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 September 30,
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 October 31, 2009Class
      A Common Stock
            
            3,663,390Class
      B Common Stock
            
            4,608,945


2


CONGOLEUM
CORPORATION





Index





PART
      I.
              FINANCIAL
      INFORMATION
              PageFactors
      That May Affect Future Results
              4Item
      1.
              Financial
      Statements:Consolidated
      Balance Sheets as of September 30, 2009 (unaudited) and December 31,
      2008
              5Condensed
      Consolidated Statement of Operations for the three and nine months ended
      September 30, 2009 and 2008 (unaudited)
              6Condensed
      Consolidated Statement of Cash Flows for the nine months ended September
      30, 2009 and 2008 (unaudited)
              7Notes
      to Unaudited Condensed Consolidated Financial Statements
      (unaudited)
              8Item
      2.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              28Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              37Item
      4T.
              Controls
      and Procedures
              37PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              38Item
      1A.
              Risk
      Factors
              38Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              43Item
      3.
              Defaults
      Upon Senior Securities
              43Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              44Item
      5.
              Other
      Information
              44Item
      6.
              Exhibits
              44Signatures
              45





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)


(Unaudited)





September
      30,
            
            
            December
      31,2009
            
            
            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            14,069
            
            
            $
            15,077Restricted
      cash
            
            
            30,770
            
            
            
            29,680Accounts
      receivable, less allowances of $498 and $588as
      of September 30, 2009 and December 31, 2008
            
            
            16,078
            
            
            
            13,789Inventories
            
            
            24,503
            
            
            
            35,814Prepaid
      expenses and other current assets
            
            
            3,570
            
            
            
            3,922Total
      current assets
            
            
            88,990
            
            
            
            98,282Property,
      plant and equipment, net
            
            
            51,205
            
            
            
            56,520Deferred
      income taxes
            
            
            8,098
            
            
            
            8,098Other
      assets, net
            
            
            8,967
            
            
            
            8,967Total
      assets
            
            $
            157,260
            
            
            $
            171,867LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
            
            $
            5,871
            
            
            $
            7,132Accrued
      liabilities
            
            
            15,037
            
            
            
            17,114Asbestos-related
      liabilities
            
            
            44,792
            
            
            
            50,022Revolving
      credit loan
            
            
            12,449
            
            
            
            13,994Deferred
      income taxes
            
            
            6,533
            
            
            
            6,533Accrued
      taxes
            
            
            71
            
            
            
            123Liabilities
      subject to compromise – current
            
            
            4,997
            
            
            
            4,997Total
      current liabilities
            
            
            89,750
            
            
            
            99,915Liabilities
      subject to compromise - long term
            
            
            164,033
            
            
            
            161,503Total
      liabilities
            
            
            253,783
            
            
            
            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  September 30,
      2009and
      December 31, 2008
            
            
            47
            
            
            
            47Class
      B common stock, par value $0.01; 4,608,945 shares authorized, issued
      andoutstanding
      at September 30, 2009 and December 31, 2008
            
            
            46
            
            
            
            46Additional
      paid-in capital
            
            
            49,393
            
            
            
            49,386Retained
      deficit
            
            
            (87,017
            )
            
            
            (80,038
            )Accumulated
      other comprehensive loss
            
            
            (51,179
            )
            
            
            (51,179
            )(88,710
            )
            
            
            (81,738
            )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares
      atSeptember
      30, 2009 and December 31, 2008
            
            
            7,813
            
            
            
            7,813Total
      stockholders’ deficit
            
            
            (96,523
            )
            
            
            (89,551
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            157,260
            
            
            $
            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 Ended
            
            
            Nine
      months EndedSeptember
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      sales
            
            $
            37,359
            
            
            $
            46,085
            
            
            $
            106,815
            
            
            $
            140,948Cost
      of sales
            
            
            31,872
            
            
            
            37,765
            
            
            
            90,690
            
            
            
            111,866Selling,
      general and administrative expenses
            
            
            7,210
            
            
            
            7,768
            
            
            
            22,907
            
            
            
            26,138Asbestos
      related reorganization charges
            
            
            --
            
            
            
            11,491
            
            
            
            --
            
            
            
            11,491Loss
      from operations
            
            
            (1,723
            )
            
            
            (10,939
            )
            
            
            (6,782
            )
            
            
            (8,547
            )Other
      income (expense):Interest
      income
            
            
            --
            
            
            
            49
            
            
            
            3
            
            
            
            1,241Interest
      expense
            
            
            8
            
            
            
            (43
            )
            
            
            (200
            )
            
            
            (240
            )Other
      (expense) / income
            
            
            (180
            )
            
            
            (377
            )
            
            
            50
            
            
            
            (791
            )Loss
      before income taxes
            
            
            (1,895
            )
            
            
            (11,310
            )
            
            
            (6,929
            )
            
            
            (8,337
            )Provision/
      (benefit) for income taxes
            
            
            35
            
            
            
            (1,185
            )
            
            
            50
            
            
            
            (103
            )Net
      Loss
            
            $
            (1,930
            )
            
            $
            (10,125
            )
            
            $
            (6,979
            )
            
            $
            (8,234
            )Net
      Loss per common shareBasic
      & Diluted
            
            $
            (0.23
            )
            
            $
            (1.22
            )
            
            $
            (0.84
            )
            
            $
            (1.00
            )Weighted
      average number of common sharesoutstanding:
      Basic & Diluted
            
            
            8,272
            
            
            
            8,272
            
            
            
            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)





Nine months
      EndedSeptember
      30,2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (6,979
              )
              
              $
              (8,234
              )Adjustments
      to reconcile net loss to net cashprovided
      by (used in)Operating
      activities:Depreciation
              
              
              7,242
              
              
              
              7,607Amortization
              
              
              --
              
              
              
              174Asbestos
      related reorganization charges
              
              
              --
              
              
              
              11,491Stock
      based compensation expense
              
              
              7
              
              
              
              14Changes
      in certain assets and liabilities:Accounts
      and notes receivable
              
              
              (2,289
              )
              
              
              (1,809
              )Inventories
              
              
              11,311
              
              
              
              (1,548
              )Prepaid
      expenses and other assets
              
              
              352
              
              
              
              (946
              )Proceeds
      from legal fee disgorgement
              
              
              --
              
              
              
