================================================================================

Congoleum Corporation
Selected Financial Data
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              For the years ended
                                                                  December 31,
                                         ---------------------------------------------------------------
                                            1999         1998         1997         1996         1995
<S>                                      <C>          <C>          <C>          <C>          <C>
--------------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales ............................   $ 246,006    $ 259,126    $ 252,526    $ 269,451    $ 263,147
Cost of sales ........................     176,559      181,997      180,093      182,585      186,382
Selling, general and
    administrative expenses ..........      57,428       56,839       57,094       61,597       55,228
--------------------------------------------------------------------------------------------------------
Income from operations ...............      12,019       20,290       15,339       25,269       21,537
Interest expense, net ................      (6,101)      (5,758)      (5,258)      (6,369)      (6,708)
Other income, net ....................       1,729          984          974        1,095        1,135
--------------------------------------------------------------------------------------------------------
Income before taxes
    and extraordinary item ...........       7,647       15,516       11,055       19,995       15,964
Provision for income
    taxes ............................       2,719        5,663        4,035        7,898        6,529
--------------------------------------------------------------------------------------------------------
Income before
    extraordinary item ...............       4,928        9,853        7,020       12,097        9,435
Extraordinary item ...................          --       (2,413)        (279)          --           --
--------------------------------------------------------------------------------------------------------
Net income ...........................   $   4,928    $   7,440    $   6,741    $  12,097    $   9,435
========================================================================================================
Income per common share before
    extraordinary item ...............   $    0.57    $    1.09    $    0.72    $    1.21    $    0.94

Extraordinary Item ...................          --        (0.27)       (0.03)          --           --
--------------------------------------------------------------------------------------------------------
Net income per common share, basic
    and diluted ......................   $    0.57    $    0.82    $    0.69    $    1.21    $    0.94
========================================================================================================
Average shares outstanding ...........       8,699        9,038        9,839       10,007       10,022
========================================================================================================
Balance Sheet Data (at end of period):
Total assets .........................   $ 231,817    $ 231,865    $ 196,581    $ 219,798    $ 206,842
Total debt ...........................      99,575       99,526       76,594       87,750       90,000
Stockholders' equity .................      40,130       37,853       31,783       33,667       22,602
</TABLE>


                                       8
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================

Results of Operations

The Company's business is cyclical and is affected by the same economic factors
that affect the remodeling and housing industries in general, including the
availability of credit, consumer confidence, changes in interest rates, market
demand and general economic conditions.

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

Year ended December 31, 1999 as compared to year ended December 31, 1998

      Net sales for the year ended December 31, 1999 were $246.0 million as
compared to $259.1 million for the year ended December 31, 1998, a decrease of
$13.1 million or 5.1%. This decrease resulted primarily from lower sales of
certain residential products, a decline in commercial product sales, and
competitive pressures which caused 1999 selling prices to average 2.7% below
1998 levels. The decline in residential product sales resulted from lower sales
to two retail buying groups and competition from alternative hard surface
products.

      Gross profit for the year ended December 31, 1999 was $69.4 million
compared to $77.1 million in 1998, a decrease of $7.7 million or 10.0%. Gross
profit declined due to lower sales and a decrease in gross profit margins. Gross
profit margins declined from 29.8% of net sales in 1998 to 28.2% of net sales in
1999 due to lower average selling prices and a less profitable mix of sales.

      Selling, general and administrative expenses were $57.4 million for the
year ended December 31, 1999 as compared to $56.8 million for the year ended
December 31, 1998, an increase of $0.6 million or 1.0%. As a percent of net
sales, selling, general and administrative expenses increased from 21.9% in 1998
to 23.3% in 1999. The Company introduced a wood laminate flooring product line
in mid-1999 and expensed $2.0 million in displays, samples, and other
launch-related costs. In addition, research and development spending was
increased $0.4 million from 1998 to 1999. These increases offset other expense
reductions, including lower sales-related costs.

      Income from operations was $12.0 million (4.9% of net sales) for the year
ended December 31, 1999, compared to $20.3 million (7.8% of net sales) for the
year ended December 31, 1998, a decrease of $8.3 million or 40.8%, primarily due
to the decline in sales and gross profit margins.

      Interest expense (net) increased from $5.8 million in 1998 to $6.1 million
in 1999 primarily due to higher average levels of long-term debt in 1999 versus
1998.

      Other income (net) increased from $1.0 million in 1998 to $1.7 million in
1999 due to higher sales of sundry items.

      Net income in 1999 was $4.9 million as compared to $9.9 million ($7.4
million after an extraordinary charge for debt extinguishment) in 1998. Net
income per common share was $.57 in 1999 as compared to $1.09 ($.82 after
extraordinary charge) in 1998. The weighted average number of common shares
outstanding declined from 9.0 million in 1998 to 8.7 million in 1999 as a result
of share repurchases.

Year ended December 31, 1998 as compared to year ended December 31, 1997

      Net sales for the year ended December 31, 1998 were $259.1 million as
compared to $252.5 million for the year ended December 31, 1997, an increase of
$6.6 million or 2.6%. Increases in sales to the manufactured housing industry
and to home centers from 1997 to 1998 were partly offset by a decline in sales
of lower-end products to the specialty retail channel. Price reductions occurred
in certain products and markets which resulted in an aggregate decrease in
prices of 1.2%.


                                       9
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================

      Gross profit for the year ended December 31, 1998 was $77.1 million
compared to $72.4 million in 1997, an increase of $4.7 million or 6.5%, as a
result of higher sales and improved gross profit margins. Gross profit margins
improved from 28.7% of net sales in 1997 to 29.8% of net sales in 1998 due to
declines in raw material costs, an increase in manufacturing productivity and a
higher margin mix of sales.

      Selling, general and administrative expenses were $56.8 million for the
year ended December 31, 1998 as compared to $57.1 million for the year ended
December 31, 1997, a decrease of $0.3 million or 0.4%. As a percent of net
sales, selling, general, and administrative expenses declined from 22.6% in 1997
to 21.9% in 1998. Expense control initiatives have succeeded in reducing these
costs on an overall basis despite increased spending related to Year 2000
compliance. In addition, the sales channels where the Company has experienced
the most sales growth require relatively less sales and marketing support than
the specialty retail channel.

      Income from operations was $20.3 million (7.8% of net sales) for the year
ended December 31, 1998 compared to $15.3 million (6.1% of net sales) for the
year ended December 31, 1997, an increase of $5.0 million or 32.3%, primarily
due to the increase in sales and gross profit margins.

      Interest expense increased from $6.8 million in 1997 to $7.4 million in
1998 primarily due to a higher amount of interest being capitalized rather than
expensed in connection with capital expenditures in 1997.

      During 1998, the Company issued $100 million in ten-year 8 5/8 % Senior
Notes (priced to yield 8.70%). Most of the proceeds were used to retire the
Company's existing 9% Senior Notes due in 2001. In connection with this
transaction, the Company recorded an extraordinary charge of $2.4 million (net
of tax benefit) for the prepayment premium and write-off of deferred financing
costs. In 1997, the Company had recorded an extraordinary charge of $0.3 million
for similar costs in connection with open market purchases of $11.2 million of
the 9% Senior Notes.

      Before the extraordinary charges, income in 1998 was $9.9 million as
compared to $7.0 million in 1997, an increase of $2.8 million or 40.4%. Income
per common share before extraordinary item increased 51.4%, from $.72 in 1997 to
$1.09 in 1998.

