $1.3 million in fees and expenses
related to implementation of its planned reorganization under the Bankruptcy
Code and the Coverage Action.  Based on its reorganization plans,
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 would not have been collected
under the terms of the Joint Plan and are not expected to be collected under any
future plan, including the Amended 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, and the
expected terms of any future plan, including the Amended Joint Plan, the Senior
Note holders would not have received any post-petition
interest.  Following the ruling that the Joint Plan was unconfirmable
and based on the anticipated terms and anticipated timing of effectiveness of
the Amended Joint Plan, Congoleum recorded an additional charge of $11.5 million
in the third quarter of 2008 for costs to effect its
reorganization.





Costs
for pursuing and implementing the Amended Joint Plan or any other plan of
reorganization could be materially higher than currently recorded or previously
estimated.  Delays in proposing, filing or obtaining approval of the
Amended 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.




29


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, 2008 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 Amended 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   November 14, 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, 2008 filed with the Securities
and Exchange Commission.





Three Months
                            Ended
                            March 31, 2009
                          
                          
                          
                          
                          
                          Three Months
                            Ended
                            March 31, 2008(In
      thousands of dollars)Net
      sales
                          
                          $
                          30,106
                          
                          
                          
                          
                          
                          $
                          47,697Cost
      of sales
                          
                          
                          25,960
                          
                          
                          
                          
                          
                          
                          36,824Gross
      profit
                          
                          
                          4,146
                          
                          
                          13.8%
                          
                          
                          
                          10,873
                          
                          
                          22.8
                          %Selling,
      general & administrative expenses
                          
                          
                          8,250
                          
                          
                          27.4%
                          
                          
                          
                          9,132
                          
                          
                          19.1
                          %Operating  income
                          
                          
                          (4,104
                          )
                          
                          
                          
                          
                          
                          1,741Interest
      (expense) income, net
                          
                          
                          (106
                          )
                          
                          
                          
                          
                          
                          931Other
      income (expense), net
                          
                          
                          118
                          
                          
                          
                          
                          
                          
                          (64
                          )(Loss)
      income before taxes
                          
                          
                          (4,092
                          )
                          
                          
                          
                          
                          
                          2,608Provision
      for income taxes
                          
                          
                          15
                          
                          
                          
                          
                          
                          
                          929Net
      (loss) income
                          
                          $
                          (4,107
                          )
                          
                          
                          
                          
                          $
                          1,679





Net
sales for the three months ended March 31, 2009 totaled $30.1 million as
compared to $47.7 million for the three months ended March 31, 2008, down $17.6
million or 36.8%. This decrease in sales was primarily due to lower sales to the
manufactured housing and recreational vehicle industry, coupled with continued
weakness in product sales to the builder market and a weak retail sales
environment for professionally installed products, partially offset by price
increases instituted in the second half of 2008.  In addition to
weaker end user demand, sales were adversely affected by $5.4 million in
inventory reductions in Congoleum’s distribution channel during the first
quarter of 2009.





Gross
profit for the three months ended March 31, 2009 totaled $4.1 million, or 13.8%
of net sales, compared to $10.9 million or 22.8% of net sales for the three
months ended March 31, 2008. The unfavorable impact of lower production volumes
over which to spread fixed factory overhead accounted for most of the gross
profit margin decline, partially offset by cost reduction measures instituted in
plant spending.


30


Selling,
general and administrative expenses were $8.3 million for the three months ended
March 31, 2009 compared to $9.1 million for the three months ended March 31,
2008, a decrease of $0.8 million. Lower compensation and benefit costs
reflecting workforce reductions, coupled with reduced sales support and
merchandising costs resulted in the decrease. Selling, general and
administrative expenses in the first quarter of 2009 include a severance charge
of $0.5 million for workforce reductions during that quarter.





The
loss from operations was $4.1 million for the three months ended March 31, 2009
compared to income from operations of $1.7 million for the three months ended
March 31, 2008, reflecting the lower sales and gross margin, partially offset by
lower selling, general and administrative expenses.





Interest
expense, net, was $106 thousand for the three months ended March 31, 2009
compared with $931 thousand income for the same period one year
earlier.  Interest income (expense), net for the three months ended
March 31, 2008 included $1.0 million in interest income received as part of a
settlement for legal fee settlement.





The
provision for income taxes was $15 thousand for the quarter ending March 31,
2009, and $929 thousand as of March 31, 2008.  The full year effective
tax rate is expected to be negligible.





Liquidity
and Capital Resources





The
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
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 Consolidated
Financial Statements contained in 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 Consolidated Financial
Statements contained in 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
quarter of 2009, the Company paid $1.3 million in fees and expenses related to
reorganization proceedings under the Bankruptcy Code and the Coverage
Action.  Furthermore, at March 31, 2009, the Company had incurred but
not paid approximately $9.7 million in additional fees and expenses for services
rendered through that date.




31


Based on its reorganization plans,
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 would not have been collected
under the terms of the Joint Plan and are not expected to be collected under any
future plan, including the Amended 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, and the
expected terms of any future plan, including the Amended Joint Plan, the Senior
Note holders would not have received any post-petition interest. Following the
ruling that the Joint Plan was unconfirmable and based on the anticipated terms
and timing of effectiveness of the Amended Joint Plan, Congoleum recorded an
additional charge of $11.5 million in the third quarter of 2008 for costs to
effect its reorganization.





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 accrued 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.