              9,168Accounts
      payable
              
              
              (1,261
              )
              
              
              (1,567
              )Accrued
      liabilities
              
              
              (987
              )
              
              
              (3,641
              )Asbestos-related
      liabilities
              
              
              (6,320
              )
              
              
              (12,519
              )Other
              
              
              2,478
              
              
              
              (137
              )Net
      cash provided by / (used in) operating activities
              
              
              3,554
              
              
              
              (1,947
              )Cash
      flows from investing activities:Capital
      expenditures
              
              
              (1,927
              )
              
              
              (2,746
              )Net
      cash (used in) investing activities
              
              
              (1,927
              )
              
              
              (2,746
              )Cash
      flows from financing activities:Net short-term borrowings
              
              
              (1,545
              )
              
              
              2,085Net change in restricted cash
              
              
              (1,090
              )
              
              
              38Net cash (used in) / provided by financing activities
              
              
              (2,642
              )
              
              
              2,123Net
      decrease in cash and cash equivalents
              
              
              (1,008
              )
              
              
              (2,570
              )Cash
      and cash equivalents:Beginning
      of period
              
              
              15,077
              
              
              
              26,327End
      of period
              
              $
              14,069
              
              
              $
              23,757





The accompanying notes are an integral
part of the condensed consolidated financial statements.


7


CONGOLEUM
CORPORATION


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


September
30, 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 and nine month period ended
September 30, 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 have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business.  Accordingly, the financial statements
do not include any adjustments that might be necessary should the Company be
unable to continue as a going concern.  As described more fully below,
there is substantial doubt about the Company's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy
Code.





On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy Court for the District of
New Jersey (the "Bankruptcy Court") (Case No. 03-51524) seeking relief under
Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) as a
means to resolve claims asserted against it related to the use of asbestos in
its products decades ago.  During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed a modified plan of
reorganization and related documents with the Bankruptcy Court (the "Fourth
Plan") reflecting the result of further negotiations with representatives of the
Asbestos Claimants' Committee ("ACC"), the Future Claimants' Representative (the
"FCR") and other asbestos claimant representatives. The Bankruptcy Court
approved the disclosure statement and plan voting


8


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 March 2007, Congoleum resumed global plan mediation
discussions with the various


9


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. 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 settlement agreements regarding asbestos
claims (the “Litigation Settlement”) was signed by the parties to the agreement
and filed with the Bankruptcy Court in August 2008.  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 met 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 in
February 2009.  On February 26, 2009, the Bankruptcy Court rendered an
opinion finding certain provisions of the Amended Joint Plan unconfirmable as a
matter of law.  Pursuant to the opinion, the Bankruptcy Court entered
an 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, the
Bondholders’ Committee and ACC appealed the Order of Dismissal and the Summary
Judgment Ruling (the “Summary Judgment Ruling”) unconfirmable as a matter of law
to the U.S. District Court for the District of New Jersey (the “District
Court”).  On August 17, 2009, the District Court issued an opinion and
order (the “District Court Order”) reversing the Order of
Dismissal.  With respect to the plan of reorganization, the District
Court ruled that a settlement with certain asbestos claimants was not an
impediment to confirmation while another plan provision would require a minor
modification.  The decision also provided specific guidance about the
plan and directed the parties in the case to provide briefings in preparation
for a confirmation hearing.  In addition, the District Court assumed
jurisdiction over the proceedings from the Bankruptcy Court. Certain insurers
have filed notices of appeal with respect to the District Court Order with the
Third Circuit Court of Appeals (the “Third Circuit”).  The Debtors,
the Bondholders’ Committee and the ACC have moved to dismiss the appeals, and
such motion is pending.


10





Following additional negotiations, on
October 22, 2009, the ACC, the Bondholders’ Committee and Congoleum jointly
filed a revised plan of reorganization (the “Second Amended Joint Plan”) and
disclosure statement with the District Court. The District Court has scheduled a
hearing to consider the adequacy of the disclosure statement for the Second
Amended Joint Plan for December 7, 2009.  A copy of the Second Amended
Joint Plan and Disclosure Statement is available on Congoleum’s web site at
www.Congoleum.com.





There can be no assurance that the
Second Amended Joint Plan or any other plan of reorganization, if proposed, will
receive the acceptances necessary for confirmation, that the Second Amended
Joint Plan will not be modified further, that the Second Amended Joint Plan or
any other plan will receive necessary court approvals from the District
Court,  that such approvals will be received in a timely fashion, that
any plan will be confirmed if the District Court Order were to be reversed, that
any plan, if confirmed, will become effective,  that there will be
sufficient funds to pay for continued proceedings with respect to  any
plan of reorganization or that the Third Circuit will affirm the District Court
Order if the appeal of the District Court Order by such insurers is not
dismissed.  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 District 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
District Court approval, 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 provides guidance for
Financial Reporting by Entities in Reorganization under the Bankruptcy Code. The
Company implemented this guidance in its consolidated financial statements for
periods after December 31, 2003.





The
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.
            Recent
      Accounting Pronouncements:





In
September 2006, the Financial Accounting Standards Board (the “FASB”) issued new
guidance which 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. This guidance 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. It is effective for fiscal years
beginning after November 15, 2007.  The Company adopted the standard
on January 1, 2008 and the adoption did not have a material impact on the
Company's consolidated financial statements.





In
April 2009, the FASB issued new guidance on “Interim Disclosures about Fair
Value of Financial Instruments”.  This new guidance amends previous
guidance “Disclosures about Fair Value of Financial Instruments,” and requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
 This guidance also amends previous guidance “Interim Financial Reporting,”
which requires those disclosures in summarized financial information at interim
reporting periods.  This new guidance is effective for interim reporting
periods ending after June 15, 2009.  The adoption of this guidance for the
period ended September 30, 2009, did not have a material impact on the Company's
consolidated financial statements. The fair value of the Company's financial
instruments approximated the carrying value as of September 30, 2009 and
December 31, 2008, in each case due to the short-term and the variable interest
rate nature of the financial instruments.





In
May 2009, the FASB issued new accounting guidance, which establishes general
standards of accounting and disclosure of events that occur after the balance
sheet date but before financial statements are issued or are available to be
issued.  This statement requires entities to disclose the date through
which they have evaluated subsequent events and whether the date corresponds
with the release of their financial statements.  This standard is effective
for interim and annual periods ending after June 15, 2009.  The Company
adopted this standard as of June 30, 2009 which did not have an impact on its
consolidated financial statements.