      Net income increased from $6.7 million, or $.69 per share, in 1997, to
$7.4 million, or $.82 per share, in 1998. Weighted average number of common and
equivalent shares outstanding decreased in 1998 to 9.0 million from 9.8 million
in 1997, primarily due to repurchases of its stock in the fourth quarter of
1997.

Liquidity and Capital Resources

Cash and equivalents, including short-term investments at December 31, 1999,
were $38.0 million, a decrease of $12.3 million from December 31, 1998. Working
capital was $59.7 million, down from $68.5 million one year earlier. The ratio
of current assets to current liabilities at December 31, 1999 was 2.1 to one,
compared to 2.4 to one a year earlier. The ratio of debt to total capital at
both December 31, 1999 and 1998 was .43. Net cash provided by operations during
the year ended December 31, 1999 was $10.3 million, down from $24.0 million in
1998. Capital expenditures in 1999 totaled $18.7 million, which included a large
expenditure for a new coating mix facility. The Company increased inventories
$9.4 million in 1999 to support sales of its wood laminate product and to
accommodate larger, more economical production runs of sheet flooring. The
Company is currently planning capital expenditures of approximately $15 million
in both 2000 and 2001.

      During 1998, the Company issued $100 million of 8 5/8 % Senior Notes
maturing August 1, 2008 priced at 99.505 to yield 8.70%. Proceeds of the
offering were used to redeem all $76.6 million of its 9% Senior Notes, plus
accrued interest and prepayment premium, to pay certain fees and expenses in
connection with the offering, and for working capital and general corporate
purposes. In connection with this offering, the Company recorded an
extraordinary after-tax charge of $2.4 million in the third quarter of 1998.

      During 1998, the Company entered into a new five-year revolving credit
facility which provides for borrowings up to $30 million. Interest ranges from
0-1% below prime, or 0.75% to 1.5% over LIBOR,


                                       10
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================

depending on the Company's ratio of debt to EBITDA. This financing agreement
contains certain covenants which include the maintenance of minimum net worth,
income, and fixed charge coverage levels. It also includes restrictions on the
incurrence of additional debt and limitations on capital expenditures.
Borrowings under this facility are collateralized by inventory and receivables.
At December 31, 1999, based on the level of receivables and inventory, the
Company had a borrowing base available of $27.8 million, of which $3.7 million
was utilized for outstanding letters of credit.

      In 1998, the Company's Board of Directors approved a new plan to
repurchase up to $5.0 million of the Company's common stock. As of December 31,
1999, the Company had repurchased 717,665 shares of its common stock for an
aggregate cost of $4.1 million pursuant to this plan.

      From 1997 to 1999, the Company made modifications and replacements to its
systems and equipment necessary for handling dates in the Year 2000.

      Costs directly associated with achieving Year 2000 compliance, including
modifying computer software or converting to new programs, consisted of payments
to third parties as well as an allocation of the payroll and benefits of its
employees based on the amount of their time devoted to this activity. These
costs were expensed as incurred. Costs for new hardware were capitalized in
accordance with the Company's fixed asset policy, and any equipment retired was
written off.

      The following table summarizes the Company's direct Year 2000 compliance
expenditures by year:

   (In thousands)                   1997     1998     1999
                                    ----     ----     ----
   Expenses paid to third parties    $52     $330     $127
   Allocated payroll costs           174      386       59
   Capital expenditures                5      206       --

      In addition to work undertaken explicitly to achieve Year 2000 compliance,
the Company replaced or upgraded a number of systems in the ordinary course of
business where the replacement or upgrade, in addition to its primary benefits,
also provided Year 2000 compliance. The nature of these costs, and their
accounting treatment, was the same as described above. The following table
summarizes the Company's expenditures on systems improvements undertaken for
reasons unrelated to the Year 2000, which also served to achieve Year 2000
compliance:

   (In thousands)                   1997     1998     1999
                                    ----     ----     ----
   Expenses paid to third parties    $13      $76      $95
   Allocated payroll costs            48       37       --
   Capital expenditures               92      144      126

      The Company is not aware of any significant adverse effects of Year 2000
on our systems and operations.

      Collective bargaining agreements with hourly employees at the Company's
facilities expire in 2001 and 2003. In the past five years, there have been no
strikes by employees at the Company, and the Company believes that its employee
relations are satisfactory.

      The Company has recorded what it believes are adequate provisions for
environmental remediation and product-related liabilities, including provisions
for testing for potential remediation of conditions at its own facilities. While
the Company believes its estimate of the future amount of these liabilities is
reasonable, that such amounts will not have a material adverse impact on the
Company's financial position, 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 could have a material adverse
effect on its financial position. There can be no assurances that the costs of
any future government regulations could be passed along to its customers.

      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, asbestos-related
claims, and general liability claims (more fully discussed in "Legal
Proceedings" in Part I Item 3. and "Environmental Regulation" in Part I Item 1.
of the Company's Annual Report on Form 10-K for the year ended December 31,
1999). These actions include possible obligations to remove or mitigate the
effects on the environment of wastes deposited


                                       11
<PAGE>

Congoleum Corporation
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
================================================================================

at various sites, including Superfund sites and certain of the Company's owned
and previously owned facilities. The contingencies also include claims for
personal injury and/or property damage. The exact amount of such future cost and
timing of payments are indeterminable due to such unknown factors as the
magnitude of cleanup costs, the timing and extent of the remedial actions that
may be required, the determination of the Company's liability in proportion to
other potentially responsible parties, and the extent to which costs may be
recoverable from insurance. The Company has recorded provisions in its financial
statements for the estimated probable loss associated with all known general,
environmental and asbestos-related contingencies.

      The Company records a liability for environmental remediation,
asbestos-related claim costs, and general liability claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated. As assessments and cleanups progress, these liabilities are adjusted
based upon progress in determining the timing and extent of remedial actions and
the related costs and damages. The extent and amounts of the liabilities can
change substantially due to factors such as the nature or extent of
contamination, changes in remedial requirements and technological improvements.
Estimated insurance recoveries related to these liabilities are reflected in
other noncurrent assets (see Note 15 of Notes to Financial Statements).

      Although the outcome of these matters could result in significant expenses
or judgments, the Company does not believe based on present facts and
circumstances that their disposition will have a material adverse effect on the
financial position of 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 these sources will be adequate to fund working capital requirements,
debt service payments and planned capital expenditures through the foreseeable
future.


                                       12
<PAGE>

Congoleum Corporation
Balance Sheets
(dollars in thousands, except share amounts)
================================================================================

