UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-K





[X]
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008OR[  ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from __________ to
  ___________





Commission
File Number 1-13612





CONGOLEUM
CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            02-0398678(State
      or Other Jurisdiction of
            (IRS
      Employer Identification No.)Incorporation
      or Organization)





3500
Quakerbridge Road


P.O.
Box 3127


Mercerville,
NJ  08619-0127


(Address
of Principal Executive Offices and Zip Code)





(609)
584-3000


(Registrant’s
Telephone Number, Including Area Code)







Securities
Registered Pursuant to Section 12(b) of the Act: None





Securities
Registered Pursuant to Section 12(g) of the Act:  Class A Common Stock, par value $0.01 per
share














Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities
Act.    YES [  ]    NO [X]





Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.    YES [  ]
    NO [X]





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]





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]





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




As of June 30, 2008, the aggregate
market value of all shares of Class A Common Stock held by non-affiliates of the
Registrant was approximately $73.3 thousand based on the last sales price of
$0.02 per share as reported by Pink OTC Markets. 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 its shares. Under the terms
of the Amended Joint Plan, if confirmed and effective, the Company’s common
stock will be cancelled.




For purposes of determining this
amount, affiliates are defined as directors and executive officers of the
Registrant, American Biltrite Inc. and Hillside Capital Incorporated. All of the
shares of Class B Common Stock of the Registrant are held by affiliates of the
Registrant.




As of March 13, 2009, an aggregate of
3,663,390 shares of Class A Common Stock and an aggregate of 4,608,945 shares of
Class B Common Stock of the Registrant were outstanding.







2





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of Congoleum Corporation’s Proxy Statement for the 2009 Annual Meeting of
Stockholders to be held on May 12, 2009, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2008, are
incorporated by reference into Part III of this Annual Report on Form
10-K.





3








TABLE OF
      CONTENTS
            PagePART
      IITEM
      1.
            BUSINESS
            6ITEM
      1A.
            RISK
      FACTORS
            13ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS
            19ITEM
      2.
            PROPERTIES
            19ITEM
      3.
            LEGAL
      PROCEEDINGS
            20ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            33PART
      IIITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
            33ITEM
      6.
            SELECTED
      FINANCIAL DATA
            34ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            34ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            45ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            46ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            90ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES
            90ITEM
      9B.
            OTHER
      INFORMATION
            91PART
      IIIITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            91ITEM
      11.
            EXECUTIVE
      COMPENSATION
            92ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            92ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            93ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            93PART
      IVITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
            94





4





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.





5





PART
I





Item
      1.
            BUSINESS





General





Congoleum
was incorporated in Delaware in 1986, but traces its history in the flooring
business back to Nairn Linoleum Co., which began in 1886.





Congoleum
produces both sheet and tile floor covering products with a wide variety of
product features, designs and colors.  Sheet flooring, in its
predominant construction, is produced by applying a vinyl gel to a flexible
felt, printing a design on the gel, applying a wear layer, heating the gel layer
sufficiently to cause it to expand into cushioned foam and, in some products,
adding a urethane coating.  The Company also produces
through-chip-inlaid sheet products for both residential and commercial
markets.  These products are produced by applying an adhesive coat and
solid vinyl colored chips to a felt backing and laminating the sheet under
pressure with a heated drum.  Tile flooring is manufactured by
creating a base stock (consisting primarily of limestone and vinyl resin) which
is less flexible than the backings for sheet flooring, and transferring or
laminating to it preprinted colors and designs followed by a wear layer and, in
some cases, a urethane coating.  Commercial tile is manufactured by
including colored vinyl chips in the pigmented base stock.  For
do-it-yourself tile, an adhesive is applied to the back of the
tile.  The differences between products within each of the two product
lines consist primarily of content and thickness of wear layers and coatings,
the use of chemical embossing to impart a texture, the complexity of designs and
the number of colors.  Congoleum also purchases sundries and accessory
products for resale.





Congoleum’s
products serve both the residential and commercial hard-surface flooring
markets, and are used in remodeling, manufactured housing, new construction and
commercial applications. These products, together with a limited quantity of
related products purchased for resale, are sold primarily to wholesale
distributors and major retailers in the United States and
Canada.  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.




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







6







voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum’s pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the “Plan Trust”) to pay asbestos claims against
Congoleum.  In July 2005, Congoleum filed an amended plan of
reorganization (the “Sixth Plan”) and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005.  In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn.  In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof.  In March 2006, Congoleum filed a new
amended plan of reorganization (the “Eighth Plan”).  In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, “CNA”), filed a plan of reorganization and the
Official Committee of Bondholders (the “Bondholders’ Committee”) (representing
holders of the Company’s 8 5/8% Senior Notes due August 1, 2008 (the “Senior
Notes”)) also filed a plan of reorganization. In May 2006, the Bankruptcy Court
ordered all parties in interest in Congoleum’s reorganization proceedings to
participate in global mediation discussions.  Numerous mediation
sessions took place from June through September 2006. During the initial
mediation negotiations, Congoleum reached an agreement in principle, subject to
mutually agreeable definitive documentation, with the ACC, the FCR and the
Company’s controlling shareholder, American Biltrite, Inc. (“ABI”), on certain
terms of an amended plan of reorganization (the “Ninth Plan”), which Congoleum
filed and proposed jointly with the ACC in August 2006.  CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization. Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’ Committee
reached agreement on the terms of a new amended plan (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







7







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





On February 27, 2009, Congoleum and the
Bondholders’Committee appealed the Order of
Dismissaland the summaryjudgmentrulingdenying Plan confirmationto the U.S. District Court for the
District of New Jersey.  On March 3, 2009, an order was entered by the
Bankruptcy Court granting a stay of the Bankruptcy Court’s Order of Dismissal pendingentry ofa finalnon-appealable decision affirming the Order of
Dismissal.SeeNotes1 and 17 of the Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report on Form
10-K.





8





The
Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and any amendments to these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), are available free of charge through its Internet
website (www.congoleum.info),
as soon as reasonably practicable after being electronically filed with, or
otherwise furnished to, the Securities and Exchange Commission.





As
a result of filing its bankruptcy case, the Company is required to file
periodically with the Bankruptcy Court certain financial information on an
unconsolidated basis for itself and two subsidiaries. This information includes
Statements of Financial Affairs, schedules and certain monthly operating reports
(in forms prescribed by the Federal Rules of Bankruptcy Procedure). The debtors’
informational filings with the Bankruptcy Court, including the Statements of
Financial Affairs, schedules and monthly operating reports (collectively, the
“Bankruptcy Reports”), are available to the public at the office of the Clerk of
the Bankruptcy Court, Clarkson S. Fisher U.S. Courthouse, 402 East State Street,
Trenton, NJ 08608. Certain of the Bankruptcy Reports may be viewed at www.njb.uscourts.gov
(Case No. 03-51524).





The
Company is furnishing the information set forth above for convenience of
reference only. The Company cautions that the information contained in the
Bankruptcy Reports is or will be unaudited and subject to change and not
prepared in accordance with generally accepted accounting principles or for the
purpose of providing the basis for an investment decision relating to any of the
securities of the Company. In view of the inherent complexity of the matters
that may be involved in the bankruptcy case, the Company does not undertake any
obligation to make any further public announcement with respect to any
Bankruptcy Reports that may be filed with the Bankruptcy Court or the matters
referred to therein.





Raw
Materials





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.





9





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.





Patents and
Trademarks





The
Company believes that the Congoleum brand names, as well as the other trademarks
it holds, are important to maintaining its competitive position.





The
Company also believes that patents and know-how play an important role in
furthering and maintaining competitive position.





Distribution





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.  Net
sales to customers in the United States for the years ended December 31, 2008
and 2007 totaled $161.0 million and $192.9 million, respectively, with net sales
to customers outside the United States for the years ended December 31, 2008 and
2007 totaling $11.6 million and $11.4 million, respectively.





The
Company’s sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October.  See Note 21
of the Notes to Consolidated Financial Statements for a comparison of quarterly
operating results for the years ended December 31, 2008 and
2007.  Orders are generally shipped as soon as a truckload quantity
has been accumulated, and backorders can be canceled without
penalty.  At December 31, 2008, the backlog of unshipped orders was
$5.8 million, compared to $6.6 million at December 31, 2007.








10





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 sales,
at least until a suitable replacement was in place. For the year ended December
31, 2008, two customers each accounted for over 10% of the Company’s net
sales.  These customers were its manufactured housing market
distributor, LaSalle-Bristol Corporation, and its retail market distributor,
Mohawk Industries, Inc.  Together, they accounted for approximately
62.9% of the Company’s net sales in 2008.





Working
Capital





The Company produces goods for
inventory and sells on credit to customers.  Generally, the Company’s
distributors carry inventory as needed to meet local or rapid delivery
requirements.  The Company’s credit terms generally require payment on
invoices within 31 days, with a discount available for earlier payment. 
These practices are typical within the industry.





Congoleum
anticipates that its debtor-in-possession financing facility (including
anticipated extensions thereof) together with cash from operations will provide
it with sufficient liquidity to operate during 2009 while under Chapter 11
protection, although there can be no assurances of such in light of current
business conditions.  The existing financing facility expires June 30,
2009. 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 (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time.
 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.  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.





Product
Warranties





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.





11





Competition





The
market for the Company’s products is highly competitive.  Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile.  In
residential applications, both tile and sheet products are used primarily in
kitchens, bathrooms, laundry rooms and foyers and, to a lesser extent, in
playrooms and basements.  Ceramic tile is used primarily in kitchens,
bathrooms and foyers.  Carpeting is used primarily in bedrooms, family
rooms and living rooms.  Hardwood flooring and melamine laminate are
used primarily in family rooms, foyers and kitchens.  Commercial grade
resilient flooring faces substantial competition from carpeting, ceramic tile,
rubber tile, hardwood flooring and stone in commercial
applications.  The Company believes, based upon its market research,
that purchase decisions are influenced primarily by fashion elements such as
design, color and style, durability, ease of maintenance, price and ease of
installation.  Both tile and sheet resilient flooring are easy to
replace for repair and redecoration and, in the Company’s view, have advantages
over other floor covering products in terms of both price and ease of
installation and maintenance.





The
Company encounters competition from three other manufacturers in North America
and, to a lesser extent, foreign manufacturers. In the resilient category,
Armstrong World Industries, Inc. has the largest market share. Some of the
Company’s competitors have substantially greater financial and other resources
and access to capital than the Company.





Research and
Development





The
Company’s research and development efforts concentrate on new product
development, improving product durability and expanding technical expertise in
the manufacturing process.  Expenditures for research and development
for the year ended December 31, 2008 were $3.8 million, compared to $4.2 million
for the year ended December 31, 2007.





Environmental
Regulation





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.  Pursuant to administrative consent orders signed in 1986
and in connection with a prior restructuring, the Company is in the process of
implementing cleanup measures at its Trenton sheet facility under New Jersey’s
Environmental Clean-up Responsibility Act, as amended by the New Jersey
Industrial Site Recovery Act.  The Company does not anticipate that
the additional costs of these measures will be significant.  The
Company also agreed to be financially responsible for any cleanup measures
required at its Trenton tile facility when that facility was acquired in
1993.  In 2008, the Company did not incur any capital expenditures for
environmental compliance and control facilities.





12





The
Company has historically expended substantial amounts for compliance with
existing environmental laws and regulations, including those matters described
above.  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 those amounts may be substantial. Because environmental requirements have
grown increasingly strict, the outcome of these matters could result in
significant expenses or judgments that could have a material adverse effect on
the financial position of the Company.SeeItem 3 of this Annual Report on Form
10-K for certain additional information regarding environmental
matters.





Employees





At
December 31, 2008, the Company employed a total of 613 employees compared to 753
employees at December 31, 2007.





The
Company has entered into collective bargaining agreements with hourly employees
at its four plants and with the drivers of the trucks that provide interplant
transportation. These agreements cover approximately 408 of the Company’s
employees.  The Trenton tile plant has a five-year collective
bargaining agreement with United Steelworkers of America – Local 547, which
expires in May 2013.  The Trenton warehouse has a five-year collective
bargaining agreement with United Steelworkers of America – Local 107L, which
expires in February 2011.  The Marcus Hook plant has a five-year
collective bargaining agreement with the United Steelworkers of America – Local
12698-01, which expires in November 2013.  The Marcus Hook plant also
has a five-year collective bargaining agreement with the Teamsters Union – Local
312, which expires in January 2014.  The Finksburg plant negotiated
its first collective bargaining agreement and ratified this agreement in April
2007.  This is a three-year agreement with the United Steelworkers of
America – Local 9477-27, which expires in January 2010.  In the past
five years, there have been no strikes by employees of the Company and the
Company believes that its employee relations are satisfactory.








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 this Annual Report on Form 10-K, 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.








13





There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the United States
District Court for the District of New Jersey (the “District Court”), that the
District Court will reverse the Order of Dismissal or the Summary Judgment
ruling, or that such approvals and appellate decisions will be received in a
timely fashion, that any plan will be confirmed, that any plan, if confirmed,
will become effective, or that there will be sufficient funds to pay for
continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.





Confirmation
of any plan of reorganization will depend on the Company obtaining exit
financing to provide it with sufficient liquidity to fund obligations upon the
plan becoming effective.  If the Company’s cash flow from operations
is materially less than anticipated, and/or if the costs in connection with
seeking confirmation of the Amended Joint Plan or any other plan of
reorganization or in connection with the New Jersey State Court (the “State
Court”) insurance coverage litigation discussed elsewhere in this Annual Report
on Form 10-K are materially more than anticipated, the Company may be unable to
obtain exit financing which, when combined with net cash provided from operating
activities, would provide it with sufficient funds.  Such a
circumstance would likely result in the Company not being able to confirm the
Amended Joint Plan or have such plan become effective.





Some
additional factors that could cause actual results to differ from the Company’s
goals for resolving its asbestos liability through any plan of reorganization
include: (i) the future cost and timing of estimated asbestos liabilities and
payments, (ii) the availability of insurance coverage and reimbursement from
insurance companies that underwrote the applicable insurance policies for the
Company for asbestos-related claims, (iii) the costs relating to the execution
and implementation of any plan of reorganization pursued by the Company, (iv)
timely agreement with other creditors, or classes of creditors, that exist or
may emerge, (v) satisfaction of the conditions and obligations under the
Company’s outstanding debt instruments, (vi) the response from time to time of
the lenders, customers, suppliers and other constituencies of the Company and
ABI to the ongoing process arising from the Company’s strategy to settle its
asbestos liability, (vii) the Company’s ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms, (viii) timely
creditor and court approval (including the results of any relevant appeals) of
any reorganization plan pursued by the Company and the court overruling any
objections to the Company’s reorganization plan that may be filed, (ix) costs
of, developments in and the outcome of insurance coverage litigation pending in
the State Court involving Congoleum and certain insurers, (x) compliance with
the Bankruptcy Code, including Section 524(g), and successfully




14




obtaining
reversal or vacation of the Dismissal Order, and (xi) the possible adoption of
another party’s plan of reorganization which may prove to be unfeasible. In any
event, if the Company is not successful in obtaining sufficient creditor and
court approval of its amended plan of reorganization, such failure would have a
material adverse effect upon its business, results of operations and financial
condition.





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





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





Under
the terms of the Amended Joint Plan, existing Class A and Class B common shares
of Congoleum will be cancelled when the plan takes effect and holders of those
shares will not receive anything on account of their cancelled
shares.  Treatment under any future plan would likely be
similar.




The
Company’s common stock is thinly traded, which will affect a stockholder’s
ability to sell the Company’s stock or the price for which it can be sold; the
Company’s common stock will be cancelled if the Amended Joint Plan is confirmed
and becomes effective.




There has been and may continue to be,
at least for the immediate future, a limited public market for the Company’s
common stock. The Company’s Class A common stock was delisted by the American
Stock Exchange (“Amex”) on February 19, 2008 because it did not meet Amex
listing standards for share value, share price and aggregate market
capitalization. From February 19, 2008, the Company’s common stock has not been
listed on any securities exchange or on an automated dealer quotation system.
Accordingly, there is a limited trading market for our shares. Under the terms
of the Amended Joint Plan, if confirmed and effective, the Company’s common
stock will be cancelled.





The
Company may incur substantial liability for environmental, product and general
liability claims in addition to asbestos-related claims, and its insurance
coverage and its likely recoverable insurance proceeds may be substantially less
than the liability incurred by the Company for these claims.





Environmental
Liabilities.  Due to the nature of the Company’s business and certain
of the substances which are or have been used, produced or discharged by the
Company, the Company’s operations are subject to extensive federal, state and
local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws and regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites.  The




15




Company
will continue to be required to expend amounts in the future for costs related
to prior activities at its facilities and third party sites, and for ongoing
costs to comply with existing environmental laws, and such amounts may be
substantial. There is no certainty that these amounts will not have a material
adverse effect on its business, results of operations and financial condition
because, as a result of environmental requirements becoming increasingly strict,
the Company is unable to determine the ultimate cost of compliance with
environmental laws and enforcement policies.  Moreover, in addition to
potentially having to pay substantial amounts for compliance, future
environmental laws and regulations may require or cause the Company to modify or
curtail its operations, which could have a material adverse effect on the
Company’s business, results of operations and
financial condition.





Product
and General Liabilities.  In the ordinary course of its business, the
Company becomes involved in lawsuits, administrative proceedings, product
liability claims (in addition to asbestos-related claims) and other
matters.  In some of these proceedings, plaintiffs may seek to recover
large and sometimes unspecified amounts and the matters may remain unresolved
for several years.  These matters could have a material adverse effect
on the Company’s business, results of operations and financial condition if the
Company is unable to successfully defend against or settle these matters, its
insurance coverage is insufficient to satisfy unfavorable judgments or
settlements relating to these matters, or the Company is unable to collect
insurance proceeds relating to these matters.





The
Company is dependent upon a continuous supply of raw materials from third party
suppliers and would be harmed if there were a significant, prolonged disruption
in supply or increase in its raw material costs.





The Company’s business is dependent upon a
continuous supply of raw materials from third party
suppliers.The principal raw materials used by the Company in
its manufacture of sheet and tile flooring are vinyl resins, plasticizers,
latex, limestone, stabilizers, cellulose paper fibers, urethane and transfer
print film.  The Company purchases most of these raw materials from
multiple sources.  Although the Company has generally not had
difficulty in obtaining its requirements for these materials, it has
periodically experienced significant price increases for some of these
materials.  Although the Company has been able to obtain sufficient
supplies of specialty resin and other raw materials, there can be no assurances
that it may not experience difficulty in the future, particularly if global
supply conditions deteriorate, which could have a material adverse effect on
profit margins.





The
Company believes that suitable alternative suppliers are generally available for
substantially all of its raw material requirements, although quantities of
certain materials available from alternative suppliers may be in limited supply
and production trials may be required to qualify new materials for
use.  The Company does not have readily available alternative sources
of supply for specific designs of transfer print film, which are produced
utilizing print cylinders engraved to the Company’s specifications. Although no
loss of this source of supply is anticipated, replacement could take a
considerable period of time and interrupt production of some of the Company’s
products.  In an attempt to protect against this risk of loss of
supply, the Company maintains a raw material inventory and continually seeks to
develop new sources which will provide continuity of supply for its raw material
requirements.





16





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 itsproduct development, manufacturing
facilities, distribution network and sales and marketing activities.Competitive pressures may also result in
decreased demand for the Company’s products and in the loss of the
Company’s market share for its
products.  Moreover, due to the competitive nature of the
Company’s industry, the Company may be
commercially restricted from raising or even maintaining the sales prices of its
products, which could
result in the Company incurring significant operating losses if its expenses
were to increase or otherwise represent an increased percentage of the
Company’s sales.





The
Company’s business is subject to general economic conditions and conditions
specific to the remodeling and housing industries.





The
Company is subject to the effects of general economic conditions.  A
sustained general economic slowdown would have serious negative consequences for
the Company’s business, results of operations and financial
condition.  Moreover, the Company’s business is cyclical and is
affected by the economic factors that affect the remodeling and housing
industries in general and the manufactured housing industry specifically,
including the availability of credit, consumer confidence, changes in interest
rates, market demand and general economic conditions.  The Company has
experienced a very significant decline in sales as a result of weakness in the
housing market and general economy.  The Company may experience
further sales declines resulting from continued deterioration in the housing
market and a further decline in consumer confidence, and there can be no
assurances as to the timing of any recovery in these markets.





17





The
Company could realize shipment delays, depletion of inventory and increased
production costs resulting from unexpected disruptions of operations at any of
the Company’s facilities.





The Company’s business depends upon its
ability to timely manufacture and deliver products that meet the needs of its
customers and the end users of the Company’s products. If the Company were to
realize an unexpected, significant and prolonged disruption of its operations at
any of its facilities, including disruptions in its manufacturing operations, it
could result in shipment delays of its products, depletion of its inventory as a
result of reduced production and increased production costs as a result of
taking actions in an attempt to cure the disruption or carry on its business
while the disruption remains.  Any resulting delay, depletion or
increased production cost could result in increased costs, lower revenues and
damaged customer and product end user relations, which could have a material
adverse effect on the Company’s business, results of operations and financial
condition.





The
Company offers limited warranties on its products which could result in the
Company incurring significant costs as a result of warranty claims.





The
Company offers a limited warranty on all of its products against manufacturing
defects.  In addition, as a part of its efforts to differentiate mid-
and high-end products through color, design and other attributes, the Company
offers enhanced warranties with respect to wear, moisture discoloration and
other performance characteristics, which generally increase with the price of
such products.  If the Company were to incur a significant number of
warranty claims, the resulting warranty costs could be substantial.





The
Company is heavily dependent upon its distributors to sell the Company’s
products and the loss of a major distributor could have a material adverse
effect on the Company’s business, results of operations and financial
condition.





The
Company currently sells its products through approximately 13 distributors
providing approximately 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 63%
and 66% of the Company’s net sales for the year ended December 31, 2008 and
2007, respectively.  In addition, two other customers, Bayard Sales
and Kraus Canada, accounted for 10% and 11%, respectively, of accounts
receivable at December 31, 2008 and 11% and 9%, respectively, of accounts
receivable at December 31, 2007.





18





Stockholder votes are
controlledby ABI; Congoleum’s interests may notbe the same as ABI’s interests.





ABI
owns a majority (approximately 55% as of December 31, 2008) 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
      1B.
            UNRESOLVED
      STAFF COMMENTS





Not
applicable.








Item
      2.
            PROPERTIES





The
Company owns four manufacturing facilities located in Maryland, Pennsylvania and
New Jersey and leases corporate and marketing offices in Mercerville, New
Jersey, which are described below:





Location
              Owned/Leased
              Usage
              Square
      FeetFinksburg,
      MD
              Owned
              Felt
              107,000Marcus
      Hook, PA
              Owned
              Sheet
      Flooring
              1,000,000Trenton,
      NJ
              Owned
              Sheet
      Flooring
              1,050,000Trenton,
      NJ
              Owned
              Tile
      Flooring
              282,000Mercerville,
      NJ
              Leased
              Corporate
      Offices
              55,902





The
Finksburg facility consists primarily of a 16-foot wide flooring felt production
line.





The
Marcus Hook facility is capable of manufacturing rotogravure printed sheet
flooring in widths of up to 16 feet.  Major production lines at this
facility include a 12-foot wide oven, two 16-foot wide ovens, a 12-foot wide
printing press and a 16-foot wide printing press.





The
Trenton sheet facility is capable of manufacturing rotogravure printed and
through-chip inlaid sheet products in widths up to 6 feet.  Major
production lines, all six-foot wide, include an oven, a rotary laminating line
and a press. The examination, packing and warehousing of all sheet products
(except products for the manufactured housing market) occur at the Trenton plant
distribution center.





