UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549


FORM
10-K





x      ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
fiscal year ended December 31, 2007





OR





o      TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
transition period from __________ to ___________





Commission
File Number 1-13612





CONGOLEUM
CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





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





3500
Quakerbridge Road


P.O. Box
3127


Mercerville,
NJ  08619-0127


(Address
of Principal Executive Offices and Zip Code)





(609)
584-3000


(Registrant’s
Telephone Number, Including Area Code)





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





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











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





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





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  YES x   NO o





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





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





Large accelerated filer o   Accelerated
filer o   Non-accelerated
filer o   Smaller
reporting company x





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





As of June 29, 2007, the aggregate
market value of all shares of Class A Common Stock held by non-affiliates of the
Registrant was approximately $3.3 million based on the closing price of $0.95
per share on the American Stock Exchange.  For purposes of determining
this amount, affiliates are defined as directors and executive officers of the
Registrant, American Biltrite Inc. and Hillside Capital
Incorporated.  All of the shares of Class B Common Stock of the
Registrant are held by affiliates of the Registrant.  As of March 10,
2008, an aggregate of 3,663,390 shares of Class A Common Stock and an aggregate
of 4,608,945 shares of Class B Common Stock of the Registrant were
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of Congoleum Corporation’s Proxy Statement for the 2008 Annual Meeting of
Stockholders to be held on May 6, 2008, which will be filed with the Securities
and Exchange Commission within 120 days after December 31, 2007, are
incorporated by reference into Part III of this Annual Report on Form
10-K.


2





TABLE OF
      CONTENTS
            PagePART
      IITEM
      1.
            BUSINESS
            5ITEM
      1A.
            RISK
      FACTORS
            11ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS
            16ITEM
      2.
            PROPERTIES
            17ITEM
      3.
            LEGAL
      PROCEEDINGS
            18ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            29PART
      IIITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
            30ITEM
      6.
            SELECTED
      FINANCIAL DATA
            31ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
            31ITEM
      7A
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            42ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            43ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            83ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES
            83ITEM
      9B.
            OTHER
      INFORMATION
            84PART
      IIIITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            84ITEM
      11.
            EXECUTIVE
      COMPENSATION
            85ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            85ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            86ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            86PART
      IVITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
            87


3


Factors That May Affect
Future Results





Some of the information presented in or
incorporated by reference in this report constitutes "forward-looking
statements," within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks, uncertainties and assumptions. These statements can
be identified by the use of the words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project” and other words of similar
meaning.  In particular, these include statements relating to
intentions, beliefs or current expectations concerning, among other things,
future performance, results of operations, the outcome of contingencies such as
bankruptcy and other legal proceedings, and financial
conditions.  These statements do not relate strictly to historical or
current facts.  These forward-looking statements are based on the
expectations of Congoleum Corporation (the “Company” or “Congoleum”), as of the
date of this report, of future events, and the Company undertakes no obligation
to update any of these forward-looking statements. Although the Company believes
that these expectations are based on reasonable assumptions, within the bounds
of its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Readers are
cautioned not to place undue reliance on any forward-looking statements. Any or
all of these statements may turn out to be incorrect.  By their
nature, forward-looking statements involve risks and uncertainties because they
relate to events and depend on circumstances that may or may not occur in the
future.  Any forward-looking statement made in this report speaks only
as of the date of such statement.  It is not possible to predict or
identify all factors that could potentially cause actual results to differ
materially from expected and historical results.Factors that could cause or contribute
to the Company's actual results differing from its expectations include those
factors discussed elsewhere in this report, including in the section of this
report entitled "Risk Factors" and in the Company's other filings with the
Securities and Exchange Commission.


4


PART
I





Item
1. BUSINESS





General





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





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





Congoleum’s products serve both the
residential and commercial hard-surface flooring markets, and are used in
remodeling, manufactured housing, new construction and commercial applications.
These products, together with a limited quantity of related products purchased
for resale, are sold primarily to wholesale distributors and major retailers in
the United States and Canada.  Based upon the nature of the Company’s
operations, facilities and management structure, the Company considers its
business to constitute a single segment for financial reporting
purposes.




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




5


voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan. In April 2005, Congoleum announced that it had reached an agreement in
principle with representatives of the ACC and the FCR to make certain
modifications to its proposed plan of reorganization and related documents
governing the settlement and payment of asbestos-related claims against
Congoleum. Under the agreed-upon modifications, asbestos claimants with claims
settled under Congoleum's pre-petition settlement agreements would agree to
forbear from exercising the security interest they were granted and share on a
pari passu basis with
all other present and future asbestos claimants in insurance proceeds and other
assets of the trust to be formed upon confirmation of the plan under Section
524(g) of the Bankruptcy Code (the “Plan Trust”) to pay asbestos claims against
Congoleum.  In July 2005, Congoleum filed an amended plan of
reorganization (the “Sixth Plan”) and related documents with the Bankruptcy
Court which reflected the result of these negotiations, as well as other
technical modifications. The Bankruptcy Court approved the disclosure statement
and voting procedures and Congoleum commenced solicitation of acceptances of the
Sixth Plan in August 2005.  In September 2005, Congoleum learned that
certain asbestos claimants were unwilling to agree to forbear from exercising
their security interest as contemplated by the Sixth Plan and the Sixth Plan was
subsequently withdrawn.  In November 2005, the Bankruptcy Court denied
a request to extend Congoleum’s exclusive right to file a plan of reorganization
and solicit acceptances thereof.  In March 2006, Congoleum filed a new
amended plan of reorganization (the “Eighth Plan”).  In addition, an
insurance company, Continental Casualty Company, and its affiliate, Continental
Insurance Company (collectively, “CNA”), filed a plan of reorganization and the
Official Committee of Bondholders (the “Bondholders’ Committee”) (representing
holders of the Company’s 8 5/8% Senior Notes due August 1, 2008 (the “Senior
Notes”)) also filed a plan of reorganization. In May 2006, the Bankruptcy Court
ordered all parties in interest in Congoleum’s reorganization proceedings to
participate in global mediation discussions.  Numerous mediation
sessions took place from June through September
2006.  During  the initial mediation negotiations, Congoleum
reached an agreement in principle, subject to mutually agreeable definitive
documentation, with  the ACC, the FCR and the Company’s controlling
shareholder, American Biltrite, Inc. (“ABI”), on certain terms of an amended
plan of reorganization (the “Ninth Plan”), which Congoleum filed and proposed
jointly with the  ACC in August 2006.  CNA and the
Bondholders’ Committee jointly filed a new, competing plan in August 2006 and
each withdrew its prior plan of reorganization. Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’ Committee
reached agreement on the terms of a new amended plan (the “Tenth Plan”), which
Congoleum filed jointly with the ACC in September 2006.  Following the
Bondholders’ Committee’s withdrawal of support for CNA’s plan, CNA filed an
amended plan of reorganization (the “CNA Plan”).  In October 2006,
Congoleum and the ACC jointly filed a revised version of the Tenth Plan (the
“Eleventh Plan”) which reflected minor technical changes agreed to by the
various parties supporting Congoleum’s plan.  In October 2006, the
Bankruptcy Court held a hearing to consider the adequacy of the disclosure
statements with respect to the Tenth Plan and the CNA Plan and to hear arguments
on respective summary judgment motions as to whether the Tenth Plan and the CNA
Plan were confirmable as a matter of law.  The Bankruptcy Court
provisionally approved the disclosure statements for both the Tenth Plan and the
CNA Plan subject to the Bankruptcy Court’s ruling on the respective summary
judgment motions.  In February 2007, the Bankruptcy Court issued two
separate opinions ruling that the Tenth Plan and the CNA Plan were
not




6




confirmable
as a matter of law.  In March 2007, Congoleum resumed global plan
mediation discussions with the various parties seeking to resolve the issues
raised in the Bankruptcy Court’s ruling with respect to the Tenth Plan. In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement.  After extensive further mediation sessions, on February 5,
2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum jointly filed a
plan of reorganization (the “Joint Plan”). The Bankruptcy Court approved the
disclosure statement for the Joint Plan in February 2008, and a confirmation
hearing is scheduled for June 26, 2008.  See Notes 1 and 17 of the
Notes to Consolidated Financial Statements, which are contained in Item 8 of
this Annual Report on Form 10-K.