<TABLE>
<CAPTION>
                                                                                     December 31,   December 31,
                                                                                         1999           1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents........................................................ $   18,768      $  50,344
   Short-term investments ..........................................................     19,232             --
   Accounts and notes receivable, less allowance for doubtful accounts and cash
     discounts of $3,283 and $3,336 as of December 31, 1999 and 1998, respectively .     13,745         15,880
   Inventories .....................................................................     54,599         45,192
   Prepaid expenses and other current assets .......................................      3,687          3,022
   Deferred income taxes ...........................................................      3,515          3,046
-------------------------------------------------------------------------------------------------------------------
     Total current assets ..........................................................    113,546        117,484
Property, plant, and equipment, net ................................................     96,404         87,954
Goodwill, net ......................................................................     11,387         11,819
Deferred income taxes ..............................................................         --          1,863
Other noncurrent assets ............................................................     10,480         12,745
-------------------------------------------------------------------------------------------------------------------
     Total assets..................................................................  $  231,817      $ 231,865
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable................................................................  $   19,160      $  14,399
   Accrued liabilities .............................................................     30,597         31,209
   Accrued taxes ...................................................................        311            317
   Deferred income taxes ...........................................................      3,757          3,058
-------------------------------------------------------------------------------------------------------------------
     Total current liabilities .....................................................     53,825         48,983
Long-term debt .....................................................................     99,575         99,526
Other liabilities ..................................................................     18,405         23,501
Noncurrent pension liability .......................................................      9,230         12,130
Accrued postretirement benefit obligation ..........................................      9,647          9,872
Deferred income taxes ..............................................................      1,005             --
-------------------------------------------------------------------------------------------------------------------
     Total liabilities .............................................................    191,687        194,012
-------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950
   shares issued; 3,711,190 and 4,258,610 shares
   outstanding as of December 31, 1999 and 1998, respectively ......................         47             47
Class B common stock, par value $0.01; 4,608,945 and 4,755,000 shares authorized,
   issued and outstanding as of December 31, 1999 and 1998, respectively ...........         46             47
Additional paid-in capital .........................................................     49,105         49,574
Retained deficit ...................................................................       (452)        (5,380)
Minimum pension liability adjustment ...............................................     (1,000)        (2,302)
Common stock held in treasury, at cost; 1,025,760 shares and 399,390 shares at
   December 31,  1999 and 1998, respectively .......................................     (7,616)        (4,133)
-------------------------------------------------------------------------------------------------------------------
     Total stockholders' equity ....................................................     40,130         37,853
-------------------------------------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity....................................  $  231,817      $ 231,865
===================================================================================================================
</TABLE>

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


                                       13
<PAGE>

Congoleum Corporation
Statements of Operations
(in thousands, except per share amounts)
================================================================================

<TABLE>
<CAPTION>
                                                                        For the years ended
                                                                           December 31,
                                                              --------------------------------------
                                                                   1999         1998         1997
----------------------------------------------------------------------------------------------------
<S>                                                           <C>          <C>          <C>
Net sales .................................................   $ 246,006    $ 259,126    $ 252,526
Cost of sales .............................................     176,559      181,997      180,093
Selling, general and administrative expenses ..............      57,428       56,839       57,094
----------------------------------------------------------------------------------------------------
       Income from operations .............................      12,019       20,290       15,339
Other income (expense):
   Interest income ........................................       1,837        1,607        1,539
   Interest expense .......................................      (7,938)      (7,365)      (6,797)
   Other income ...........................................       1,819        1,249        1,287
   Other expense ..........................................         (90)        (265)        (313)
----------------------------------------------------------------------------------------------------
       Income before income taxes and extraordinary item ..       7,647       15,516       11,055
Provision for income taxes ................................       2,719        5,663        4,035
----------------------------------------------------------------------------------------------------
       Income before extraordinary item ...................       4,928        9,853        7,020
Extraordinary item-early retirement of debt,
   net of income tax benefit ..............................          --       (2,413)        (279)
----------------------------------------------------------------------------------------------------
       Net income .........................................   $   4,928    $   7,440    $   6,741
====================================================================================================
       Income per common share before extraordinary item ..   $     .57    $    1.09    $     .72
       Extraordinary item .................................          --         (.27)        (.03)
----------------------------------------------------------------------------------------------------
       Net income per common share, basic and diluted .....   $     .57    $     .82    $     .69
====================================================================================================
       Weighted average number of common and
             equivalent shares outstanding ................       8,699        9,038        9,839
====================================================================================================
</TABLE>

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


                                       14
<PAGE>

Congoleum Corporation
Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>

                                                Common Stock
                                               par value $0.01    Additional
                                             ------------------     Paid-in     Retained
                                             Class A    Class B     Capital      Deficit
------------------------------------------------------------------------------------------
<S>                                         <C>         <C>       <C>          <C>
Balance, December 31, 1996 ..............   $     47    $    53   $   55,172   $  (19,561)
Purchase of treasury stock ..............
Purchase and retirement of
  Class B stock .........................                    (6)      (5,624)
Exercise of stock options ...............                                 26
Minimum pension liability adjustment,
  net of tax of $658 ....................
Net income ..............................                                           6,741

Net comprehensive income ................
------------------------------------------------------------------------------------------
Balance, December 31, 1997 ..............         47         47       49,574      (12,820)
Purchase of treasury stock ..............
Minimum pension liability adjustment,
  net of tax benefit of $678 ............
Net income ..............................                                           7,440

Net comprehensive income ................
------------------------------------------------------------------------------------------
Balance, December 31, 1998 ..............         47         47       49,574       (5,380)
Purchase of treasury stock ..............
Purchase and retirement of
  Class B stock .........................                    (1)        (469)
Minimum pension liability adjustment,
  net of tax of $748 ....................
Net income ..............................                                           4,928

Net comprehensive income ................
------------------------------------------------------------------------------------------
Balance, December 31, 1999 ..............   $     47    $    46   $   49,105   $     (452)
==========================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                            Accumulated Other
                                              Comprehensive
                                              Income (Loss)   Treasury                   Comprehensive
                                               Adjustment*      Stock         Total         Income
--------------------------------------------------------------------------------------   -------------
<S>                                            <C>           <C>           <C>           <C>
Balance, December 31, 1996 ..............      $   (1,995)   $      (49)   $   33,667
Purchase of treasury stock ..............                        (3,894)       (3,894)
Purchase and retirement of
  Class B stock .........................                                      (5,630)
Exercise of stock options ...............                                          26
Minimum pension liability adjustment,
  net of tax of $658 ....................             873                         873    $      873
Net income ..............................                                       6,741         6,741
                                                                                         -----------
Net comprehensive income ................                                                $    7,614
--------------------------------------------------------------------------------------   ===========
Balance, December 31, 1997 ..............          (1,122)       (3,943)       31,783
Purchase of treasury stock ..............                          (190)         (190)
Minimum pension liability adjustment,
  net of tax benefit of $678 ............          (1,180)                     (1,180)   $   (1,180)
Net income ..............................                                       7,440         7,440
                                                                                         -----------
Net comprehensive income ................                                                $    6,260
--------------------------------------------------------------------------------------   ===========
Balance, December 31, 1998 ..............          (2,302)       (4,133)       37,853
Purchase of treasury stock ..............                        (3,483)       (3,483)
Purchase and retirement of
  Class B stock .........................                                        (470)
Minimum pension liability adjustment,
  net of tax of $748 ....................           1,302                       1,302    $    1,302
Net income ..............................                                       4,928         4,928
                                                                                         -----------
Net comprehensive income ................                                                $    6,230
--------------------------------------------------------------------------------------   ===========
Balance, December 31, 1999 ..............      $   (1,000)   $   (7,616)   $   40,130
======================================================================================
</TABLE>

* Entire amount relates to minimum pension liability adjustment.