The
Trenton tile facility consists of three major production lines, which are a
four-foot wide commercial tile line, a two-foot wide residential tile line and a
one-foot wide residential tile line.





19





Productive
capacity and extent of utilization of the Company’s facilities are dependent on
a number of factors, including the size, construction, and quantity of product
being manufactured, some of which also dictate which production line(s) must be
utilized to make a given product. The Company’s major production lines were
operated an average of 52% of the hours available on a five-day, three-shift
basis in 2008 with the corresponding figure for individual production lines
ranging from 33% to 66%.





Although
many of the Company’s manufacturing facilities have been substantially
depreciated for financial reporting purposes, the Company has generally
maintained and improved the productive capacity of these facilities over time
through a program of regular capital expenditures.  The Company
considers its manufacturing facilities to be adequate for its present and
anticipated near-term production needs.








Item
      3.
            LEGAL
      PROCEEDINGS




Bankruptcy Proceedings and
Asbestos-Related Liabilities:  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




20




plan
of reorganization and the Bondholders’ Committee also filed a plan of
reorganization.  In May 2006, the Bankruptcy Court ordered all parties
in interest in Congoleum’s reorganization proceedings to participate in global
mediation discussions.  Numerous mediation sessions took place from
June through September 2006.  During the initial mediation
negotiations, Congoleum reached an agreement in principle, subject to mutually
agreeable definitive documentation, with the ACC, the FCR and the Company’s
controlling shareholder, ABI, on certain terms of the Ninth Plan, which
Congoleum filed and proposed jointly with the ACC in August 2006.  CNA
and the Bondholders’ Committee jointly filed a new, competing plan in August
2006 and each withdrew its prior plan of reorganization.  Following
further mediated negotiations, Congoleum, the ACC, the FCR, ABI and the
Bondholders’ Committee reached agreement on the terms of the Tenth Plan, which
Congoleum filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan. In July 2007, the FCR
filed a plan of reorganization and proposed disclosure
statement.  After extensive further mediation sessions, in February
2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed
the Joint Plan.  The Bankruptcy Court approved the disclosure
statement for the Joint Plan in February 2008, and the Joint Plan was solicited
in accordance with court-approved voting procedures. Various objections to the
Joint Plan were filed, and in May 2008 the Bankruptcy Court heard oral argument
on summary judgment motions relating to certain of those
objections.  In June 2008, the Bankruptcy Court issued a ruling that
the Joint Plan was not legally confirmable, and issued an Order to Show Cause
why the case should not be converted or dismissed pursuant to 11 U.S.C. § 1112.
Following a further hearing in June 2008, the Bankruptcy Court issued an opinion
that vacated the Order to Show Cause and instructed the parties to propose a
confirmable plan by the end of calendar year 2008. Following further negotiations, the
Bondholders’ Committee, the ACC, the FCR, representatives of holders of
pre-petition settlements and Congoleum reached an agreement in principle which
the Company believes addresses the issues raised by the Bankruptcy Court in the
ruling on the Joint Plan and in the court’s prior decisions.  A term sheet
describing the proposed material terms of the Amended Joint Plan and the
Litigation Settlement was signed by the parties to the agreement and filed with
the Bankruptcy Court in August 2008 and reported by Congoleum on Form 8-K filed
on August 15, 2008 and incorporated herein by reference. Certain insurers and a
large bondholder filed objections to the Litigation Settlement and/or reserved
their rights to object to




21




confirmation of the Amended Joint Plan.
The Bankruptcy Court approved the Litigation Settlement following a hearing in
October 2008, but the court reserved until a later date a determination of
whether the settlement meets the standards required for confirmation of a plan
of reorganization. The Amended Joint Plan was filed with the Bankruptcy Court in
November 2008.In January 2009, First State Insurance
Company and Twin City Fire Insurance Company filed a motion for summary judgment
seeking denial of confirmation of the Amended Joint Planon several discrete issues, and a
hearing was held on
February 5, 2009.On February 26, 2009, the Bankruptcy
Court rendered an opiniondenying confirmation of the
AmendedJointPlan.Pursuant to the Opinion, the Bankruptcy
Court entered an Order of Dismissal dismissing Congoleum’s bankruptcy case.




On February 27, 2009, Congoleum and the
Bondholders’Committee appealed the Order of
Dismissaland the Summary
Judgment ruling denying plan confirmationto the U.S. District Court for the
District of New Jersey.  On March 3, 2009, an order was entered by the
Bankruptcy Court granting a stay of the Bankruptcy Court’s Order of Dismissal pendingentry ofa final non-appealable decision
affirming the Order of Dismissal.See Notes 1 and 17 of the
Notes to Consolidated Financial Statements, which are contained in Item 8 of
this Annual Report on Form 10-K.




There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the District Court, that
the District Court will reverse Order of Dismissal or the Summary judgment
ruling, or that such approvals and appellate decisions will be received in a
timely fashion, that any plan will be confirmed, that any plan, if confirmed,
will become effective, or that there will be sufficient funds to pay for
continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.





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





22





In
anticipation of Congoleum’s commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with approximately 79,000 asbestos personal
injury claimants (the “Claimant Agreement”), which provides for an aggregate
settlement value of at least $466 million.  The Claimant Agreement,
along with a number of individually negotiated trial listed settlements with an
aggregate value of approximately $25 million, amount to settlements in excess of
$491 million.  As contemplated by the Claimant Agreement, Congoleum
also entered into agreements establishing a pre-petition trust (the “Collateral
Trust”) to distribute funds in accordance with the terms of the Claimant
Agreement and granting the Collateral Trust a security interest in Congoleum’s
rights under its applicable insurance coverage and payments from Congoleum’s
insurers for asbestos claims.  In December 2005, Congoleum commenced
an Omnibus Avoidance Action and a Sealed Avoidance Action (collectively, the
“Avoidance Actions”) seeking to void the Claimant Agreement, individual
settlements and other pre-petition agreements, including voiding the security
interest granted to the Collateral Trust. In March 2006, Congoleum filed a
motion for summary judgment in the Omnibus Avoidance Action seeking to void the
Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006.  Subsequently, Congoleum filed
another summary judgment motion in the Omnibus Avoidance Action seeking a
determination that any security interests conveyed in connection with the
Claimant Agreement and the other pre-petition asbestos settlement agreements
were ineffective and unenforceable. In July 2007, the Bankruptcy Court ruled
that the security interests in insurance collateral conveyed to the settled
claimants pre-bankruptcy were ineffective and unenforceable against Congoleum’s
insurance policies or the proceeds of those policies because the attempts to
create security interests were outside the scope of the Uniform Commercial Code;
nor could such security interests be considered to be a common law
pledge.  The Bankruptcy Court therefore granted summary judgment in
Congoleum’s favor on those counts of the Omnibus Avoidance Action which sought
to void these security interests.  In the event that the Order of
Dismissal is affirmed on appeal and becomes a final order, it is possible that
the Avoidance Actions would be dismissed and the lien avoidance ruling would
become a nullity.





During
the 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 million in primary insurance limits plus related defense costs before their
policies were implicated. There is insurance coverage litigation currently
pending in the New Jersey State Court
between Congoleum and its excess insurance carriers, and the guaranty funds and
associations for the State of New Jersey.  The litigation was
initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”).  In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in
the




23




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.  Pursuant to the terms of
the Security Agreement, the Company is obligated to pay any remaining insurance
proceeds it receives under the Liberty Settlement, net of any fees and expenses
it may be entitled to deduct, to the Collateral Trust or Plan
Trust.  Payment of such fees and expenses are subject to Bankruptcy
Court order or approval.  As of December 31, 2002, the Company had
already entered into settlement agreements with asbestos claimants exceeding the
amount of this previously disputed primary coverage.  Based on these
settlements, the Company contended that, even allowing for annual limits of all
primary policies, primary coverage was exhausted and the excess policies
triggered. The excess carriers have objected to the reasonableness of several of
these settlements,  and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in the Coverage Action.





The
excess insurance carriers have objected to the global settlement of the asbestos
claims currently pending against Congoleum as contemplated by the Claimant
Agreement on the grounds that, among other things, the negotiations leading to
the settlement and the Claimant Agreement violate provisions in their insurance
policies, including but not limited to the carriers’ right to associate in the
defense of the asbestos cases, the duty of Congoleum to cooperate with the
carriers and the right of the carriers to consent to any
settlement.  The excess insurance carriers also contend the settlement
terms in the Claimant Agreement are not fair or reasonable and/or that the
Claimant Agreement was not negotiated at arm’s length or in good
faith.  Additionally, certain insurers have argued that Congoleum’s
entering into the Claimant Agreement voids the insurance for the underlying
claims in their entirety.  Certain insurers also have claimed that the
Claimant Agreement voids their entire policy obligations. Congoleum has disputed
the allegations and 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.





24





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
August 2004, the State Court entered a case management order that divided the
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 has
completed its plan confirmation process in the Bankruptcy Court.  A
hearing on the Company’s motion was held in April 2005 and the motion was
denied.





The
first phase of the Coverage Action 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 Court 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.





25





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 there under be disallowed and expunged because, since the filing of
Congoleum’s bankruptcy case, supervening events have resulted in a substantial
frustration of the purpose of those agreements. The Bankruptcy Court heard
arguments on the Omnibus Objection in July 2007 and ruled that the Omnibus
Objection should be heard in the context of an adversary proceeding (a formal
lawsuit) in order to insure that the Bankruptcy Court has jurisdiction over all
the affected claimants and that their due process rights are otherwise
protected.  The Company amended the Omnibus Avoidance Action to seek
the same relief requested in the Omnibus Objection.





In
September 2007, Congoleum filed the Third Amended Complaint in the Omnibus
Adversary Proceeding adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending.  In October 2007, Congoleum filed a motion for summary
judgment in the Omnibus Adversary Proceeding seeking a ruling that all of the
pre-petition settlement agreements, including the Claimant Agreement, were null
and void or should be rescinded.  Argument on the summary judgment
motion was heard in November 2007 and by opinion dated December 28, 2007, the
Bankruptcy Court denied the motion for summary judgment.  Congoleum
and the Bondholders’ Committee have filed notice of appeal from this decision to
the District Court and the matter remains pending.  A motion was filed
to amend further the complaint in the Omnibus Avoidance Action, but such
complaint was not filed as a result of the Litigation Settlement discussed
above.  In the event that the Order of Dismissal is affirmed on appeal
and becomes a final order, it is possible that the Avoidance Actions would be
dismissed and the lien avoidance ruling would become a nullity.





26





The
second phase of the Coverage Action trial will address all coverage issues,
including but not limited to whether certain other trial listed settlements were
fair, reasonable and negotiated in good faith and covered by insurance as well
as trigger and allocation of asbestos losses to insurance
policies.  In February 2008, the State Court expanded the scope of
Phase 2 of the Coverage Action to include obligations of insurers with respect
to the settlement agreement in the Joint Plan with respect to the Avoidance
Actions. The State Court has entered a new case management order scheduling
further discovery. Congoleum sought to stay Phase 2 of the Coverage Action
because of the pendency of the solicitation and balloting and scheduled
confirmation hearing on the Joint Plan, but the Bankruptcy Court denied the stay
motion, which decision was appealed to the District Court. Based on the
Litigation Settlement, which provides, in part, for the unwinding of the
Claimant Agreement and certain pre-petition settlements, Congoleum again sought
to stay Phase 2 of the Coverage Action trial, but after a hearing before the
Bankruptcy Court such stay was denied.





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





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.  The amount of the disgorgement was
approximately $9.6 million.  In October 2006, Congoleum and GHR
entered into a settlement agreement (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.





During
2005 and 2006, Congoleum entered into a number of settlement agreements with
excess insurance carriers over coverage for asbestos-related
claims.





In
May 2005, certain AIG companies agreed to pay approximately $103 million over
ten years to the Plan Trust.  This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code.  An insurer
appealed the approval order granted by the Bankruptcy Court to the District
Court.  The District Court, however, entered an order in September
2006 that administratively terminated the appeal.  The AIG settlement
provided that any party may declare that the settlement agreement is null and
void if the Confirmation Order failed to become a final order by May 12,
2007.  In June 2007, Congoleum and AIG executed a letter agreement
providing that the parties would provide 45 days’ advance notice of their intent
to terminate the AIG settlement.  To date, neither party has given
notice of an intent to terminate the agreement.





27





In
June 2005, the Company entered into a settlement agreement with certain
underwriters at Lloyd’s, London, pursuant to which the certain underwriters paid
approximately $20 million into an escrow account in exchange for a release of
insurance coverage obligations.  The escrow agent will transfer
certain of the funds to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds.  The
settlement provided that any party may declare that the settlement would be null
and void if the confirmation order failed to become a final order by June 22,
2007.  In November 2007, Congoleum filed a motion to amend the
settlement agreement to, among other things, remove the termination provision in
exchange for revised terms relating to disposition of interest and earnings that
have accrued and will continue to accrue on the settlement amount being held in
an escrow account. In December 2007, the Bankruptcy Court entered an order
approving the amendment and no party has appealed from that
decision.





In
August 2005, the Company entered into a settlement agreement with Federal
Insurance Company (“Federal”) pursuant to which Federal will pay $4 million to
the Plan Trust, subject to certain adjustments, once a plan of reorganization
with the Section 524(g) protection specified in the settlement agreement goes
effective and the Bankruptcy Court approves the transfer of the funds. The FCR
appealed the approval order granted by the Bankruptcy Court to the District
Court.  The FCR, Federal and the Company reached an agreement to
resolve the appeal pursuant to which the Federal settlement agreement was
amended to fix the settlement amount payable by Federal at $2.1 million and to
delete from the settlement agreement the adjustment mechanism, which operated
under certain circumstances to reduce the settlement amount.  The
Bankruptcy Court approved this amendment.





In
October 2005, Congoleum entered into a settlement agreement with Mt. McKinley
Insurance Company (“Mt. McKinley”) and Everest Reinsurance Company (“Everest”)
pursuant to which Mt. McKinley and Everest paid $21.5 million into an escrow
account, which funds were to be transferred to the Plan Trust once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement goes effective and the Bankruptcy Court approves the transfer of the
funds.  An insurer and the FCR appealed the approval order granted by
the Bankruptcy Court to the District Court, but the appeal was administratively
terminated by agreement.  The Mt. McKinley settlement agreement
contains a provision that any party may declare the agreement to be null and
void if the confirmation order and approval order do not become final orders
within two years of the execution date of the Mt. McKinley settlement
agreement.  In January 2008, Congoleum and Mt. McKinley and Everest
entered in to an amended settlement agreement which, among other things,
maintained the settlement amount, removed the temporal condition to termination
of the agreement, caused the escrow agent to pay Mt. McKinley and Everest all
interest and other income earned in the escrow account, net of all applicable
fees, taxes and expenses, and restructured the settlement as a sale and buyback
of the insurance policies not subject to confirmation of any Section 524(g) plan
of reorganization. The Bankruptcy Court approved the amended settlement
agreement in February 2008.





28





In
March 2006, Congoleum entered into a settlement agreement with Harper Insurance
Limited (“Harper”). Under the terms of this settlement, Harper will pay
approximately $1.4 million to Congoleum or the Plan Trust once certain
conditions are satisfied, including the effectiveness of a plan of
reorganization containing the Section 524(g) protection specified in the
settlement agreement.  The Bankruptcy Court approved this settlement
in April 2006.





In
April 2006, Congoleum entered into a settlement agreement with Travelers
Casualty and Surety Company and St. Paul Fire and Marine Insurance Company
(collectively, “Travelers”).  Under the terms of this settlement,
Travelers will pay $25 million in two installments over thirteen months to the
Plan Trust once a plan of reorganization with the Section 524(g) protection
specified in the settlement agreement goes effective and the Bankruptcy Court
approves the transfer of the funds.  The FCR sought, and was granted,
limited discovery with respect to the Travelers settlement to which the FCR has
objected.  A hearing to consider approval of the Travelers settlement
was held in April 2007, and in May 2007, the Bankruptcy Court issued a decision
denying approval of the Travelers settlement, and Congoleum and Travelers
appealed that decision to the District Court.  Travelers has taken the
position that the filing of the Joint Plan in February 2008 constitutes the
failure of a condition precedent to the effectiveness of the settlement
agreement.  By letter agreement dated March 18, 2008, Travelers, ABI
and Congoleum extended the time for Travelers to exercise its right to waive the
putative failure of the contingency allegedly caused by the filing of the Joint
Plan to April 29, 2008.  On March 25, 2008, the District Court issued
a decision remanding the case to the Bankruptcy Court for further consideration
of the Travelers Settlement.  On December 30, 2008, Travelers sent
Congoleum a letter waiving, with respect to the Amended Joint Plan, the plan’s
inconsistency with respect to the Travelers Settlement to the extent a
channeling injunction is not extended pursuant to the Amended Joint Plan to ABI,
and it reserved all of its rights with respect to subsequent plans.





In
April 2006, Congoleum entered into a settlement agreement with Fireman’s Fund
Insurance Company (“Fireman’s Fund”).  Under the terms of this
settlement, Fireman’s Fund will pay $1 million to the Plan Trust once a plan of
reorganization with the Section 524(g) protection specified in the settlement
agreement becomes effective and the Bankruptcy Court approves the transfer of
the funds.  The settlement was approved by the Bankruptcy Court in
September 2006.





In
August 2006, Congoleum entered into a settlement agreement with Century
Indemnity Company and its affiliates (“Century”).  Under the terms of
this settlement, Century will pay $16.95 million to the Plan Trust in four
installments over a three-year period commencing 60 days after all conditions to
the agreement have been satisfied.  The Bankruptcy Court approved this
settlement in September 2006. Certain insurance companies initially appealed the
Bankruptcy Court approval order to the District Court. Upon the entry of
stipulations with the appellants, the appeal was dismissed.








29





In
February 2008, Congoleum entered into a settlement agreement with Protective
National Insurance, which insurer is presently in liquidation.  Under
the terms of this settlement, Congoleum will receive an allowed claim in the
amount of $3 million to be paid over time at the payment percentage in such
liquidation proceedings. The settlement was approved by the Bankruptcy
Court.





It
is possible that one or more of the settling insurers may argue temporal,
Plan-related, and other conditions to payment have not been satisfied and
therefore such insurer is relieved of certain of its settlement obligations. If
the Company is unable to confirm a plan of reorganization with Section 524(g)
protection, certain settlements described above may be subject to
termination.





There
were no asbestos related property damage claims asserted against the Company at
the time of its bankruptcy filing.  The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company’s bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand.  It is
anticipated that any plan of reorganization will provide for payment of those
claims in full from certain insurance proceeds.





During
2008, the Company paid $15.9 million in fees and expenses related to
implementation of its planned reorganization under Chapter 11 of the Bankruptcy
Code and the Coverage Action.  Based on its reorganization plans,
Congoleum has made provision in its financial statements for the minimum
estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in years
prior to 2007.  Based on the terms of the Joint Plan, in the fourth
quarter of 2007 Congoleum recorded an additional $41.3 million
charge.  Of this charge, $14.9 million related to the write-off of
certain insurance litigation costs receivable that would not have been collected
under the terms of the Joint Plan and are not expected to be collected under any
future plan, including the Amended Joint Plan and $26.4 million was an
additional provision for estimated costs for the reorganization proceedings and
the Coverage Action.  In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Joint Plan, and the
expected terms of any future plan, including the Amended Joint
Plan,  the Senior Note holders would not have received any
post-petition interest.  Following the ruling that the Joint Plan was
unconfirmable and based on the anticipated terms and anticipated timing of
effectiveness of the Amended Joint Plan, Congoleum recorded an additional charge
of $11.5 million in the third quarter of 2008 for costs to effect its
reorganization.








30





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





Environmental
Liabilities:  The Company is named, together with a large
number (in most cases, hundreds) of other companies, as a potentially
responsible party (“PRP”) in pending proceedings under the federal Comprehensive
Environmental Response, Compensation and Liability Act, as amended (“CERCLA”),
and similar state laws.  In addition, in four other instances,
although not named as a PRP, the Company has received a request for
information.  The pending proceedings relate to eight disposal sites
in New Jersey, Pennsylvania, and Maryland in which recovery from generators of
hazardous substances is sought for the cost of cleaning up the contaminated
waste sites.  The Company’s ultimate liability and funding obligations
in connection with those sites depends on many factors, including the volume of
material contributed to the site, the number of other PRPs and their financial
viability, the remediation methods and technology to be used and the extent to
which costs may be recoverable from insurance.  However, under CERCLA
and certain other laws, the Company, as a PRP, can be held jointly and severally
liable for all environmental costs associated with a site.





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








31





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 as 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.





Other:  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.





The
total balances of environmental, asbestos-related, and other liabilities and the
related insurance receivable and deemed probable of recovery at December 31,
2008 and December 31, 2007 are as follows:





2008
                        
                        
                        2007(in
      millions)
                        
                        Liability
                        
                        
                        Receivable
                        
                        
                        Liability
                        
                        
                        ReceivableEnvironmental
      liabilities
                        
                        $
                        4.4
                        
                        
                        $
                        2.1
                        
                        
                        $
                        4.4
                        
                        
                        $
                        2.1Asbestos
      product liability(1)
                        
                        
                        50.0
                        
                        
                        
                        1.3
                        
                        
                        
                        31.2
                        
                        
                        
                        10.5Other
                        
                        
                        0.9
                        
                        
                        
                        0.1
                        
                        
                        
                        0.9
                        
                        
                        
                        0.1Total
                        
                        $
                        55.3
                        
                        
                        $
                        3.5
                        
                        
                        $
                        36.5
                        
                        
                        $
                        12.7





(1)
              Asbestos
      product liability at December 31, 2008 and 2007 reflects the accrued cost
      to settle asbestos liabilities through a plan of reorganization under
      Chapter 11.  This liability at December 31, 2008 and 2007
      includes $29.7 million and $6.5 million, respectively, received in
      connection with an insurance settlement (recorded as restricted cash),
      which the Company is required to contribute to a trust.  Stated
      liability pursuant to settlement agreements is in excess of $491
      million.  See Note 17 of the Notes to Consolidated Financial
      Statements contained in Item 8 of this Annual Report on Form
      10-K.





32





Item
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.








PART
II





Item
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Under
the terms of the Amended Joint Plan, if confirmed and effective, Congoleum’s
existing equity securities will be cancelled and holders of equity securities
and options to acquire equity securities will receive nothing for their
cancelled shares or options.





The
Company’s Class A common stock is not listed on any securities exchange or on an
automated dealer quotation system.  During 2007 the stock was listed
on the Amex under the symbol CGM.  The Company’s Class A common stock
was delisted by the Amex on February 19, 2008 because it did not meet Amex
listing standards for share value, share price, and aggregate market
capitalization, and the stock has traded over the counter since that
date.





The
following table reflects the high and low prices of the Company’s Class A Common
Stock (rounded to the nearest one-hundredth) based on prices reported by the
American Stock Exchange and over-the-counter market quotations, as applicable,
over the past two years:





Sales
Prices of Class A Common Stock:





2008
                High
                LowFirst
      Quarter
                $  0.55
                $  0.02Second
      Quarter
                0.03
                0.01Third
      Quarter
                0.02
                0.01Fourth
      Quarter
                0.01
                0.01





Sales
Prices of Class A Common Stock:





2007
              High
              LowFirst
      Quarter
              $  1.78
              $  1.47Second
      Quarter
              1.63
              0.90Third
      Quarter
              1.07
              0.40Fourth
      Quarter
              0.66
              0.35








33





The
Company’s Class B common stock is not listed on any exchange.  Holders
of Class A common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders and holders of Class B common stock are
entitled to two votes per share on all matters other than certain extraordinary
matters.  Each share of Class B common stock is convertible into one
share of Class A common stock under certain circumstances, including a sale or
other transfer by the holders of such shares to a person or entity other than an
affiliate of the transferor. Both classes vote together as a single class on all
matters with limited exceptions. Except with respect to voting rights and
conversion rights, the Class A common stock and the Class B common stock are
identical.