In June 2009, the FASB issued Statement
of Financial Accounting Standards No. 168, The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162.  On the effective date,
the FASB Accounting Standards Codification became the source of authoritative
U.S. accounting and reporting standards for nongovernmental entities, in
addition to guidance issued by the Securities and Exchange
Commission.  This statement became effective for financial statements
issued for interim and annual periods ending after September 15,
2009.


12




3.
            Inventories:  A summary of the major components of
inventories is as follows (in thousands):





September
      30,
            
            
            December
      31,2009
            
            
            2008Finished
      goods
            
            $
            18,503
            
            
            $
            30,203Work-in-process
            
            
            2,267
            
            
            
            852Raw
      materials and supplies
            
            
            3,733
            
            
            
            4,759Total
      inventories
            
            $
            24,503
            
            
            $
            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 loss per share is calculated by dividing net loss
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period, unless their effect is
anti-dilutive.





5.
            Environmental
      and Other Liabilities





The
Company records a liability for environmental remediation claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated.  As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at September 30, 2009 and December 31, 2008,
are not reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.1 million at September 30, 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.


13


The
most significant exposure for which the Company has been named a PRP relates to
a recycling facility site in Elkton, Maryland (the “Galaxy/Spectron Superfund
Site”). The PRP group at this site is made up of 81 companies, substantially all
of which are large financially solvent entities. Two removal actions were
substantially complete as of December 31, 1998 and a groundwater treatment
system was installed thereafter.  The Environmental Protection Agency
(“EPA”) has selected a remedy for the soil and shallow groundwater (“Operable
Unit 1” or OU-1); however, the remedial investigation/feasibility study related
to the deep groundwater (OU-2) has not been completed.  The PRP group,
of which the Company is a part, has entered into a Consent Decree to perform the
remedy for OU-1 and resolve natural resource damage claims. The Consent Decree
also requires the PRPs to perform the OU-2 remedy, assuming that the estimated
cost of the remedy is not more than $10 million.  If the estimated
cost of the OU-2 remedy is more than$10 million, the PRPs may decline to perform
it or they may elect to perform anyway. Cost estimates for the OU-1 and OU-2
work combined (including natural resource damages) range between $22 million and
$34 million, with the Company’s share ranging between approximately $1.0 million
and $1.6 million.  This assumes that all parties participate and that
none cash-out and pay a premium; those two factors may account for some
fluctuation in the Company’s share. Fifty percent (50%) of Congoleum’s share of
the costs is presently being paid by one of its insurance carriers, Liberty
Mutual Insurance Company, whose remaining policy limits for this claim are
expected to cover approximately $0.3 million in additional
costs.  Congoleum expects to fund the balance to the extent further
insurance coverage is not available.





The
Company filed a motion before the Bankruptcy Court seeking authorization and
approval of the Consent Decree and related settlement agreements for the
Galaxy/Spectron Superfund Site, as well authorization for Liberty Mutual
Insurance Company and the Company to make certain payments that have been
invoiced to the Company with respect to the Consent Decree and related
settlement agreements.  An order authorizing and approving the Consent
Decree and related settlement agreements was issued by the Bankruptcy Court in
August 2006.





The Company also accrues remediation
costs for certain of the Company’s owned facilities on an undiscounted basis.
The Company has entered into an administrative consent order with the New Jersey
Department of Environmental Protection and has established a remediation trust
fund of $100 thousand as financial assurance for certain remediation funding
obligations.  Estimated total cleanup costs of $1.3 million, including
capital outlays and future maintenance costs for soil and groundwater
remediation, are primarily based on engineering studies.  Of this amount,
$0.3 million is included in current liabilities subject to compromise and $1.0
million is included in non-current liabilities subject to
compromise.





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.


14




6.
            Asbestos
      Liabilities  Claims
Settlement and Chapter 11 Reorganization





On December 31, 2003, Congoleum filed a
voluntary petition with the Bankruptcy Court (Case No. 03-51524) seeking relief
under Chapter 11 of the Bankruptcy Code as a means to resolve claims asserted
against it related to the use of asbestos in its products decades
ago.  During 2003, Congoleum had obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of a proposed,
pre-packaged Chapter 11 plan of reorganization. In January 2004, the Company
filed its proposed plan of reorganization and disclosure statement with the
Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan with the
Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum's pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum.  In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 2005. In September 2005, Congoleum
learned that certain asbestos claimants were unwilling to agree to forbear from
exercising their security interest as contemplated by the Sixth Plan and the
Sixth Plan was subsequently withdrawn.  In November 2005, the
Bankruptcy Court denied a request to extend Congoleum’s exclusive right to file
a plan of reorganization and solicit acceptances thereof.  In March
2006, Congoleum filed the Eighth Plan.  In addition, CNA filed a plan
of reorganization and the Bondholders’ Committee also filed a plan of
reorganization.  In May 2006, the Bankruptcy Court ordered all parties
in interest in Congoleum’s reorganization proceedings to participate in global
mediation discussions.  Numerous mediation sessions took place from
June through September 2006.  During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and the 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


15


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,   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   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 met 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 in February 2009.  On
February 26, 2009, the Bankruptcy Court rendered an opinion finding certain
provisions of the Amended Joint Plan unconfirmable as a matter of
law.  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, the
Bondholders’ Committee and the ACC appealed the Order of Dismissal and the
Summary Judgment Ruling to the District Court. On August 17, 2009, the District
Courts issued an opinion and order reversing the Order of
Dismissal.   With respect to the plan of reorganization, the
District Court ruled that a settlement with certain asbestos claimants was not
an impediment to confirmation while another plan provision would require a minor
modification.  The decision also provided specific guidance about the
plan and directed the parties in the case to provide briefings in preparation
for a confirmation hearing.  In addition, the District Court assumed
jurisdiction over the proceedings from the Bankruptcy Court. Certain insurers
have filed notices of appeal with respect to the District Court Order with the
Third Circuit.  The Debtors, the Bondholders’ Committee and the ACC
have moved to dismiss the appeals, and such motion is pending.


.


Following
additional negotiations, on October 22, 2009, the ACC, the Bondholders’
Committee and Congoleum jointly filed the Second Amended Joint Plan with the
District Court. The District Court has scheduled a hearing to consider the
adequacy of the disclosure statement for the Second Amended Joint Plan for
December 7, 2009.