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


                                       15
<PAGE>

Congoleum Corporation
Statements of Cash Flows
(dollars in thousands)
================================================================================

<TABLE>
<CAPTION>
                                                                                    For the years ended
                                                                                        December 31,
                                                                              --------------------------------
                                                                                1999        1998        1997
--------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>         <C>         <C>
Cash flows from operating activities:
   Net income .............................................................   $  4,928    $  7,440    $  6,741
   Adjustments to reconcile net income to net cash provided by operating
      activities:
         Depreciation .....................................................     10,220       9,848       9,102
         Amortization .....................................................        818         893         992
         Loss on early retirement of debt, including write-off
              of deferred financing fees ..................................         --       3,809         252
         Deferred income taxes ............................................      2,350       2,074          93
         Loss on disposition of assets ....................................         --          --         331
         Changes in certain assets and liabilities:
              Accounts and notes receivable ...............................      2,135      (1,368)      3,216
              Inventories .................................................     (9,407)       (758)      3,016
              Prepaid expenses and other current assets ...................     (1,147)     (2,299)     (1,294)
              Accounts payable ............................................      4,761         959      (6,495)
              Accrued liabilities .........................................     (2,218)      1,854      (4,781)
              Other liabilities ...........................................     (2,161)      1,515        (156)
--------------------------------------------------------------------------------------------------------------
                   Net cash provided by operating activities ..............     10,279      23,967      11,017
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Capital expenditures, net ..............................................    (18,670)     (9,440)    (19,523)
   Purchase of short-term investments .....................................    (51,044)    (15,000)    (40,200)
   Maturities of short-term investments ...................................     31,812      22,900      49,800
--------------------------------------------------------------------------------------------------------------
                   Net cash used by investing activities ..................    (37,902)     (1,540)     (9,923)
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Issuance of long-term debt .............................................         --      99,505          --
   Debt issuance costs ....................................................         --      (3,310)         --
   Payments to reduce long-term debt ......................................         --     (76,594)    (11,156)
   Premium payments on early retirement of debt ...........................         --      (2,563)         --
   Purchase of treasury stock .............................................     (3,483)       (190)     (3,894)
   Purchase and retirement of Class B stock ...............................       (470)         --      (5,630)
   Exercise of stock options ..............................................         --          --          26
--------------------------------------------------------------------------------------------------------------
                  Net cash (used) provided by financing activities ........     (3,953)     16,848     (20,654)
--------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash ...........................................    (31,576)     39,275     (19,560)
Cash and cash equivalents:
   Beginning of year ......................................................     50,344      11,069      30,629
--------------------------------------------------------------------------------------------------------------
   End of year ............................................................   $ 18,768    $ 50,344    $ 11,069
==============================================================================================================
</TABLE>

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


                                       16
<PAGE>

Congoleum Corporation
Notes to Financial Statements
(dollars in thousands, except per share amounts)
================================================================================

1. Summary of Significant
Accounting Policies:

Nature of Business and Basis of Presentation - Congoleum Corporation (the
"Company" or "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.

Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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 could differ from those estimates.

Revenue Recognition - Revenue is recognized when products are shipped. Net sales
are comprised of the total sales billed during the period less the sales value
of goods returned, trade discounts and customers' allowances.

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. The carrying amount reported in the balance sheets for cash and
cash equivalents approximates its fair value.

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 carrying amount of the investments
approximates fair value due to their short maturity. 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 cost or market. The LIFO
(last-in, first-out) method of determining cost is used for substantially all
inventories.

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 long-term
debt have been capitalized and are being amortized over the life of the related
debt. Such costs at December 31, 1999 and 1998 amounted to $2,834 and $3,170,
respectively, net of accumulated amortization of $476 and $140, respectively,
and are included in other noncurrent assets.

Goodwill - The excess of purchase cost over the fair value of net assets
acquired (goodwill) is being amortized on a straight-line basis over 40 years.
At each balance sheet date, the Company evaluates the recoverability of its
goodwill using certain financial indicators, such as historical and future
ability to generate income from operations. Accumulated amortization amounted to
$5,705 and $5,273 at December 31, 1999 and 1998, respectively.

      The Company periodically evaluates goodwill to ensure it is fully
recoverable from projected undiscounted cash flows of the related business
operations. There have been no impairment adjustments to goodwill through
December 31, 1999.

Environmental Remediation Liabilities - The Company is subject to federal, state
and local environmental laws and regulations. The Company records a lia-


                                       17
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

bility 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 Notes 4, 6,
and 15).

Income Taxes - The provision for income taxes is based on earnings reported in
the financial statements under an asset and liability approach in accordance
with SFAS No. 109, "Accounting for Income Taxes," that requires the recognition
of deferred tax assets and liabilities for the difference between the tax basis
of assets and liabilities and their reported amounts for financial statement
purposes.

Changes in Accounting Principles - During 1998, the Accounting Standards
Executive Committee ("AcSEC") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement requires certain costs of internally developed
software to be capitalized for years beginning after December 15, 1998. The
Company adopted SOP 98-1 effective January 1, 1999. The adoption of this SOP did
not have a material impact in 1999.

2. Inventories:

A summary of the major components of inventories is as follows:

                                                   December 31,     December 31,
                                                       1999             1998
--------------------------------------------------------------------------------
Finished goods ...............                       $43,719          $36,018
Work-in-process ..............                         2,743            3,106
Raw materials and supplies ...                         8,137            6,068
--------------------------------------------------------------------------------
Total inventories ............                       $54,599          $45,192
================================================================================

      If the FIFO (first-in, first-out) method of inventory accounting (which
approximates current cost) had been used, inventories would have been
approximately $1,640 and $1,251 lower than reported at December 31, 1999 and
1998, respectively. The carrying value of certain LIFO inventories was reduced
by market valuation reserves of $100 and $300 at December 31, 1999 and 1998,
respectively.

3. Property, Plant, and Equipment:

A summary of the major components of property, plant, and equipment is as
follows:

                                                    December 31,    December 31,
                                                        1999            1998
--------------------------------------------------------------------------------
Land ............................................    $   2,930       $   2,930
Buildings and improvements ......................       37,309          35,759
Machinery and equipment .........................      142,062         138,782
Construction-in-progress ........................       17,912           4,072
--------------------------------------------------------------------------------
                                                       200,213         181,543
Less accumulated
   depreciation .................................     (103,809)        (93,589)
--------------------------------------------------------------------------------
Total property, plant,
   and equipment, net ...........................    $  96,404       $  87,954
================================================================================

      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 interest cost was $691 and $325 for 1999 and 1998,
respectively.

      The amount of approved but unexpended capital appropriations at December
31, 1999 was $5,800, substantially all of which is planned to be expended during
2000.

4. Accrued Liabilities:

Accrued liabilities consists of the following:

                                                      December 31,  December 31,
                                                         1999          1998
--------------------------------------------------------------------------------
Accrued warranty,
   marketing and sales
   promotion .......................................    $19,021       $18,174
Employee
   compensation and
   related benefits ................................      5,115         6,377
Interest ...........................................      3,595         3,599
Environmental
   remediation and
   product-related
   liabilities .....................................      1,070         1,040
Other ..............................................      1,796         2,019
--------------------------------------------------------------------------------
Total accrued
   liabilities .....................................    $30,597       $31,209
================================================================================


                                       18
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

5. Long-Term Debt:

Long-term debt consists of the following:

                                                 December 31,       December 31,
                                                     1999              1998
--------------------------------------------------------------------------------
8 5/8% Senior Notes
    due 2008 ......................................$ 99,575           $ 99,526

      On August 3, 1998, the Company issued $100 million of 8 5/8% Senior Notes
maturing August 1, 2008 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 date of redemption. The Indenture
under which the notes were issued includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments.

      Proceeds of the offering were used to redeem all of the outstanding 9%
Senior Notes, including accrued interest and prepayment premium, to pay certain
fees and expenses in connection with the offering, and for working capital and
general corporate purposes. In connection with this offering, the Company
recorded an extraordinary charge of $2.4 million, net of $1.4 million of income
tax benefits, to write off debt issuance costs and premiums associated with the
repurchase of the 9% Senior Notes.

      During 1997, the Company repurchased $11,156 of its 9% Senior Notes. In
connection with the repurchase in 1997, the Company recorded an extraordinary
charge of $279, net of $160 of income tax benefits, to write off the portion of
the debt issuance cost and premiums associated with the repurchased 9% Senior
Notes.