The
Company did not pay any cash dividends in 2008 or 2007 and does not anticipate
paying any cash dividends prior to confirmation of a plan of reorganization or
in the foreseeable future thereafter.  The Company’s current
debtor-in-possession credit facility prohibits payment of cash
dividends.  Any change in the Company’s dividend policy after
confirmation of a plan of reorganization will be within the discretion of the
Board of Directors, subject to restrictions contained in the Company’s plan of
reorganization and debt or other agreements, and will depend, among other
things, on the Company’s solvency, earnings, debt service and capital
requirements, restrictions in financing agreements, business conditions and
other factors that the Board of Directors deems relevant.




The number of registered and beneficial
holders of the Company’s Class A common stock on March 13, 2009 was
approximately 1,000.  The number of registered and beneficial holders
of the Company’s Class B common stock on March 10, 2009 was two.








Item
      6.
            SELECTED
      FINANCIAL DATA





Not applicable.








Item
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto contained in Item 8 of this Annual Report
on Form 10-K.





Results of
Operations





The
Company’s business is cyclical and is affected by the same economic factors that
affect the remodeling and housing industries in general, including the
availability of credit, consumer confidence, changes in interest rates, market
demand and general economic conditions.  Economic conditions
experienced in 2008 had a significant negative impact on the Company’s sales and
results of operations, and those effects are likely to continue in
2009.





34





In
addition to external economic factors, the Company’s results are sensitive to
sales and manufacturing volume, competitors’ pricing, consumer preferences for
flooring products, raw material costs and the mix of products
sold.  The manufacturing process is capital intensive and requires
substantial investment in facilities and equipment.  The cost of
operating these facilities generally does not vary in direct proportion to
production volume and, consequently, operating results fluctuate
disproportionately with changes in sales volume.





On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under Chapter 11 of the Bankruptcy Code
as a means to resolve claims asserted against it related to the use of asbestos
in its products decades ago.  During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of reorganization and related
documents governing the settlement and payment of asbestos-related claims
against Congoleum. Under the agreed-upon modifications, asbestos claimants with
claims settled under Congoleum’s pre-petition settlement agreements would agree
to forbear from exercising the security interest they were granted and share on
a pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the Plan Trust to pay asbestos claims against Congoleum.  In
July 2005, Congoleum filed the Sixth Plan and related documents with the
Bankruptcy Court which reflected the result of these negotiations, as well as
other technical modifications. The Bankruptcy Court approved the disclosure
statement and voting procedures and Congoleum commenced solicitation of
acceptances of the Sixth Plan in August 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




35




filed
jointly with the ACC in September 2006.  Following the Bondholders’
Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement.  After extensive further mediation sessions, in February
2008 the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed
the Joint Plan.  The Bankruptcy Court approved the disclosure
statement for the Joint Plan in February 2008, and the Joint Plan was solicited
in accordance with court-approved voting procedures.  Various
objections to the Joint Plan were filed, and in May 2008 the Bankruptcy Court
heard oral argument on summary judgment motions relating to certain of those
objections.  In June 2008, the Bankruptcy Court issued a ruling that
the Joint Plan was not legally confirmable, and issued an Order to Show Cause
why the case should not be converted or dismissed pursuant to 11 U.S.C. §
1112.  Following a further hearing in June 2008, the Bankruptcy Court
issued an opinion that vacated the Order to Show Cause and instructed the
parties to propose a confirmable plan by the end of calendar year 2008. Following further negotiations, the
Bondholders’Committee, the ACC, the FCR,
representatives of holders of pre-petition settlements and Congoleum reached an
agreement in principle which the Company believes addresses the issues
raised by the Bankruptcy
Court in the ruling on the Joint Plan and in the court’s prior decisions.  A term sheet
describing the proposed material terms of a new plan of reorganization (the“Amended Joint Plan”) and the Litigation Settlement was
signed by the parties to
the agreement and filed with the Bankruptcy Courtin August 2008 and reported by Congoleum
onForm 8-K on August 15, 2008and incorporated herein by
reference.  Certain insurers and a
large bondholder filed objections to the Litigation Settlementand/or reserved their rights to object
to confirmation of theAmended Joint Plan. The Bankruptcy Court approved the
Litigation Settlement following a hearingin October 2008, but the court reserved
until a later date a determination of whether the settlement meets the standards required for
confirmation of a plan of reorganizationthe Amended Joint Plan was filed with
the Bankruptcy Court in November 2008.In January 2009, First State Insurance
Company and Twin City Fire Insurance Company filed a motion forsummary judgment seeking denial of
confirmation of the Amended Joint Planon several discrete issues, and a hearing was held on February 5,
2009.  On February 26, 2009, the Bankruptcy Court rendered an opinion
denying confirmation of the Amended Joint Plan.  Pursuant to theopinion, the Bankruptcy Court enteredtheOrder of Dismissal dismissing
Congoleum’s bankruptcy case.





36




On February 27, 2009, Congoleum and the
Bondholders’Committee appealed the Order of
Dismissaland the summary
judgment ruling denying plan confirmationto the U.S. District Court for the
District of New Jersey.  On March 3, 2009, an order was entered by the
Bankruptcy Court granting a stay of the Order of Dismissal pendingentry ofa final non-appealable decision
affirming the Order of Dismissal.  See Notes1 and 17 of the Notes to Consolidated
Financial Statements, which are contained in Item 8 of this Annual Report on
Form 10-K.




There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the District Court, that
the District Court will reverse the Order of Dismissal or the summary judgment
ruling,  or that such approvals and appellate decisions will be
received in a timely fashion, that any plan will be confirmed, that any plan, if
confirmed, will become effective, or that there will be sufficient funds to pay
for continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.





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





In
anticipation of Congoleum’s commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million.  As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum’s rights under its applicable insurance coverage and
payments from Congoleum’s insurers for asbestos claims.  In December
2005, Congoleum commenced the Avoidance Actions seeking to void the security
interest granted to the Collateral Trust and such pre-petition
settlements.  Following summary judgment hearings, the Bankruptcy
Court rendered decisions that the grant of the security interest was not valid
but denying motions to avoid the settlements; certain of these decisions are
under appeal.  The terms of the Amended Joint Plan provide for a
settlement of litigation related to the Avoidance Actions.  However,
at this time, it is not possible to estimate how that settlement may affect the
nominal liability.  In addition, as a result of tabulating ballots on
the Fourth Plan, the Company is also aware of claims by claimants
whose




37




claims
were not determined under the Claimant Agreement but who have submitted claims
with a value of approximately $512 million based on the settlement values
applicable in the Sixth Plan.  Additional new claims may be asserted
in connection with solicitation of acceptances of any future
plan.  Congoleum does not believe it can reasonably estimate the
liability associated with claims that may be pending.





During
2008, the Company paid $15.9 million in fees and expenses related to
implementation of its planned reorganization under the Bankruptcy Code and the
Coverage Action.  Based on its reorganization plans, Congoleum has
made provision in its financial statements for the minimum estimated cost to
effect its plan to settle asbestos liabilities through confirmation of a plan
that complies with section 524(g) of the Bankruptcy Code. Congoleum recorded
charges aggregating approximately $51.3 million in years prior to
2007.  Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge.  Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that would not have been collected under the terms of the Joint
Plan and are not expected to be collected under any future plan, including the
Amended Joint Plan and $26.4 million was an additional provision for estimated
costs for the reorganization proceedings and the Coverage Action.  In
the fourth quarter of 2007 Congoleum also recorded a $41.0 million interest
expense credit to reverse post-petition interest accrued on its Senior
Notes.  Terms of previous reorganization plans had provided, among
other things, for the payment of post-petition interest on the Senior Notes and
therefore Congoleum had continued to accrue such interest.  Under the
terms of the Joint Plan, and the expected terms of any future plan, including
the Amended Joint Plan, the Senior Note holders would not have received any
post-petition interest.  Following the ruling that the Joint Plan was
unconfirmable and based on the anticipated terms and anticipated timing of
effectiveness of the Amended Joint Plan, Congoleum recorded an additional charge
of $11.5 million in the third quarter of 2008 for costs to effect its
reorganization.





Costs
for pursuing and implementing the Amended Joint Plan or any plan of
reorganization could be materially higher than currently recorded or previously
estimated.  Delays in proposing, filing or obtaining approval of the
Amended Joint Plan, or the proposal or solicitation of additional plans by other
parties could result in a proceeding that takes longer and is more costly than
the Company has previously estimated.  The Company may experience and
therefore record significant additional charges in connection with its
reorganization proceedings.





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 this Annual Report on
Form 10-K.  In addition, please refer to “Risk Factors – The Company
has significant asbestos liability and funding exposure,” contained in Item 1A
of this Annual Report on Form 10-K for a discussion of certain factors that
could cause actual results to differ from the Company’s goals for resolving its
asbestos liability through a plan of reorganization.  Readers should
also refer to the Disclosure Statement with respect to the Amended Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of the Futures
Representative, the Debtors, the Official Asbestos Claimants’ Committee and the
Official Committee of Bondholders for Congoleum Corporation, et al., dated as
of   November 14, 2008, a copy of which has been filed as an
exhibit to this Annual Report on Form 10-K.





38





Year
ended December 31, 2008 as compared to year ended December 31, 2007





2008
                                
                                
                                
                                
                                
                                2007(In
      thousands of dollars)Net
      sales
                                
                                $
                                172,644
                                
                                
                                
                                
                                
                                $
                                204,262Cost
      of sales
                                
                                
                                142,032
                                
                                
                                
                                
                                
                                
                                153,809Gross
      profit
                                
                                
                                30,612
                                
                                
                                17.7%
                                
                                
                                
                                50,453
                                
                                
                                24.7%Selling,
      general & administrative expenses
                                
                                
                                35,397
                                
                                
                                20.5%
                                
                                
                                
                                37,469
                                
                                
                                18.3%Asbestos-related
      reorganization charges
                                
                                
                                11,491
                                
                                
                                
                                
                                
                                
                                41,315Operating
      loss
                                
                                
                                (16,276
                                )
                                
                                
                                
                                
                                
                                (28,331
                                )Bond
      interest (reversal) expense
                                
                                
                                -
                                
                                
                                
                                
                                
                                
                                29,603Interest
      income, net
                                
                                
                                857
                                
                                
                                
                                
                                
                                
                                197Other
      expense, net
                                
                                
                                (970
                                )
                                
                                
                                
                                
                                
                                (447
                                )Income
      (loss) before taxes
                                
                                
                                (16,389
                                )
                                
                                
                                
                                
                                
                                1,022Provision
      for (benefit from) income taxes
                                
                                
                                (1,768
                                )
                                
                                
                                
                                
                                
                                1,713Net
      loss
                                
                                $
                                (14,621
                                )
                                
                                
                                
                                
                                $
                                (691
                                )





Net
sales for the year ended December 31, 2008 totaled $172.6 million as compared to
$204.3 million for the year ended December 31, 2007, a decrease of $31.7 million
or 15.5%.  The decrease in sales resulted primarily from lower sales
to the manufactured housing industry coupled with continued demand weakness in
the new construction and remodeling markets, partially offset by price increases
instituted during 2008 (4.7%).





Gross
profit for the year ended December 31, 2008 totaled $30.6 million, or 17.7% of
net sales, compared to $50.5 million or 24.7% of net sales for the year ended
December 31, 2007. Sharp increases in raw material costs during the year (3.7%
of net sales), coupled with the negative impact of lower production volumes over
which to spread fixed manufacturing overhead (6.5% of net sales) accounted for
the decline in gross margin dollars and percentage, partially offset by cost
reduction programs implemented during the year.





Selling,
general and administrative expenses were $35.4 million for the year ended
December 31, 2008 as compared to $37.5 million for the year ended December 31,
2007, a decrease of $2.1 million. The decrease was primarily driven by lower
wages and benefits expense (down $2.0 million), reflecting workforce reductions
instituted in 2008, coupled with reductions in other selling, general and
administrative expenses.





Based
on the terms of the Amended Joint Plan, in the third quarter of 2008 Congoleum
recorded an additional $11.5 million provision for estimated costs for the
reorganization proceedings.  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 $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and the Coverage Action.





39





Loss
from operations, excluding the special charges above, was $4.8 million for the
year ended December 31, 2008 compared to operating income of $12.9 million for
the year ended December 31, 2007, a decrease of $17.7 million. This change in
operating income was a result of lower sales, coupled with the unfavorable
impact of raw material costs and lower production volumes on gross profit,
partially offset by lower operating expenses.





Interest
income was $1.3 million and $1.2 million in 2008 and 2007, respectively. 
Interest expense, excluding interest on the Senior Notes, for 2008, was $0.4
million as compared to interest expense of $1.0 million for 2007. Bond interest
reversal on the Senior Notes in 2007 was $29.6 million.





Benefit
for income taxes was $1.8 million in 2008 and a provision of $1.7 million in
2007.  The $1.8 million tax benefit was attributable to a significant
pre-tax loss in 2008 offset by $1.4 million for the impact of non-deductible
legal reserves related to the Company’s reorganization plan and by a $2.8
million increase in the valuation allowance on federal and state deferred tax
assets. In 2007, the provision of $1.7 reflected an increase in non deductible
expenses for tax purposes.








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 8 of this Annual Report on Form 10-K,
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 17 of the Notes to Consolidated Financial
Statements contained in Item 8 of this Annual Report on Form 10-K, for a
discussion of the Company’s bankruptcy proceedings. These matters continue to
have a material adverse impact on liquidity and capital
resources.  During 2008, the Company paid $15.9 million in fees and
expenses related to reorganization proceedings under the Bankruptcy Code and the
Coverage Action.  Furthermore, at December 31, 2008, the Company had
incurred but not paid approximately $7.4 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
future plan, including the Amended Joint Plan,





40





and
$26.4 million was an additional provision for estimated costs for the
reorganization proceedings and the Coverage Action.  In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes.  Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest.  Under the terms of the Joint
Plan, and the expected terms of any future plan, including the Amended Joint
Plan, the Senior Note holders would not have received any post-petition
interest. Following the ruling that the Joint Plan was unconfirmable and based
on the anticipated terms and timing of effectiveness of the Amended Joint Plan,
Congoleum recorded an additional charge of $11.5 million in the third quarter of
2008 for costs to effect its reorganization.





In
February 2006, the Bankruptcy Court ordered GHR to disgorge all fees and certain
expenses it was paid by Congoleum.  In October 2006, Congoleum and GHR
entered into the GHR Settlement under which GHR was to pay Congoleum
approximately $9.2 million plus accrued interest in full satisfaction of the
disgorgement order.  The obligation was secured by assets of GHR and
was to be made over time according to a formula based on GHR’s
earnings.  The Bankruptcy Court approved the GHR Settlement in April
2007.  Congoleum received $9.2 plus $1.0 million of accrued interest
in full satisfaction of the GHR Settlement in March 2008.





Unrestricted
cash and cash equivalents, including short-term investments at December 31,
2008, were $15.1 million, a decrease of $11.3 million from December 31,
2007.  Under the terms of its revolving credit agreement, payments on
the Company’s accounts receivable are deposited in an account assigned by the
Company to its lender and the funds in that account are used by the lender to
pay down any loan balance.  There were no funds deposited in this
account at December 31, 2008 and December 31, 2007.  Additionally,
$6.5 million remaining from a $14.5 million settlement received in August 2004
from an insurance carrier, which is subject to a court order, is included as
restricted cash at December 31, 2008. In the second quarter of 2008 the Company
received an additional $22.7 million from other insurance carriers which is also
included in restricted cash.  The Company expects to contribute these
funds, less any amounts withheld pursuant to reimbursement arrangements, to the
Plan Trust should the Bankruptcy Court confirm a plan pursuant to section 524(g)
of the Bankruptcy Code.  Net working capital was a negative $1.6
million at December 31, 2008, down from $9.4 million at December 31,
2007.  The ratio of current assets to current liabilities was 1.0 to
1.0 at December 31, 2008 and 1.1 to 1.0 at December 31, 2007.  Net
cash used in operations during for the year ended December 31, 2008 was $10.1
million, as compared to net cash provided by operations of $11.3 million during
the year ended December 31, 2007.





Capital
expenditures in 2008 totaled $4.6 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 the Company expects to fund with cash from
operations and credit facilities.





41





In
January 2004, the Bankruptcy Court authorized entry of a final order approving
Congoleum’s debtor-in-possession financing, which replaced its pre-petition
credit facility on substantially similar terms. The debtor-in-possession
financing agreement (as amended and approved by the Bankruptcy Court to date)
provides a revolving credit facility expiring on the earlier of (i) June 30,
2009 and (ii) the date the plan of reorganization in Congoleum’s bankruptcy
cases as confirmed by the Bankruptcy Court becomes effective.  Total
borrowing under the facility may not exceed $30.0 million.  Interest
is based on 0.25% above the prime rate.  This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization (“EBITDA”). In connection
with the amendment and extension of the agreement during 2008, the minimum level
of EBITDA that Congoleum must maintain was reduced for quarters ending after
June 30, 2008.  Congoleum paid a fee of $25 thousand for such
amendment, plus an amendment fee in the amount of $15 thousand per
month.  The financing agreement also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
the Company to borrow from the facility. Congoleum was not in compliance with
the minimum EBITDA covenant under its credit facility for the period ended
December 31, 2008, and obtained a waiver of that covenant as well as an
amendment of the covenant levels for the remaining term of the facility to make
them less restrictive.  The interest rate was increased to 1.75% above
the prime rate.  A fee of $30 thousand was paid in connection with the
waiver and amendment.  Borrowings under this facility are
collateralized by inventory and receivables.  At December 31, 2008,
based on the level of receivables and inventory, $17.4 million was available
under the facility, of which $2.0 million was utilized for outstanding letters
of credit and $14.0 million was utilized by the revolving loan.  The
existing financing facility expires June 30, 2009. The Company believes that it
will be able to obtain an extension of the credit facility through the end of
2009, however, given the current business conditions and uncertainty in the
credit markets, there can be no assurances that an extension or refinancing will
be available. There can also be no assurances that the Company will continue to
be in compliance with the required covenants under this facility or that the
debtor-in-possession facility will be renewed prior to its expiration if a plan
of reorganization is not confirmed before that time.  Congoleum was 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.  Congoleum anticipates that its
debtor-in-possession financing facility (including anticipated extensions
thereof) together with cash from operations will provide it with sufficient
liquidity to operate during 2009 while under Chapter 11
protection.  For a plan of reorganization to be confirmed, the Company
will need to obtain and demonstrate the sufficiency of exit financing.  The
Company cannot presently determine the terms of such financing, nor can there be
any assurances of its success obtaining it.





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 16 to
the Consolidated Financial Statements contained in Item 8 of this Annual Report
on Form 10-K). These actions include possible obligations to remove or mitigate
the effects on the





42





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 ofpayments
are indeterminable due to such unknown factors as the magnitude of cleanup
costs, the timing and extent of the remedial actions that may be required, the
determination of the Company’s liability in proportion to other potentially
responsible parties, and the extent to which costs may be recoverable from
insurance.  The Company has recorded provisions in its financial
statements for the estimated probable loss associated with all known general and
environmental contingencies. While the Company believes its estimate of the
future amount of these liabilities is reasonable, and that they will be paid
over a period of five to ten years, the timing and amount of such payments may
differ significantly from the Company’s assumptions.  Although the
effect of future government regulation could have a significant effect on the
Company’s costs, the Company is not aware of any pending legislation which would
reasonably have such an effect.  There can be no assurances that the
costs of any future government regulations could be passed along to its
customers.  Estimated insurance recoveries related to these
liabilities are reflected in other non-current assets.





The
outcome of these environmental matters could result in significant expenses
incurred by or judgments assessed against the Company.





The
Company’s principal sources of capital are net cash provided by operating
activities and borrowings under its financing agreement. The Company believes
that its existing cash (including restricted cash), cash generated from
operations, and debtor-in-possession credit arrangements should be sufficient to
provide adequate working capital for operations during
2009.  Congoleum’s ability to emerge from Chapter 11 will depend on
obtaining sufficient exit financing to settle administrative expenses of the
reorganization and any other related obligations, and to provide adequate future
liquidity.





Off- Balance Sheet
Arrangements





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





Critical Accounting
Policies





The
discussion and analysis of the Company’s financial condition and results of
operations are based upon the Company’s Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States.  The preparation of these financial statements
requires making estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.  Actual results may differ from
these estimates under different assumptions or conditions.





43




Critical
accounting policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results under
different assumptions and conditions. The Company believes its most critical
accounting policies upon which its financial condition depends, and which
involve the most complex or subjective decisions or assessments, are those
described below. For a discussion on the application of these and other
accounting policies, See Note 1 in the Notes to Consolidated Financial
Statements contained in Item 8 of this Annual Report on Form 10-K.





Asbestos Liabilities - As
discussed in Notes 1 and 17 in the Notes to Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K, the Company is a party
to a significant number of lawsuits stemming from its manufacture of
asbestos-containing products.  During 2008, the Company paid $15.9
million in fees and expenses related to implementation of its planned
reorganization under Chapter 11 of the Bankruptcy Code and litigation with
certain insurance companies.  Based on the Amended Joint Plan,
Congoleum has made provision in its financial statements for the minimum
estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $92.6 million in prior
years.  Based on the terms of the Amended Joint Plan, in the third
quarter of 2008 Congoleum recorded an additional $11.5 million charge for
estimated costs for the reorganization proceedings and coverage
litigation.





Inventories - Inventories are
stated at the lower of LIFO cost or market. The LIFO (last-in, first-out) method
of determining cost is used for substantially all inventories. The Company
records as a charge to cost of goods sold any amount required to reduce the
carrying value of inventories to the net realizable sales value.





Valuation of Deferred Tax
Assets - The Company provides for valuation reserves against its deferred
tax assets in accordance with the requirements of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No.
109”).  In evaluating the recovery of deferred tax assets, the Company
makes certain assumptions as to future events such as the ability to generate
future taxable income.





Environmental Contingencies -
The Company has incurred liabilities related to environmental remediation costs
at both third-party sites and Company-owned sites.  Management has
recorded both liabilities and insurance receivables in its financial statements
for its estimate of costs and insurance recoveries for future remediation
activities.  These estimates are based on certain assumptions such as
the extent of cleanup activities to be performed, the methods employed in the
cleanup activities, the Company’s relative share in costs at sites where other
parties are involved, and the ultimate insurance coverage
available.  These projects tend to be long-term in nature, and these
assumptions are subject to refinement as facts change.  As such, it is
possible that the Company may need to revise its recorded liabilities and
receivables for environmental costs in future periods resulting in potentially
material adjustments to the Company’s earnings in future periods.





44





Pension and Other Postretirement
Plans - The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No.
87”), and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension, and
Other Postretirement Plans on amendment of FASB Statements No. 87, 88, 106 and
132 (R)”, which require that amounts recognized in financial statements be
determined on an actuarial basis.  As permitted by SFAS No. 87, the
Company uses a calculated value of the expected return on plan assets (which is
further described below).  Under SFAS No. 87, the effects of the
actual performance of the pension plan’s assets and changes in pension liability
discount rates on the Company’s computation of pension income or expense are
amortized over future periods.





The
most significant element in determining the Company’s pension income or expense
in accordance with SFAS No. 87 is the expected return on plan
assets.  For 2008, the Company has assumed that the expected long-term
rate of return on plan assets will be 7.0%.  The assumed long-term
rate of return on assets is applied to the value of plan assets, which produces
the expected return on plan assets that is included in determining pension
expense.  The difference between this expected return and the actual
return on plan assets is deferred.  The net deferral of past actuarial
gains or losses
($49.5million loss and
$22.1million loss at December 31,
2008and 2007,respectively) will
ultimately be recognized as an adjustment to future pension
expense.