16




There can be no assurance that the
Second Amended Joint Plan or any other plan of reorganization, if proposed, will
receive the acceptances necessary for confirmation, that the Second Amended
Joint Plan will not be modified further, that any plan will receive necessary
court approvals from  the District Court,  that such
approvals  will be received in a timely fashion, that any plan will be
confirmed if the District Court Order were to be reversed, that any plan, if
confirmed, will become effective,  that there will
be  sufficient funds to pay for continued proceedings with respect to
any plan of reorganization or that the Third Circuit will affirm the District
Court Order if the appeal of the District Court Order by such insurers is not
dismissed.





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 or District 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 final terms of any future plan that may
become effective, the proposed terms of the Second Amended Joint Plan provide
that if the Second Amended Joint Plan is approved by the District 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 Second Amended Joint Plan.  Under the proposed
terms of the Second 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 50.1% of the newly issued common stock in reorganized Congoleum when the
Second Amended Joint Plan takes effect.





Under
the proposed terms  of the Second Amended Joint Plan, holders of
Congoleum’s $100 million in 8.625% Senior Notes due in August 2008 would receive
on a pro rata basis $33 million in new 9% senior secured notes (the “New Senior
Notes”) maturing December 31, 2017.  The New Senior Notes would not
accrue or earn interest for the first six months after the effective date of the
Second Amended Joint Plan, after which they would accrue interest at the rate of
9% per annum payable semi-annually in cash.  During the period
beginning with the interest payment due 12 months after the effective date of
the Second Amended Joint Plan to and including the interest payment due 30
months after the effective date of the Second Amended Joint Plan, at Congoleum’s
option, interest may be paid in kind by the issuance of additional New Senior
Notes in the aggregate amount of the interest then due and payable on each such
payment date, in which case the interest rate applicable during the period for
which the payment applies would be 11%.





The
indenture governing the New Senior Notes also will provide for the annual
issuance of additional New Senior Notes ("Additional Notes"), with the amount of
Additional Notes to be issued being determined as of the end of Congoleum’s
fiscal year ending December 31, 2011, and on an annual basis at the end of each
of the succeeding five years (each such date, a "Determination Date"), according
to the following procedure.  As soon as practicable after each
Determination Date, the


17


average
EBITDA for the two-year period ending on the Determination Date shall be
calculated.  An assumed net debt capacity ("Net Debt Capacity") shall
then be determined as of each such Determination Date by multiplying this
two-year average annual EBITDA by four.   Additional Notes shall
be issuable to holders of New Senior Notes with respect to a Determination Date
to the extent that the Net Debt Capacity as of such Determination Date, plus any
cash amount on Congoleum's balance sheet as of such Determination Date, exceeds
the sum of (i) the amount of the balance of Reorganized Congoleum's working
capital loan (determined as the daily average of such loan for the year ending
on such Determination Date); (ii) the $33 million of New Senior Notes to be
issued on the effective date of the Second Amended Joint Plan; (iii) the amount
of Additional Notes issued with respect to all prior Determination Dates; and
(iv) the amount of other interest-bearing debt outstanding as of such
Determination Date.  The calculation of the amount of Additional Notes
to be issued shall take place within three months after each Determination Date,
and the issuance of such Additional Notes shall be deemed to have occurred as of
the first day of the fiscal year following the Determination
Date.  The indenture governing the New Senior Notes will provide that
in no event will the cumulative amount of Additional Notes issued under the
procedures described in this paragraph exceed $37 million.





The
New Senior 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 49.9% of the common stock in reorganized
Congoleum.  Congoleum’s obligations for the $100 million in 8.625%
Senior Notes due in August 2008, including accrued pre-petition interest (which
amounted to $3.6 million) would be satisfied by the New Senior Notes and 49.9%
of the common stock issued if the Second Amended Joint Plan takes
effect.




Under
the proposed terms of the Second Amended Joint Plan, existing Class A and Class
B common shares of Congoleum would be cancelled if the Second 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


18


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 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 a plan is not confirmed and the
reorganization cases were dismissed, it is possible that the Avoidance Actions
would be dismissed and the lien avoidance ruling would become a
nullity.





During
the first nine months of 2009, the Company paid $6.3 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
subsequent plan, including the Second 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, and the
terms of all subsequent plans proposed to date including the Second 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.





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.  The Second Amended Joint Plan provides for payment of those
claims in full from certain insurance proceeds.


19




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


20


Claimant
Agreement was not negotiated at arm’s length or in good
faith.  Additionally, certain insurers have argued that Congoleum’s
entering into the Claimant Agreement voids the insurance for the underlying
claims in their entirety.  Certain insurers also have claimed that the
Claimant Agreement voids their entire policy obligations.  Congoleum
has disputed the allegations and contentions of the excess insurance
carriers.  In November 2003, the State Court denied a motion for
summary judgment by the excess insurance carriers that the Claimant Agreement
was not fair, reasonable or in good faith, ruling that material facts concerning
these issues were in dispute.  In April 2004, the State Court denied
motions for summary judgment by the excess carriers that the Claimant Agreement
was not binding on them because Congoleum had breached the consent and
cooperation clauses of their insurance policies by, among other things, entering
into the Claimant Agreement without their consent.  Congoleum has
argued, among other things, that it was entitled to enter into the Claimant
Agreement and/or the Claimant Agreement was binding on the excess insurance
carriers because they were in breach of their policies and/or had denied
coverage and/or had created a conflict with Congoleum by reserving rights to
deny coverage and/or the Claimant Agreement was fair, reasonable and in good
faith and/or there was and is no prejudice to the excess insurance carriers from
the Claimant Agreement and/or the excess insurance carriers had breached their
duties of good faith and fair dealing.





In
August 2004, the State Court entered a case management order that divided the
Coverage Action trial into three phases.  A new judge was assigned to
the case in February 2005 and the schedule was modified as a
result.





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.


21





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 had
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.