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





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





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





Raw
Materials





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





7


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





In
addition, the Company could incur significant increases in the costs of its raw
materials due to market conditions, energy costs, and other
factors.  Although the Company generally attempts to pass on increases
in the costs of its raw materials to its customers, the Company’s ability to do
so is, to a large extent, dependent upon the rate and magnitude of any increase,
competitive pressures and market conditions for its products.  There
have been in the past, and may be in the future, periods of time during which
increases in these costs cannot be recovered.





Patents and
Trademarks





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





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





Distribution





The
Company currently sells its products through approximately 13 distributors
providing approximately 51 distribution points in the United States and Canada,
as well as directly to a limited number of mass market retailers.  Net
sales to customers in the United States for the years ended December 31, 2007
and 2006 totaled $192.9 million and $209.8 million, respectively, with net sales
to customers outside the United States for the years ended December 31, 2007 and
2006 totaled $11.4  million and $9.6 million,
respectively.





The
Company’s sales pattern is seasonal, with peaks in retail sales typically
occurring during March/April/May and September/October.  See Note 21
of the Notes to Consolidated Financial Statements for a comparison of quarterly
operating results for the years ended December 31, 2007 and
2006.  Orders are generally shipped as soon as a truckload quantity
has been accumulated, and backorders can be canceled without
penalty.  At December 31, 2007, the backlog of unshipped orders was
$6.6 million, compared to $5.2 million at December 31, 2006.





8


The Company considers its distribution
network very important to maintaining its competitive position. Although the
Company has more than one distributor in some of its distribution territories
and actively manages its credit exposure to its distributors, the loss of a
major distributor could have a material adverse impact on the Company’s sales,
at least until a suitable replacement was in place. For the year ended December
31, 2007, two customers each accounted for over 10% of the Company’s net
sales.  These customers were its manufactured housing market
distributor, LaSalle-Bristol Corporation, and its retail market distributor,
Mohawk Industries, Inc.  Together, they accounted for approximately
66% of the Company’s net sales in 2007.





Working
Capital





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





Congoleum anticipates that its
debtor-in-possession financing facility (including anticipated extensions
thereof and any replacement facility provided in connection with exiting
bankruptcy) together with cash from operations, will provide it with sufficient
liquidity to operate during 2008 while under Chapter 11 protection and to exit
bankruptcy pursuant to the terms of the Joint Plan.  There can be no
assurances that the Company will continue to be in compliance with the required
covenants under this facility, or that the debtor-in-possession facility (as
extended) will be renewed prior to its expiration if the Joint Plan is not
confirmed and becomes effective before June 30, 2008.  For any plan of
reorganization to be confirmed, the Company will need to obtain and demonstrate
the sufficiency of exit financing.  The Company cannot presently
determine the terms of such financing, nor can there be any assurances of its
success obtaining it.





Product
Warranties





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





Competition





The
market for the Company’s products is highly competitive.  Resilient
sheet and tile compete for both residential and commercial customers primarily
with carpeting, hardwood, melamine laminate and ceramic tile.  In
residential applications, both tile and sheet products are used primarily in
kitchens, bathrooms, laundry rooms and foyers and, to a lesser extent, in
playrooms and basements.  Ceramic tile is used primarily in kitchens,
bathrooms and foyers.  Carpeting is used primarily in bedrooms, family
rooms and living rooms.  Hardwood flooring and melamine laminate are
used primarily in family rooms, foyers and
kitchens.  Commercial


9




grade
resilient flooring faces substantial competition from carpeting, ceramic tile,
rubber tile, hardwood flooring and stone in commercial
applications.  The Company believes, based upon its market research,
that purchase decisions are influenced primarily by fashion elements such as
design, color and style, durability, ease of maintenance, price and ease of
installation.  Both tile and sheet resilient flooring are easy to
replace for repair and redecoration and, in the Company’s view, have advantages
over other floor covering products in terms of both price and ease of
installation and maintenance.





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





Research and
Development





The Company’s research and development
efforts concentrate on new product development, improving product durability and
expanding technical expertise in the manufacturing
process.  Expenditures for research and development for the year ended
December 31, 2007 were $4.2 million, compared to $4.2 million for the year ended
December 31, 2006.





Environmental
Regulation





Due to the nature of the Company's
business and certain of the substances which are or have been used, produced or
discharged by the Company, the Company's operations are subject to extensive
federal, state and local laws and regulations relating to the generation,
storage, disposal, handling, emission, transportation and discharge into the
environment of hazardous substances.  Pursuant to administrative
consent orders signed in 1986 and in connection with a prior restructuring, the
Company is in the process of implementing cleanup measures at its Trenton sheet
facility under New Jersey’s Environmental Clean-up Responsibility Act, as
amended by the New Jersey Industrial Site Recovery Act.  The Company
does not anticipate that the additional costs of these measures will be
significant.  The Company also agreed to be financially responsible
for any cleanup measures required at its Trenton tile facility when that
facility was acquired in 1993.  In 2007, the Company incurred capital
expenditures of less than $80 thousand for environmental compliance and control
facilities.





The Company has historically expended
substantial amounts for compliance with existing environmental laws and
regulations, including those matters described above.  The Company
will continue to be required to expend amounts in the future for costs related
to prior activities at its facilities and third party sites and for ongoing
costs to comply with existing environmental laws, and those amounts may be
substantial. Because environmental requirements have grown increasingly strict,
the outcome of these matters could result in significant expenses or judgments
that could have a material adverse effect on the financial position of the
Company.See Item 3 of
this Annual Report on Form 10-K for certain additional information regarding
environmental
matters.


10


Employees





At
December 31, 2007, the Company employed a total of 753 employees compared to 823
employees at December 31, 2006.





The Company has entered into collective
bargaining agreements with hourly employees at its four plants and with the
drivers of the trucks that provide interplant transportation. These agreements
cover approximately 500 of the Company’s employees.  The Trenton tile
plant has a five-year collective bargaining agreement with United Steelworkers
of America – Local 547, which expires in June 2008.  The Trenton
warehouse has a five-year collective bargaining agreement with United
Steelworkers of America – Local 107L, which expires in February
2011.  The Marcus Hook plant has a five-year collective bargaining
agreement with the United Steelworkers of America – Local 12698-01, which
expires in November 2008.  The Marcus Hook plant also has a five-year
collective bargaining agreement with the Teamsters Union – Local 312, which
expires in January 2009.  The Finksburg plant negotiated its first
collective bargaining agreement and ratified this agreement in April
2007.  This is a three-year agreement with the United Steelworkers of
America – Local 9477-27, which expires in January 2010.  In the past
five years, there have been no strikes by employees of the Company and the
Company believes that its employee relations are satisfactory.








Item
1A. RISK FACTORS





The Company has significant asbestos
liability and funding exposure.





As more fully set forth in Notes 1 and
17 of the Notes to Consolidated Financial Statements, which are included in this
Annual Report on Form 10-K, the Company has significant liability and funding
exposure for asbestos claims.  The Company has entered into settlement
agreements with various asbestos claimants totaling in excess of $491
million.