      The fair value of the Company's long-term debt is based on the quoted
market prices for publicly traded issues. The estimated fair value of the 8 5/8%
Senior Notes was approximately $88,000 and $98,500 at December 31, 1999 and
1998, respectively.

      The Company has a revolving credit facility which expires in 2003 that
provides for borrowings up to $30,000 with interest varying based on the
Company's ratio of debt to EBITDA, as defined. This agreement provides for a
commitment fee based on the average daily unused portion of the commitment equal
to one-fifth of one percent per annum. This financing agreement contains certain
covenants which include the maintenance of minimum net worth, income, and fixed
charge coverage levels. It also includes restrictions on the incurrence of
additional debt and limitations on capital expenditures. Borrowings under this
facility are collateralized by inventory and receivables. There were no
borrowings outstanding under this facility at December 31, 1999; however, the
facility provides for standby letters of credit which total $3,689 at December
31, 1999.

6. Other Liabilities:

Other liabilities consists of the following:

                                                     December 31,  December 31,
                                                         1999          1998
--------------------------------------------------------------------------------
Environmental
   remediation and
   product-related
   liabilities ....................................    $11,928       $16,198
Accrued workers'
   compensation
   claims .........................................      5,164         4,987
Other .............................................      1,313         2,316
--------------------------------------------------------------------------------
Total other liabilities ...........................    $18,405       $23,501
================================================================================

7. Research and Development Costs:

Total research and development costs charged to operations amounted to $4,242,
$3,819 and $3,718 for the years ended December 31, 1999, 1998 and 1997,
respectively.

8. Operating Lease Commitments and Rent Expense:

The Company leases certain office facilities and equipment under leases with
varying terms.

      Future minimum lease payments of significant,


                                       19
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

noncancelable operating leases having initial or remaining lease terms in excess
of one year as of December 31, 1999 are as follows:

Years Ending
--------------------------------------------------------------------------------
2000 .......................................................             $ 1,942
2001 .......................................................               2,480
2002 .......................................................               2,231
2003 .......................................................               2,056
2004 .......................................................               1,626
Thereafter .................................................               9,227
--------------------------------------------------------------------------------
Total minimum lease payments ...............................             $19,562
================================================================================

      Rent expense was $3,030, $2,368 and $1,902 for the years ended December
31, 1999, 1998 and 1997, respectively.

9. Retirement Plans:

Retirement benefits are provided for substantially all employees under
Company-sponsored defined benefit pension plans. The plans are noncontributory
and generally provide monthly lifetime payments, normally commencing at age 65.
Benefits under the plans are based upon the provisions of negotiated labor
contracts and years of service. It is the Company's policy to make contributions
to these plans sufficient to meet the minimum funding requirements of applicable
laws and regulations plus such additional amounts, if any, as the Company's
actuarial consultants advise to be appropriate.

      Net periodic pension cost includes the following components:

                                                       For the years ended
                                                           December 31,
                                                  ------------------------------
                                                    1999       1998       1997
--------------------------------------------------------------------------------
Service cost ..................................   $ 1,152    $ 1,134    $ 1,144
Interest cost .................................     3,920      3,898      3,863
Expected return on
    plan assets ...............................    (4,100)    (4,070)    (3,614)
Amortization of transition
    amount ....................................        76         76         76
Amortization of prior
    service benefit ...........................      (242)      (242)      (242)
Recognized actuarial
    loss ......................................       186          2        290
--------------------------------------------------------------------------------
Net periodic
    pension cost ..............................   $   992    $   798    $ 1,517
================================================================================

Weighted average rate assumptions as of December 31 were as follows:

                                                   1999        1998       1997
--------------------------------------------------------------------------------
Discount rate ..............................      7.25%        6.75%     7.00%
Rate of compensation
    increase ...............................      5.00%        5.00%     5.50%
Expected long-term
    rate of return
    on assets ..............................      9.00%        9.00%     9.00%

      The following table sets forth the components of the change in projected
benefit obligation and fair value of plan assets during 1999 and 1998 as well as
funded status of the plans at December 31, 1999 and 1998:

                                                    December 31,    December 31,
                                                       1999            1998
--------------------------------------------------------------------------------
Accumulated benefit
   obligation at end of year ......................  $ 57,314        $ 59,451
================================================================================
Change in projected benefit obligation:
     Projected benefit obligation
       at beginning of year .......................  $ 60,352        $ 58,000
     Service cost .................................     1,152           1,134
     Interest cost ................................     3,920           3,898
      Actuarial (gain) loss .......................    (2,713)          1,629
     Benefits paid ................................    (4,430)         (4,309)
--------------------------------------------------------------------------------
Projected benefit obligation
       at the end of the year .....................  $ 58,281        $ 60,352
================================================================================
Change in plan assets:
     Fair value of plan assets
       at beginning of year .......................  $ 46,926        $ 46,405
     Actual return on assets ......................     4,823           3,100
     Employer contributions .......................     1,858           1,730
     Benefit paid .................................    (4,430)         (4,309)
--------------------------------------------------------------------------------


                                       20
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

Fair value of plan assets
     at end of year ....................................   $ 49,177    $ 46,926
================================================================================
Funded status...........................................   $ (9,104)   $(13,426)
Unrecognized transition
  amount ...............................................        (67)          9
Unrecognized prior
  service benefit ......................................     (1,736)     (1,978)
Unrecognized net
  actuarial loss .......................................      3,383       7,006
--------------------------------------------------------------------------------
Net amount
  recognized ...........................................   $ (7,524)   $ (8,389)
================================================================================
Amounts recognized in the
  financial statements consist of:
     Accrued benefit liability
        (including current amount
        of $730 and $864,
        respectively) ..................................   $ (9,754)   $(12,759)
     Intangible asset ..................................        655         746
     Deferred tax asset ................................        575       1,322
     Accumulated other
        comprehensive
        income .........................................      1,000       2,302
--------------------------------------------------------------------------------
Net amount
  recognized ...........................................   $ (7,524)   $ (8,389)
================================================================================

      For the year ended December 31, 1999, one of the plan's assets exceeded
the projected benefit obligation. At December 31, 1999 the projected benefit
obligation, accumulated benefit obligation, and assets were $31,276, $30,309 and
$31,695, respectively.

      The Company also has two 401(k) defined contribution retirement plans that
cover substantially all employees. Eligible employees may contribute up to 15%
of compensation with partially matching Company contributions. The charge to
income relating to the Company match was $1,356, $1,529 and $1,316 for the years
ended December 31, 1999, 1998 and 1997, respectively.