22





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.  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.  On December 28, 2007, the Bankruptcy
Court denied the motion for summary judgment.  Congoleum and the
Bondholders' Committee filed a notice of appeal from this decision to the
District Court and the appeal has been administratively terminated and all
parties have reserved their rights. The Fourth Amended Complaint was filed in
January 2009 in the Omnibus Avoidance Action updating certain claimant exhibit
lists, and potential additional causes of action have been tolled pursuant to
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 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 State Court also
denied a motion to stay Phase 2 of the Coverage Action, and Congoleum has
filed a motion for leave to appeal the denial of the stay. On appeal, the State
Court’s Order denying a stay was affirmed.





On July 30, 2009, certain insurers
filed summary judgment motions seeking declarations that Congoleum has
materially breached its insurance policies and that the insurers have no
coverage obligation for the underlying asbestos claims that were the subject of
the Claimant Agreement, the Joint Plan, the Amended Joint Plan or are part of
any other agreement for which the insurers' consent was not procured or is not
procured in the future.  The insurers likely will take the position that
their motions impact all present and future asbestos claims.  Congoleum has
opposed these motions.   The State Court denied these motions.
The Phase 2 trial is scheduled to begin on February 12, 2010.  The
precise scope of the Phase 2 trial is in dispute.  The parties have
submitted competing case management orders to define the scope of the Phase 2
trial, but no case management order has been entered by the
Court.  The Court’s ruling on the insurers’ motions for summary
judgment may impact the scope of issues to be tried in Phase II. The third and
final phase of the Coverage Action trial will address bad faith punitive
damages, if appropriate.


23





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 September 30, 2009:




(In
      thousands)
              
              Balance
      at
                12/31/2008
              
              
              Additions
                (Deletions)
              
              
              Spending
                Against
                Reserve
              
              
              Recoveries
              
              
              Balance
      at
                9/30/2009ReservesReserve
      for
                reorganization costs
              
              $
              20,340
              
              
              
              --
              
              
              $
              (6,321
              )
              
              
              --
              
              
              $
              14,019Insurance
      Proceeds
              
              $
              29,682
              
              
              $
              1,091
              
              
              $
              --
              
              
              $
              --
              
              
              $
              30,773Total Asbestos
      Liability
              
              $
              50,022
              
              
              $
              1,091
              
              
              $
              (6,321
              )
              
              $
              --
              
              
              $
              44,792ReceivablesReceivable
      from Trust
                (in other current assets)
              
              
              (1,322
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (1,322
              )Net Asbestos
      Liability
              
              $
              48,700
              
              
              $
              1,091
              
              
              $
              (6,321
              )
              
              
              --
              
              
              $
              43,470








The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2007 to September 30, 2008:





(In
      thousands)
                    
                    Balance
      at
                      12/31/2007
                    
                    
                    Additions
                      (Deletions)
                    
                    
                    Spending
                      Against
                      Reserve
                    
                    
                    Recoveries
                      From
                      Insurance
                    
                    
                    Balance
      at
                      9/30/2008ReservesReserve
      for
                      reorganization costs
                    
                    $
                    24,744
                    
                    
                    $
                    11,491
                    
                    
                    $
                    (12,519
                    )
                    
                    $
                    --
                    
                    
                    $
                    23,716Insurance
      Proceeds
                    
                    $
                    6,463
                    
                    
                    $
                    22,700
                    
                    
                    $
                    375
                    
                    
                    $
                    --
                    
                    
                    $
                    29,538Total
      Asbestos Liability
                    
                    $
                    31,207
                    
                    
                    $
                    34,191
                    
                    
                    $
                    (12,144
                    )
                    
                    $
                    --
                    
                    
                    $
                    53,254ReceivablesReceivable
      from Trust
                      (in other current assets)
                    
                    
                    (10,490
                    )
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    9,168
                    
                    
                    
                    (1,322
                    )Net
      Asbestos Liability
                    
                    $
                    20,717
                    
                    
                    $
                    34,191
                    
                    
                    $
                    (12,144
                    )
                    
                    $
                    9,168
                    
                    
                    $
                    51,932





24


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):





Nine
      months EndedSeptember
      30,2009
            
            2008Beginning
      balance
            
            $
            1,476
            
            
            $
            1,806Accruals
            
            
            2,458
            
            
            
            2,428Charges
            
            
            (2,553
            )
            
            
            (2,689
            )Ending
      balance
            
            $
            1,381
            
            
            $
            1,545





8.
            Liabilities
      Subject to Compromise




As a result of the Company’s Chapter 11
filing (see Notes 1 and 6), the Company is required to segregate pre-petition
liabilities that are subject to compromise and report them separately on the
consolidated balance sheet.  Liabilities that may be affected by a
plan of reorganization are recorded at the amount of the expected allowed
claims, even if they may be settled for lesser amounts.  Substantially
all of the Company’s pre-petition debt is recorded at face value and is
classified within liabilities subject to compromise.  Prior to the
fourth quarter of 2007, the Company’s accrued interest expense on its Senior
Notes was also recorded in liabilities subject


to
compromise.  In the fourth quarter of 2007 Congoleum also recorded a
$41.0 million interest expense credit to reverse post-petition interest accrued
on its Senior Notes.  Terms of previous reorganization plans had
provided, among other things, for the payment of post-petition interest on the
Senior Notes and therefore Congoleum had continued to accrue such interest.
Under the terms of the Second Amended Joint Plan, the Senior Note holders will
not receive any post-petition interest.





Liabilities subject to compromise are
as follows (in thousands):





September 30,
            
            
            December
      31,2009
            
            
            2008CurrentPre-petition
      other payables and accrued interest
            
            $
            4,997
            
            
            $
            4,997Non-currentDebt
      (at face value)
            
            
            100,000
            
            
            
            100,000Pension
      liability
            
            
            39,335
            
            
            
            37,022Other
      post-retirement benefit obligation
            
            
            11,339
            
            
            
            10,938Pre-petition
      other liabilities
            
            
            13,359
            
            
            
            13,543Total
      liabilities subject to compromise
            
            $
            169,030
            
            
            $
            166,500





25




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):





September
      30,
            
            
            December
      31,2009
            
            
            2008Accrued
      warranty, marketing and sales promotion
            
            $
            10,669
            
            
            $
            13,167Employee
      compensation and related benefits
            
            
            3,188
            
            
            
            3,349Other
            
            
            1,180
            
            
            
            598Total
      accrued liabilities
            
            $
            15,037
            
            
            $
            17,114





As
a result of the Company’s Chapter 11 bankruptcy filing, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of
September 30, 2009 and December 31, 2008 (see Note 8).