At
the end of each year, the Company determines the discount rate to be used to
calculate the present value of plan liabilities.  The discount rate is
an estimate of the current interest rate at which the pension liabilities could
be effectively settled at the end of the year.  In estimating this
rate, the Company looks to rates of return on high-quality, fixed-income
investments that receive one of the two highest ratings given by a recognized
ratings agency.  At December 31, 2008, the Company determined this
rate to be 6.0%.





The
Company accounts for its post-retirement benefits other than pensions in
accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other than Pensions”,which
requires that amounts recognized in financial statements be determined on an
actuarial basis.  These amounts are projected based on the January 1,
2008 SFAS No. 106 valuation and the 2007 year-end disclosure assumptions,
including a discount rate of 6.0% and health care cost trend rates of 9.0% in
2008 reducing to an ultimate rate of 5% in
2012.








Item
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.








45





Item
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




Consolidated
Balance Sheets


(dollars
in thousands, except per share amounts)





December
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007ASSETSCurrent
      assets:Cash and cash equivalents
                  
                  $
                  15,077
                  
                  
                  $
                  26,327Restricted cash
                  
                  
                  29,680
                  
                  
                  
                  6,501Accounts receivable, less allowances of $588 and $1,017as of December 31, 2008 and  2007
                  
                  
                  13,789
                  
                  
                  
                  14,162Inventories
                  
                  
                  35,814
                  
                  
                  
                  35,182Prepaid expenses and other current assets
                  
                  
                  3,922
                  
                  
                  
                  13,138Total current assets
                  
                  
                  98,282
                  
                  
                  
                  95,310Property, plant and equipment, net
                  
                  
                  56,520
                  
                  
                  
                  61,993Deferred income taxes
                  
                  
                  8,098
                  
                  
                  
                  7,400Other assets, net
                  
                  
                  8,967
                  
                  
                  
                  8,002Total assets
                  
                  $
                  171,867
                  
                  
                  $
                  172,705LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts payable
                  
                  $
                  7,132
                  
                  
                  $
                  10,399Accrued liabilities
                  
                  
                  17,114
                  
                  
                  
                  20,933Asbestos-related liabilities
                  
                  
                  50,022
                  
                  
                  
                  31,207Revolving credit loan
                  
                  
                  13,994
                  
                  
                  
                  10,551Deferred income taxes
                  
                  
                  6,533
                  
                  
                  
                  7,725Accrued taxes
                  
                  
                  123
                  
                  
                  
                  125Liabilities subject to compromise – current
                  
                  
                  4,997
                  
                  
                  
                  4,997Total current liabilities
                  
                  
                  99,915
                  
                  
                  
                  85,937Liabilities
      subject to compromise - long term
                  
                  
                  161,503
                  
                  
                  
                  133,224Total liabilities
                  
                  
                  261,418
                  
                  
                  
                  219,161STOCKHOLDERS’
      EQUITY (DEFICIT)Class
      A common stock, par value $0.01; 20,000,000 shares authorized;
      4,736,950shares
      issued and 3,663,390 shares outstanding at December 31, 2008 and
      2007
                  
                  
                  47
                  
                  
                  
                  47Class
      B common stock, par value $0.01; 4,608,945 shares authorized, issued
      andoutstanding
      at December 31, 2008 and 2007
                  
                  
                  46
                  
                  
                  
                  46Additional
      paid-in capital
                  
                  
                  49,386
                  
                  
                  
                  49,368Retained
      deficit
                  
                  
                  (80,038
                  )
                  
                  
                  (65,417
                  )Accumulated
      other comprehensive loss
                  
                  
                  (51,179
                  )
                  
                  
                  (22,687
                  )(83,738
                  )
                  
                  
                  (38,643
                  )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares
      atDecember
      31, 2008 and 2007
                  
                  
                  7,813
                  
                  
                  
                  7,813Total
      stockholders’ deficit
                  
                  
                  (89,551
                  )
                  
                  
                  (46,456
                  )Total
      liabilities and stockholders’ equity (deficit)
                  
                  $
                  171,867
                  
                  
                  $
                  172,705





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





46





Consolidated
Statements of Operations


(in
thousands, except per share amounts)





For
      the years endedDecember
      31,2008
                      
                      
                      2007Net
      sales
                      
                      $
                      172,644
                      
                      
                      $
                      204,262Cost
      of sales
                      
                      
                      142,032
                      
                      
                      
                      153,809Selling,
      general and administrative expenses
                      
                      
                      35,397
                      
                      
                      
                      37,469Asbestos-related
      reorganization charges
                      
                      
                      11,491
                      
                      
                      
                      41,315Loss
      from operations
                      
                      
                      (16,276
                      )
                      
                      
                      (28,331
                      )Other
      income (expense):Interest
      income
                      
                      
                      1,261
                      
                      
                      
                      1,224Bond
      interest (expense) reversal
                      
                      
                      --
                      
                      
                      
                      29,603Interest
      expense
                      
                      
                      (404
                      )
                      
                      
                      (1,027
                      )Other
      income
                      
                      
                      340
                      
                      
                      
                      564Other
      expense
                      
                      
                      (1,310
                      )
                      
                      
                      (1,011
                      )Income
      (loss) before income taxes
                      
                      
                      (16,389
                      )
                      
                      
                      1,022Provision
      for (benefit from) income taxes
                      
                      
                      (1,768
                      )
                      
                      
                      1,713Net
      loss
                      
                      $
                      (14,621
                      )
                      
                      $
                      (691
                      )Net
      loss per common shareBasic
                      
                      $
                      (1.77
                      )
                      
                      $
                      (0.08
                      )Diluted
                      
                      
                      (1.77
                      )
                      
                      
                      (0.08
                      )Weighted
      average number of common shares outstandingBasic
                      
                      
                      8,272
                      
                      
                      
                      8,272Diluted
                      
                      
                      8,272
                      
                      
                      
                      8,272





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








47





Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)


(dollars
in thousands)





Common
                                Stock
                                Class
      A
                              
                              
                              Common
                                Stock
                                Class
      B
                              
                              
                              Additional
                                Paid-in
                                Capital
                              
                              
                              Retained
                                Deficit
                              
                              
                              Accumulated
                                Other
                                Comprehensive
                                Loss
                              
                              
                              Treasury
                                Stock
                              
                              
                              Total
                                Stockholders’
                                Equity
                                (Deficit)
                              
                              
                              Comprehensive
                                Income
      (Loss)Balance
      at December 31, 2006
                              
                              $
                              47
                              
                              
                              $
                              46
                              
                              
                              $
                              49,349
                              
                              
                              $
                              (64,726
                              )
                              
                              $
                              (23,456
                              )
                              
                              $
                              7,813
                              
                              
                              $
                              (46,553
                              )Stock
      based compensation expense
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              19
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              19--
                              
                              
                              
                              --
                              
                              
                              
                              
                              
                              
                              
                              --Minimum
      pension liability
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              769
                              
                              
                              
                              --
                              
                              
                              
                              769
                              
                              
                              $
                              769Net
      loss
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              (691
                              )
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              (691
                              )
                              
                              
                              (691
                              )Net
      comprehensive income
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              $
                              78Balance
      at December 31, 2007
                              
                              $
                              47
                              
                              
                              $
                              46
                              
                              
                              $
                              49,368
                              
                              
                              $
                              (65,417
                              )
                              
                              $
                              (22,687
                              )
                              
                              $
                              7,813
                              
                              
                              $
                              (46,456
                              )Stock
      based compensation expense
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              18
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              18Minimum
      pension liability
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              (28,492
                              )
                              
                              
                              --
                              
                              
                              
                              (28,492
                              )
                              
                              $
                              (28,492
                              )Net
      loss
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              (14,621
                              )
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              (14,621
                              )
                              
                              
                              (14,621
                              )Net
      comprehensive loss
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              
                              --
                              
                              
                              $
                              (43,113
                              )Balance
      at December 31, 2008
                              
                              $
                              47
                              
                              
                              $
                              46
                              
                              
                              $
                              49,386
                              
                              
                              $
                              (80,038
                              )
                              
                              $
                              (51,179
                              )
                              
                              $
                              7,813
                              
                              
                              $
                              (89,551
                              )





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








48





Consolidated
Statements of Cash Flows


(dollars
in thousands)





For
      the years endedDecember
      31,2008
                  
                  
                  2007Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (14,621
                  )
                  
                  $
                  (691
                  )Adjustments
      to reconcile net (loss) income to net cash providedby (used
      in) operating activities:Depreciation
                  
                  
                  10,064
                  
                  
                  
                  10,305Amortization
                  
                  
                  174
                  
                  
                  
                  385Deferred
      taxes
                  
                  
                  (1,721
                  )
                  
                  
                  325Asbestos-related
      charges
                  
                  
                  11,491
                  
                  
                  
                  41,315Bond
      interest (expense) reversal
                  
                  
                  --
                  
                  
                  
                  (29,603
                  )Stock
      based compensation expense
                  
                  
                  18
                  
                  
                  
                  19Changes
      in certain assets and liabilities:Accounts
      and notes receivable
                  
                  
                  373
                  
                  
                  
                  3,436Inventories
                  
                  
                  (632
                  )
                  
                  
                  (962
                  )Prepaid
      expenses and other assets
                  
                  
                  48
                  
                  
                  
                  1,965Accounts
      payable
                  
                  
                  (3,267
                  )
                  
                  
                  (29
                  )Accrued
      liabilities
                  
                  
                  (3,848
                  )
                  
                  
                  (1,068
                  )Asbestos-related
      liabilities
                  
                  
                  (15,895
                  )
                  
                  
                  (13,048
                  )Proceeds
      from legal fee disgorgement
                  
                  
                  9,168
                  
                  
                  
                  --Reimbursement
      from other insurance settlements
                  
                  
                  --
                  
                  
                  
                  1,498Other
      liabilities
                  
                  
                  (1,494
                  )
                  
                  
                  (2,561
                  )Net
      cash (used in) provided by operating activities
                  
                  
                  (10,142
                  )
                  
                  
                  11,286Cash
      flows from investing activities:Capital
      expenditures, net
                  
                  
                  (4,591
                  )
                  
                  
                  (4,541
                  )Net
      cash used in investing activities
                  
                  
                  (4,591
                  )
                  
                  
                  (4,541
                  )Cash
      flows from financing activities:Net
      short-term borrowings
                  
                  
                  3,443
                  
                  
                  
                  (2,164
                  )Net
      change in restricted cash
                  
                  
                  40
                  
                  
                  
                  3,155Net
      cash provided by financing activities
                  
                  
                  3,483
                  
                  
                  
                  991Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (11,250
                  )
                  
                  
                  7,736Cash
      and cash equivalents:Beginning
      of year
                  
                  
                  26,327
                  
                  
                  
                  18,591End
      of year
                  
                  $
                  15,077
                  
                  
                  $
                  26,327





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








49





Notes
to Consolidated Financial Statements





1.  Basis
of Presentation:





The
Consolidated Financial Statements of Congoleum Corporation (the “Company” or
“Congoleum”) have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.  Accordingly, the financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.  As described more fully below, there is substantial
doubt about the Company’s ability to continue as a going concern unless it
obtains relief from its substantial asbestos liabilities through a successful
reorganization under Chapter 11 of the Bankruptcy Code.





On
December 31, 2003, Congoleum filed a voluntary petition with the 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





50





agreeable
definitive documentation, with the ACC, the FCR and the Company’s controlling
shareholder, ABI, on certain terms of the Ninth Plan, which Congoleum filed and
proposed jointly with the ACC in August 2006.  CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization.  Following further
mediated negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’
Committee reached agreement on the terms of the Tenth Plan, which Congoleum
filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s plan.
In October 2006, the Bankruptcy Court held a hearing to consider the adequacy of
the disclosure statements with respect to the Tenth Plan and the CNA Plan and to
hear arguments on respective summary judgment motions as to whether the Tenth
Plan and the CNA Plan were confirmable as a matter of law.  The
Bankruptcy Court provisionally approved the disclosure statements for both the
Tenth Plan and the CNA Plan subject to the Bankruptcy Court’s ruling on the
respective summary judgment motions.  In February 2007, the Bankruptcy
Court issued two separate opinions ruling that the Tenth Plan and the CNA Plan
were not confirmable as a matter of law.  In March 2007, Congoleum
resumed global plan mediation discussions with the various parties seeking to
resolve the issues raised in the Bankruptcy Court’s ruling with respect to the
Tenth Plan.  In July 2007, the FCR filed a plan of reorganization and
proposed disclosure statement.  After extensive further mediation
sessions, in February 2008 the FCR, the ACC, the Bondholders’ Committee and
Congoleum jointly filed the Joint Plan.  The Bankruptcy Court approved
the disclosure statement for the Joint Plan in February 2008, and the Joint Plan
was solicited in accordance with court-approved voting
procedures.  Various objections to the Joint Plan were filed, and in
May 2008 the Bankruptcy Court heard oral argument on summary judgment motions
relating to certain of those objections. In June 2008, the Bankruptcy Court
issued a ruling that the Joint Plan was not legally confirmable, and issued an
Order to Show Cause why the case should not be converted or dismissed pursuant
to 11 U.S.C. § 1112.  Following a further hearing in
June  2008, the Bankruptcy Court issued an opinion that vacated the
Order to Show Cause and instructed the parties to propose a confirmable plan by
the end of calendar year 2008. Following further negotiations, the
Bondholders’Committee, the ACC, the FCR,
representatives of holders of pre-petition settlements and Congoleum reached an
agreement in principle which the Company believes addresses the issues raised by
the Bankruptcy Court in the ruling on the Joint Plan and in the
court’s prior decisions.  A term sheet
describing the proposed material termsof theAmended Joint Planandthe Litigation Settlement was signed by the parties to
the agreement and filed with the Bankruptcy Courtin August  2008 and reported by
Congoleum onForm 8-Kfiledin August 2008.  Certain
insurers and a large bondholder filed objections to the Litigation
Settlementand incorporated
by reference herein and/orreserved their rights to object to
confirmation of theAmended
Joint Plan.  The
Bankruptcy Court approved the Litigation Settlement following a hearingin October 2008,but the court reserved until a later
date a determination of whether the settlement meets the standards required for
confirmation of a plan of reorganization.The Amended Joint Plan was
filed with the Bankruptcy Court in November 2008.In January 2009, First State Insurance Company and Twin
City Fire Insurance Company filed a motion for summary judgment seeking denial
of confirmation of the Amended Joint Planon several discrete issues, and a hearing was held on February 5,
2009.  On February 26, 2009, the Bankruptcy Court rendered an opinion
denying confirmation of the Amended Joint Plan.  Pursuant to theopinion, the Bankruptcy Court enteredthe Orderof Dismissaldismissing Congoleum’s bankruptcy case.




51




On February 27, 2009, Congoleum and the
Bondholders’Committee appealed the Order of
Dismissaland the summary
judgment ruling denying plan confirmationto the U.S. District Court for the
District of New Jersey.  On March 3, 2009, an order was entered by the
Bankruptcy Court granting a stay of the Orderof Dismissal pendingentry ordera final non-appealable decision
affirming the Order of Dismissal.





There
can be no assurance that the Amended Joint Plan or any other plan will receive
the acceptances necessary for confirmation, that the Amended Joint Plan will not
be modified further, that the Amended Joint Plan or any other plan will receive
necessary court approvals from the Bankruptcy Court and the District Court, that
the District Court will reverse the Order of Dismissal or Summary Judgment
ruling, or that such approvals and appellate decisions will be received in a
timely fashion, that any plan will be confirmed, that any plan, if confirmed,
will become effective, or that there will be sufficient funds to pay for
continued litigation over any plan of reorganization.  It also is
unclear whether any other person might successfully propose and confirm a plan
or what any such plan, when confirmed, would ultimately provide, and whether the
Bankruptcy Court would approve such a plan.  Any plan of
reorganization pursued by the Company will be subject to numerous conditions,
approvals and other requirements, including Bankruptcy Court and District Court
approvals, and there can be no assurance that such conditions, approvals and
other requirements will be satisfied or obtained.





For
more information regarding the Company’s asbestos liability and plan for
resolving that liability, please refer to Note 17 of the Notes to Consolidated
Financial Statements.





American
Institute of Certified Public Accountant Statement of Position 90-7, “Financial
Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”)
provides financial reporting guidance for entities that are reorganizing under
the Bankruptcy Code. The Company implemented this guidance in its consolidated
financial statements for periods after December 31, 2003.





Pursuant
to SOP 90-7, companies are required to segregate pre-petition liabilities that
are subject to compromise and report them separately on the balance sheet.
Liabilities that may be affected by a plan of reorganization are recorded at the
amount of the expected allowed claims, even if they may be settled for lesser
amounts. Substantially all of the Company’s liabilities at December 31, 2003
have been reclassified as liabilities subject to compromise. Obligations arising
post-petition, and pre-petition obligations that are secured, are not classified
as liabilities subject to compromise.





Additional
pre-petition claims (liabilities subject to compromise) may arise due to the
rejection of executory contracts or unexpired leases, or as a result of the
allowance of contingent or disputed claims.








52





2.  Summary
of Significant Accounting Policies:





Nature of Business -
Congoleum manufactures resilient sheet and tile flooring
products.  These products, together with a limited quantity of related
products purchased for resale, are sold primarily to wholesale distributors and
major retailers in the United States and Canada.  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.





Basis of Consolidation - The
accompanying consolidated financial statements reflect the operations, financial
position and cash flows of the Company and include the accounts of the Company
and its subsidiaries after elimination of all significant inter-company
transactions in consolidation.





Use of Estimates and Critical
Accounting Policies - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Critical
accounting policies are defined as those that entail significant judgments and
estimates, and could potentially result in materially different results under
different assumptions and conditions. The Company believes that the most
critical accounting policies upon which its financial condition depends, and
which involve the most complex or subjective decisions or assessments, concern
asbestos liabilities, inventories, environmental contingencies, valuation of
deferred tax assets, and pension plan and post-retirement benefits.





Although
the Company believes it employs reasonable and appropriate estimates and
assumptions in the preparation of its financial statements and in the
application of accounting policies, if business conditions are different than
the Company has assumed they will be, or if the Company used different estimates
and assumptions, it is possible that materially different amounts could be
reported in the Company’s financial statements.





Revenue Recognition-Revenue is recognized when
products are shipped and title has passed to the customer. Net sales are
comprised of the total sales billed during the period less the sales value of
estimated returns and sales incentives, which consist primarily of trade
discounts and customers’ allowances.  The Company defers recognition
of revenue for its estimate of potential sales returns under right-of-return
agreements with its customers until the right-of-return period
lapses.





Selling, General and Administrative
Expenses -Selling, general and administrative expenses are charged to
income as incurred.  Expenses promoting and selling products are
classified as selling expenses and include such items as advertising, sales
commissions and travel.  Advertising expenses amounted to $0.8 million
and $1.0 million in 2008 and 2007.  General and administrative
expenses include such items as officers’ salaries, office supplies, insurance
and office rental.  In addition, general and administrative expenses
include other operating items such as provision for doubtful accounts,
professional (accounting and legal) fees, purchasing and environmental
remediation costs.





53





Cash and Cash Equivalents -
All highly liquid debt instruments with a maturity of three months or less at
the time of purchase are considered to be cash equivalents.





Restricted Cash – Under the
terms of its revolving credit agreement, payments on the Company’s accounts
receivable are deposited in an account assigned by the Company to its lender and
the funds in that account are used by the lender to pay down any loan
balance.  Restricted cash represents funds deposited in this account
but not immediately applied to the loan balance.  At December 31, 2008
and 2007, there were no funds restricted under this financing agreement.
Additionally, $29.7 million and $6.5 million from insurance carrier settlements
is included as restricted cash at December 31, 2008 and 2007,
respectively.





Short-Term Investments - The
Company invests in highly liquid debt instruments with strong credit
ratings.  Commercial paper investments with a maturity greater than
three months, but less than one year at the time of purchase, are considered to
be short-term investments. The Company maintains cash and cash equivalents and
short-term investments with certain financial institutions.  The
Company performs periodic evaluations of the relative credit standing of those
financial institutions that are considered in the Company’s investment
strategy.





Inventories - Inventories are
stated at the lower of LIFO cost or market. The LIFO (last-in, first-out) method
of determining cost is used for substantially all inventories. The Company
records as a charge to cost of goods sold any amount required to reduce the
carrying value of inventories to the net realizable sales value.





Property, Plant, and
Equipment - Property, plant, and equipment are recorded at cost and are
depreciated over their estimated useful lives (30 years for buildings, 15 years
for building improvements, production equipment and heavy-duty vehicles, 3 to 10
years for light-duty vehicles and office furnishings and equipment) on the
straight-line method for financial reporting and accelerated methods for income
tax purposes. Costs of major additions and betterments are capitalized;
maintenance and repairs which do not improve or extend the life of the
respective assets are charged to operations as incurred. When an asset is sold,
retired or otherwise disposed of, the cost of the asset and the related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is reflected in operations.





Debt Issue Costs - Costs
incurred in connection with the issuance of debt have been capitalized and are
being amortized over the life of the related debt. Such costs at December 31,
2008 and 2007 amounted to $0.0 million and $0.1 million, respectively, net of
accumulated amortization of $3.3 million and $3.2 million, respectively, and are
included in other non-current assets.





Environmental Remediation -
The Company is subject to federal, state and local environmental laws and
regulations.  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.  The recorded liabilities are
not discounted for delays in future payments (see Note 16).





54





Asbestos Liabilities and Plan of
Reorganization – The Company is a defendant in a large number of
asbestos-related lawsuits and has filed a proposed joint plan of reorganization
under Chapter 11 of the United States Bankruptcy Code to resolve this liability
(see Note 17).  Accounting for asbestos-related and reorganization
costs includes significant assumptions and estimates, and actual results could
differ materially from those estimates.





Income Taxes - The Company
accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes” (“SFAS No. 109”).  Under SFAS No.
109, deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.  SFAS No. 109 requires current
recognition of net deferred tax assets to the extent that it is more likely than
not that such net assets will be realized.  To the extent that the
Company believes that its net deferred tax assets will not be realized, a
valuation allowance must be recorded against those assets.  Effective
January 1, 2007, the Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement 109”(“FIN 48”).
FIN 48 prescribes, among other things, a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of uncertain tax positions taken or expected to be taken in a company’s income
tax return. FIN 48 utilizes a two-step approach for evaluating uncertain
tax positions accounted for in accordance with SFAS No. 109.  Step
one, Recognition,
requires a company to determine if the weight of available evidence indicates
that a tax position is more likely than not to be sustained upon audit,
including resolution of related appeals or litigation processes, if any. Step
two, Measurement, is
based on the largest amount of benefit, which is more likely than not to be
realized on settlement with the taxing authority.





Allowance for Doubtful Accounts and
Cash Discounts – The Company provides an allowance for doubtful accounts
and cash discounts based on estimates of historical collection experience and a
review of the current status of trade accounts receivable, revising its
estimates when circumstances dictate.





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 millions):





December
      31,2008
                    
                    
                    2007Beginning
      balance
                    
                    $
                    1.8
                    
                    
                    $
                    2.0Accruals
                    
                    
                    3.5
                    
                    
                    
                    3.2Charges
                    
                    
                    (3.8
                    )
                    
                    
                    (3.4
                    )Ending
      balance
                    
                    $
                    1.5
                    
                    
                    $
                    1.8








55





Shipping and Handling Costs -
Shipping costs for the years ended December 31, 2008 and 2007, were $0.5 million
and $0.6 million, respectively, and are included in selling, general and
administrative expenses.