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





11


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





Some additional factors that could
cause actual results to differ from the Company's goals for resolving its
asbestos liability through an amended plan of reorganization  include:
(i) the future cost and timing of estimated asbestos liabilities and payments,
(ii) the availability of insurance coverage and reimbursement from insurance
companies that underwrote the applicable insurance policies for the Company for
asbestos-related claims, (iii) the costs relating to the execution and
implementation of any plan of reorganization pursued by the Company, (iv)
timely  agreement with other creditors, or classes of creditors, that
exist or may emerge, (v) satisfaction of the conditions and obligations under
the Company's outstanding debt instruments, (vi) the response from time to time
of the lenders, customers, suppliers and other constituencies of the Company and
ABI to the ongoing process arising from the Company's strategy to settle its
asbestos liability, (vii) the Company's ability to maintain debtor-in-possession
financing sufficient to provide it with funding that may be needed during the
pendency of its Chapter 11 case and to obtain exit financing sufficient to
provide it with funding that may be needed for its operations after emerging
from the bankruptcy process, in each case, on reasonable terms, (viii) timely
creditor and court approval (including the results of any relevant appeals) of
any reorganization plan pursued by the Company and the court
overruling  any  objections  to the
Company's  reorganization plan that may be filed, (ix) costs of,
developments in and the outcome of insurance coverage litigation pending in the
State Court involving Congoleum and certain insurers, (x) compliance with the
Bankruptcy Code, including Section 524(g), and (xi) the possible adoption of
another party's plan of reorganization which may prove to be unfeasible. In any
event, if the Company is not successful in obtaining sufficient creditor and
court approval of its amended plan of reorganization, such failure would have a
material adverse effect upon its business, results of operations and financial
condition.





For further information regarding the
Company’s asbestos liability, insurance coverage and strategy to resolve its
asbestos liability, please see Notes 1 and 17 of Notes to the Consolidated
Financial Statements, which are included in this Annual Report on Form 10-K for
the fiscal year ended December 31, 2007.





12


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





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







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






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







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





Environmental
Liabilities.  Due to the nature of the Company's business and certain
of the substances which are or have been used, produced or discharged by the
Company, the Company's operations are subject to extensive federal, state and
local laws and regulations relating to the generation, storage, disposal,
handling, emission, transportation and discharge into the environment of
hazardous substances. The Company has historically expended substantial amounts
for compliance with existing environmental laws and regulations, including
environmental remediation costs at both third-party sites and Company-owned
sites.  The Company will continue to be required to expend amounts in
the future for costs related to prior activities at its facilities and third
party sites, and for ongoing costs to comply with existing environmental laws
and such amounts may be substantial. There is no certainty that these amounts
will not have a material adverse effect on its business, results of operations
and financial condition because, as a result of environmental requirements
becoming increasingly strict, the Company is unable to determine the ultimate
cost of compliance with environmental laws and enforcement
policies.  Moreover, in addition to potentially having to pay
substantial amounts for compliance, future environmental laws and regulations
may require or cause the Company to modify or curtail its operations, which
could have a material adverse
effect on the Company's business, results of operations and financial
condition.





13


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





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





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





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





In addition, the Company could incur
significant increases in the costs of its raw materials due to market
conditions, energy costs, and other factors.  Although the Company
generally attempts to pass on increases in the costs of its raw materials to its
customers, the Company’s ability to do so is, to a large extent, dependent upon
the rate and magnitude of any increase, competitive pressures and market
conditions for its products.  There have been in the past, and may be
in the future, periods of time during which increases in these costs cannot be
recovered.








14


The  Company
operates  in  a  highly competitive
flooring  industry and  some of
its competitors have  greater resources  and  broader  distribution  channels  than  the
Company.





The market for the Company's products
is highly competitive. The Company encounters competition from three other
manufacturers in North America and, to a lesser extent, foreign
manufacturers.  Some of
the Company's competitors have greater financial and other resources and access
to capital than the
Company.Furthermore, one of the Company's major competitors
has successfully confirmed a plan of reorganization under Chapter 11 of the
Bankruptcy Code. Having shed much of its pre-filing asbestos and other
liabilities, that competitor may have a competitive cost advantage over the
Company.  In addition, in order to maintain its competitive
position, the Company may need to make substantial investments in its business,
including itsproduct development, manufacturing
facilities, distribution network and sales and marketing
activities.Competitive pressures may also result in
decreased demand for the Company's products and in the loss of the Company's
market share for its products.  Moreover, due to the competitive
nature of the Company's industry, the Company may be commercially
restricted from raising or even maintaining the sales prices of its products,
which could result in the Company incurring significant operating losses if its
expenses were to increase or otherwise represent an increasedpercentage of the Company's
sales.





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





The Company is subject to the effects
of general economic conditions.  A sustained general economic slowdown
could have serious negative consequences for the Company's business, results of
operations and financial condition.  Moreover, the Company's business
is cyclical and is affected by the economic factors that affect the remodeling
and housing industries in general and the manufactured housing industry
specifically, including the availability of credit, consumer confidence, changes
in interest rates, market demand and general economic conditions.  The
Company has experienced a significant decline in sales as a result of weakness
in the housing market and general economy.  The Company may experience
further sales declines resulting from continued deterioration in the housing
market.





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





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





15


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





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





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





The Company currently sells its
products through approximately 13 distributors providing approximately 51
distribution points in the United States and Canada, as well as directly to a
limited number of mass market retailers.  The Company considers its
distribution network very important to maintaining its competitive position.
Although the Company has more than one distributor in some of its distribution
territories and actively manages its credit exposure to its distributors, the
loss of a major distributor could have a material adverse impact on the
Company's business, results of operations and financial condition. The Company
derives a significant percentage of its sales from two of its distributors,
LaSalle-Bristol Corporation and Mohawk Industries, Inc. LaSalle-Bristol
Corporation serves as the Company's manufactured housing market distributor, and
Mohawk Industries, Inc. serves as its retail market
distributor.  These two distributors accounted for
approximately  66% and 67% of the Company's net sales for the year
ended December 31, 2007 and 2006, respectively.





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





ABI owns a majority (approximately 55%
as of December 31, 2007) of the outstanding shares of the Company’s common
stock, representing a 69.4% voting interest.  As a result, ABI can
elect all of the Company’s directors and can control the vote on all matters
that require Shareholder or Board of Director approval.  In addition,
certain officers of Congoleum are officers of ABI and members of the family
group that owns a controlling interest in ABI.








Item
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.




















16


Item
2.  PROPERTIES





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





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





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





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





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





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





Productive capacity and extent of
utilization of the Company’s facilities are dependent on a number of factors,
including the size, construction, and quantity of product being manufactured,
some of which also dictate which production line(s) must be utilized to make a
given product. The Company’s major production lines were operated an average of
58% of the hours available on a five-day, three-shift basis in 2007 with the
corresponding figure for individual production lines ranging from 25% to
83%.





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





17


Item
3.  LEGAL PROCEEDINGS





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


18


hear
arguments on respective summary judgment motions as to whether the Tenth Plan
and the CNA Plan were confirmable as a matter of law.  The Bankruptcy
Court provisionally approved the disclosure statements for both the Tenth Plan
and the CNA Plan subject to the Bankruptcy Court’s ruling on the respective
summary judgment motions.  In February 2007, the Bankruptcy Court
issued two separate opinions ruling that the Tenth Plan and the CNA Plan were
not confirmable as a matter of law.  In March 2007, Congoleum resumed
global plan mediation discussions with the various parties seeking to resolve
the issues raised in the Bankruptcy Court’s ruling with respect to the Tenth
Plan. In July 2007, the FCR filed a plan of reorganization and proposed
disclosure statement.  After extensive further mediation sessions, on
February 5, 2008, the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed the Joint Plan.  The Bankruptcy Court approved the
disclosure statement for the Joint Plan in February 2008, and a confirmation
hearing is scheduled for June 26, 2008.