10. Postretirement Benefits Other Than Pensions:

      Net periodic postretirement benefits cost is as follows:

                                                        For the years ended
                                                            December 31,
                                                   -----------------------------
                                                    1999       1998       1997
--------------------------------------------------------------------------------

Service cost ..................................    $ 148      $ 139      $ 139
Interest cost .................................      480        480        505
Amortization of
    prior service benefit .....................     (409)      (409)      (409)
Amortization of
    net loss ..................................       71         60         99
--------------------------------------------------------------------------------
Net periodic benefits cost ....................    $ 290      $ 270      $ 334
================================================================================
Weighted average
    discount rate .............................     7.25%      6.75%      7.00%
================================================================================

      The change in benefit obligation and the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded in
1999 and 1998, were as follows:

                                                     December 31,  December 31,
                                                        1999          1998
--------------------------------------------------------------------------------
Change in benefit obligation:
     Benefit obligation at end of
         prior year ...............................   $  7,376      $  7,552
     Service cost
        (with interest) ...........................        148           139
     Interest cost ................................        480           480
     Actuarial gain ...............................       (346)         (256)
     Benefits paid ................................       (517)         (539)
--------------------------------------------------------------------------------
Benefit obligation at end
  of year .........................................   $  7,141      $  7,376
================================================================================
Funded status .....................................   $ (7,141)     $ (7,376)
Unrecognized net
  gain ............................................       (513)          (96)
Unrecognized prior
  service benefit .................................     (2,406)       (2,815)
--------------------------------------------------------------------------------
  Accrued postretirement
  benefit cost ....................................    (10,060)      (10,287)
  Less current portion ............................        413           415
--------------------------------------------------------------------------------
Noncurrent
     postretirement
     benefit obligations ..........................   $ (9,647)     $ (9,872)
================================================================================


                                       21
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

     The annual rate of increase in the per capita cost of covered health care
benefits was assumed to be 7.4% in 1999; the rate was assumed to decrease
gradually to 5.0% over the next 7 years and remain level thereafter. An increase
of one percentage point in the assumed health care cost trend rates for each
future year would increase the aggregate of the service and interest cost
components of net periodic postretirement benefits cost by $56 for the year
ended December 31, 1999, and would increase the accumulated postretirement
benefit obligations by $506 at December 31, 1999.

11. Income Taxes:

The provision for income taxes is comprised of the following:

                                                       For the years ended
                                                           December 31,
                                                  ------------------------------
                                                    1999       1998        1997
--------------------------------------------------------------------------------
Current:
   Federal ..................................     $  259     $2,866     $ 3,980
   State ....................................        113         45         246
Deferred:
   Federal ..................................      2,123      2,353        (213)
   State ....................................        224        399          22
--------------------------------------------------------------------------------
Provision for
   income taxes .............................     $2,719     $5,663     $ 4,035
================================================================================

      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,
                                                --------------------------------
                                                  1999        1998        1997
--------------------------------------------------------------------------------
Statutory federal
    income tax rate ........................      34.0%       34.0%       34.0%
State income taxes,
    net of federal
    benefit ................................       2.7         1.9         1.6
Goodwill ...................................       1.9         1.0         1.4
Other ......................................      (3.0)       (0.4)       (0.5)
--------------------------------------------------------------------------------
Effective tax rate .........................      35.6%       36.5%       36.5%
================================================================================

      Deferred taxes are recorded using enacted tax rates based upon differences
between financial statement and tax bases of assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. The components of the deferred tax asset and
liability relate to the following temporary differences:

                                                     December 31,  December 31,
                                                         1999         1998
--------------------------------------------------------------------------------
Deferred tax asset:
    Accounts receivable ..........................    $    941     $    949
    Unfunded pension
       liability .................................       3,303        3,895
    Environmental
       remediation and
       product-related
       reserves ..................................       6,399        8,416
    Postretirement
       benefit obligations .......................       3,926        4,053
    Other accruals ...............................       2,958        3,313
--------------------------------------------------------------------------------
Total deferred tax asset .........................      17,527       20,626
--------------------------------------------------------------------------------
Deferred tax liability:
    Depreciation and
       amortization ..............................     (12,403)     (12,279)
    Inventory ....................................      (3,756)      (3,058)
    Other ........................................      (2,615)      (3,438)
--------------------------------------------------------------------------------
Total deferred tax
    liability ....................................     (18,774)     (18,775)
--------------------------------------------------------------------------------
Net deferred tax
    (liability) asset ............................    $ (1,247)    $  1,851
================================================================================


                                       22
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

12. Supplemental Cash Flow Information:

Cash payments for interest were $8,577, $7,580 and $7,710 for the years ended
December 31, 1999, 1998 and 1997, respectively. Cash payments for income taxes
were $2,494, $3,494 and $4,964 for the years ended December 31, 1999, 1998 and
1997, respectively.

13. Related Party Transactions:

The Company and its controlling shareholder, American Biltrite Inc. ("ABI"- see
Note 17) provide certain goods and services to each other pursuant to agreements
negotiated at arm's length. The Company had the following transactions with ABI:

                                                        For the years ended
                                                             December 31,
                                                      --------------------------
                                                       1999     1998     1997
--------------------------------------------------------------------------------
Sales ......................................          $  568   $  868   $  964
Raw material
   transfers to ABI ........................           4,637    3,493    2,942
Computer service
   income ..................................              17      134      145
Material purchases
   from ABI ................................           7,306    7,079    5,269
Management fees ............................             900    1,291    1,221
================================================================================

      Amounts as of December 31, 1999 and 1998 due from an affiliate of ABI
totaled $310 and $243, respectively, and are included in accounts receivable.
Amounts as of December 31, 1999 and 1998 due to ABI and its affiliates totaled
$1,315 and $1,425, respectively, and are included in accounts payable.

14. Major Customers:

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

      Two customers accounted for 28% and 21% of the Company's net sales for the
year ended December 31, 1999, 25% and 22% for the year ended December 31, 1998,
and 23% and 19% for the year ended December 31, 1997 and accounted for 42% of
accounts receivable at December 31, 1999 and 1998.

15. 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 are not reduced by the amount of insurance recoveries. Such
estimated insurance recoveries are reflected in other noncurrent assets and are
considered probable of recovery.

      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 ("CERCLA"), as amended, and similar state laws.
In two instances, although not named as a PRP, the Company has received a
request for information. These pending proceedings currently relate to seven
disposal sites in New Jersey, Pennsylvania, Maryland, Connecticut and Delaware
in which recovery from generators of hazardous substances is sought for the cost
of


                                       23
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

cleaning up the contaminated waste sites. The Company's ultimate liability in
connection with those sites may depend 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, as a PRP, the Company can be held jointly and severally
liable for all environmental costs associated with a site.

      The most significant exposure to which the Company has been named a PRP
relates to a recycling facility site in Elkton, Maryland. Two removal actions
were substantially complete as of December 31, 1998, however, the groundwater
remediation phase has not begun and the remedial investigation/feasibility study
related to the groundwater remediation has not been approved. The PRP group
estimated that future costs of groundwater remediation would be approximately
$26 million of which, based on waste allocations amongst members of the PRP
group, Congoleum's share was estimated to be approximately 5.5%. At December 31,
1999, the Company believes its probable liability, which has been recorded in
other liabilities, based on present facts and circumstances, to be approximately
$1.5 million. A corresponding insurance receivable of $1.2 million has been
recorded in other noncurrent assets. No other PRP sites are material on an
individual basis.

      The Company also accrues remediation costs for certain of the Company's
owned facilities on an undiscounted basis. Estimated total cleanup costs,
including capital outlays and future maintenance costs for soil and groundwater
remediation are primarily based on engineering studies.

      Although there can be no assurance, the Company anticipates that these
matters will be resolved over a period of years for amounts (including legal
fees and other defense costs) which the Company believes based on current
estimates of liability and, in part, on insurance coverage, and based on advice
from counsel, will not have a material adverse effect on the financial position
of the Company.

Asbestos-Related Liabilities: The Company is one of many defendants in
approximately 670 pending claims (including workers' compensation cases)
involving approximately 6,246 individuals as of December 31, 1999, alleging
personal injury from exposure to asbestos or asbestos-containing products. There
were 657 claims at December 31, 1998 which involved approximately 1,984
individuals. Activity related to asbestos claims during the years ended December
31, 1999 and 1998 was as follows:

                                                                1999       1998
--------------------------------------------------------------------------------
Claims at Jan. 1 .........................................       657        654
New Claims ...............................................       247        203
Settlements ..............................................       (48)       (63)
Dismissals ...............................................      (186)      (137)
--------------------------------------------------------------------------------
Claims at Dec. 31 ........................................       670        657
================================================================================

      The total indemnity costs incurred, excluding the case noted below, to
settle claims during 1999 and 1998 were $2,924 and $2,160, respectively, which
were paid by the Company's insurance carriers, as were the related defense
costs. The average indemnity cost per resolved claim was $12 in 1999 and $11 in
1998, all of which costs were covered by the Company's insurance carriers. Costs
per claim vary depending on a number of factors, including the number of
plaintiffs, the nature of their alleged exposure, and the location of the claim.