Earnings Per Share – SFAS No.
128, “Earnings Per Share”, requires the computation of basic and diluted
earnings per share.  The calculation of basic earnings per share is
based on the average number of common shares outstanding during the
period.  Diluted earnings per share reflect the effect of all
potentially diluted securities which consist of outstanding common stock
options.





Long-lived Assets- The
Company periodically considers whether there has been a permanent impairment in
the value of its long-lived assets, primarily property and equipment, in
accordance with Financial Accounting Standards Board (“FASB”) Statement
No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  The Company evaluates various factors, including current and
projected future operating results and the undiscounted cash flows for the
under-performing long-lived assets. The Company then compares the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. To the extent that the estimated future
undiscounted cash flows are less than the carrying amount of the asset, the
asset is written down to its estimated fair market value and an impairment loss
is recognized. The value of impaired long-lived assets is adjusted periodically
based on changes in these factors.  At December 31, 2008, the
Company determined, based on its evaluation, that the carrying value of its
long-lived assets was appropriate. No adjustments to the carrying costs were
made.





Share Based Payment -On
December 16, 2004, the FASB issued Statement No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123R”), a revision of FASB Statement No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). SFAS 123R supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees” (“APB No. 25”), and amends SFAS No. 95, “Statement of
Cash Flows” (“SFAS No. 95”).  SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values at the date of
grant.





Effective
January 1, 2006, the Company adopted SFAS 123R using the modified prospective
method as permitted under SFAS 123R. Under this transition method, compensation
cost recognized in 2006 includes: (a) compensation cost for all share-based
payments granted prior to but not yet vested as of December 31, 2005, based on
the grant-date fair value estimated in accordance with the provisions of SFAS
123, and (b) compensation cost for all share-based payments granted subsequent
to December 31, 2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123R. In accordance with the modified prospective
method of adoption, the Company’s results of operations and financial position
for prior periods have not been restated.  Prior to the adoption of
SFAS 123R, the Company accounted for stock option grants in accordance with APB
No. 25 (the intrinsic value method), and, accordingly, recognized no
compensation expense for stock option grants as the exercise price of the grant
was equal to the market price of the underlying common stock on the date of
grant.








56





As
a result of adopting SFAS 123R effective January 1, 2006, income before taxes,
net income and basic and diluted earnings per share for the year were $223
thousand and $0.03 per share lower, respectively, than if the Company had
continued to account for stock-based compensation under APB Opinion No. 25 for
our stock option grants.





At December 31,2008, there was$9.8thousand of unrecognized compensation
expense related to share-based payments, which is expected to be
recognized over a weighted-average period of2years.





The fair value for these options
granted was estimated at the date of grant using a Black-Scholes option pricing
model.





New
Accounting Standards





In
May 2008, the FASB issued SFAS No. 162, ‘‘The Hierarchy of Generally Accepted
Accounting Principles’’ (‘‘SFAS No. 162’’). SFAS No. 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. The Company adopted SFAS
No. 162 as of December 31, 2008 which did not have a material impact on the
Company’s consolidated financial statements





In
February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for
Financial Assets and Liabilities, Including an amendment of FASB Statement No.
115’’, (‘‘SFAS 159’’). SFAS 159 permits companies to choose to measure certain
financial instruments and other items at fair value. SFAS 159 is effective as of
the beginning of 2008. The Company adopted SFAS No. 159 on January 1, 2008 and
elected not to use the fair value option for its existing financial assets and
liabilities and, therefore, the adoption of SFAS No. 159 did not have an impact
on the Company’s consolidated financial statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 provides a common fair value hierarchy for companies to follow in
determining fair value measurements in the preparation of financial statements
and expands disclosure requirements relating to how such fair value measurements
were developed. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions that the marketplace would use when pricing an asset or
liability, rather than company-specific data. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007.  However, on February
12, 2008, the FASB issued Staff Position 157-2 which delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. For items within its scope, this Staff Position
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008. The Company is in the process of evaluating the impact of
SFAS No. 157 on its non-recurring fair value measurements.  The
Company adopted SFAS No. 157 on January 1, 2008 for its financial assets and
liabilities measured at fair value on a recurring basis.  The partial
adoption of SFAS No. 157 for financial assets and liabilities did not have a
material impact on the Company’s consolidated financial statements.








57





3.  Inventories:





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





December 31,
                
                
                December 31,2008
                
                
                2007Finished
      goods
                
                $
                30,203
                
                
                $
                28,445Work-in-process
                
                
                852
                
                
                
                1,108Raw
      materials and supplies
                
                
                4,759
                
                
                
                5,629Total
      inventories
                
                $
                35,814
                
                
                $
                35,182





If
the FIFO (first in, first out) inventory method, which approximates replacement
cost, had been used to value these inventories, they would have been $10,402
higher at December 31, 2008 and $4,825 higher at December 31, 2007. During 2008,
inventory quantities were increased. The LIFO method is utilized in determining
inventory values as it results in better matching of costs and
revenue.





4.  Property,
Plant, and Equipment:





A
summary of the major components of property, plant, and equipment is as follows
(in thousands):





December 31,
                
                
                December 31,2008
                
                
                2007Land
                
                $
                2,931
                
                
                $
                2,931Buildings
      and improvements
                
                
                48,353
                
                
                
                47,697Machinery
      and equipment
                
                
                196,810
                
                
                
                193,627Construction-in-progress
                
                
                2,799
                
                
                
                2,047250,893
                
                
                
                246,302Less
      accumulated depreciation
                
                
                194,373
                
                
                
                184,309Total
      property, plant, and equipment, net
                
                $
                56,520
                
                
                $
                61,993





Interest
is capitalized in connection with the construction of major facilities and
equipment. The capitalized interest is recorded as part of the asset to which it
relates and is amortized over the asset’s estimated useful life. Capitalized
interested for 2008 and 2007 was $9.4 thousand. Total depreciation expense for
2008 and 2007 was $10.1 million and $10.3 Million, respectively








58





5.  Liabilities
Subject to Compromise:





As
a result of the Company’s Chapter 11 filing (see Notes 1 and 17), pursuant to
SOP 90-7, the Company is required to segregate pre-petition liabilities that are
subject to compromise and report them separately on the consolidated balance
sheet.  Liabilities that may be affected by a plan of reorganization
are recorded at the amount of the expected allowed claims, even if they may be
settled for lesser amounts.  Substantially all of the Company’s
pre-petition debt is recorded at face value and is classified within liabilities
subject to compromise.  Prior to the fourth quarter of 2007, the
Company’s accrued interest expense on its Senior Notes was also recorded in
liabilities subject to compromise.  In the fourth quarter of 2007
Congoleum recorded a $41.0 million interest expense credit to reverse
post-petition interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Amended Joint Plan,
the Senior Note holders will not receive any post-petition
interest.





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





December 31,
                
                
                December 31,2008
                
                
                2007CurrentPre-petition
      other payables and accrued interest
                
                $
                4,997
                
                
                $
                4,997Non-currentDebt
      (at face value)
                
                
                100,000
                
                
                
                100,000Pension
      liability
                
                
                37,022
                
                
                
                10,772Other
      post-retirement benefit obligation
                
                
                10,938
                
                
                
                9,337Pre-petition
      other liabilities
                
                
                13,543
                
                
                
                13,115Total
      liabilities subject to compromise
                
                $
                166,500
                
                
                $
                138,221





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.








59





6.  Accrued
Liabilities:





A summary of the significant components
of accrued liabilities consists of the following (in thousands):





December 31,
                
                
                December 31,2008
                
                
                2007Accrued
      warranty, marketing andsales
      promotion
                
                $
                13,167
                
                
                $
                16,636Employee
      compensation andrelated
      benefits
                
                
                3,349
                
                
                
                3,584Other
                
                
                598
                
                
                
                713Total
      accrued liabilities
                
                $
                17,114
                
                
                $
                20,933





As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of
December 31, 2008 and 2007 (see Note 5).





7.  Debt:





In
January 2004, the Bankruptcy Court authorized entry of a final order approving
Congoleum’s debtor-in-possession financing, which replaced its pre-petition
credit facility on substantially similar terms. The debtor-in-possession
financing agreement (as amended and approved by the Bankruptcy Court to date)
provides a revolving credit facility expiring on the earlier of (i) June 30,
2009 and (ii) the date the plan of reorganization in Congoleum’s bankruptcy
cases as confirmed by the Bankruptcy Court becomes effective.  Total
borrowing under the facility may not exceed $30.0 million.  Interest
is based on 0.25% above the prime rate.  This financing agreement
contains certain covenants, which include the maintenance of minimum earnings
before interest, taxes, depreciation and amortization (“EBITDA”).  In
connection with the amendment and extension of the agreement during 2008, the
minimum level of EBITDA that Congoleum must maintain was reduced for quarters
ending after June 30, 2008.  Congoleum paid a fee of $25 thousand for
such amendment, plus an amendment fee in the amount of $15 thousand per
month.  The financing agreement also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures. The
covenants and conditions under this financing agreement must be met in order for
the Company to borrow from the facility. Congoleum was not in compliance with
the minimum EBITDA covenant under its credit facility for the period ended
December 31, 2008, and obtained a waiver of that covenant as well as an
amendment of the covenant levels for the remaining term of the facility to make
them less restrictive.  A fee of $30 thousand was paid in connection
with the waiver and amendment.








60





The
interest rate was increased to 1.75% above the prime rate.  Borrowings
under this facility are collateralized by inventory and
receivables.  At December 31, 2008, based on the level of receivables
and inventory, $17.4 million was available under the facility, of which $2.0
million was utilized for outstanding letters of credit and $14.0 million was
utilized by the revolving loan. The
existing financing facility expires June 30, 2009. The Company believes that it
will be able to obtain an extension of the credit facility through the end of
2009, however, given the current business conditions and uncertainty in the
credit markets, there can be no assurances that an extension or refinancing will
be available. Congoleum anticipates that its debtor-in-possession financing
facility (including anticipated extensions thereof) together with cash from
operations will provide it with sufficient liquidity to operate during 2009
while under Chapter 11 protection.  For a plan of reorganization to be
confirmed, the Company will need to obtain and demonstrate the sufficiency of
exit financing.  The Company cannot presently determine the terms of such
financing, nor can there be any assurances of its success obtaining
it.





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 interest and the principal amount of
the Senior Notes, are included in “Liabilities Subject to Compromise” (see Note
5) as of December 31, 2008.





Interest paid during 2008 and 2007 was
$0.4 million and $1.0 million, respectively.





8.  Other
Liabilities:





As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of
December 31, 2008 and 2007 (see Note 5).





9.  Research
and Development Costs:





Total
research and development costs charged to operations amounted to $3.8 million
and $4.2 million for the years ended December 31, 2008 and 2007,
respectively.








61





10.  Operating
Lease Commitments and Rent Expense:





The
Company leases certain office facilities and equipment under leases with varying
terms.  Certain leases contain rent escalation clauses. These rent
expenses are recognized on a straight-line basis over the respective term of the
lease.





Future
minimum lease payments of non-cancelable operating leases having initial or
remaining lease terms in excess of one year as of December 31, 2008 are as
follows (in thousands):





Years
      Ending:2009
                  
                  $
                  2,6732010
                  
                  
                  2,1292011
                  
                  
                  133Thereafter
                  
                  
                  --Total
      minimum lease payments
                  
                  $
                  4,935





Rent expense was $3.1 million for the
years ended December 31, 2008 and 2007.





11.  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”).





62




The
following summarizes the change in the benefit obligation, the change in plan
assets, the funded status, and reconciliation to the amounts recognized in the
balance sheets for the pension benefits and other benefit plans. The measurement
date for all items set forth below is the last day of the fiscal year
presented.





Obligations
      and Funded Status:
                              
                              At
      December 31,Pension
      Benefits
                              
                              
                              Other
      Benefits(in
      thousands)
                              
                              2008
                              
                              
                              2007
                              
                              
                              2008
                              
                              
                              2007Change
      in Benefit Obligation:Benefit
      obligation at beginning of year
                              
                              $
                              79,787
                              
                              
                              $
                              79,821
                              
                              
                              $
                              9,926
                              
                              
                              $
                              9,664Service
      cost
                              
                              
                              1,370
                              
                              
                              
                              1,381
                              
                              
                              
                              188
                              
                              
                              
                              213Interest
      cost
                              
                              
                              4,545
                              
                              
                              
                              4,559
                              
                              
                              
                              594
                              
                              
                              
                              566Actuarial
      (gain) loss
                              
                              
                              4,399
                              
                              
                              
                              (1,378
                              )
                              
                              
                              1,186
                              
                              
                              
                              (137
                              )Benefits
      paid
                              
                              
                              (4,624
                              )
                              
                              
                              (4,596
                              )
                              
                              
                              (407
                              )
                              
                              
                              (380
                              )Benefit
      obligation at end of year
                              
                              $
                              85,477
                              
                              
                              $
                              79,787
                              
                              
                              $
                              11,487
                              
                              
                              $
                              9,926Change
      in Plan Assets:Fair
      value of plan assets at beginning of year
                              
                              $
                              69,016
                              
                              
                              $
                              64,319
                              
                              
                              $
                              --
                              
                              
                              $
                              --Actual
      return on plan assets
                              
                              
                              (19,459
                              )
                              
                              
                              2,514
                              
                              
                              
                              --
                              
                              
                              
                              --Employer
      contribution
                              
                              
                              3,522
                              
                              
                              
                              6,779
                              
                              
                              
                              --
                              
                              
                              
                              --Benefits
      paid
                              
                              
                              (4,624
                              )
                              
                              
                              (4,596
                              )
                              
                              
                              --
                              
                              
                              
                              --Fair
      value of plan assets at end of year
                              
                              $
                              48,455
                              
                              
                              $
                              69,016
                              
                              
                              $
                              --
                              
                              
                              $
                              --Unfunded
      status
                              
                              $
                              (37,022
                              )
                              
                              $
                              (10,771
                              )
                              
                              $
                              (11,487
                              )
                              
                              $
                              (9,926
                              )Unrecognized
      net actuarial loss
                              
                              
                              49,452
                              
                              
                              
                              22,
      069
                              
                              
                              
                              1,386
                              
                              
                              
                              250Unrecognized
      prior service cost
                              
                              
                              6
                              
                              
                              
                              29
                              
                              
                              
                              --
                              
                              
                              
                              3Net
      amount recognized
                              
                              $
                              12,436
                              
                              
                              $
                              11,327
                              
                              
                              $
                              (10,101
                              )
                              
                              $
                              (9,673
                              )





Amounts
recorded in the balance sheets consist of:





Pension
      Benefits
                                  
                                  
                                  Other
      Benefits(in
      thousands)
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2008
                                  
                                  
                                  2007Accrued
      benefit cost
                                  
                                  $
                                  (37,022
                                  )
                                  
                                  $
                                  (10,771
                                  )
                                  
                                  $
                                  (11,487
                                  )
                                  
                                  $
                                  (9,926
                                  )Intangible
      asset
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --Accumulated
      other comprehensive loss
                                  
                                  
                                  49,458
                                  
                                  
                                  
                                  22,098
                                  
                                  
                                  
                                  1,386
                                  
                                  
                                  
                                  253Net
      amounts recorded
                                  
                                  $
                                  12,436
                                  
                                  
                                  $
                                  11,327
                                  
                                  
                                  $
                                  (10,101
                                  )
                                  
                                  $
                                  (9,673
                                  )




Included
in accumulated other comprehensive loss at December 31, 2008 and 2007 was the
tax effect of $0.2 million for the changes in minimum pension liability recorded
in prior years.




63




Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:





December
      31,(in
      thousands)
                  
                  2008
                  
                  
                  2007Projected
      benefit obligation
                  
                  $
                  85,477
                  
                  
                  $
                  79,787Accumulated
      benefit obligation
                  
                  
                  84,472
                  
                  
                  
                  76,916Fair
      value of plan assets
                  
                  
                  48,455
                  
                  
                  
                  69,016





Components
of Net Periodic Benefit Cost:





Pension
      Benefits
                                                            
                                                            
                                                            Other
      Benefits(in
      thousands)
                                                            
                                                            2008
                                                            
                                                            
                                                            2007
                                                            
                                                            
                                                            2008
                                                            
                                                            
                                                            2007Service
      cost
                                                            
                                                            $
                                                            1,370
                                                            
                                                            
                                                            $
                                                            1,381
                                                            
                                                            
                                                            $
                                                            188
                                                            
                                                            
                                                            $
                                                            213Interest
      cost
                                                            
                                                            
                                                            4,545
                                                            
                                                            
                                                            
                                                            4,559
                                                            
                                                            
                                                            
                                                            594
                                                            
                                                            
                                                            
                                                            566Expected
      return on plan assets
                                                            
                                                            
                                                            (4,783
                                                            )
                                                            
                                                            
                                                            (4,590
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --Recognized
      net actuarial loss
                                                            
                                                            
                                                            1,258
                                                            
                                                            
                                                            
                                                            1,340
                                                            
                                                            
                                                            
                                                            50
                                                            
                                                            
                                                            
                                                            71Amortization
      of prior service cost
                                                            
                                                            
                                                            23
                                                            
                                                            
                                                            
                                                            46
                                                            
                                                            
                                                            
                                                            3
                                                            
                                                            
                                                            
                                                            10Net
      periodic benefit cost
                                                            
                                                            $
                                                            2,413
                                                            
                                                            
                                                            $
                                                            2,736
                                                            
                                                            
                                                            $
                                                            835
                                                            
                                                            
                                                            $
                                                            860





For the Company’s pension plans, the estimated net loss
and prior service cost to be amortized from accumulated other comprehensive loss
during 2009is expected to be $1.3million and $23.6thousand, respectively.  For
the Company’s post-retirement benefit plans, the
estimated net loss and prior service cost to be amortized from accumulated other
comprehensive loss during 2009is expected to be $65.0and $0.0thousand,
respectively.





Additional
Information:





The weighted average assumptions used
to determine benefit obligation as of year-end were as follows:





Pension
      Benefits
                
                Other
      Benefits2008
                2007
                
                2008
                2007Discount
      rate
                5.75%
                6.00%
                
                5.75%
                6.00%Rate
      of compensation increase
                3.00%
                5.00%
                
                NA
                NA








64





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





Pension
      Benefits
                  
                  Other
      Benefits2008
                  2007
                  
                  2008
                  2007Discount
      rate
                  6.00%
                  6.00%
                  
                  6.00%
                  6.00%Expected
      long-term return on plan assets
                  7.00%
                  7.00%
                  
                  NA
                  NARate
      of compensation increase
                  5.00%
                  5.00%
                  
                  NA
                  NA





In
developing the expected long-term return on plan assets assumption, a building
block approach was used in which rates of return in excess of inflation were
considered separately for equity securities, debt securities, and other assets. The
excess returns were weighted by the representative target allocation and added,
with an appropriate rate of inflation, to develop the overall expected long-term
return on plan assets assumption. The Company believes this determination is
consistent with SFAS No. 87.





Assumed healthcare cost trend rates as
of year-end were as follows:





December
      31,2008
                2007Healthcare
      cost trend rate assumed for next year
                8.5%
                9.5%Ultimate
      healthcare cost trend rate
                5.0%
                5.0%Year
      that the assumed rate reaches ultimate rate
                2012
                2012





Assumed healthcare cost trend rates have
a significant effect on the amounts reported for healthcare benefits. A
one-percentage point change in assumed healthcare cost trend rates would have
the following effects:





(in
      thousands)
                1 Percentage
                  Point
                  Increase
                1 Percentage
                  Point
                  DecreaseEffect
      on total of service and interest cost components
                $
       72
                $
       63Effect
      on post-retirement benefit obligation
                886
                797








65





Plan Assets:





For the pension plans, the
weighted-average asset allocation at December 31, 2008and 2007by asset category is as
follows:





Plan
      Assets atDecember
      31,Asset
      Category:
              2008
              2007Equity
      securities
              51%
              61%Debt
      securities
              48%
              38%Other
              1%
              1%Total
              100%
              100%





The Company hasdeveloped an investment strategy for the
pension plans. The investment strategy is to emphasize total return; that is,
the aggregate return from capital appreciation and dividend and interest income.
The primary objective of the investment management for the plans’assets is the emphasis on consistent
growth; specifically, growth in a manner that protects the plans’assets from excessive volatility in
market value from year to year. The investment policy takes into consideration
the benefit obligations, including timing of distributions.





The primary objective for the plans is
to provide long-term capital appreciation through investment in equity and debt
securities. The Company’s target asset allocation is consistent
with the weighted average allocation at December 31, 2008.





The Company selects professional money
managers whose investment policies are consistent with the Company’s investment strategy and monitors their
performance against appropriate benchmarks.





Contributions:





The Companyexpectsto contribute $5.2 million to its
pension plan and $0.6 million to its other postretirement plan in
2009.








66





Estimated Future Benefit
Payments:





The following benefit payments, which
reflect future service as appropriate, are expected to be paid. The benefit
payments are based on the same assumptions used to measure the Company’s benefit
obligation at the end of 2006.





(in
      thousands)
                  Pension
                    Benefit
                  
                  Other
      Benefits
                    Projected
      Net
                    Benefit
      Payments2009
                  $   5,151
                  
                  $    5712010
                  5,408
                  
                  6582011
                  5,516
                  
                  7402012
                  5,806
                  
                  8312013
                  5,888
                  
                  9412014-2018
                  31,827
                  
                  5,969





Defined
Contribution Plan:





The
Company also has two 401(k) defined contribution retirement plans that cover
substantially all employees.  Eligible employees may contribute up to
50% of compensation, with partially matching Company contributions. The charge
to income relating to the Company match was $0.4 million for the years ended
December 31, 2008 and 2007.





12.  Income
Taxes:





The
Company recorded a tax benefit of $1.8 million on loss before income taxes of
$16.4 million in 2008.  The $1.8 million tax benefit was attributable to a
significant pre-tax loss in 2008 offset by $1.4 million for the impact of
non-deductible legal reserves related to the Company’s reorganization plan and
by a $2.8 million increase in the valuation allowance on federal and state
deferred tax assets.





Income taxes are comprised of the
following (in thousands):





For
      the years ended
                        December
      31,2008
                      
                      
                      2007Current:Federal
                      
                      $
                      101
                      
                      
                      $
                      1,276State
                      
                      
                      21
                      
                      
                      
                      112Deferred:Federal
                      
                      
                      (4,292
                      )
                      
                      
                      1,759State
                      
                      
                      (443
                      )
                      
                      
                      (289
                      )Valuation
      allowance
                      
                      
                      2,845
                      
                      
                      
                      (1,145
                      )Provision
      (benefit) for income taxes
                      
                      $
                      (1,768
                      )
                      
                      $
                      1,713





67





The following is a reconciliation of
the statutory federal income tax rate to the Company’s effective tax rate
expressed as a percentage of income before income taxes:





For
      the years ended
                              December
      31,2008
                            
                            2007Statutory
      federal income tax rate
                            
                            
                            34.0
                            %
                            
                            
                            34.0
                            %State
      income taxes, net of federal benefit
                            
                            
                            2.7
                            
                            
                            
                            (12.1
                            )Non-deductible
      expenses
                            
                            
                            (8.6
                            )
                            
                            
                            265.8Change
      in valuation allowance
                            
                            
                            (17.4
                            )
                            
                            
                            (118.3
                            )Tax
      credits
                            
                            
                            0.3
                            
                            
                            
                            (3.9
                            )Change
      in prior year estimates
                            
                            
                            (0.2
                            )
                            
                            
                            16.1Adjustment
      to current tax reserve
                            
                            
                            (0.1
                            )
                            
                            
                            (15.8
                            )Other
                            
                            
                            --
                            
                            
                            
                            1.8Effective
      tax rate
                            
                            
                            10.8
                            %
                            
                            
                            167.6
                            %





During 2008 and 2007, the Company made
net payments for income taxes of $ 212 thousand and $4 thousand,
respectively.