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





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





In anticipation of Congoleum's
commencement of the Chapter 11 cases, Congoleum entered into a settlement
agreement with approximately 79,000 asbestos personal injury claimants (the
"Claimant Agreement"), which provides for an aggregate settlement value of at
least $466 million as well as an additional number of individually negotiated
trial listed settlements with an aggregate value of approximately $25 million,
for total settlements in excess of $491 million.  As contemplated by
the Claimant Agreement, Congoleum also entered into agreements establishing a
pre-petition trust (the "Collateral Trust") to distribute funds in accordance
with the terms of the Claimant Agreement and granting the Collateral Trust a
security interest in Congoleum’s rights under its applicable insurance coverage
and payments from Congoleum’s insurers for asbestos claims.  In
December 2005, Congoleum commenced an Omnibus Avoidance Action and a Sealed
Avoidance Action (collectively, the “Avoidance Actions”) seeking to void the
security interest granted to the Collateral Trust and such settlements. In March
2006, Congoleum filed a motion for summary judgment in the
Omnibus


19


Avoidance
Action seeking to avoid the Claimant Agreement settlements and liens under
various bankruptcy theories, which motion was denied in June
2006.  Subsequently, Congoleum filed another summary judgment motion
in the Omnibus Avoidance Action seeking a determination that any security
interests conveyed in connection with the Claimant Agreement and the other
pre-petition asbestos settlement agreements were ineffective and
unenforceable.  In July 2007, the Bankruptcy Court ruled that the
security interests in insurance collateral conveyed to the settled claimants
pre-bankruptcy were ineffective and unenforceable against Congoleum’s insurance
policies or the proceeds of those policies because the attempts to create
security interests were outside the scope of the Uniform Commercial Code; nor
could such security interests be considered to be a common law
pledge.  The Bankruptcy Court therefore granted summary judgment in
Congoleum’s favor on those counts of the Omnibus Avoidance Action which sought
to void these security interests.





During the period that Congoleum
produced asbestos-containing products,  the Company purchased primary
and excess insurance policies providing in excess of $1 billion of coverage for
general and product liability claims.  These policies did not contain
asbestos exclusions. Through August 2002, substantially all asbestos-related
claims and defense costs were paid through primary insurance coverage. In August
2002, the Company received notice that its primary insurance limits had been
paid in full. The payment of limits in full by one of the primary insurance
companies was based on its contention that limits in successive policies were
not cumulative for asbestos claims and that Congoleum was limited to only one
policy limit for multiple years of coverage. Certain excess insurance carriers
claimed that the non-cumulation provisions of the primary policies were not
binding on them and that there remained an additional $13 million in primary
insurance limits plus related defense costs before their policies were
implicated. There is insurance coverage litigation currently pending in the New
Jersey State Court between Congoleum and its excess insurance carriers, and the
guaranty funds and associations for the State of New Jersey.  The
litigation was initiated in September 2001, by one of Congoleum’s excess
insurers (the “Coverage Action”).  In April 2003, the New Jersey
Supreme Court ruled in another case involving the same non-cumulation provisions
as in the Congoleum primary policies (the "Spaulding Case") that the
non-cumulation provisions are invalid under New Jersey law and that the primary
policies provide coverage for the full amount of their annual limits for all
successive policies.  Congoleum has reached a settlement agreement
(the “Liberty Settlement”) with the insurance carrier whose policies contained
the non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date.  Pursuant to the terms of
the Security Agreement, the Company is obligated to pay any insurance proceeds
it receives under the Liberty Settlement, net of any fees and expenses it may be
entitled to deduct, to the Collateral Trust or Plan Trust.  Payment of
such fees and expenses are subject to Bankruptcy Court order or
approval.  As of December 31, 2002, the Company had already entered
into settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage.  Based on these settlements, the
Company contended that, even allowing for annual limits of all primary policies,
primary coverage was exhausted and the excess policies triggered.  The
excess carriers have objected to the reasonableness of several of these
settlements,  and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in ongoing coverage litigation.


20


The excess insurance carriers have
objected to the global settlement of the asbestos claims currently pending
against Congoleum as contemplated by the Claimant Agreement on the grounds that,
among other things, the negotiations leading to the settlement and the Claimant
Agreement violate provisions in their insurance policies, including but not
limited to the carriers' right to associate in the defense of the asbestos
cases, the duty of Congoleum to cooperate with the carriers and the right of the
carriers to consent to any settlement.  The excess insurance carriers
also contend the settlement terms in the Claimant Agreement are not fair or
reasonable and/or that the Claimant Agreement was not negotiated at arm’s length
or in good faith.  Additionally, certain insurers have argued that
Congoleum’s entering into the Claimant Agreement voids the insurance for the
underlying claims in their entirety.  Certain insurers also have
claimed that the Claimant Agreement voids their entire policy obligations.
Congoleum has disputed the allegations and contentions of the excess insurance
carriers. In November 2003, the State Court denied a motion for summary judgment
by the excess insurance carriers that the Claimant Agreement was not fair,
reasonable or in good faith, ruling that material facts concerning these issues
were in dispute.  In April 2004, the State Court denied motions for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent.  Congoleum has argued, among
other things, that it was entitled to enter into the Claimant Agreement and/or
the Claimant Agreement was binding on the excess insurance carriers because they
were in breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and / or the
Claimant Agreement was fair, reasonable and in good faith and/or there was and
is no prejudice to the excess insurance carriers from the Claimant Agreement
and/or the excess insurance carriers had breached their duties of good faith and
fair dealing.





In March
2004, the Bankruptcy Court approved the retention of Gilbert, Heintz &
Randolph LLP (“GHR”) as special insurance counsel to the Company.  An
insurance company appealed the retention order.





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





In
February 2005, the State Court ruled on a series of summary judgment motions
filed by various insurers.  The State Court denied a motion for
summary judgment filed by certain insurers, holding that there were disputed
issues of fact regarding whether the Claimant Agreement and other settlement
agreements between Congoleum and the claimants had released Congoleum and the
insurers from any liability for the asbestos bodily injury claims of the
claimants who signed the Claimant Agreement and the other settlement
agreements.





The State
Court also denied another motion for summary judgment filed by various insurers
who argued that they did not have to cover the liability arising from the
Claimant Agreement because they had not consented to it.





21


The State
Court granted summary judgment regarding Congoleum’s bad faith claims against
excess insurers (other than first-layer excess insurers), holding that the
refusal of these excess insurers to cover the Claimant Agreement was at least
fairly debatable and therefore not in bad faith.





In March
2005, the Company filed a motion in the Bankruptcy Court asking the Bankruptcy
Court to vacate its prior order lifting the automatic stay in bankruptcy to
permit the Coverage Action to proceed.  The Company requested that the
Coverage Action proceedings be stayed until the Company has completed its plan
confirmation process in the Bankruptcy Court.  A hearing on the
Company’s motion was held in April 2005 and the motion was denied.





The first phase of the Coverage Action
began in August 2005.  Phase 1 was limited to deciding whether the
insurers are obligated to provide coverage under the policies at issue in this
litigation for the asbestos claims settled under the terms of the global
Claimant Agreement.  Three months into the trial, in October 2005, a
federal appeals court ruled that GHR, which had been acting as the Company’s
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum.  As a result of
this ruling, with Bankruptcy Court approval, Congoleum retained the firm of
Covington & Burling to represent it as co-counsel with Dughi & Hewit in
the insurance coverage litigation and insurance settlement matters previously
handled by GHR.