10.
            Pensions
      and Other Postretirement Plans


The
Company sponsors several non-contributory defined benefit pension plans covering
most of the Company’s employees.  Benefits under the plans are based
on years of service and employee compensation.  Amounts funded
annually by the Company are actuarially determined using the projected unit
credit and unit credit methods and are equal to or exceed the minimum required
by government regulations.  The Company also maintains health and life
insurance programs for retirees (reflected in the table below in “Other
Benefits”).


26


The
following summarizes the components of the net periodic benefit cost for the
Pension and Other Benefit Plans for the three months and nine months ended
September 30, 2009 and 2008 (in thousands):





Three
      Months Ended
            
            
            Three
      Months EndedSeptember 30,
      2009
            
            
            September 30,
      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
            
            
            $
            806
            
            
            $
            215








Nine
      months Ended
            
            
            Nine
      months EndedSeptember 30,
      2009
            
            
            September 30,
      2008Other
            
            
            
            
            
            OtherPension
            
            
            Benefits
            
            
            Pension
            
            
            BenefitsComponents
      of Net Periodic Benefit Cost:Service
      cost
            
            $
            921
            
            
            $
            171
            
            
            $
            1,143
            
            
            $
            168Interest
      cost
            
            
            3,647
            
            
            
            483
            
            
            
            3,621
            
            
            
            432Expected
      return on plan assets
            
            
            (2,588
            )
            
            
            --
            
            
            
            (3,594
            )
            
            
            --Recognized
      net actuarial loss
            
            
            3,134
            
            
            
            48
            
            
            
            1,230
            
            
            
            45Amortization
      of transition obligation
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Amortization
      of prior service cost
            
            
            1
            
            
            
            --
            
            
            
            18
            
            
            
            --Net
      periodic benefit cost
            
            $
            5,115
            
            
            $
            702
            
            
            $
            2,418
            
            
            $
            645





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





September 30,
      2009
            
            
            September 30,
      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
            %
            
            
            --





27


11.
            Subsequent
      Events





The Company evaluated all events or
transactions that occurred through November 13, 2009, the date the Company
issued its financial statements.  No material subsequent events have
occurred since September 30, 2009 that required recognition or disclosure in the
accompanying consolidated financial statements.




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 and 2009 had a
significant negative impact on the Company’s sales and results of operations,
and those effects may continue in 2010.








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


28


Plan
Trust to pay asbestos claims against Congoleum.  In July 2005,
Congoleum filed the Sixth Plan and related documents with the Bankruptcy Court
which reflected the result of these negotiations, as well as other technical
modifications. The Bankruptcy Court approved the disclosure statement and voting
procedures and Congoleum commenced solicitation of acceptances of the Sixth Plan
in August 2005.  In
September 2005, Congoleum learned that certain asbestos claimants were unwilling
to agree to forbear from exercising their security interest as contemplated by
the Sixth Plan and the Sixth Plan was subsequently withdrawn.  In
November 2005, the Bankruptcy Court denied a request to extend Congoleum’s
exclusive right to file a plan of reorganization and solicit acceptances
thereof.  In March 2006, Congoleum filed the Eighth
Plan.  In addition, CNA filed a plan of reorganization and the
Bondholders’ Committee also filed a plan of reorganization.  In May
2006, the Bankruptcy Court ordered all parties in interest in Congoleum’s
reorganization proceedings to participate in global mediation
discussions.  Numerous mediation sessions took place from June through
September 2006.  During the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with the ACC, the FCR and the 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.   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.   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


29


determination
of whether the settlement met 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 in February 2009.  On February
26, 2009, the Bankruptcy Court rendered an opinion finding certain provisions of
the Amended Joint Plan unconfirmable as a matter of law.  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. Congoleum is
continuing to manage its assets and businesses under the protection of the stay
pending the outcome of the appeal.





On February 27, 2009, Congoleum, the
Bondholders’ Committee and the ACC appealed the Order of Dismissal and the
Summary Judgment Ruling to the District Court.  On August 17, 2009,
the District Court issued an opinion and order reversing the Order of
Dismissal   With respect to the plan of reorganization, the
District Court ruled that a settlement with certain asbestos claimants was not
an impediment to confirmation while another plan provision would require a minor
modification.  The decision also provided specific guidance about the
plan and directed the parties in the case to provide briefings in preparation
for a confirmation hearing.  In addition, the District Court assumed
jurisdiction over the proceedings from the Bankruptcy Court. Certain insurers
have filed notices of appeal with respect to the District Court Order with the
Third Circuit.  The Debtors, the Bondholders’ Committee and the ACC
have moved to dismiss the appeals, and such motion is pending.





Following
additional negotiations, on October 22, 2009, the ACC, the Bondholders’
Committee and Congoleum jointly filed the Second Amended Joint Plan with the
District Court. The District Court has scheduled a hearing to consider the
adequacy of the disclosure statement for the Second Amended Joint Plan for
December 7, 2009.   See Notes 1 and 6 of the Notes to
Consolidated Financial Statements, which are contained in Item I of Part I
this  Quarterly  Report on Form 10-Q.





There can be no assurance that the
Second Amended Joint Plan or any other plan of reorganization, if proposed, will
receive the acceptances necessary for confirmation, that the Second Amended
Joint Plan will not be modified further, that any plan will receive necessary
court approvals from the District Court, that such approvals will be received in
a timely fashion, that any plan will be confirmed if the District Court Order
were reversed, that any plan, if confirmed, will become
effective,  that there will be sufficient funds to pay for continued
proceedings with respect to any plan of reorganization or that the Third Circuit
will affirm the District Court Order if the appeal of the District Court Order
by such insurers is not dismissed.  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 District 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 District Court approval, 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 the Second Amended
Joint Plan.  Certain other parties have also filed various objections
to Congoleum’s previously proposed plans of reorganization and may file
objections to the Second Amended Joint Plan.


30





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million, as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million.  As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum’s rights under its applicable insurance coverage and
payments from Congoleum’s insurers for asbestos claims.  In December
2005, Congoleum commenced the Avoidance Actions seeking to void the security
interest granted to the Collateral Trust and such pre-petition
settlements.  Following summary judgment hearings, the Bankruptcy
Court 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 Second 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. Congoleum does not believe it can reasonably
estimate the liability associated with claims that may be pending.