Deferred
income taxes are recorded using enacted tax rates based upon differences between
financial statement and tax bases of assets and liabilities. Valuation
allowances are established to reduce deferred tax assets when it is more likely
than not that some or all will not be realized.








68





The components of the deferred tax
asset and liability relate to the following temporary differences (in
thousands):





December 31,
                        
                        
                        December 31,2008
                        
                        
                        2007Deferred
      tax assets:Accounts
      receivable
                        
                        $
                        9
                        
                        
                        $
                        120Inventory
                        
                        
                        314
                        
                        
                        
                        --Environmental
      remediation andproduct-related
      reserves
                        
                        
                        21,603
                        
                        
                        
                        13,073Postretirement
      benefit obligations
                        
                        
                        18,005
                        
                        
                        
                        3,930Tax
      credit and other carryovers
                        
                        
                        14,848
                        
                        
                        
                        18,408Intangibles
                        
                        
                        172
                        
                        
                        
                        --Other
      accruals
                        
                        
                        1,065
                        
                        
                        
                        1,680Deferred
      tax assets
                        
                        
                        56,016
                        
                        
                        
                        37,211Valuation
      allowances
                        
                        
                        (6,720
                        )
                        
                        
                        (3,876
                        )Net
      deferred tax asset
                        
                        
                        49,296
                        
                        
                        
                        33,335Deferred
      tax liabilities:Depreciation
      and amortization
                        
                        
                        (5,052
                        )
                        
                        
                        (6,685
                        )Inventory
                        
                        
                        --
                        
                        
                        
                        (586
                        )Unfunded
      pension
                        
                        
                        (18,979
                        )
                        
                        
                        (4,313
                        )Casualty
      insurance receivable
                        
                        
                        (3,769
                        )
                        
                        
                        (6,780
                        )Accrued
      interest expense
                        
                        
                        (19,806
                        )
                        
                        
                        (15,296
                        )Other
                        
                        
                        (123
                        )
                        
                        
                        --Total
      deferred tax liabilities
                        
                        
                        (47,729
                        )
                        
                        
                        (33,660
                        )Net
      deferred tax asset (liability)
                        
                        $
                        1,567
                        
                        
                        $
                        (325
                        )





At
December 31, 2008 and 2007, the Company had available federal net operating loss
carry forwards of approximately $21.4 million and $32.9 million, respectively,
to offset future taxable income.  The federal loss carry forwards will
begin to expire in 2025.  At December 31, 2008 and 2007, the Company
had available state net operating loss carry forwards of approximately $37.6
million and $43.7 million, respectively, to offset future taxable
income.  The state loss carry forwards will begin to expire in
2009.  At both December 31, 2008 and 2007, the Company had available
federal tax credit carry forwards of $2.3 million, which will begin to expire in
2020.  Additionally, the Company has state tax credit carry forwards
of $1.8 million and $1.7 million at December 31, 2008 and 2007, respectively,
which will begin to expire in 2009.  A change of control resulting
from the Company’s reorganization proceedings could result in the acceleration
of expiration or extinguishment of these tax loss and credit carry
forwards.





69





Accounting
for Uncertainty in Income Taxes





Effective
January 1, 2007, Congoleum adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN
48”).  FASB requires that Congoleum recognize the impact of a tax
position taken, or expected to be taken, in tax returns if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position.  Under FIN 48, tax positions are evaluated for
recognition using a “more-likely-than-not” threshold, and those tax positions
requiring recognition are measured as the largest amount of tax benefit that is
greater than fifty percent likely of being realized upon ultimate settlement
with a taxing authority that has full knowledge of all relevant
information.  Congoleum evaluated its tax positions in the tax returns
filed, as well as un-filed tax positions and the amounts comprising deferred tax
assets.  Congoleum determined that the adoption of FIN 48 did not have
a material impact on its financial position or results of
operations.  A reconciliation of the beginning and ending amount of
unrecognized tax benefits follows:





(in
      thousands)2008
                    
                    
                    2007Balance
      at January 1,
                    
                    $
                    2,308
                    
                    
                    $
                    1,561Additions
      based on tax positions related to the current year
                    
                    
                    0
                    
                    
                    
                    704Additions
      for tax positions of prior years
                    
                    
                    0
                    
                    
                    
                    43Reductions
      for tax positions of prior years
                    
                    
                    0
                    
                    
                    
                    0Settlements
                    
                    
                    0
                    
                    
                    
                    0Balance
      at December 31,
                    
                    $
                    2,308
                    
                    
                    $
                    2,308





Of
the unrecognized tax benefits, $1.6 million would affect the effective tax rate
if recognized in a future period, not considering the impact of the current
valuation allowance.  $113 thousand of this benefit would currently be
offset by an increase in the valuation allowance as it is not more likely than
not that Congoleum would have sufficient earnings to recognize this
amount.  Included in the balance at December 31, 2008 and December 31,
2007 are $704 thousand of tax positions for which the ultimate deductibility is
highly certain but for which there is uncertainty about the timing of such
deductibility.  Because of the impact of deferred tax accounting,
other than interest and penalties, the disallowance of the shorter deductibility
period would not affect the annual effective tax rate but could accelerate the
payment of cash to the taxing authority to an earlier period.





Congoleum
anticipates decreases in unrecognized tax benefits of approximately $704
thousand related to accounting method changes during 2009.





Congoleum’s
policy is to report interest (and penalties, if applicable) as tax provision
(benefit) in the Consolidated Statements of Operations.  During the
years ended December 31, 2008 and 2007, Congoleum recognized approximately $16
and $31 thousand in interest and penalties, respectively.  Congoleum
had approximately $66 thousand and $50 thousand accrued for the payment of
interest and penalties at December 31, 2008 and 2007, respectively.








70





Congoleum
or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state jurisdictions. With few exceptions, Congoleum is
no longer subject to U.S. federal or state income tax examinations by tax
authorities for years before 2000. Congoleum is not currently under examination
by the Internal Revenue Service or state taxing authorities. Congoleum’s tax
return net operating loss carry forwards are significant. The calendar
years in which losses arose may be subject to audit when such carry forwards are
utilized to offset taxable income in future periods.





13.  Supplemental
Cash Flow Information:





Cash
payments for interest were $0.4 million and $0.9 million for the years ended
December 31, 2008 and 2007. Net cash refunds for income taxes were $0.1 million
and $2.2 million for the years ended December 31, 2008 and 2007.





14.  Related
Party Transactions:





The
Company and its controlling shareholder, American Biltrite Inc. (“ABI”), provide
certain goods and services to each other pursuant to negotiated agreements. The
Company had the following transactions with ABI (in thousands):





For
      the years endedDecember
      31,2008
                      
                      
                      2007Sales
      commissions earned by ABI
                      
                      $
                      1,373
                      
                      
                      $
                      865Raw
      material transfers to ABI
                      
                      
                      613
                      
                      
                      
                      1,108Computer
      service income earned from ABI
                      
                      
                      60
                      
                      
                      
                      55Material
      purchases from ABI
                      
                      
                      4,156
                      
                      
                      
                      4,656Management
      fees paid to ABI
                      
                      
                      722
                      
                      
                      
                      696





ABI
owed $5.9 thousand and 0 on December 31, 2008 and December 31, 2007,
respectively. Amounts as of December 31, 2008 and 2007 due to ABI totaled $0.1
million and $0, respectively, and are included in accounts payable and accrued
expenses.





15.  Major
Customers:





Substantially
all the Company’s sales are to select flooring distributors and retailers
located in the United States and Canada. Economic and market conditions, as well
as the individual financial condition of each customer, are considered when
establishing allowances for losses from doubtful accounts.





71





Two
customers, LaSalle-Bristol Corporation and Mohawk Industries, Inc., accounted
for approximately 22.0% and 41.0%, respectively, of the Company’s net sales for
the year ended December 31, 2008, and 25% and 40%, respectively, for the year
ended December 31, 2007.  Mohawk Industries accounted for 44% and 38%
of accounts receivable at December 31, 2008 and 2007, respectively, while
LaSalle–Bristol Corporation accounted for 1% and 5%, respectively, of accounts
receivable at December 31, 2008 and 2007. In addition, two other customers,
Bayard Sales and Kraus Canada accounted for 10% and 11%, respectively of
accounts receivable at December 31, 2008 and 11% and 9%, respectively, of
accounts receivable at December 31, 2007.





16.  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 December 31, 2008 and 2007, are not
reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.1 million at December 31, 2008 and 2007,
and are reflected in other non-current assets. Receivables for expected
insurance recoveries are recorded if the related carriers are solvent and paying
claims under a reservation of rights or under an obligation pursuant to coverage
in place or a settlement agreement.  Substantially all of Congoleum’s
recorded insurance asset for environmental matters is collectible from a single
carrier.





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.





72





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.








73





17.  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




74




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, theBondholders’Committee, the ACC, the FCR,
representatives of holders of pre-petition settlements and Congoleum reached an
agreement in principle which the Company believes addresses the issues raised by
the Bankruptcy Court in the ruling on the Joint Planand in the court’s prior decisions.  A term sheet
describing the proposed material terms of theAmended Joint Planand the Litigation
Settlement,  was signed by the parties to the agreement and filed with
the Bankruptcy Courtin August 2008 and reported
byCongoleum onForm 8-Kfiledon August 15, 2008and incorporated by reference
herein.  Certain
insurers and a large bondholder filed objections to the Litigation Settlement
and/or reserved their rights to object to confirmation of theAmended Joint Plan.The Bankruptcy Court approved the
Litigation Settlement following a hearing on October 20, 2008, but the court
reserved until a later date a determination of whether the settlement meets the
standards required for
confirmation of a plan of reorganization.  The Amended Joint
Plan was filed with the Bankruptcy Court in November 2008.  In January 2009, First State Insurance
Company and Twin City Fire Insurance Company filed a motion for summary judgment seeking
denial of confirmation of the Amended Joint Plan,and a hearing was held on February 5,
2009.  On February 26, 2009, the Bankruptcy Court rendered an opinion
denying confirmation of the Amended Joint Plan.  Pursuant to theopinion, the Bankruptcy Court enteredtheOrder of Dismissal dismissing
Congoleum’s bankruptcy case.





On February 27, 2009, Congoleum and the
Bondholders’Committee appealed the Order of
Dismissaland the Summary
Judgment ruling denying plan confirmationto the U.S. District Court for the
District of New Jersey.  On March 3, 2009, an order was entered by the Bankruptcy Court
granting a stay of the Bankruptcy Court’s Order of Dismissal pendingentry ofa final non-appealable decision
affirming the Order of Dismissal.





75





There
can be no assurance that the Amended Joint Plan or any subsequent plan of
reorganization, if proposed, will receive the acceptances necessary for
confirmation, that any plan will not be modified further, that any plan will
receive necessary court approvals from the Bankruptcy Court and the District
Court, or that such approvals and appellate decisions will be received in a
timely fashion, that any plan will be confirmed, that any plan, if confirmed,
will become effective, or that Congoleum will continue to earn sufficient funds
to pay for continued proceedings with respect to any plan of
reorganization.  It also is unclear whether any other person might
successfully propose and confirm a plan or what any such plan, when confirmed,
would ultimately provide, and whether the Bankruptcy Court would approve such a
plan.  Any plan of reorganization pursued by the Company will be
subject to numerous conditions, approvals and other requirements, including
Bankruptcy Court and District Court approvals, and there can be no assurance
that such conditions, approvals and other requirements will be satisfied or
obtained.





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




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




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







76





In March 2004, the Bankruptcy Court
approved the retention of Gilbert, Heintz & Randolph LLP (“GHR”) as special
insurance counsel to the Company.  An insurance company appealed the
retention order.  In October 2005, the United States Court of Appeals
for the Third Circuit issued an opinion disqualifying GHR from serving as
counsel to Congoleum. As a result of the federal appeals court decision on GHR’s
retention, in February 2006, the Bankruptcy Court ordered GHR to disgorge all
fees and certain expenses it was paid by Congoleum.  In October 2006,
Congoleum and GHR entered into a settlement agreement (the “GHR Settlement”)
under which GHR agreed to pay Congoleum approximately $9.2 million plus accrued
interest in full satisfaction of the disgorgement order.  The
obligation was secured by assets of GHR and was to be made over time according
to a formula based on GHR’s earnings.  The Bankruptcy Court approved
the GHR Settlement in April 2007. Congoleum received $9.2 million plus $1.0
million of accrued interest in full satisfaction of the GHR Settlement in March
2008.





In
anticipation of Congoleum’s commencement of the Chapter 11 cases, Congoleum
entered into a settlement agreement with approximately 79,000 asbestos personal
injury claimants (the “Claimant Agreement”), which provides for an aggregate
settlement value of at least $466 million.  The Claimant Agreement,
along with a number of individually negotiated trial listed settlements with an
aggregate value of approximately $25 million, amount to settlements in excess of
$491 million.  As contemplated by the Claimant Agreement, Congoleum
also entered into agreements establishing a pre-petition trust (the “Collateral
Trust”) to distribute funds in accordance with the terms of the Claimant
Agreement and granting the Collateral Trust a security interest in Congoleum’s
rights under its applicable insurance coverage and payments from Congoleum’s
insurers for asbestos claims.  In December 2005, Congoleum commenced
an Omnibus Avoidance Action and a Sealed Avoidance Action (collectively, the
“Avoidance Actions”) seeking to void the Claimant Agreement, individual
settlements and other pre-petition agreements, including voiding the security
interest granted to the Collateral Trust. In March 2006, Congoleum filed a
motion for summary judgment in the Omnibus Avoidance Action seeking to void the
Claimant Agreement settlements and liens under various bankruptcy theories,
which motion was denied in June 2006.  Subsequently, Congoleum filed
another summary judgment motion in the Omnibus Avoidance Action seeking a
determination that any security interests conveyed in connection with the
Claimant Agreement and the other pre-petition asbestos settlement agreements
were ineffective and unenforceable. In July 2007, the Bankruptcy Court ruled
that the security interests in insurance collateral conveyed to the settled
claimants pre-bankruptcy were ineffective and unenforceable against Congoleum’s
insurance policies or the proceeds of those policies because the attempts to
create security interests were outside the scope of the Uniform Commercial Code;
nor could such security interests be considered to be a common law
pledge.  The Bankruptcy Court therefore granted summary judgment in
Congoleum’s favor on those counts of the Omnibus Avoidance Action which sought
to void these security interests.  In the event that the Order of
Dismissal is affirmed on appeal and becomes a final order, it is possible that
the Avoidance Actions would be dismissed and the lien avoidance ruling would
become a nullity.





77





During
2008, the Company paid $15.9 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 are not expected to be collected under any future
plan, including the Amended Joint Plan, the Senior Note holders would not have
received any post-petition interest.  Following the ruling that the
Joint Plan was unconfirmable and based on the anticipated terms and anticipated
timing of effectiveness of the Amended Joint Plan, Congoleum recorded an
additional charge of $11.5 million in the third quarter of 2008 for costs to
effect its reorganization.





There
were no asbestos related property damage claims asserted against the Company at
the time of its bankruptcy filing.  The Bankruptcy Court approved an
order establishing a bar date of May 3, 2004 for the filing of asbestos property
damage claims. The claims agent appointed in the Company’s bankruptcy proceeding
advised the Company that, as of the bar date, it received 35 timely filed
asbestos property damage claims asserting liquidated damages in the amount of
approximately $0.8 million plus additional unspecified amounts. The Company
objected to certain claims on various grounds, and the Bankruptcy Court
ultimately allowed 19 claims valued at $133 thousand.  It is
anticipated that any plan of reorganization will provide for payment of those
claims in full from certain insurance proceeds.





Status
of Insurance Coverage





During
the period that Congoleum produced asbestos-containing products, the Company
purchased primary and excess insurance policies providing in excess of $1
billion of coverage for general and product liability claims. These policies did
not contain asbestos exclusions. Through August 2002, substantially all
asbestos-related claims and defense costs were paid through primary insurance
coverage. In August 2002, the Company received notice that its primary insurance
limits had been paid in full. The payment of limits in full by one of the
primary insurance companies was based on its contention that limits in
successive policies were not cumulative for asbestos claims and that Congoleum
was limited to only one policy limit for multiple years of coverage. Certain
excess insurance carriers claimed that the non-cumulation provisions of the
primary policies were not binding on them and that there remained an additional
$13.0 million in primary insurance limits plus




78




related
defense costs before their policies were implicated. There is insurance coverage
litigation currently pending in the New Jersey State Court (the “State Court”)
between Congoleum and its excess insurance carriers, and the guaranty funds and
associations for the State of New Jersey.  The litigation was
initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”).  In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in the Congoleum
primary policies (the “Spaulding Case”) that the non-cumulation provisions are
invalid under New Jersey law and that the primary policies provide coverage for
the full amount of their annual limits for all successive
policies.  Congoleum has reached a settlement agreement (the “Liberty
Settlement”) with the insurance carrier whose policies contained the
non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date.  The Company is obligated
to pay any insurance proceeds it receives under the Liberty Settlement, net of
any fees and expenses it may be entitled to deduct, to the Plan
Trust.  As of December 31, 2002, the Company had already entered into
settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage. Based on these settlements, the Company
contended that, even allowing for annual limits of all primary policies, primary
coverage was exhausted and the excess policies triggered. The excess carriers
have objected to the reasonableness of several of these
settlements,  and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in the Coverage Action.





The
excess insurance carriers have objected to the global settlement of the asbestos
claims currently pending against Congoleum as contemplated by the Claimant
Agreement on the grounds that, among other things, the negotiations leading to
the settlement and the Claimant Agreement violate provisions in their insurance
policies, including but not limited to the carriers’ right to associate in the
defense of the asbestos cases, the duty of Congoleum to cooperate with the
carriers and the right of the carriers to consent to any
settlement.  The excess insurance carriers also contend the settlement
terms in the Claimant Agreement are not fair or reasonable and/or that the
Claimant Agreement was not negotiated at arm’s length or in good
faith.  Additionally, certain insurers have argued that Congoleum’s
entering into the Claimant Agreement voids the insurance for the underlying
claims in their entirety.  Certain insurers also have claimed that the
Claimant Agreement voids their entire policy obligations.  Congoleum
has disputed the allegations and 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.





79





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.





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.)





80





Congoleum
completed the presentation of its case in April 2006.  Certain
insurers moved for a directed verdict in their favor during the first week of
May 2006. Hearings of arguments on the directed verdict motion took place in
June 2006.  In July 2006 the State Court denied the motion for a
directed verdict.  The trial resumed in September
2006.  Defendant insurers presented their case, for the most part,
through documents and deposition designations.  Post-trial briefs were
submitted by the parties in November 2006.





In
May 2007, the State Court issued a decision ruling that Congoleum’s insurers
have no coverage obligations under New Jersey law for the Claimant
Agreement.  In that ruling, the State Court judge also cited trial
testimony in his opinion that the releases (given by claimants who signed the
Claimant Agreement) were non-recourse to Congoleum whether or not any claimant
recovered insurance proceeds.  Based in part upon that finding,
Congoleum filed an objection (the “Omnibus Objection”) in the Bankruptcy Court
in June  2007 requesting that all asbestos-related personal injury
claims settled and/or liquidated (the “Settled Claims”) pursuant to either a
pre-petition settlement agreement or the Claimant Agreement be disallowed and
expunged.  The Omnibus Objection also requested in the event the
Bankruptcy Court found that the holders of Settled Claims retained viable tort
claims with recourse against Congoleum, that the Bankruptcy Court rescind the
pre-petition settlement agreements and the Claimant Agreement and the claims
settled thereunder be disallowed and expunged because, since the filing of
Congoleum’s bankruptcy case, supervening events have resulted in a substantial
frustration of the purpose of those agreements. The Bankruptcy Court heard
arguments on the Omnibus Objection in July 2007 and ruled that the Omnibus
Objection should be heard in the context of an adversary proceeding (a formal
lawsuit) in order to insure that the Bankruptcy Court has jurisdiction over all
the affected claimants and that their due process rights were otherwise
protected.  The Company amended the Omnibus Avoidance Action to seek
the same relief requested in the Omnibus Objection.





In
September 2007, Congoleum filed the Third Amended Complaint in the Omnibus
Avoidance Action adding new counts that encompass the subject matter and relief
requested in the Omnibus Objection. The Third Amended Complaint remains
pending.  In October 2007, Congoleum filed a motion for summary
judgment in the Omnibus Avoidance Action seeking a ruling that all of the
pre-petition settlement agreements, including the Claimant Agreement, were null
and void or should be rescinded.  Argument on the summary judgment
motion was heard in November 2007 and by opinion dated December 28, 2007, the
Bankruptcy Court denied the motion for summary judgment.  Congoleum
and the Bondholders’ Committee have filed notice of appeal from this decision to
the District Court and the matter remains pending.  A motion was filed
to amend further the complaint in the Omnibus Avoidance Action, but such
complaint was not filed as a result of the Litigation Settlement discussed
above.





The
second phase of the Coverage Action trial will address all coverage issues,
including but not limited to whether certain other trial listed settlements were
fair, reasonable and negotiated in good faith and covered by insurance as well
as the triggering and allocation of asbestos losses to insurance
policies.  In February 2008, the State Court expanded the scope of
Phase 2 of the Coverage Action trial to include obligations of insurers with
respect to the Joint Plan.  The State Court has entered a new case
management order scheduling further discovery. Congoleum sought to stay
Phase 2 of the Coverage Action trial because of the pendency of the
solicitation and balloting and scheduled confirmation hearing on the Joint Plan,
but the Bankruptcy Court denied the stay motion, which decision was appealed to
the District Court.  Based on the Litigation Settlement, which
provides, in part, for the unwinding of the Claimant Agreement and certain
pre-petition settlements, Congoleum again sought to stay Phase 2 of the
Coverage Action trial, but after a hearing before the Bankruptcy Court, such
stay was denied.








81





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





Amounts
Recorded in Financial Statements





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





(in
      thousands)
                                  
                                  Balance
      at
                                    12/31/2007
                                  
                                  
                                  Additions
                                    (Deletions)
                                  
                                  
                                  Spending
                                    Against
                                    Reserve
                                  
                                  
                                  Recoveries
                                    From
                                    Insurance
                                  
                                  
                                  Balance
      at
                                    12/31/2008ReservesCurrent
                                  
                                  $
                                  24,744
                                  
                                  
                                  $
                                  11,491
                                  
                                  
                                  $
                                  (15,895
                                  )
                                  
                                  
                                  --
                                  
                                  
                                  $
                                  20,340ReceivablesCurrent
                                  
                                  
                                  (10,490
                                  )
                                  
                                  
                                  --
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  9,168
                                  
                                  
                                  
                                  (1,322
                                  )Net Asbestos
      Liability
                                  
                                  $
                                  14,254
                                  
                                  
                                  $
                                  11,491
                                  
                                  
                                  $
                                  (15,895
                                  )
                                  
                                  $
                                  9,168
                                  
                                  
                                  $
                                  19,018Restricted
      CashInsurance
      Proceeds
                                  
                                  $
                                  6,463
                                  
                                  
                                  $
                                  22,711
                                  
                                  
                                  $
                                  508
                                  
                                  
                                  
                                  --
                                  
                                  
                                  $
                                  29,683





The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2006 to December 31, 2007:





(in
      thousands)
                            
                            Balance
      at
                              12/31/2006
                            
                            
                            Additions
                              (Deletions)
                            
                            
                            Spending
                              Against
                              Reserve
                            
                            
                            Recoveries
                              From
                              Insurance
                            
                            
                            Balance
      at
                              12/31/2007ReservesCurrent
                            
                            $
                            7,800
                            
                            
                            
                            26,448
                            
                            
                            $
                            (9,504
                            )
                            
                            
                            --
                            
                            
                            $
                            24,744ReceivablesCurrent
                            
                            
                            (21,813
                            )
                            
                            
                            14,867
                            
                            
                            
                            (3,544
                            )
                            
                            
                            --
                            
                            
                            
                            (10,490
                            )Net Asbestos
      Liability
                            
                            $
                            (14,013
                            )
                            
                            $
                            41,315
                            
                            
                            $
                            (13,048
                            )
                            
                            $
                            --
                            
                            
                            $
                            14,254Restricted
      CashInsurance
      Proceeds
                            
                            $
                            6,149
                            
                            
                            $
                            314
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            6,463








82





18.  Stock
Option Plans:





Under
the Company’s 1995 Stock Option Plan, as amended (the “1995 Plan”), options to
purchase up to 800,000 shares of the Company’s Class A common stock may be
issued to officers and key employees. Such options may be either incentive stock
options or nonqualified stock options, and the options’ exercise price must be
at least equal to the fair value of the Company’s Class A common stock on the
date of grant. All options granted under the 1995 Plan have ten-year terms and
vest over five years at the rate of 20% per year beginning on the first
anniversary of the date of grant.