In the middle of Congoleum presenting
its case, in or about mid-November 2005 and  early December 2005,
certain insurers filed motions for summary judgment on the grounds, inter alia, that the federal
appeals court decision regarding GHR, and/or Congoleum’s filing of the Avoidance
Actions in the Bankruptcy Court, entitled them to judgment as a matter of law on
the Phase 1 issues.  Congoleum opposed the motions.  The
motions were argued in January 2006, and in March 2006 the State Court denied
the motions for summary judgment.





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





























22


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





In
September 2007, Congoleum filed the Third Amended Complaint in the Omnibus
Adversary Proceeding adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending.  In October 2007, Congoleum filed a motion for summary
judgment in the Omnibus Adversary Proceeding seeking a ruling that all of the
pre-petition settlement agreements, including the Claimant Agreement, were null
and void or should be rescinded.  Argument on the summary judgment
motion was heard in November 2007 and by opinion dated December 28, 2007, the
Bankruptcy Court denied the motion for summary judgment.  Congoleum
and the Bondholders' Committee have filed notice of appeal from this decision to
the District Court.





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





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






23


As a result of the Federal appeals
court decision on GHR's retention, in February 2006, the Bankruptcy Court
ordered GHR to disgorge all fees and certain expenses it was paid by
Congoleum.  The amount of the disgorgement is approximately $9.6
million.  In October 2006, Congoleum and GHR entered into a settlement
agreement (the “GHR Settlement”) under which GHR is to pay Congoleum
approximately $9.2 million plus accruing interest in full satisfaction of the
disgorgement order.  The payment is secured by assets of GHR and is to
be made over time according to a formula based on GHR’s earnings.  The
Bankruptcy Court approved the GHR Settlement in April 2007.  Payments
received pursuant to the GHR Settlement in 2007 were not
significant.  By correspondence dated March 27, 2008, GHR notified
Congoleum of its intention to pay all sums outstanding under the GHR Settlement
in full.  GHR requested a payoff amount for an April 1, 2008 payment
date.





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





In May
2005, certain AIG companies agreed to pay approximately $103 million over ten
years to the Plan Trust.  This settlement resolves coverage
obligations of policies with a total of $114 million in liability limits for
asbestos bodily injury claims. Payment is subject to various conditions,
including without limitation, the effectiveness of a plan of reorganization that
provides AIG with certain specified relief including a channeling injunction
pursuant to Section 524(g) of the Bankruptcy Code.  An insurer
appealed the approval order granted by the Bankruptcy Court to the District
Court.  The District Court, however, entered an order in September
2006 that administratively terminated the appeal.  The AIG settlement
provided that any party may declare that the settlement agreement is null and
void if the Confirmation Order failed to become a final order by May 12,
2007.  In June 2007, Congoleum and AIG executed a letter agreement
providing that the parties would provide 45 days’ advance notice of their intent
to terminate the AIG settlement.  To date, neither party has given
notice of an intent to terminate the agreement.  At this time, it is
not known whether AIG will seek to terminate the settlement
agreement.





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






24


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





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





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





In April 2006, Congoleum entered into a
settlement agreement with Travelers Casualty and Surety Company and St. Paul
Fire and Marine Insurance Company (collectively, “Travelers”).  Under
the terms of this settlement, Travelers will pay $25 million in two installments
over thirteen months to the Plan Trust once a plan of reorganization with the
Section 524(g) protection specified in the settlement agreement goes effective
and the Bankruptcy Court approves the transfer of the funds.  The FCR
sought, and was granted, limited discovery with respect to the Travelers
settlement to which the FCR has objected.  A hearing to consider
approval of the Travelers settlement was held in April 2007, and in May 2007,
the Bankruptcy Court issued a decision denying approval of the Travelers
settlement, and Congoleum and Travelers  appealed that decision to the
District Court.  Travelers has taken the position that the filing of
the Joint Plan in February 2008 constitutes the failure of a condition precedent
to the


25


effectiveness
of the settlement agreement.  By letter agreement dated March 18,
2008, Travelers, ABI and Congoleum extended the time for Travelers to exercise
its right to waive the putative failure of the contingency allegedly caused by
the filing of the Joint Plan to April 29, 2008.  On March 25, 2008,
the District Court issued a decision remanding the case to the Bankruptcy Court
for further consideration of the Travelers Settlement.





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





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





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





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





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




26


Based on the Joint Plan, Congoleum has
made provision in its financial statements for the minimum estimated cost to
effect its plan to settle asbestos liabilities through confirmation of a plan
that complies with section 524(g) of the Bankruptcy Code. Congoleum recorded
charges aggregating approximately $51.3 million in prior years.  Based
on the terms of the Joint Plan, in the fourth quarter of 2007 Congoleum recorded
an additional $41.3 million charge.  Of this charge, $14.9 million
related to the write-off of certain insurance litigation costs receivable that
will not be collected under the terms of the Joint Plan and $26.4 million was an
additional provision for estimated costs for the reorganization proceedings and
coverage litigation.  In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Joint Plan, the
Senior Noteholders will not receive any post-petition interest.





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





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





The most significant exposure for which
the Company has been named a PRP relates to a recycling facility site in Elkton,
Maryland (the “Galaxy/Spectron Superfund Site”). The PRP group at this site is
made up of 81 companies, substantially all of which are large financially
solvent entities.  Two removal actions were substantially complete as
of December 31, 1998 and a groundwater treatment system was installed
thereafter.  The Environmental Protection Agency (“EPA”) has selected
a remedy for the soil and shallow groundwater (“Operable Unit 1” or OU-1);
however, the remedial investigation/feasibility study related to the deep
groundwater (OU-2) has not been completed.  The PRP group, of which
the Company is a part, has entered into a Consent Decree to perform the remedy
for OU-1 and resolve natural resource damage claims. The Consent Decree also
requires the PRPs to perform the OU-2 remedy, assuming that the estimated cost
of the remedy is not more than $10 million.  If the estimated cost of
the OU-2


27


remedy is
more than $10 million, the PRPs may decline to perform it or they may elect to
perform anyway. Cost estimates for the OU-1 and OU-2 work combined (including
natural resource damages) range between $22 million and $34 million, with the
Company’s share ranging between approximately $1.0 million and $1.6
million.  This assumes that all parties participate and that none
cash-out and pay a premium; those two factors may account for some fluctuation
in the Company’s share. Fifty percent (50%) of Congoleum’s share of the costs is
presently being paid by one of its insurance carriers, Liberty Mutual Insurance
Company, whose remaining policy limits for this claim are expected to cover
approximately $0.3 million in additional costs.  Congoleum expects to
fund the balance to the extent further insurance coverage is not
available.





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





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





The Company anticipates that these
matters will be resolved over a period of years and that after application of
expected insurance recoveries, funding the costs will not have a material
adverse impact on the Company’s liquidity or financial position. However,
unfavorable developments in these matters could result in significant expenses
or judgments that could have a material adverse effect on the financial position
of the Company.





Other:  In the ordinary
course of its business, the Company becomes involved in lawsuits, administrative
proceedings, product liability claims (in addition to asbestos-related claims),
and other matters.  In some of these proceedings, plaintiffs may seek
to recover large and sometimes unspecified amounts and the matters may remain
unresolved for several years.