During
the first nine months of 2009, the Company paid $6.3 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
subsequent plans proposed to date, including the Second 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 Second 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
Second 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.


31


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 proposed Disclosure
Statement with respect to the Second Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code of the Debtors, the Official Asbestos
Claimants’ Committee and the Official Committee of Bondholders for Congoleum
Corporation, et al., dated as of October 22, 2009, a copy of which has been
filed as an exhibit to the Company’s Report on Form 8-K dated October 22, 2009
filed with the Securities and Exchange Commission on October 28,
2009.








Three
      months ended
              
              
              
              
              
              Nine
      months endedSeptember
      30,
              
              
              
              
              
              September
      30,2009
              
              
              
              
              
              2008
              
              
              
              
              
              2009
              
              
              
              
              
              2008(In
      thousands of dollars)
              
              
              
              
              
              (In
      thousands of dollars)Net
      sales
              
              $
              37,359
              
              
              
              
              
              $
              46,085
              
              
              
              
              
              $
              106,815
              
              
              
              
              
              $
              140,948Cost
      of sales
              
              
              31,872
              
              
              
              
              
              
              37,765
              
              
              
              
              
              
              90,690
              
              
              
              
              
              
              111,866Gross
      profit
              
              
              5,487
              
              
              14.7
              %
              
              
              8,320
              
              
              18.1
              %
              
              
              16,125
              
              
              15.1
              %
              
              
              29,082
              
              
              20.6
              %Selling,
      general andadministrative
      expenses
              
              
              7,210
              
              
              19.3
              %
              
              
              7,768
              
              
              16.9
              %
              
              
              22,907
              
              
              21.4
              %
              
              
              26,138
              
              
              18.5
              %Asbestos
      related charges
              
              
              --
              
              
              
              
              
              
              11,491
              
              
              
              
              
              
              --
              
              
              
              
              
              
              11,491Operating
      loss
              
              
              (1,723
              )
              
              
              
              
              
              (10,939
              )
              
              
              
              
              
              (6,782
              )
              
              
              
              
              
              (8,547
              )Interest
      income(expense), net
              
              
              8
              
              
              
              
              
              
              6
              
              
              
              
              
              
              (197
              )
              
              
              
              
              
              1,001Other
      income (expense), net
              
              
              (180
              )
              
              
              
              
              
              (377
              )
              
              
              
              
              
              50
              
              
              
              
              
              
              (791
              )Loss
      before taxes
              
              
              (1,895
              )
              
              
              
              
              
              (11,310
              )
              
              
              
              
              
              (6,929
              )
              
              
              
              
              
              (8,337
              )Provision/(benefit)
      for
                income
      taxes
              
              
              35
              
              
              
              
              
              
              (1,185
              )
              
              
              
              
              
              50
              
              
              
              
              
              
              (103
              )Net
      loss
              
              $
              (1,930
              )
              
              
              
              
              $
              (10,125
              )
              
              
              
              
              $
              (6,979
              )
              
              
              
              
              $
              (8,234
              )





Net
sales for the three months ended September 30, 2009 were $37.4 million as
compared to $46.1 million for the three months ended September 30, 2008, a
decrease of $8.7 million or 18.9% on net sales. The sales decline was primarily
a result of significantly lower sales to the manufactured housing industry as
well as continuing weakness in the residential new construction and remodeling
categories.





Net
sales for the nine months ended September 30, 2009 were $106.8 million as
compared to $140.9 million for the nine months ended September 30, 2008, a
decrease of $34.1 million or 24.2%. The year-to-date sales shortfall reflects
lower sales to the manufactured housing industry as a result of sharp reductions
in manufactured and RV home production during 2009, coupled with declines in new
residential construction and remodeling activity demand.


32





Gross profit for the three months ended
September 30, 2009 totaled $5.5 million, or 14.7% of net sales, compared to $8.3
million, or 18.1% of net sales, for the same period last year. The decrease in
gross profit dollars resulted from the lower sales levels while the reduced
gross profit margin percentage reflects the impact of lower production volumes
(resulting from both lower and demand and inventory reductions) over which to
spread fixed manufacturing overhead, partially mitigated by cost reductions
enacted earlier in the year.





Gross
profit for the nine months ended September 30, 2009 totaled $16.1 million, or
15.1% of net sales, compared to $29.1 million, or 20.6% of net sales, for the
same period last year. The decrease in gross profit dollars resulted from the
lower sales levels and the impact of unabsorbed fixed overhead spending, with
the decline in gross profit margins reflecting lower production volume over
which to spread fixed manufacturing overhead, partially offset by manufacturing
costs reductions, including workforce reductions.





Selling, general and administrative
expenses were $7.2 million for the three months ended September 30, 2009 as
compared to $7.8 million for the three months ended September 30, 2008. The
decrease reflects cost reductions measures enacted during the first quarter of
2009, including headcount and expense reductions, partially offset by increased
pension expense of $0.9 million.





Selling, general and administrative
expenses were $22.9 million for the nine months ended September 30, 2009 or
21.4% of net sales, compared to $26.1 million or 18.5% of net sales for the nine
months ended September 30, 2008, Cost reduction measures instituted during the
first quarter of 2009 accounted for most of the decrease, partially offset by a
severance charge of $0.5 million and incremental pension expense of $2.7
million.





The loss from operations was $1.7
million for the three months ended September 30, 2009 compared to a loss of
$10.9 million for three months ended September 30, 2008.  The three
months ending September 30, 2008 included an $11.5 million charge to add to the
reorganization related reserve. The loss from operations for the nine months
ended September 30, 2009 was $6.8 million compared to a loss from operations of
$8.5 million for the same period last year, which included a charge of $11.5
million to add to the reorganization reserve.




Due
to the inability to recognize any tax benefits associated with operating losses,
the Company expects its effective tax rate for 2009 will be
negligible.  The Company recorded a provision of $35 thousand for
income taxes for the three months ended September 30, 2009.  For the
nine months ended September 30, 2009 the Company has recorded $50 thousand as a
provision for income taxes. The Company recorded a tax benefit of $1.2 million
during the third quarter of 2008 primarily related to the deferred federal tax
impact (net of valuation allowance) of $11,491 in additional asbestos reserves
recorded in the third quarter 2008.