      Nearly all claims allege that various diseases or health issues were
contracted as a result of exposure to asbestos in the course of activities
either as independent contractors or as employees of shipyards or other
industries utilizing asbestos-containing products (or, in the workers' compen
sation cases, as employees of the Company) and that included among such products
which allegedly caused their diseases were sheet products provided by the
Company or resilient tile provided by the Amtico Tile Division of ABI (the "Tile
Division"), or both. The Company discontinued the manufacture of
asbestos-containing sheet products in 1983, and the Tile Division ceased
manufacturing asbestos-containing tile products in 1984. In general,
asbestos-containing products have not been found to pose a health risk unless
significant amounts of free asbestos fibers become airborne. All of the asbestos
in asbestos-containing sheet and tile prod-


                                       24
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

ucts sold by the Company or the Tile Division was fully bonded or encapsulated
during the manufacturing process. The Company has issued warnings not to remove
asbestos-containing flooring by sanding or other methods that do not comply with
governmental asbestos handling standards.

      In one of the cases tried before a jury in Superior Court of California in
Los Angeles held in May and June 1997, the Company and another defendant were
found liable for $3.3 million in damages, subject to proportional liability
under California law. The Company had previously settled one count for an
immaterial amount and had gone to trial for the remaining counts. The jury found
that the Company was liable for only 25% of the plaintiff's non-economic damages
but as a result of post-verdict motions the trial judge granted plaintiff's
motion for judgment notwithstanding the verdict and held that California
Proposition 51 (establishing proportionate liability for non-economic damages)
did not apply in this case. The Company and the other defendant appealed this
decision and in August 1999 the appeal court reversed the judgment
notwithstanding the verdict and ordered the trial court to enter a judgment
against Congoleum for $818. The Company's insurance carrier has paid for the
defense costs incurred and has indicated that it would be responsible for paying
the ultimate judgment in the case, subject to certain limitations.

      At December 31, 1999, the Company has accrued approximately $4.4 million
for costs related to asbestos product liability. Estimated insurance coverage of
$0.8 million has been recorded in other noncurrent assets at December 31, 1999
and is considered probable of recovery.

      Although there can be no assurance, the Company believes, based upon the
nature of its asbestos-containing products and its experience with cases to
date, that any potential liability from pending personal injury claims relating
to the Company's asbestos-containing products will not have a material adverse
effect on the financial position of the Company.

      The total balances of environmental and asbestos-related liabilities and
the related insurance receiv ables deemed probable of recovery at

December 31 are as follows:

                                      1999                      1998
(in millions)                Liability    Receivable    Liability   Receivable
--------------------------------------------------------------------------------
Environmental
   liabilities......           $ 7.5         $ 2.0       $  9.2        $ 2.9
Asbestos product
   liability........             4.4            .8          6.9          3.3
Other...............              .8            --          1.1           --
--------------------------------------------------------------------------------
Total...............           $12.7         $ 2.8        $17.2        $ 6.2
================================================================================

Other: In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings, product liability, and other matters. In
some of these proceedings, plaintiffs may seek to recover large and sometimes
unspecified amounts and the matters may remain unresolved for several years. On
the basis of information furnished by counsel and others, the Company does not
believe that these matters, individually or in the aggregate, will have a
material adverse effect on its business or financial condition.

16. Stock Option Plans:

Under the Company's 1995 Stock Option 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 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.

      Pro forma disclosure regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1999, 1998, and 1997,
respectively: option forfeiture of 15%; risk-free interest rates of 6.61%,
4.80%, and 5.76%; no dividends; volatility fac-


                                       25
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

tors of the expected market price of the Company's common stock of .576 for
1999, .365 for 1998, and .356 for 1997; and a weighted-average expected life of
the options of 7 years. The exercise price of options outstanding at December
31, 1999 range from $7.18 to $13.00 per share.

      For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Certain
options repriced in 1998 were not fully vested and, accordingly, were subject to
a new vesting schedule. The additional pro forma compensation (along with any
existing unamortized pro forma compensation) will be amortized over the new
vesting period beginning in 1998. The Company's estimated pro forma compensation
expense from stock options for the years ended December 31, 1999, 1998, and
1997, respectively, was $684, $648, and $631. The Company's pro forma net income
for the years ended December 31, 1999, 1998, and 1997, respectively, is as
follows: 1999, $4,244 or $0.49 per share; 1998, $6,792, or $0.75 per share; and
1997, $6,110, or $0.62 per share. The initial impact on pro forma net income may
not be representative of compensation expense in future years, when the effect
of the amortization of multiple awards would be reflected in the pro forma
disclosures.

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

December 31, 1999:
--------------------------------------------------------------------------------
                                                  Shares        Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
  beginning of year ............................. 626,000          $   10.91
Options granted .................................   5,000               7.19
Options exercised ...............................      --                 --
Options forfeited ............................... (14,000)              9.00
                                                 --------
Options outstanding
  end of year ................................... 617,000          $   10.93
================================================================================
Exercisable at end of year ...................... 306,200          $   12.12
Weighted average remaining
  contractual life .............................. 7 years                 --
Stock options available
  for future issuance ........................... 181,000                 --
================================================================================

December 31, 1998:
--------------------------------------------------------------------------------
                                                  Shares        Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
  beginning of year ............................  511,900          $   13.01
Options granted* ...............................  345,000               9.00
Options exercised ..............................       --              --
Options forfeited ..............................  (22,400)             11.82
Options exchanged* ............................. (208,500)             12.82
                                                 --------
Options outstanding
  end of year ..................................  626,000          $   10.91
================================================================================
Exercisable at end of year .....................  180,000          $   13.00
Weighted average remaining
  contractual life .............................  8 years                 --
Stock options available
  for future issuance ..........................  172,000                 --
================================================================================

December 31, 1997:
--------------------------------------------------------------------------------
                                                  Shares        Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
  beginning of year ............................  484,500          $   12.89
Options granted ................................   56,000              14.25
Options exercised ..............................   (2,000)             13.00
Options forfeited ..............................  (26,600)             13.53
                                                 --------
Options outstanding
  end of year ..................................  511,900          $   13.01
================================================================================
Exercisable at end of year .....................  185,200          $   12.95
Weighted average remaining
  contractual life .............................  7 years                 --
Stock options available
  for future issuance ..........................  286,100                 --
================================================================================

* Includes 208,500 options repriced in 1998.

     The weighted average grant date fair value of options granted for the 1995
Plan in 1999, 1998 and 1997 was $4.67, $4.31 and $6.97, respectively.

     On July 1, 1999, a Directors Stock Option Plan was established, under which
non-employee directors may be granted options to purchase up to 50,000 shares of
Class A common stock. Options granted have ten-year terms and vest 6 months from
the grant date. During 1999, options to purchase 5,000 shares were granted under
the plan.