28


The total balances of environmental,
asbestos-related, and other liabilities and the related insurance receivable and
deemed probable of recovery at December 31, 2007 and December 31, 2006 are as
follows:





2007
            
            
            2006(in
      millions)
            
            Liability
            
            
            Receivable
            
            
            Liability
            
            
            ReceivableEnvironmental
      liabilities
            
            $
            4.4
            
            
            $
            2.1
            
            
            $
            4.4
            
            
            $
            2.2Asbestos
      product liability(1)
            
            
            31.2
            
            
            
            10.5
            
            
            
            13.9
            
            
            
            21.8Other
            
            
            0.9
            
            
            
            0.1
            
            
            
            1.0
            
            
            
            0.2Total
            
            $
            36.5
            
            
            $
            12.7
            
            
            $
            19.3
            
            
            $
            24.2





(1)
            Asbestos
      product liability at December 31, 2007 and 2006 reflects the accrued cost
      to settle asbestos liabilities through a plan of reorganization under
      Chapter 11.  This liability at December 31, 2006 and 2007
      includes $6.1 million and $6.5 million, respectively, received in
      connection with an insurance settlement (recorded as restricted cash),
      which the Company is required to contribute to a trust.  Stated
      liability pursuant to settlement agreements is in excess of $491
      million.  See Note 17 of the Notes to Consolidated Financial
      Statements contained in Item 8 of this Annual Report on Form
      10-K.








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





None.








29


PART
II





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





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





The
Company’s Class A common stock is not listed on any securities exchange or on an
automated dealer quotation system.  During 2007 and 2006, the stock
was listed on the Amex under the symbol CGM.  The Company’s Class A
common stock was delisted by the Amex on February 19, 2008 because it did not
meet Amex listing standards for share value, share price, and aggregate market
capitalization.





The
following table reflects the high and low prices of the Company’s Class A Common
Stock (rounded to the nearest one-hundredth) based on American Stock Exchange
trading over the past two years.





Sales
Prices of Class A Common Stock:


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





Sales
Prices of Class A Common Stock:


2006
            
            High
            
            
            LowFirst
      Quarter
            
            $
            3.08
            
            
            $
            1.47Second
      Quarter
            
            
            2.36
            
            
            
            1.94Third
      Quarter
            
            
            2.25
            
            
            
            1.87Fourth
      Quarter
            
            
            2.24
            
            
            
            1.49








30


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





The Company has not paid any cash
dividends in 2007 or 2006 and does not anticipate paying any cash dividends
prior to confirmation of a plan of reorganization or in the foreseeable future
thereafter.  The Company’s current debtor-in-possession credit
facility prohibits payment of cash dividends.  Any change in the
Company's dividend policy after confirmation of a plan of reorganization will be
within the discretion of the Board of Directors, subject to restrictions
contained in the Company's plan of reorganization and debt or other agreements,
and will depend, among other things, on the Company's solvency, earnings, debt
service and capital requirements, restrictions in financing agreements, business
conditions and other factors that the Board of Directors deems
relevant.




The number of registered and beneficial
holders of the Company’s Class A common stock on March 10, 2008 was
approximately 1,000.  The number of registered and beneficial holders
of the Company’s Class B common stock on March 10, 2008 was two.








Item
6.   SELECTED FINANCIAL DATA





Not applicable.








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




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





Results of
Operations





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





31


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





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


32


withdrawal
of support for CNA’s plan, CNA filed the CNA Plan.  In October 2006,
Congoleum and the ACC jointly filed the Eleventh Plan, a revised version of the
Tenth Plan which reflected minor technical changes agreed to by the various
parties supporting Congoleum’s plan.  In October 2006, the Bankruptcy
Court held a hearing to consider the adequacy of the disclosure statements with
respect to the Tenth Plan and the CNA Plan and to hear arguments on respective
summary judgment motions as to whether the Tenth Plan and the CNA Plan were
confirmable as a matter of law.  The Bankruptcy Court provisionally
approved the disclosure statements for both the Tenth Plan and the CNA Plan
subject to the Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure statement.
After extensive further mediation sessions, on February 5, 2008 the FCR, the
ACC, the Bondholders’ Committee and Congoleum jointly filed the Joint
Plan.  The Bankruptcy Court approved the disclosure statement for the
Joint Plan in February 2008, and a confirmation hearing is scheduled for June
26, 2008.





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





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





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491 million.  As
contemplated by the Claimant Agreement, Congoleum also entered into agreements
establishing the Collateral Trust to distribute funds in accordance with the
terms of the Claimant Agreement and granting the Collateral Trust a security
interest in Congoleum’s rights under its applicable insurance coverage and
payments from Congoleum’s insurers for


33


asbestos
claims.  In December 2005, Congoleum commenced the Avoidance Actions
seeking to void the security interest granted to the Collateral Trust and such
pre-petition settlements.  Following summary judgment hearings, the
Bankruptcy Court has rendered decisions that the grant of the security interest
was not valid but denying motions to avoid the settlements; certain of these
decisions are under appeal.  The terms of the Joint Plan provide for a
settlement of litigation related to the Avoidance Actions.  However,
at this time, it is not possible to estimate how that settlement may affect the
nominal liability.  In addition, as a result of tabulating ballots on
the Fourth Plan, the Company is also aware of claims by claimants whose claims
were not determined under the Claimant Agreement but who have submitted claims
with a value of approximately $512 million based on the settlement values
applicable in the Sixth Plan.  It is also likely that additional new
claims will be asserted in connection with solicitation of acceptances of the
Joint Plan.  Congoleum does not believe it can reasonably estimate the
liability associated with claims that may be pending.





Based on
the Joint Plan, Congoleum has made provision in its financial statements for the
minimum estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years.  Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge.  Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that will not be collected under the terms of the Joint Plan
and $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and coverage litigation.  In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes.  Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest.  Under the terms of the Joint
Plan, the Senior Noteholders will not receive any post-petition
interest.





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





For more
information regarding the Company’s asbestos liability and plan for resolving
that liability, please refer to Notes 1 and 17 of the Notes to Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form
10-K.  In addition, please refer to “Risk Factors – The Company has
significant asbestos liability and funding exposure," contained in Item 1A of
this Annual Report on Form 10-K for a discussion of certain factors that could
cause actual results to differ from the Company’s goals for resolving its
asbestos liability through a plan of reorganization.  Readers should
also refer to the Disclosure Statement with respect to the Joint Plan of
Reorganization under Chapter 11 of the Bankruptcy Code of the Futures
Representative, the Debtors, the Official Asbestos Claimants’ Committee and the
Official Committee of Bondholders for Congoleum Corporation, et al., dated as of
February 5, 2008, a copy of which has been filed as an exhibit to this Annual
Report on Form 10-K.


34


Year
ended December 31, 2007 as compared to year ended December 31, 2006





2007
            
            
            
            
            
            2006(In
      thousands of dollars)Net
      sales
            
            $
            204,262
            
            
            
            
            
            $
            219,474Cost
      of sales
            
            
            153,809
            
            
            
            
            
            
            169,023Gross
      profit
            
            
            50,453
            
            
            
            24.7
            %
            
            
            50,451
            
            
            
            23.0
            %Selling,
      general & administrative expenses
            
            
            37,469
            
            
            
            18.3
            %
            
            
            39,906
            
            
            
            18.2
            %Asbestos-related
      reorganization charges
            
            
            41,315
            
            
            
            
            
            
            
            —Operating
      (loss) income
            
            
            (28,331
            )
            
            
            
            
            
            
            10,545Bond
      interest (reversal) expense
            
            
            29,603
            
            
            
            
            
            
            
            (10,612
            )Interest
      income (expense), net
            
            
            197
            
            
            
            
            
            
            
            (260
            )Other
      (expense) income, net
            
            
            (447
            )
            
            
            
            
            
            
            162Income
      (loss) before taxes
            
            
            1,022
            
            
            
            
            
            
            
            (165
            )Provision
      for (benefit from) income taxes
            
            
            1,713
            
            
            
            
            
            
            
            (844
            )Net
      (loss) income
            
            $
            (691
            )
            
            
            
            
            
            $
            679





Net sales
for the year ended December 31, 2007 totaled $204.3 million as compared to
$219.5 million for the year ended December 31, 2006, a decrease of $15.2 million
or 6.9%. The decrease in sales was primarily attributable to declines in new
home construction, softness in the remodeling market and lower production of
homes in the manufactured housing segment. The impact of these sales decreases
was partially mitigated by continued sales growth in the Duraproduct category
and the impact of price increases instituted in mid-2007.