33





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
nine months of 2009, the Company paid $6.3 million in fees and expenses related
to reorganization proceedings under the Bankruptcy Code and the Coverage
Action.  Furthermore, at September 30, 2009, the Company had incurred
but not paid approximately $5.7 million in additional fees and expenses for
services rendered through that date.





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
subsequent plan, including the Second 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
terms of all subsequent plans proposed to date, including the Second 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.


34




Unrestricted cash and cash equivalents,
including short-term investments at September 30, 2009, were $14.1 million, a
decrease of $1.0 million from December 31, 2008.  Restricted cash of
$30.8 million at September 30, 2009 consists of insurance settlement proceeds,
the disposition of which is subject to court order.   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 $0.8 million at September 30, 2009 and a negative
$1.6 million at December 31, 2008.





The
ratio of current assets to current liabilities was 1.0 to 1.0 at September 30,
2009 and December 31, 2008.  Net cash provided by operations during
the nine months ended September 30, 2009 was $3.6 million, as compared to net
cash used in operations of $1.9 million during the nine months ended September
30, 2008.





Capital expenditures for the nine
months ended September 30, 2009 totaled $1.9 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) December 31, 2009 and (ii) the date the plan of
reorganization in Congoleum's bankruptcy cases becomes
effective.  This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization (“EBITDA”). 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. During the second quarter of 2009 the Company received an
extension of the existing financing facility to December 31,
2009.  A covenant modification and extension fee of $25 thousand
was paid in connection with this extension, plus a monthly extension fee of
$15 thousand per month.  In connection with the amendment for the
period ending December 31, 2009, minimum EBITDA covenants were set for the
months ending up through December 31, 2009.  Borrowings under
this facility are collateralized by inventory and receivables.  At
September 30, 2009, based on the level of receivables and inventory, $18.6
million was available under the facility, of which $2.0 million was utilized for
outstanding letters of credit and $12.4 million was utilized by the revolving
loan.     In November, 2009, Congoleum and Wachovia
agreed to a further modification of the credit facility that extends the
facility until the earlier of June 30, 2010 and (ii) the date the plan of
reorganization in Congoleum's bankruptcy cases becomes effective.  The
amendment also provided an additional $5 million of availability under the
revolver secured by certain real estate.  The $5 million loan
availability against real estate reduces by $69 thousand per month beginning
December 1, 2009.  In connection with the amendment, Congoleum will
grant Wachovia a first lien on its properties on East State Street in Trenton,
NJ and in Marcus Hook, PA. The amendment will be executed upon approval by the
District Court, which has been requested.  A $60 thousand amendment
fee will be payable at that time.


35


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 September 30, 2009, as the excess borrowing availability it
maintained under the revolving line of credit exceeded the threshold at which it
was required to meet minimum EBITDA levels.  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 and 2010 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.





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.


36





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 and 2010.  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.





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 September 30, 2009.  Based on this evaluation,
      the Company’s CEO and CFO concluded that, as of September 30, 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.





(b)
            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.






37





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 contained in Item 1 of Part I of this
      Quarterly Report on Form 10-Q 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.





There can be no assurance that the
Second Amended Joint Plan or any other plan of reorganization, if proposed, will
receive the acceptances necessary for confirmation, that the Second Amended
Joint Plan will not be modified further, that the Second Amended Joint Plan or
any other plan will receive necessary court approvals from the District
Court,  that such approvals will be received in a timely fashion, that
any plan will be confirmed, that any plan, if confirmed, will become effective,
that there will be sufficient funds to pay for continued proceedings with
respect to any plan of reorganization or that the Third Circuit will affirm the
District Court Order if the appeal of the District Court Order by such insurers
is not dismissed.





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 District 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 District Court approval, 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 Second 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
Second Amended Joint Plan or have such plan become effective.


38


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 obtaining sufficient creditor and court approval
of any reorganization plan pursued by the Company (including the results of any
relevant appeals)  (ix) costs of, developments in and the outcome of
insurance coverage litigation pending in the State Court involving Congoleum and
certain insurers, (x) compliance with the Bankruptcy Code, including Section
524(g), and (xi) the possible adoption of another party's plan of reorganization
which may prove to be unfeasible. In any event, if the Company is not successful
in obtaining sufficient creditor and court approval of its amended plan of
reorganization, such failure would have a material adverse effect upon its
business, results of operations and financial condition.





For further information regarding the
Company’s asbestos liability, insurance coverage and strategy to resolve its
asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated
Financial Statements, which are included in the 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 Second 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 Second 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.




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 Second 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 Second Amended Joint Plan, if confirmed and effective, the
Company's common stock will be cancelled.




39


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.





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.


40





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.





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.


41





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 and manufactured housing/RV 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.  The
reductions in its inventory levels that the Company has made during 2009 in
response to market conditions could make the adverse impact of any disruption
more pronounced.





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%
of the Company's net sales for the nine months ended September 30, 2009 and
2008.


42





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 September 30, 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.





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
September 30, 2009.  During 2007, the Company reversed all accrued
post-petition interest on the Senior Notes to reflect the terms of the Joint
Plan and the terms of all subsequent plans proposed to date, including the
Second Amended Joint Plan.


43





Item 4.
            Submission of Matters to a Vote
      of Security Holders:





None.





Item
      5.
            Other
      Information:





On November 11, 2009, Congoleum
Corporation, issued a press release announcing its financial results for the
three and nine months ended September 30, 2009.  The text of the press
release is filed herewith as Exhibit 99.1, and incorporated herein by
reference.





Item 6.
            Exhibits:







Exhibit
              Number
            
            Exhibits31.1
            
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial
    Officer32.1
            
            Section
      1350 Certification of the Chief Executive Officer.32.2
            
            Section
      1350 Certification of the Chief Financial Officer.99.1
            
            Press
      Release, dated November 11, 2009





44


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:
            November
      13, 2009
            
            By:
      /s/Howard N.
      Feist IIIHoward
      N. Feist IIIChief
      Financial Officer(Duly
      Authorized Officer andPrincipal
      Financial & Accounting Officer)








45





Exhibit
Index








Exhibit
              Number
            
            Exhibits31.1
            
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/ 15d-14(a) Certification of Chief Financial
    Officer32.1
            
            Section
      1350 Certification of the Chief Executive Officer.32.2
            
            Section
      1350 Certification of the Chief Financial Officer.99.1
            
            Press
      Release, dated November  11,
2009





46