                                       26
<PAGE>

Congoleum Corporation
Notes to Financial Statements (continued)
(dollars in thousands, except per share amounts)
================================================================================

A summary of the Directors Stock Option Plan activity, and related information,
is as follows:

December 31, 1999:
--------------------------------------------------------------------------------
                                                  Shares        Weighted average
                                                                 exercise price
--------------------------------------------------------------------------------
Options outstanding
  beginning of year .............................     --                 --
Options granted .................................  5,000           $   7.19
Options exercised ...............................     --                 --
Options forfeited ...............................     --                 --
                                                   -----
Options outstanding
  end of year ...................................  5,000           $   7.19
================================================================================

The weighted average grant date fair value of options granted for the Directors
Stock Option Plan in 1999 was $3.15.

17. Stockholders' Equity:

Holders of the Class B shares are entitled to two votes per share on all matters
submitted to a vote of stockholders other than certain extraordinary matters.
The holders of the Class A shares 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 $5,000 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 $15,000. Under the
total plan, Congoleum has repurchased $13,716 of common stock through December
31, 1999. Shares of Class B stock repurchased (totaling 741,055) have been
retired. As of December 31, 1999, ABI owned 4,395,605 Class B shares that
represented 68.0% of the voting control of the Company.

18. Quarterly Financial Data (Unaudited):

The following table sets forth certain unaudited quarterly financial
information.

                                                Year ended December 31, 1999
                                           -------------------------------------
                                            First     Second    Third     Fourth
                                           Quarter   Quarter   Quarter   Quarter
--------------------------------------------------------------------------------
Net sales ..............................   $65,387   $64,306   $62,495   $53,818
Gross profit ...........................    18,193    18,688    19,160    13,406
Net income .............................       737     1,191     1,506     1,494
Net income per
  common share .........................   $   .08   $   .14   $   .17   $   .18
================================================================================

                                                Year ended December 31, 1998
                                         ---------------------------------------
                                          First     Second    Third       Fourth
                                         Quarter   Quarter   Quarter(a)  Quarter
--------------------------------------------------------------------------------
Net sales .............................. $63,875   $69,750   $68,644     $56,857
Gross profit ...........................  17,357    21,001    21,930      16,841
Net income .............................     427     2,645     1,493       2,875
Net income per
  common share ......................... $   .05   $   .29   $   .17     $   .32
================================================================================

(a) Third quarter 1998 includes a $2.4 million (after tax) charge ($0.26 per
share for the quarter ended) for an extraordinary item (see Note 5).


                                       27
<PAGE>

Congoleum Corporation
Report of Independent Auditors
================================================================================

To the Board of Directors
and Stockholders of
Congoleum Corporation:

We have audited the accompanying balance sheets of Congoleum Corporation as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
Congoleum Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as 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 financial position of Congoleum Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.


/s/ Ernst & Young, LLP

Ernst & Young, LLP
Philadelphia, Pennsylvania
February 11, 2000


                                       28
<PAGE>

Directors and Officers
================================================================================

Board of Directors

Roger S. Marcus
Chairman of the Board, President and Chief Executive Officer of Congoleum
Corporation and Chairman of the Board and Chief Executive Officer of American
Biltrite Inc.

Cyril C. Baldwin, Jr.
Chairman Emeritus of the Board of Cambrex Corporation

David N. Hurwitz
Former President and Chief Executive Officer of Goodson Newspaper Group

John N. Irwin III
Managing Director of Hillside Capital Incorporated

Mark N. Kaplan
Of Counsel, Skadden, Arps, Slate, Meagher & Flom LLP (Attorneys)

Richard G. Marcus
Vice Chairman of Congoleum Corporation and President and Chief Operating Officer
of American Biltrite Inc.

William M. Marcus
Executive Vice President and Treasurer of American Biltrite Inc.

C. Barnwell Straut
Managing Director of Hillside Capital Incorporated

Corporate Officers

Roger S. Marcus
Chairman of the Board, President and Chief Executive Officer

Richard G. Marcus
Vice Chairman

Robert N. Agate
Executive Vice President

David W. Bushar
Senior Vice President - Manufacturing

Michael L. Dumont
Senior Vice President - Sales

Howard N. Feist III
Chief Financial Officer and Secretary

Dennis P. Jarosz
Senior Vice President - Marketing

Sidharth Nayar
Senior Vice President - Finance

Peter J. Rohrbacher
Senior Vice President - Engineering

Thomas A. Sciortino
Senior Vice President - Administration

Merrill M. Smith
Senior Vice President - Technology

Corporate Information
================================================================================

Corporate Headquarters

Congoleum Corporation
3705 Quakerbridge Road
P.O. Box 3127
Mercerville, NJ  08619-0127
(609) 584-3000
Internet: www.Congoleum.com

General Counsel

Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY  10036-6710

Independent Auditors

Ernst & Young LLP
Two Commerce Square
Suite 4000
2001 Market Street
Philadelphia, PA  19103

Registrar and Transfer Agent

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(908) 497-2300

Market Information

The Company's Class A common stock is listed on the New York Stock Exchange. The
following table reflects the high and low prices (rounded to the nearest
one-sixteenth) based on New York Stock Exchange trading over the past two years.

1999                                                       High           Low
--------------------------------------------------------------------------------
First Quarter ........................................   8 15/16         6 1/2
Second Quarter .......................................     9 3/8         6 5/8
Third Quarter ........................................     7 7/8             5
Fourth Quarter .......................................   4 15/16         2 3/4

1998                                                       High           Low
--------------------------------------------------------------------------------
First Quarter ........................................    11 1/4        9 1/16
Second Quarter .......................................    10 1/2        9 1/16
Third Quarter ........................................     9 3/4             6
Fourth Quarter .......................................    9 7/16             6

      The Company does not anticipate paying any cash dividends in the
foreseeable future. Any future change in the Company's dividend policy is within
the discretion of the Board of Directors and will depend, among other things, on
the Company's earnings, debt service and capital requirements, restrictions in
financing agreements, business conditions and other factors that the Board of
Directors deem relevant. The payment of cash dividends is limited under the
terms of the Indenture relating to the Company's Senior Notes and the terms of
the Company's existing revolving credit facility, subject to the Company's
cumulative earnings and other factors.

      The number of registered and beneficial holders of the Class A common
stock on February 10, 2000 was approximately 1,000.

Annual Meeting

The 2000 Annual Meeting of the Stockholders of Congoleum Corporation will be
held on Tuesday, May 9, 2000 in the Long Lane Room, 2nd Floor, FleetBoston
Financial Corporation, 100 Federal Street, Boston, Massachusetts at 8:30 a.m.
local time.

Stockholder Information

The Company will supply any owner of common stock, upon written request to Mr.
Howard N. Feist III of the Company at the address set forth herein, and without
charge, a copy of the Annual Report on Form 10-K for the year ended December 31,
1999, which has been filed with the Securities and Exchange Commission.
<PAGE>

Exhibit 23.1 - Consent of Independent Auditors

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Congoleum Corporation of our report dated February 11, 2000 included in the
1999 Annual Report to Shareholders of Congoleum Corporation.

Our audits also included the financial statement schedule of Congoleum
Corporation for the years ended December 31, 1999, 1998 and 1997 listed in Item
14(a). This schedule is the responsibility of Congoleum Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

We also consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-97220, 333-34653 and 33-84387) pertaining to the Congoleum
Corporation 1995 Stock Option Plan and Non-Qualified, Non-Employee Directors
Stock Option Plan of this report on the financial statement schedule and our
report dated February 11, 2000, with respect to the 1999 financial statements of
Congoleum Corporation incorporated by reference in the Annual Report (Form 10-K)
for the year ended December 31, 1999.


Ernst & Young LLP
Philadelphia, Pennsylvania
March 24, 2000