Gross
profit for the year ended December 31, 2007 totaled $50.5 million, or 24.7% of
net sales, compared to $50.5 million or 23.0% of net sales for the year ended
December 31, 2006. Gross profit for the year was essentially the same year over
year, as raw material costs and the unfavorable impact of unabsorbed
manufacturing overhead due to lower volumes were offset by price increases and
manufacturing cost reduction programs.





Selling,
general and administrative expenses were $37.5 million for the year ended
December 31, 2007 as compared to $39.9 million for the year ended December 31,
2006, a decrease of $2.4 million. The decrease in selling, general and
administrative expenses reflects cost reduction programs, including headcount
reductions, instituted in early 2007.  As a percent of net sales,
selling, general and administrative expenses were 18.3% and 18.2% for the years
ended December 31, 2007 and 2006, respectively.  In August 2006, an
explosion caused extensive damage to components of a major production line at
Congoleum's Marcus Hook facility.  By implementing a seven-day
operation on its other production line and purchasing base material from a
competitor, Congoleum was able to meet substantially all production
requirements.  Congoleum’s insurance carrier paid substantially all
excess costs (beyond a deductible) for replacing the damaged equipment and
expenses to replace production capacity.  Fabrication and installation
of replacement equipment was completed by December 31, 2006.  The line
was operational by January 2007.  The


35


cost to
replace equipment and excess expenses incurred to meet production requirements
totaled $10.1 million which was reimbursed to Congoleum by the
insurer.  Congoleum recognized a $1.3 million gain to recognize the
difference between insurance proceeds for the replacement of fixed assets and
their respective book value, which was included in selling, general and
administrative expenses.





Based on
the terms of the Joint Plan, in the fourth quarter of 2007 Congoleum recorded an
additional $41.3 million charge.  Of this charge, $14.9 million
related to the write-off of certain insurance litigation costs receivable that
will not be collected under the terms of the Joint Plan and $26.4 million was an
additional provision for estimated costs for the reorganization proceedings and
coverage litigation.  In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes.





Income from operations, excluding the
one-time charge above, was $13.0 million for the year ended December 31, 2007
compared to $10.5 million for the year ended December 31, 2006, an increase of
$2.4 million. This increase in operating income primarily reflects the reduction
in operating expenses.  Operating income for the year ended December
31, 2006 included a $1.3 million gain, included in selling, general and
administrative expenses, on the replacement of a damaged production line that
was covered by insurance.





Interest income was $1.2 million and
$0.5 million in 2007 and 2006, respectively, with the increase of $0.7 million
versus the prior year reflecting interest earned on federal income tax refunds
and  higher cash balances.  Interest expense, excluding
interest on the Senior Notes, for 2007, was $1.0 million as compared to interest
expense of $0.8 million for 2006.  Bond interest reversal on the
Senior Notes in 2007 was $29.6 million as compared to interest expense on the
Senior Notes in 2006 of $10.6 million.





Provision for income taxes was $1.7
million in 2007 and a benefit of $0.8 million in 2006, reflecting an increase in
non-deductible expenses for tax purposes for 2007.





Liquidity and Capital
Resources





The
Consolidated Financial Statements of the Company have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.  Accordingly, the
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going
concern.  As described more fully in the Notes to Consolidated
Financial Statements contained in Item 8 of this Annual Report on Form 10-K,
there is substantial doubt about the Company's ability to continue as a going
concern unless it obtains relief from its substantial asbestos liabilities
through a successful reorganization under Chapter 11 of the Bankruptcy
Code.








36


On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under the Bankruptcy
Code.  See Notes 1 and 17 of the Notes to the Consolidated Financial
Statements, which are contained in Item 8 of this Annual Report on Form 10-K,
for a discussion of the Company’s bankruptcy proceedings.  These
matters continue to have a material adverse impact on liquidity and capital
resources.  During 2007, the Company paid $13.1 million in fees and
expenses related to reorganization proceedings under Chapter 11 and litigation
with certain insurance companies.  The Company expects to spend an
additional $24.7 million in 2008 on these matters. At December 31, 2007 the
Company had incurred but not paid approximately $9 million in additional fees
and expenses for services rendered through that date.





Based on
the Joint Plan, Congoleum has made provision in its financial statements for the
minimum estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years.  Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge.  Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that will not be collected under the terms of the Joint Plan
and $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and coverage litigation.  In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes.  Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest.  Under the terms of the Joint
Plan, the Senior Noteholders will not receive any post-petition
interest.





In
February 2006, the Bankruptcy Court ordered GHR to disgorge all fees and certain
expenses it was paid by Congoleum.  The amount of the disgorgement is
approximately $9.6 million.  In October 2006, Congoleum and GHR
entered into the GHR Settlement under which GHR is to pay Congoleum
approximately $9.2 million plus accruing interest in full satisfaction of the
disgorgement order.  The payment is secured by assets of GHR and is to
be made over time according to a formula based on GHR’s earnings.  The
Bankruptcy Court approved the GHR Settlement in April 2007.  Payments
received pursuant to the GHR Settlement in 2007 were not significant. By
correspondence dated March 27, 2008, GHR notified Congoleum of its intention to
pay all sums outstanding under the GHR Settlement in full.  GHR
requested a payoff amount for an April 1, 2008 payment date.





Unrestricted cash and cash equivalents,
including short-term investments at December 31, 2007, were $26.3 million, an
increase of $7.7 million from December 31, 2006.  Under the terms of
its revolving credit agreement, payments on the Company’s accounts receivable
are deposited in an account assigned by the Company to its lender and the funds
in that account are used by the lender to pay down any loan
balance.  Funds deposited in this account but not yet applied to the
loan balance, which amounted to $0.0 million and $3.6 million at December 31,
2007 and December 31, 2006, respectively, are recorded as restricted
cash.  Additionally, $6.5 million remaining from a $14.5 million
settlement received in August 2004 from an insurance carrier, which is subject
to a court order, is included as restricted cash at December 31,
2007.  The Company expects to contribute these funds, less any amounts
withheld pursuant to reimbursement arrangements, to the Plan
Trust.  Working capital was $9.4 million at December 31, 2007, down
from $11.5 million one year earlier.  The ratio of current assets to
current


37


liabilities
was 1.1 to 1.0 at December 31, 2007 and December 31, 2006,
respectively.  Net cash provided by operations during the year ended
December 31, 2007 was $11.3 million, as compared to net cash used in operations
of $8.2 million during the year ended December 31, 2006.





Capital expenditures in 2007 totaled
$4.5 million.  The Company is currently planning capital expenditures
of approximately $6.5 million in 2008 and between $5 million and $7 million in
2009, primarily for maintenance and improvement of plants and equipment, which
it expects to fund with cash from operations and credit facilities.