On
July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the “1999 Plan”), under which non-employee
directors may be granted options to purchase up to 50,000 shares of the
Company’s Class A common stock.  Options granted under the 1999 Plan
have ten-year terms and vest six months from the grant date.





In
December 2001, the Company offered its eligible option holders an exchange of
all options then outstanding and granted to them under the 1995 Plan or the 1999
Plan for new stock options to be granted under those plans not earlier than six
months and one day after the date the Company canceled any options tendered to
and accepted by it pursuant to the offer to exchange.  In
January  2002, the Company accepted and canceled 667,500 options that
had been previously granted under the 1995 Plan and 9,500 options that had been
previously granted under the 1999 Plan that were tendered to and accepted by the
Company pursuant to the offer to exchange.





A
summary of the Company’s 1995 Plan activity, and related information, is as
follows:





December
      31, 2008:Shares
                              
                              
                              Weighted average
                                exercise priceOptions
      outstanding beginning of year
                              
                              
                              635,500
                              
                              
                              $
                              2.03Options
      granted
                              
                              
                              --
                              
                              
                              
                              --Options
      exercised
                              
                              
                              --
                              
                              
                              
                              --Options
      forfeited
                              
                              
                              (14,000
                              )
                              
                              
                              (2.31
                              )Options
      outstanding end of year 2008
                              
                              
                              621,500
                              
                              
                              $
                              2.02Exercisable
      at end of year 2008
                              
                              
                              612,400
                              
                              
                              $
                              2.02Weighted
      average remaining contractual life
                              
                              3.63
      yearsStock
      options available for future issuance
                              
                              
                              164,300








83








December
      31, 2007:Shares
                          
                          
                          Weighted average
                            exercise priceOptions
      outstanding beginning of year
                          
                          
                          638,000
                          
                          
                          $
                          2.03Options
      granted
                          
                          
                          --
                          
                          
                          
                          --Options
      exercised
                          
                          
                          --
                          
                          
                          
                          --Options
      forfeited
                          
                          
                          (2,500
                          )
                          
                          
                          (2.05
                          )Options
      outstanding end of year
                          
                          
                          635,500
                          
                          
                          $
                          2.03Exercisable
      at end of year 2007
                          
                          
                          613,300
                          
                          
                          $
                          2.02Weighted
      average remaining contractual life
                          
                          4.61
      yearsStock
      options available for future issuance
                          
                          
                          150,300





A
summary of the Company’s 1999 Plan activity, and related information, is as
follows:





December
      31, 2008:Shares
                          
                          
                          Weighted average
                            exercise
      priceOptions
      outstanding beginning of year
                          
                          
                          26,500
                          
                          
                          $
                          2.37Options
      granted
                          
                          
                          2,500
                          
                          
                          
                          0.02Options
      exercised
                          
                          
                          --
                          
                          
                          
                          --Options
      forfeited
                          
                          
                          (4,000
                          )
                          
                          
                          (2.19
                          )Options
      outstanding end of year
                          
                          
                          25,000
                          
                          
                          $
                          2.02Exercisable
      at end of year
                          
                          
                          25,000
                          
                          
                          $
                          2.02Weighted
      average remaining contractual life
                          
                          5.68
      yearsStock
      options available for future issuance
                          
                          
                          25,000








84








December
      31, 2007:Shares
                          
                          
                          Weighted average
                            exercise priceOptions
      outstanding beginning of year
                          
                          
                          24,000
                          
                          
                          $
                          2.37Options
      granted
                          
                          
                          2,500
                          
                          
                          
                          0.95Options
      exercised
                          
                          
                          --
                          
                          
                          
                          --Options
      forfeited
                          
                          
                          --
                          
                          
                          
                          --Options
      outstanding end of year
                          
                          
                          26,500
                          
                          
                          $
                          2.24Exercisable
      at end of year
                          
                          
                          24,000
                          
                          
                          $
                          2.37Weighted
      average remaining contractual life
                          
                          5.27
      yearsStock
      options available for future issuance
                          
                          
                          23,500





Stock
option information related to non-vested shares for the Congoleum Stock Option
Plans for the year ended December 31, 2008, was as follows:





1995
      Plan:
                  
                  Number of
                    Shares
                  
                  
                  Weighted Average
                    Grant-Date
                    Fair
      ValueNon-vested
      stock options at January 1, 2008
                  
                  
                  22,200
                  
                  
                  $
                  1.76Granted
                  
                  
                  --
                  
                  
                  
                  --Forfeited
                  
                  
                  (400
                  )
                  
                  
                  5.74Vested
                  
                  
                  (12,700
                  )
                  
                  
                  1.48Non-vested
      stock options at December 31, 2008
                  
                  
                  9,100
                  
                  
                  
                  2.13





1999
      Plan:
                      
                      Number of
                        Shares
                      
                      
                      Weighted Average
                        Grant-Date
                        Fair
      ValueNon-vested
      stock options at January 1, 2008
                      
                      
                      2,500
                      
                      
                      $
                      0.75Granted
                      
                      
                      2,500
                      
                      
                      
                      0.02Forfeited
                      
                      
                      --
                      
                      
                      
                      --Vested
                      
                      
                      (2,500
                      )
                      
                      
                      0.75Non-vested
      stock options at December 31, 2008
                      
                      
                      2,500
                      
                      
                      $
                      0.02








85





The
intrinsic value of stock options exercised during 2008 and stock options
outstanding and exercisable at December 31, 2007, under the Congoleum Stock
Option Plans were as follows:





(in
      thousands)
              Intrinsic ValueExercised
      during 2008
              NAOutstanding
      at December 31, 2008
              NAExercisable
      at December 31, 2008
              NA





Upon exercise of stock options under
the Congoleum Stock Option Plans, Congoleum shares are issued from treasury
stock.





19.  Stockholders’
Equity:





Holders
of shares of the Company’s Class B common stock are entitled to two votes per
share on all matters submitted to a vote of stockholders other than certain
extraordinary matters.  The holders of shares of the Company’s Class A
common stock are entitled to one vote per share on all matters submitted to a
vote of stockholders.





In
November 1998, the Board of Directors authorized the Company to repurchase an
additional $5.0 million of the Company’s common stock (Class A and Class B
shares) through the open market or through privately negotiated transactions,
bringing the total authorized common share repurchases to $15.0
million.  Under the plan, Congoleum has repurchased shares of its
common stock at an aggregate cost of $14.0 million through December 31,
2008.  No shares were repurchased during 2008 or 2007. Shares of Class
B stock repurchased (totaling 741,055 shares) have been retired.  As
of December 31, 2008, ABI owned 65.6% of the voting interest of the
Company.





20.  Fair
Value of Financial Instruments:





The
Company’s cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and long-term debt are financial instruments. With
the exception of the Company’s long-term debt, the carrying value of these
financial instruments approximates their fair value at December 31, 2008 and
2007.  The Company’s long-term debt had a book value of $100 million
with no fair market value information available at December 31,
2008.  The Company’s long-term debt had a book value of $99.9 million
and a fair market value of $72.0 million at December 31, 2007.





The fair value of the Company’s
long-term debt is determined based on bid prices quoted by an investment
bank.  The fair value of the Company’s other financial instruments is
determined based on discounted cash flows.  Due to the short period
over which the cash flows are expected to be realized, the carrying value of the
financial instruments approximates the net present value of cash flows and
changes in interest rate assumptions would not have a material effect on the
calculation.





86





21.  Quarterly
Financial Data (Unaudited):





The following table summarizes
unaudited quarterly financial information (in thousands):





Year
      ended December 31, 2008First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter(1)
                  
                  
                  Fourth
                    QuarterNet
      sales
                  
                  $
                  47,697
                  
                  
                  $
                  47,166
                  
                  
                  $
                  46,085
                  
                  
                  $
                  31,696Gross
      profit
                  
                  
                  10,873
                  
                  
                  
                  9,889
                  
                  
                  
                  8,320
                  
                  
                  
                  1,529Net
      income (loss)
                  
                  
                  1,679
                  
                  
                  
                  212
                  
                  
                  
                  (10,125
                  )
                  
                  
                  (6,387
                  )Net
      income (loss) per common share:Basic
                  
                  $
                  (0.20
                  )
                  
                  $
                  0.03
                  
                  
                  $
                  (1.22
                  )
                  
                  $
                  (0.77
                  )Diluted
                  
                  
                  (0.20
                  )
                  
                  
                  0.03
                  
                  
                  
                  (1.22
                  )
                  
                  
                  (0.77
                  )





Year
      ended December 31, 2007First
                  Quarter
                
                
                Second
                  Quarter
                
                
                Third
                  Quarter
                
                
                Fourth
                  Quarter(2)Net
      sales
                
                $
                49,315
                
                
                $
                57,541
                
                
                $
                53,588
                
                
                $
                43,818Gross
      profit
                
                
                11,999
                
                
                
                13,744
                
                
                
                14,223
                
                
                
                10,486Net
      income (loss)
                
                
                (351
                )
                
                
                835
                
                
                
                1,200
                
                
                
                (2,375
                )Net
      income (loss) per common share:Basic
                
                $
                (0.04
                )
                
                $
                0.10
                
                
                $
                0.15
                
                
                $
                (0.29
                )Diluted
                
                
                (0.04
                )
                
                
                0.10
                
                
                
                0.14
                
                
                
                (0.29
                )





(1)
            The
      third quarter of 2008 includes $11.5 million or $1.38 per share for the
      effect of the asbestos-related charges described in Note
    17.


(2)
            The
      fourth quarter of 2007 includes $41.5 million or $4.99 per share for the
      effect of the asbestos-related charges described in Notes 1 and 17, and
      $29.6 million or $3.57 per share for the reversal (credit) of interest on
      the Company’s long-term debt.








87





Report
of Independent Registered Public Accounting Firm





Board
of Directors and Stockholders


Congoleum
Corporation





We
have audited the accompanying consolidated balance sheets of Congoleum
Corporation (the Company) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for each of the two years in the period ended December 31,
2008.  Our audits also included the financial statement schedule
listed in the Index at Item 15(a).  These financial statements and
schedule are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  We were not engaged to
perform an audit of the Company’s internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.





In
our opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Congoleum Corporation
at December 31, 2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





The
accompanying financial statements have been prepared assuming that Congoleum
Corporation will continue as a going concern. As more fully described in Note 1,
“Basis of Presentation”, to the consolidated financial statements, the Company
has been and continues to be named in a significant number of lawsuits stemming
primarily from the Company’s manufacture of asbestos-containing products. The
Company has recorded significant charges to earnings to reflect its estimate of
costs associated with this litigation. On December 31, 2003, Congoleum filed a
voluntary petition with the United States Bankruptcy court for the District of
New Jersey (Case No. 03-51524) seeking relief under Chapter 11 of the United
States Bankruptcy Code, as a means to resolve claims asserted against it related
to the use of asbestos in its products decades ago. These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
described in Note 1 to the consolidated financial statements. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.




88




As
discussed in Note 2 to the consolidated financial statements, in 2007 the
Company adopted Financial Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of
FASB Statement No. 109” (“FIN 48”).











Boston,
Massachusetts


March
23, 2009





89





Item
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.








Item9A(T).
              CONTROLS AND
      PROCEDURES





(a)
            Evaluation of Disclosure
      Controls and Procedures.The Company’s management, with
      the participation of the Company’s Chief Executive Officer, or CEO, and
      Chief Financial Officer, or CFO, evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended) as of December 31, 2008.  Based on this evaluation, the
      Company’s CEO and CFO concluded that, as of December 31, 2008, the
      Company’s disclosure controls and procedures were effective, in that they
      provide reasonable assurance that information required to be disclosed by
      the Company in the reports that it files or submits under the Securities
      Exchange Act of 1934, as amended, is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and is accumulated and communicated to the
      Company’s management, including the Company’s CEO and CFO, as appropriate
      to allow timely decisions regarding required
  disclosure.





(b)
            Management’s Annual Report on
      Internal Control Over Financial Reporting.  The management ofCongoleum Corporation
      isresponsible for
      establishing and maintaining adequate internal controlover financial
      reporting, as that
      term is defined under Rule 13a-15(f) and 15d-15(f) under the Securities
      Exchange Act of 1934, as amended.The management of CongoleumCorporationdesignedCongoleum Corporation’sinternal control system to provide
      reasonable assurance
      to management and the Board of Directors regarding the preparation and
      fair presentation ofCongoleum Corporation’sfinancial statements.Because of its inherent
      limitations, internal control over financial reporting may not prevent or
      detect misstatements.
      Also, projections of any evaluation of effectiveness to future periods are
      subject to the risk that controls may become inadequate because of changes
      in conditions, or that the degree of compliance with theapplicablepoliciesor procedures may
      deteriorate.





The management of Congoleum
Corporationassessed the
effectivenessofCongoleumCorporation’sinternal control over financial
reporting as of December 31, 2008.In making this assessment,the management of Congoleum Corporationused the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control—Integrated Framework.Based onitsassessment,the management of Congoleum
Corporationbelievesthat, as of December 31,
2008,Congoleum Corporation’sinternal control over financial
reporting is effective at a reasonable assurance level based on these
criteria.





90





This
Annual Report on Form 10-K does not include an attestation report of Congoleum
Corporation’s registered public accounting firm regarding internal control over
financial reporting. This Management’s Annual Report on Internal Control Over
Financial Reporting was not subject to attestation by Congoleum Corporation’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit Congoleum Corporation to provide only
management’s report in this annual report.





/s/
      Roger S. Marcus
              /s/
      Howard N. Feist IIIRoger S. Marcus, Chairman of the
      Board,
                Chief ExecutiveOfficer and
      Director
              Howard N. Feist III, Vice
      President
                Finance and Chief Financial
      Officer





(c)
            Changes in Internal
      Controls.No change in the Company’s internal control
      over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act of 1934, as amended) occurred during the
      fiscal quarter ended December 31, 2008 that has materially affected, or is
      reasonably likely to materially affect, the Company’s internal control
      over financial reporting.








Item
      9B.
            OTHER
      INFORMATION





On
March 30, 2009, the Company issued a press release announcing its financial
results for the three months and year ended December 31, 2008.  A copy
of that press release is being furnished to the Securities and Exchange
Commission pursuant to this Part II, Item 9B of Form 10-K and is attached hereto
as Exhibit 99.18.








PART
III





Item
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE





The
Company has adopted a code of ethics (as that term is defined in
Regulation S-K of the Exchange Act) that applies to its Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer or other persons
performing such functions.





The
text of the Company’s code of ethics is posted on its Internet website at www.congoleum.com
or may be obtained without charge by sending a written request to Mr. Howard N.
Feist III, Chief Financial Officer of the Company, at the Company’s office at
3500 Quakerbridge Road, P.O. Box 3127, Mercerville, NJ 08619. Amendments to, or
waivers of, the code of ethics, if any, that relate to the Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer or other persons
performing such function, will also be posted on the Internet
website.





The
other information called for by this Item is hereby incorporated by reference to
the Registrant’s definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 12, 2009.





91





Item
      11.
            EXECUTIVE
      COMPENSATION





The information called for by this Item
is hereby incorporated by reference to the Registrant’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 12,
2009.








Item
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





EQUITY
COMPENSATION PLAN INFORMATION





The following table sets forth
information regarding the Company’s equity compensation plans as of December 31,
2008:





Plan
      Category
                                                          
                                                          Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
                                                          
                                                          Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
                                                          
                                                          Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in
      Column (A))(A)
                                                          
                                                          (B)
                                                          
                                                          (C)Equity
      compensation plans approved by security holders
                                                          
                                                          
                                                          621,500
                                                          
                                                          
                                                          $2.02
                                                          
                                                          
                                                          164,300Equity
      compensation plans not approved by security holders
                                                          
                                                          
                                                          25,000
                                                          
                                                          
                                                          $2.02
                                                          
                                                          
                                                          25,000Total
                                                          
                                                          
                                                          646,500
                                                          
                                                          
                                                          $2.02
                                                          
                                                          
                                                          189,300





On
September 21, 1995, the Company established its 1995 Stock Option Plan, as
amended (the “1995 Plan”), under which options to purchase up to 800,000 shares
of the Company’s Class A common stock may be issued to officers and key
employees.  The 1995 Plan was approved by
stockholders.  Such options may be either incentive stock options or
nonqualified stock options, and the options’ exercise price must be at least
equal to the fair value of the Company’s Class A common stock on the date of
grant. All options granted under the 1995 Plan have ten-year terms and vest over
five years at the rate of 20% per year beginning on the first anniversary of the
date of grant.








92





On
July 1, 1999, the Company established its 1999 Stock Option Plan for
Non-Employee Directors, as amended (the “1999 Plan”), under which non-employee
directors may be granted non-qualified options (the “Options”) to purchase up to
50,000 shares of the Company’s Class A common stock.  The 1999 Plan
did not require or receive stockholder approval.  The Options granted
under the 1999 Plan have ten-year terms and vest six months from the grant
date.  The exercise price for each Option is the fair market value on
the date of the grant.





For
more information on the 1995 Plan and the 1999 Plan, see Note 18 of the Notes to
Consolidated Financial Statements contained in Item 8 of this Annual Report on
Form 10-K.





As
of December 31, 2008, an aggregate of 646,500 shares of common stock were
issuable upon the exercise of outstanding vested options under the 1995 Plan and
1999 Plan.





The
other information called for by this Item is hereby incorporated by reference to
the Registrant’s definitive Proxy Statement for its Annual Meeting of
Stockholders to be held on May 12, 2009.








Item
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





The information called for by this Item
is hereby incorporated by reference to the Registrant’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 12,
2009.








Item
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





The
information called for by this Item is hereby incorporated by reference to the
Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders
to be held on May 12, 2009.





93





PART
IV





Item
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





(a)        (1)      The
following financial statements of the Company are included in this Annual Report
on Form 10-K:





Page
      NumbersConsolidated
      Balance Sheets at December 31, 2008 and 2007
                    46Consolidated
      Statements of Operations for each of the two years ended December 31, 2008
      and 2007
                    47Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for each of the
      two years ended December 31, 2008 and 2007
                    48Consolidated
      Statements of Cash Flows for each of the two years ended December 31, 2008
      and 2007
                    49Notes
      to Consolidated Financial Statements
                    50Supplementary
      Data -- Quarterly Financial Data (Unaudited)
                    87





(2)    The
following financial statement schedule is included in this Annual Report on
Form  10-K:





Schedule
      II - Valuation and Qualifying Accounts
              99All
      other schedules are omitted because they are not required, are
      inapplicable, or the information is otherwise shown in the financial
      statements or notes thereto.





(b)    These
exhibits, required to be filed by Item 601 of Regulation S-K under the Exchange
Act, are listed in the Index to Exhibits included in this Annual Report on Form
10-K beginning on Page 102.





Exhibit
              Number
            Exhibits3.1
            Amended
      Certificate of Incorporation of the Company.(3)3.2
            Amended
      and Restated Bylaws of the Company as of December 12, 2007.(26)4.1
            Registration
      Rights Agreement, dated as of February 8, 1995, by and between the Company
      and Hillside Industries, Incorporated (“Hillside”).(2)4.2
            Indenture,
      dated as of August 3, 1998, by and between the Company and First Union
      National Bank, as trustee.(4)4.2.1
            First
      Supplemental Indenture, dated as of March 28, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(11)4.2.2
            Second
      Supplemental Indenture, dated as of August 7, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(12)4.2.3
            Instrument
      of Resignation, Appointment and Acceptance dated as of December 14, 2005
      among the Company, Wachovia Bank, National Association and HSBC Bank USA,
      National Association, as Successor Trustee.(17)





94








10.1
            Joint
      Venture Agreement, dated as of December 16, 1992, by and among Resilient
      Holdings, Incorporated, Hillside, the Company (collectively, the
      “Congoleum Group”), Hillside Capital Incorporated (“Hillside Capital”) and
      American Biltrite Inc. (“American Biltrite”).(1)10.2
            Closing
      Agreement, dated as of March 11, 1993, by and among the Congoleum Group,
      Hillside Capital and American Biltrite.(1)10.3
            Personal
      Services Agreement, dated as of March 11, 1993 (the “Personal Services
      Agreement”), by and between American Biltrite and the Company.(1)10.3.1
            First
      Amendment, dated February 8, 1995, to Personal Services Agreement, by and
      between American Biltrite and the Company.(2)10.3.2
            Second
      Amendment, dated November 15, 1996, to Personal Services Agreement, by and
      between American Biltrite and the Company.(5)10.3.3
            Third
      Amendment, dated as of March 10, 1998, to Personal Services Agreement, by
      and between American Biltrite and the Company.(5)10.3.4
            Fourth
      Amendment, dated as of November 7, 2002, to Personal Services Agreement,
      by and between American Biltrite and the Company.(11)10.3.5
            Fifth
      Amendment, dated as of March 11, 2008, to Personal Services Agreement, by
      and between American Biltrite and the Company.(23)10.3.6
            Sixth
      Amendment, dated as of September 23, 2008, to Personal Services Agreement,
      by and between American Biltrite and the Company.(27)10.4
            Business
      Relations Agreement, dated as of March 11, 1993, by and between American
      Biltrite and the Company.(1)10.4.1
            First
      Amendment, dated August 19, 1997, to Business Relations Agreement, by and
      between American Biltrite and the Company.(5)10.4.2
            Amendment
      to Business Relations Agreement, dated as of March 11, 2008, by and
      between American Biltrite and the Company.(23)10.4.3
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite and the Company.(27)10.5
            Tax
      Sharing Agreement, dated as of November 1, 1996, between American Biltrite
      and the Company.(5)10.6
            Trademark
      Purchase Agreement, dated November 29, 1993, by and between the Company
      and The Amtico Company LTD (“Amtico Company”).(2)10.7
            First
      Right of Refusal, dated November 29, 1993, by and between American
      Biltrite (Canada) Limited and Amtico Company.(2)10.8
            Undertaking
      Concerning Amtico Trademark, dated November 29, 1993, by and between
      American Biltrite and Amtico Company.(2)10.9
            Form
      of 1995 Stock Option Plan.(2)10.9.1
            Form
      of Amendment to 1995 Stock Option Plan.(6)10.9.2
            Form
      of Nonqualified Stock Option Award Agreement Under the Congoleum 1995
      Stock Option Plan.(15)10.10
            Congoleum
      Corporation 1999 Stock Option Plan for Non-Employee Directors.(8)10.10.1
            Form
      of Amendment to Non-qualified, Non-employee Directors Stock Option
      Plan.(9)10.10.2
            Form
      of Stock Option Agreement Under the Congoleum Corporation 1999 Stock
      Option Plan for Non-Employee Directors.(15)