Unrestricted
cash and cash equivalents, including short-term investments at March 31, 2009,
were $7.7 million, a decrease of $7.4 million from December 31,
2008.  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, 2009 and December 31, 2008.  Additionally, $6.5
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 December 31, 2008. In the second quarter of 2008 the Company
received an additional $22.7 million from other insurance carriers which is also
included in restricted cash.  The Company expects to contribute these
funds, less any amounts withheld pursuant to reimbursement arrangements, to the
Plan Trust should the Bankruptcy Court confirm a plan pursuant to section 524(g)
of the Bankruptcy Code.  Net working capital was a negative $3.5
million at March 31, 2009, down from $1.6 million at December 31,
2008.  The ratio of current assets to current liabilities was 1.0 to
1.0 at March 31, 2009 and December 31, 2008.  Net cash used in
operations during for the three months ended March 31, 2009 was $9.5 million, as
compared to net cash provided by operations of $1.6 million during the three
months  ended March 31, 2008.




32


Capital expenditures for the three
months ended March 31, 2009 totaled $0.9 million.  The Company is
currently planning capital expenditures of approximately $3.5 million in 2009
and between $3 million and $5 million in 2010, primarily for maintenance and
improvement of plants and equipment, which it expects to fund with cash from
operations and credit facilities.





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,
2009 and (ii) the date the plan of reorganization in Congoleum's bankruptcy
cases as confirmed by the Bankruptcy Court becomes
effective.  Congoleum and its lender have agreed on terms of an
amendment extending the expiration of the facility until December 31, 2009, and
execution of the agreement is pending approval of the bankruptcy
court.  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”). In connection with the amendment and extension of
the agreement during 2008, the minimum level of EBITDA that Congoleum must
maintain was reduced for quarters ending after June 30,
2008.  Congoleum paid a fee of $25 thousand for such amendment, plus
an amendment fee in the amount of $15 thousand per month.  The
financing agreement 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. Congoleum was not in compliance with the minimum EBITDA covenant under
its credit facility for the period ended December 31, 2008, and obtained a
waiver of that covenant as well as an amendment of the covenant levels for the
remaining term of the facility to make them less restrictive.  The
interest rate was increased to 1.75% above the prime rate.  A fee of
$30 thousand was paid in connection with the waiver and
amendment.  Borrowings under this facility are collateralized by
inventory and receivables.  At March 31, 2009, based on the level of
receivables and inventory, $26.3 million was available under the facility, of
which $2.0 million was utilized for outstanding letters of credit and $16.9
million was utilized by the revolving loan.   The existing
financing facility expires June 30, 2009. The Company believes that it will be
able to obtain an extension of the credit facility through the end of 2009;
however, given current business conditions and uncertainty in the credit
markets, there can be no assurances that an extension or refinancing will be
available. There can also 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 will be renewed prior to its expiration if a plan
of reorganization is not confirmed before that time.  Congoleum was in
compliance with the terms of the debtor-in-possession financing at March 31,
2009, as the excess borrowing availability it maintained under the revolving
line of credit, exceeded the threshold required to test
EBITDA.  Congoleum 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 2009
while under Chapter 11 protection.  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.


33


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 to the Consolidated Financial Statements
contained in 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.





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
2009.  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.





Off- Balance Sheet
Arrangements





The Company does not have any
off-balance sheet arrangements.








Item
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not applicable.




34


Item
4T.        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, 2009.  Based on this evaluation, the
      Company’s CEO and CFO concluded that, as of March 31, 2009 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.







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
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2008, 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.


35


There can be no assurance that the
Amended Joint Plan or any other plan will receive the acceptances necessary for
confirmation, that the Amended Joint Plan will not be modified further, that the
Amended Joint Plan or any other plan will receive necessary court approvals from
the Bankruptcy Court and the District Court , that the District Court will
reverse the Order of Dismissal or the Summary Judgment ruling, or that such
approvals and appellate decisions 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 Amended Joint Plan or any other plan of reorganization or in
connection with the New Jersey State Court (the “State Court”) insurance
coverage litigation 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 Amended 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 any  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 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 successfully obtaining reversal
or vacation of the Dismissal Order, 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 its amended plan of reorganization, such failure would have a
material adverse effect upon its business, results of operations and financial
condition.


36


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 Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008 filed with the Securities and
Exchange Commission.





Under
the Amended Joint Plan, if confirmed and effective, holders of existing equity
securities will receive nothing on account of their interests.





Under
the terms of the Amended 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.  Treatment under any future plan would likely be
similar.




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 Amended 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 the Company’s shares. Under
the terms of the Amended 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 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.


37


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.





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.


38


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.  The current recession has had and
continues to 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 very 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 and a further decline in
consumer confidence, and there can be no assurances as to the timing of any
recovery in these markets.





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.


39


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 43
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 60%
and 64% of the Company's net sales for the three months ended March 31, 2009 and
2008, respectively.





Stockholder votes are controlled by ABI;
Congoleum’s interests may not be the same as ABI’s
interests.





ABI owns a majority (approximately 55%
as of March 31, 2009) of the outstanding shares of the Company’s common stock,
representing a 65.5% 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.


40


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, 2009.  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.


41


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.





42


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
      15, 2009
            
            By:
            /s/ Howard N. Feist
      IIIHoward
      N. Feist IIIChief
      Financial Officer(Duly
      Authorized Officer andPrincipal
      Financial & Accounting Officer)





43





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.





44