95








10.11
            Loan
      and Security Agreement, dated December 10, 2001 (the “Congress Financial
      Loan Agreement”) by and between Congress Financial Corp. (the “Lender”)
      and the Company.(9)10.11.1
            Amendment
      No. 1 to Loan and Security Agreement, dated September 24, 2002,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(10)10.11.2
            Amendment
      No. 2 to Loan and Security Agreement, dated as of February 27, 2003,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(11)10.11.3
            Ratification
      and Amendment Agreement dated January 7, 2004, by and between the Company
      and Congress Financial Corporation.(13)10.11.4
            Amendment
      No. 1 to Ratification and Amendment Agreement and Amendment No. 3 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 14, 2004.(14)10.11.5
            Amendment
      No. 2 to Ratification and Amendment Agreement and Amendment No. 4 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of January 13, 2005.(24)10.11.6
            Amendment
      No. 3 to Ratification and Amendment Agreement and Amendment No. 5 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 7, 2005.(24)10.11.7
            Amendment
      No. 4 to Ratification and Amendment Agreement and Amendment No. 6 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 19, 2005.(24)10.11.8
            Amendment
      No. 5 to Ratification and Amendment Agreement and Amendment No. 7 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of September 27, 2006.(24)10.11.9
            Amendment
      No. 6 to Ratification and Amendment Agreement and Amendment No. 8 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of November 27, 2006.(24)10.11.10
            Amendment
      No. 7 to Ratification and Amendment Agreement and Amendment No. 9 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 12, 2007.(20)10.11.11
            Amendment
      No. 8 to Ratification and Amendment Agreement and Amendment No. 10 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 11, 2007.10.11.12
            Amendment
      No. 9 to Ratification and Amendment Agreement and Amendment No. 11 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 4, 2008.10.11.13
            Amendment
      No. 10 to Ratification and Amendment Agreement and Amendment No. 12 to
      Loan and Security Agreement, by and between the Company and Congress
      Financial corporation dated as of October 6, 2008.(28)10.11.14
            Amendment
      No. 11 to Ratification and Amendment Agreement and Amendment No. 13 to
      Loan and Security Agreement, by and between the Company and Congress
      Financial Corporation dated as of March 16, 2009.10.12
            Settlement
      Agreement Between the Company and Various Asbestos Claimants dated April
      10, 2003.(12)10.12.1
            First
      Amendment to Settlement Agreement Between the Company and Various Asbestos
      Claimants dated June 6, 2003.(12)





96








10.13
            Collateral
      Trust Agreement, dated April 16, 2003, by and between the Company, Arthur
      J. Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust, and Wilmington Trust Company, solely in its capacity as
      Delaware Trustee of the Collateral Trust.(12)10.13.1
            First
      Amendment to Collateral Trust Agreement, dated June 6, 2003, by and
      between the Company, Arthur J. Pergament, solely in his capacity as the
      Collateral Trustee of the Collateral Trust, and Wilmington Trust Company,
      solely in its capacity as Delaware Trustee of the Collateral Trust.(12)10.14
            Security
      Agreement, dated April 16, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.1
            Second
      Security Agreement, dated April 17, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral Trustee of
      the Collateral Trust.(12)10.14.2
            Termination
      Agreement, dated June 6, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.3
            Superseding
      Security Agreement, dated June 11, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral Trustee of
      the Collateral Trust.(12)10.15
            Purchase
      Agreement, effective as of September 1, 2006, between the Company and
      Armstrong World Industries, Inc.(24)10.16
            Note
      Agreement, dated as of October 12, 2006, by and between Gilbert Heinz
      & Randolph, LLP (“GHR”) and the Company.(25)10.17
            Promissory
      Note dated October 12, 2006 of GHR.(25)10.18
            Security
      Agreement, dated as of October 12, 2006 made by GHR in favor of the
      Company.(25)10.19
            Put/Call
      Agreement, dated as of February 20, 2008, between the Company, the Initial
      Backstop Participants and the Trust to be formed.(22)14.1
            Code
      of Ethics.(14)21.1
            Subsidiaries
      of the Company.(7)23.1
            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP.31.1
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Executive
      Officer.31.2
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Financial
      Officer.32.1
            Section
      1350 Certification of the Chief Executive Officer.32.2
            Section
      1350 Certification of the Chief Financial Officer.99.1
            Settlement
      Agreement and Release by and between Congoleum Corporation and Liberty
      Mutual Insurance Company.(16)99.2
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      certain AIG Member Companies.(16)99.3
            Confidential
      Settlement Agreement and Release among Congoleum Corporation, the Plan
      Trust and Certain Underwriters at Lloyd’s, London dated June 22,
      2005.(16)99.3.1
            Amendment
      dated July 29, 2005, to the Confidential Settlement Agreement and Release
      among Congoleum Corporation, the Plan Trust and Certain Underwriters at
      Lloyd’s, London, dated June 22, 2005.(16)





97








99.3.2
            Second
      Amendment, dated November 8, 2007, to the Confidential Settlement
      Agreement and Release among Congoleum Corporation, the Plan Trust and
      Certain Undewriters at Lloyd’s, London, dated June 22,
    2005.99.4
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      Federal Insurance Company.(15)99.5
            Amended
      and Restated Settlement Agreement and Release, dated as of January 18,
      2008, among Congoleum Corporation, the Plan Trust and Mt. McKinley
      Insurance Company and Everest Reinsurance Company.99.6
            Settlement
      Agreement and Release by and between Congoleum Corporation and Harper
      Insurance Limited, formerly known as Turegum Insurance Company.(18)99.7
            Settlement
      and Policy Buyback Agreement and Release, dated as of April 25, 2006, by
      and among Congoleum Corporation, the Plan Trust, American Biltrite,
      Travelers Casualty and Surety Co., and St. Paul Fire and Marine Insurance
      Company.(18)99.7.1
            Letter
      Agreement, dated March 18, 2008, amending the Settlement and PolicyBuyback
      Agreement and Release, dated as of April 25, 2006, by and among Congoleum
      Corporation, the Plan Trust, American Biltrite, Travelers Casualty and
      Surety Co. and St. Paul Fire and Marine Insurance
  Company.99.8
            Settlement
      Agreement, made as of April 27, 2006, by and between Congoleum Corporation
      and Fireman’s Fund Insurance Company.(18)99.9
            Settlement
      and Policy Buyback Agreement and Release, made as of August 17, 2006, by
      and between Congoleum Corporation and Century Insurance Company.(19)99.10
            Agreement
      for Claim Determination between the Liquidator of The Protective National
      Insurance Company of Omaha and Congoleum Corporation dated February 18,
      2008.(29)99.11
            Settlement
      Agreement, dated as of September 10, 2008, by and between Congoleum
      Corporation and Arthur J. Pergament, as the Collateral Trustee of the
      Collateral Trust, et
      al.(30)99.12
            In
      re: Congoleum Corporation, et al., Opinion of the
      United States Bankruptcy Court for the District of New Jersey, dated June
      5, 2008, resolving Motions and Cross Motion for Summary Judgment.(31)99.13
            In
      re: Congoleum Corporation, et al., Opinion of the
      United States Bankruptcy Court for the District of New Jersey, dated
      February 26, 2009, regarding the Order of Dismissal.(32)99.14
            In
      re: Congoleum Corporation, et al., Transcript of motion hearing held March
      3, 2009, before the Honorable Kathryn C. Ferguson, United States
      Bankruptcy Judge.(33)99.15
            Term
      Sheet, dated August 12, 2008, for Plan of Reorganization for Congoleum
      Corporation.(34)99.16
            Proposed
      Disclosure Statement with respect to the Amended Joint Plan of
      Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, the ACC and
      the Bondholders’Committee, dated as of
      November 14, 2008.(21)99.17
            Amended
      Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of
      Congoleum
      Corporation, the ACC
      and the Bondholders’Committee, dated as of
      November 14, 2008.(21)99.18
            Press
      Release, dated March 30, 2009








98








SCHEDULE
II


CONGOLEUM
CORPORATION


VALUATION
AND QUALIFYING ACCOUNTS





(in
      thousands)
              Balance
                at
                Beginning
                Of
      Period
              Reversed
      to
                Income
                Statement
              Other
                Changes
              Deductions(a)
              Balance
                At
      end
                of
      PeriodYear
      ended December 31, 2008:
                Allowance
      for doubtful accounts and cash Discounts
              $
      (1,017)
              $     300
              $      129(b)
              $     --
              $  (588)Year
      ended December 31, 2007:
                Allowance
      for doubtful accounts and cash Discounts
              $
      (1,142)
              $       --
              $     125(b)
              $     --
              $(1,017)





(a)  
Balances written off, net of recoveries.


(b)  
Represents (provision) utilization of the allowance for doubtful accounts and
cash discounts.








99





SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 9th day of
March 2009.





CONGOLEUM
CORPORATION





By:
/s/ Roger S.
Marcus


Roger
S. Marcus


President,
Chairman & Chief Executive Officer


(Principal
Executive Officer)





Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.





Signature
            Title
            Date/s/ Roger S.
      Marcus
            President,
      Chairman, Chief Executive Officer
            March
      9, 2009Roger
      S. Marcus
            and
      Director (Principal Executive Officer)/s/ Howard N. Feist
      III
            Chief
      Financial Officer
            March
      9, 2009Howard
      N. Feist III
            (Principal
      Financial and Accounting Officer)/s/ Richard G.
      Marcus
            Vice
      Chairman and Director
            March
      9, 2009Richard
      G. Marcus/s/ William M.
      Marcus
            Director
            March
      9, 2009William
      M. Marcus/s/ Mark S.
      Newman
            Director
            March
      9, 2009Mark
      S. Newman/s/ Mark N.
      Kaplan
            Director
            March
      9, 2009Mark
      N. Kaplan/s/ C. Barnwell
      Struat
            Director
            March
      9, 2009C.
      Barnwell Straut/s/ Jeffrey H.
      Coats
            Director
            March
      9, 2009Jeffrey
      H. Coats/s/ Adam H.
      Slutsky
            Director
            March
      9, 2009Adam
      H. Slutsky





100





INDEX TO
EXHIBITS





Exhibit
              Number
            Exhibits3.1
            Amended
      Certificate of Incorporation of the Company.(3)3.2
            Amended
      and Restated Bylaws of the Company as of December 12, 2007.(26)4.1
            Registration
      Rights Agreement, dated as of February 8, 1995, by and between the Company
      and Hillside Industries, Incorporated (“Hillside”).(2)4.2
            Indenture,
      dated as of August 3, 1998, by and between the Company and First Union
      National Bank, as trustee.(4)4.2.1
            First
      Supplemental Indenture, dated as of March 28, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(11)4.2.2
            Second
      Supplemental Indenture, dated as of August 7, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(12)4.2.3
            Instrument
      of Resignation, Appointment and Acceptance dated as of December 14, 2005
      among the Company, Wachovia Bank, National Association and HSBC Bank USA,
      National Association, as Successor Trustee.(17)10.1
            Joint
      Venture Agreement, dated as of December 16, 1992, by and among Resilient
      Holdings, Incorporated, Hillside, the Company (collectively, the
      “Congoleum Group”), Hillside Capital Incorporated (“Hillside Capital”) and
      American Biltrite Inc. (“American Biltrite”).(1)10.2
            Closing
      Agreement, dated as of March 11, 1993, by and among the Congoleum Group,
      Hillside Capital and American Biltrite.(1)10.3
            Personal
      Services Agreement, dated as of March 11, 1993 (the “Personal Services
      Agreement”), by and between American Biltrite and the Company.(1)10.3.1
            First
      Amendment, dated February 8, 1995, to Personal Services Agreement, by and
      between American Biltrite and the Company.(2)10.3.2
            Second
      Amendment, dated November 15, 1996, to Personal Services Agreement, by and
      between American Biltrite and the Company.(5)10.3.3
            Third
      Amendment, dated as of March 10, 1998, to Personal Services Agreement, by
      and between American Biltrite and the Company.(5)10.3.4
            Fourth
      Amendment, dated as of November 7, 2002, to Personal Services Agreement,
      by and between American Biltrite and the Company.(11)10.3.5
            Fifth
      Amendment, dated as of March 11, 2008, to Personal Services Agreement, by
      and between American Biltrite and the Company.(23)10.3.6
            Sixth
      Amendment, dated as of September 23, 2008, to Personal Services Agreement,
      by and between American Biltrite and the Company.(27)10.4
            Business
      Relations Agreement, dated as of March 11, 1993, by and between American
      Biltrite and the Company.(1)10.4.1
            First
      Amendment, dated August 19, 1997, to Business Relations Agreement, by and
      between American Biltrite and the Company.(5)10.4.2
            Amendment
      to Business Relations Agreement, dated as of March 11, 2008, by and
      between American Biltrite and the Company.(23)





101








10.4.3
            Amendment
      to Business Relations Agreement, dated as of September 23, 2008, by and
      between American Biltrite and the Company.(27)10.5
            Tax
      Sharing Agreement, dated as of November 1, 1996, between American Biltrite
      and the Company.(5)10.6
            Trademark
      Purchase Agreement, dated November 29, 1993, by and between the Company
      and The Amtico Company LTD (“Amtico Company”).(2)10.7
            First
      Right of Refusal, dated November 29, 1993, by and between American
      Biltrite (Canada) Limited and Amtico Company.(2)10.8
            Undertaking
      Concerning Amtico Trademark, dated November 29, 1993, by and between
      American Biltrite and Amtico Company.(2)10.9
            Form
      of 1995 Stock Option Plan.(2)10.9.1
            Form
      of Amendment to 1995 Stock Option Plan.(6)10.9.2
            Form
      of Nonqualified Stock Option Award Agreement Under the Congoleum 1995
      Stock Option Plan.(15)10.10
            Congoleum
      Corporation 1999 Stock Option Plan for Non-Employee Directors. (8)10.10.1
            Form
      of Amendment to Non-qualified, Non-employee Directors Stock Option
      Plan.(9)10.10.2
            Form
      of Stock Option Agreement Under the Congoleum Corporation 1999 Stock
      Option Plan for Non-Employee Directors.(15)10.11
            Loan
      and Security Agreement, dated December 10, 2001 (the “Congress Financial
      Loan Agreement”) by and between Congress Financial Corp. (the “Lender”)
      and the Company.(9)10.11.1
            Amendment
      No. 1 to Loan and Security Agreement, dated September 24, 2002,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(10)10.11.2
            Amendment
      No. 2 to Loan and Security Agreement, dated as of February 27, 2003,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(11)10.11.3
            Ratification
      and Amendment Agreement dated January 7, 2004, by and between the Company
      and Congress Financial Corporation.(13)10.11.4
            Amendment
      No. 1 to Ratification and Amendment Agreement and Amendment No. 3 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 14, 2004.(14)10.11.5
            Amendment
      No. 2 to Ratification and Amendment Agreement and Amendment No. 4 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of January 13, 2005.(24)10.11.6
            Amendment
      No. 3 to Ratification and Amendment Agreement and Amendment No. 5 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 7, 2005.(24)10.11.7
            Amendment
      No. 4 to Ratification and Amendment Agreement and Amendment No. 6 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 19, 2005.(24)10.11.8
            Amendment
      No. 5 to Ratification and Amendment Agreement and Amendment No. 7 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of September 27, 2006.(24)10.11.9
            Amendment
      No. 6 to Ratification and Amendment Agreement and Amendment No. 8 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of November 27, 2006.(24)





102








10.11.10
            Amendment
      No. 7 to Ratification and Amendment Agreement and Amendment No. 9 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 12, 2007. (20)10.11.11
            Amendment
      No. 8 to Ratification and Amendment Agreement and Amendment No. 10 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 11, 2007.(35)10.11.12
            Amendment
      No. 9 to Ratification and Amendment Agreement and Amendment No. 11 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 4, 2008.10.11.13
            Amendment
      No. 10 to Ratification and Amendment Agreement and Amendment No. 12 to
      Loan and Security Agreement, by and between the Company and Congress
      Financial corporation dated as of October 6, 2008.(28)10.11.14
            Amendment
      No. 11 to Ratification and Amendment Agreement and Amendment No. 13 to
      Loan and Security Agreement, by and between the Company and Congress
      Financial Corporation dated as of March 16, 2009.10.12
            Settlement
      Agreement Between the Company and Various Asbestos Claimants dated April
      10, 2003.(12)10.12.1
            First
      Amendment to Settlement Agreement Between the Company and Various Asbestos
      Claimants dated June 6, 2003.(12)10.13
            Collateral
      Trust Agreement, dated April 16, 2003, by and between the Company, Arthur
      J. Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust, and Wilmington Trust Company, solely in its capacity as
      Delaware Trustee of the Collateral Trust.(12)10.13.1
            First
      Amendment to Collateral Trust Agreement, dated June 6, 2003, by and
      between the Company, Arthur J. Pergament, solely in his capacity as the
      Collateral Trustee of the Collateral Trust, and Wilmington Trust Company,
      solely in its capacity as Delaware Trustee of the Collateral Trust.(12)10.14
            Security
      Agreement, dated April 16, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.1
            Second
      Security Agreement, dated April 17, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral Trustee of
      the Collateral Trust.(12)10.14.2
            Termination
      Agreement, dated June 6, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.3
            Superseding
      Security Agreement, dated June 11, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral
              Trustee
      of the Collateral Trust.(12)10.15
            Purchase
      Agreement, effective as of September 1, 2006, between the Company and
      Armstrong World Industries, Inc.(24)10.16
            Note
      Agreement, dated as of October 12, 2006, by and between Gilbert Heintz
      & Randolph LLP (“GHR”) and the Company.(25)10.17
            Promissory
      Note dated October 12, 2006 of GHR.(25)10.18
            Security
      Agreement, dated as of October 12, 2006 made by GHR in favor of the
      Company.(25)





103








10.19
            Put/Call
      Agreement, dated as of February 20, 2008, between the Company, the Initial
      Backstop Participants and the Trust to be formed.(22)12.1
            Statement
      Regarding Computation of Ratio of Earnings to Fixed
    Charges.14.1
            Code
      of Ethics.(14)21.1
            Subsidiaries
      of the Company.(7)23.1
            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP.31.1
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Executive
      Officer.31.2
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Financial
      Officer.32.1
            Section
      1350 Certification of Chief Executive Officer.32.2
            Section
      1350 Certification of Chief Financial Officer.99.1
            Settlement
      Agreement and Release by and between Congoleum Corporation and Liberty
      Mutual Insurance Company.(16)99.2
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      certain AIG Member Companies.(16)99.3
            Confidential
      Settlement Agreement and Release among Congoleum Corporation, the Plan
      Trust and Certain Underwriters at Lloyd’s, London dated June 22,
      2005.(16)99.3.1
            Amendment
      dated July 29, 2005, to the Confidential Settlement Agreement and Release
      among Congoleum Corporation, the Plan Trust and Certain Underwriters at
      Lloyd’s, London, dated June 22, 2005.(16)99.3.2
            Second
      Amendment, dated November 8, 2007, to the Confidential Settlement
      Agreement and Release among Congoleum Corporation, the Plan Trust and
      Certain Undewriters at Lloyd’s, London, dated June 22,
    2005.99.4
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      Federal Insurance Company.(15)99.5
            Amended
      and Restated Settlement Agreement and Release, dated as of January 18,
      2008, among Congoleum Corporation, the Plan Trust and Mt. McKinley
      Insurance Company and Everest Reinsurance Company.(35)99.6
            Settlement
      Agreement and Release by and between Congoleum Corporation and Harper
      Insurance Limited, formerly known as Turegum Insurance Company.(18)99.7
            Settlement
      and Policy Buyback Agreement and Release, dated as of April 25, 2006, by
      and among Congoleum Corporation, the Plan Trust, American Biltrite,
      Travelers Casualty and Surety Co., and St. Paul Fire and Marine Insurance
      Company.(18)99.7.1
            Letter
      Agreement, dated March 18, 2008, amending the Settlement and Policy
      Buyback Agreement and Release, dated as of April 25, 2006, by and among
      Congoleum Corporation, the Plan Trust, American Biltrite, Travelers
      Casualty and Surety Co. and St. Paul Fire and Marine Insurance
      Company.(35)99.8
            Settlement
      Agreement, made as of April 27, 2006, by and between Congoleum Corporation
      and Fireman’s Fund Insurance Company.(18)99.9
            Settlement
      and Policy Buyback Agreement and Release, made as of August 17, 2006, by
      and between Congoleum Corporation and Century Insurance Company.(19)99.10
            Agreement
      for Claim Determination between the Liquidator of The Protective National
      Insurance Company of Omaha and Congoleum Corporation dated February 18,
      2008.(29)





104








99.11
            Settlement
      Agreement, dated as of September 10, 2008, by and between Congoleum
      Corporation and Arthur J. Pergament, as the Collateral Trustee of the
      Collateral Trust, et
      al.(30)99.12
            In
      re:  Congoleum Corporation, et al., Opinion of the
      United States Bankruptcy Court for the District of New Jersey, dated June
      5, 2008, resolving Motions and Cross Motion for Summary Judgment.(31)99.13
            In
      re:  Congoleum Corporation, et al., Opinion of the
      United States Bankruptcy Court for the District of New Jersey, dated
      February 26, 2009, regarding the Order of Dismissal.(32)99.14
            In
      re:  Congoleum Corporation, et al., Transcript of motion hearing
      held March 3, 2009, before the Honorable Kathryn C. Ferguson, United
      States Bankruptcy Judge.(33)99.15
            Term
      Sheet, dated August 12, 2008, for Plan of Reorganization for Congoleum
      Corporation.(34)99.16
            Proposed
      Disclosure Statement with respect to the Amended Joint Plan of
      Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, the ACC and
      the Bondholders’Committee, dated as of November
      14, 2008.(21)99.17
            Amended
      Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of
      Congoleum
      Corporation, the ACC
      and the Bondholders’Committee, dated as of
      November 14, 2008.(21)99.18
            Press
      Release, dated March 30, 2009











105





(1)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Registration Statement on Form S-1 (File No. 33-71836) declared
      effective by the Securities and Exchange Commission on January 25,
      1994.





(2)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Registration Statement on Form S-1 (File No. 33-87282) declared
      effective by the Securities and Exchange Commission on February 1,
      1995.





(3)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended June 30, 1996.





(4)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended June 30, 1998.





(5)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 1997.





(6)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 1996.





(7)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 1998.





(8)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Registration Statement on Form S-8 (File No. 333-84387) declared
      effective by the Securities and Exchange Commission on August 3,
      1999.





(9)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2001.





(10)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended September 30, 2002.





(11)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2002.








106





(12)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended June 30, 2003.





(13)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2003.





(14)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2004.





(15)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended September 30, 2005.





(16)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended June 30, 2005.





(17)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2005.





(18)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended March 31, 2006.


.


(19)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended September 30, 2006





(20)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended June 30, 2007.





(21)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on November 19,
      2008.





(22)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on February 22,
      2008.





(23)
            Incorporated by reference to
      the exhibit bearing the same description filed with the Company’s
      Current Report on Form 8-K (File No. 001-13612) on March 17,
      2008.








107





(24)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2006.





(25)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on April 10,
      2007.





(26)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on December 12,
      2007.





(27)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on September 24,
      2008.





(28)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended September 30, 2008.





(29)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Quarterly Report on Form 10-Q (File No. 001-13612) for the
      period ended March 31, 2008.





(30)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on November 5,
      2008.





(31)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on June 12,
      2008.





(32)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on March 4,
      2009.





(33)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on March 12,
      2009.





(34)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on August 15,
      2008.





(35)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Annual Report on Form 10-K (File No. 001-13612) for the period
      ended December 31, 2007.






108