In January 2004, the Bankruptcy Court
authorized entry of a final order approving Congoleum’s debtor-in-possession
financing, which replaced its pre-petition credit facility on substantially
similar terms.  The debtor-in-possession financing agreement (as
amended and approved by the Bankruptcy Court to date) provides a revolving
credit facility expiring on (i) the earlier of June 30, 2008 and (ii) the date
the plan of reorganization in Congoleum's bankruptcy cases as confirmed by the
Bankruptcy Court becomes effective.  Total borrowing under the
facility may not exceed $30 million.  Interest is based on 0.25% above
the prime rate.  This financing agreement contains certain covenants,
which include the maintenance of minimum earnings before interest, taxes,
depreciation and amortization (“EBITDA”).  It also includes
restrictions on the incurrence of additional debt and limitations on capital
expenditures.  The covenants and conditions under this financing
agreement must be met in order for the Company to borrow from the facility. The
Company was in compliance with these covenants at December 31, 2007. Borrowings
under this facility are collateralized by inventory and
receivables.  At December 31, 2007, based on the level of receivables
and inventory, $14.2 million was available under the facility, of which $2.2
million was utilized for outstanding letters of credit and $10.5 million was
utilized by the revolving loan.  The Company anticipates that its
debtor-in-possession financing facility (including anticipated extensions
thereof) together with cash from operations will provide it with sufficient
liquidity to operate during 2008 while under Chapter 11 protection.  There
can be no assurances that the Company will continue to be in compliance with the
required covenants under this facility or that the debtor-in-possession facility
(as extended) will be renewed prior to its expiration if a plan of
reorganization is not confirmed before that time.  For a plan of
reorganization to be confirmed, the Company will need to obtain and demonstrate
the sufficiency of exit financing.  The Company cannot presently determine
the terms of such financing, nor can there be any assurances of its success
obtaining it.





In addition to the provision for
asbestos litigation discussed previously, the Company has also recorded what it
believes are adequate provisions for environmental remediation and
product-related liabilities (other than asbestos-related claims), including
provisions for testing for potential remediation of conditions at its own
facilities. The Company is subject to federal, state and local environmental
laws and regulations and certain legal and administrative claims are pending or
have been asserted against the Company.  Among these claims, the
Company is a named party in several actions associated with waste disposal sites
(more fully discussed in Note 16 to the Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K). These actions include
possible obligations to remove or mitigate the effects on the environment of
wastes deposited at various sites, including Superfund sites and certain of the
Company’s owned and previously owned facilities.  The contingencies
also include claims for


38


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





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





The Company's principal sources of
capital are net cash provided by operating activities and borrowings under its
financing agreement. The Company believes that its existing cash (including
restricted cash), cash generated from operations, and debtor-in-possession
credit arrangements should be sufficient to provide adequate working capital for
operations during 2008.  Congoleum’s ability to emerge from Chapter 11
will depend on obtaining sufficient exit financing to settle administrative
expenses of the reorganization and any other related obligations, and to provide
adequate future liquidity.





Critical Accounting
Policies





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





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











39


Asbestos Liabilities - As
discussed in Notes 1 and 17 in the Notes to Consolidated Financial Statements
contained in Item 8 of this Annual Report on Form 10-K, the Company is a party
to a significant number of lawsuits stemming from its manufacture of
asbestos-containing products.  During 2007, the Company paid $13.0
million in fees and expenses related to implementation of its planned
reorganization under Chapter 11 of the Bankruptcy Code and litigation with
certain insurance companies.  Based on the Joint Plan, Congoleum has
made provision in its financial statements for the minimum estimated cost to
effect its plan to settle asbestos liabilities through confirmation of a plan
that complies with section 524(g) of the Bankruptcy Code. Congoleum recorded
charges aggregating approximately $51.3 million in prior years.  Based
on the terms of the Joint Plan, in the fourth quarter of 2007 Congoleum recorded
an additional $41.3 million charge.  Of this charge, $14.9 million
related to the write-off of certain insurance litigation costs receivable that
will not be collected under the terms of the Joint Plan and $26.4 million was an
additional provision for estimated costs for the reorganization proceedings and
coverage litigation.  In the fourth quarter of 2007 Congoleum also
recorded a $41.0 million interest expense credit to reverse post-petition
interest accrued on its Senior Notes.  Terms of previous
reorganization plans had provided, among other things, for the payment of
post-petition interest on the Senior Notes and therefore Congoleum had continued
to accrue such interest.  Under the terms of the Joint Plan, the
Senior Noteholders will not receive any post-petition interest.





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491
million.  Participants in the Claimant Agreement signed releases
limiting their recourse against Congoleum to what they would receive from the
Plan Trust and Congoleum has therefore estimated its liability under the
Claimant Agreement as the cost of effecting the settlement through confirmation
of a plan of reorganization.  In addition, as a result of tabulating
ballots on the Fourth Plan, the Company is also aware of claims by claimants
whose claims were not determined under the Claimant Agreement but who have
submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.  It is also likely
that additional new claims will be asserted in connection with solicitation of
acceptances of the Joint Plan.  Congoleum does not believe it can
reasonably estimate the liability associated with claims that may be
pending.





The
Company expects that insurance will provide the substantial majority of the
recovery available to claimants, due to the amount of insurance coverage it
purchased and the comparatively limited resources and value of the Company
itself.  The Company does not have the necessary financial resources
to litigate and/or settle asbestos claims in the ordinary course of
business.





While the
Company has provided for the anticipated costs to effect the Joint Plan, costs
for pursuing and implementing the Joint Plan and any plan of reorganization
could be materially higher than recorded amounts and previous
estimates.





40


The Company will update its estimates,
if appropriate, as additional information becomes available during the
reorganization process, which could result in potentially material adjustments
to the Company’s earnings in future periods.





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





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





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





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





The most significant element in
determining the Company’s pension income or expense in accordance with SFAS No.
87 is the expected return on plan assets.  For 2007, the Company has
assumed that the expected long-term rate of return on plan assets will be
7.0%.  The assumed long-term rate of return on assets is applied to
the value of plan assets, which produces the expected return on plan assets that
is included in determining pension expense.  The difference between
this expected return and the actual return on plan assets is
deferred.  The net deferral of past actuarial gains or losses ($22.1million loss and
$22.7million loss at December 31,
2007and 2006,respectively) will
ultimately be recognized as an adjustment to future pension
expense.





41


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS No. 158”), which amends SFAS No. 87, “Employers'
Accounting for Pensions”, SFAS No. 88, “Employers’ Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions” ("SFAS No. 106"), and SFAS No. 132R, “Employers’ Disclosures about
Pensions and Other Postretirement Benefits” (revised 2003).  SFAS No.
158 requires companies to recognize an asset or liability for the overfunded or
underfunded status of their benefit plans in their financial
statements.  SFAS No. 158 also requires the measurement date for plan
assets and liabilities to coincide with the sponsor’s year end.  This
standard provides two transition alternatives related to the change in
measurement date provisions.  The recognition of an asset and
liability related to the funded status provision is effective for fiscal years
ending after December 15, 2006, and the change in measurement date provisions is
effective for fiscal years ending after December 15, 2008.  See Note
11 of the Notes to Consolidated Financial Statements, which are contained in
Item 8 of this Annual Report on Form 10-K.





At the
end of each year, the Company determines the discount rate to be used to
calculate the present value of plan liabilities.  The discount rate is
an estimate of the current interest rate at which the pension liabilities could
be effectively settled at the end of the year.  In estimating this
rate, the Company looks to rates of return on high-quality, fixed-income
investments that receive one of the two highest ratings given by a recognized
ratings agency.  At December 31, 2007, the Company determined this
rate to be 6.0%.





The Company accounts for its
post-retirement benefits other than pensions in accordance with SFAS No. 106,
which requires that amounts recognized in financial statements be determined on
an actuarial basis.  These amounts are projected based on the January
1, 2005 SFAS No. 106 valuation and the 2006 year-end disclosure assumptions,
including a discount rate of 6.0% and health care cost trend rates of 8.5% in
2007 reducing to an ultimate rate of 5% in
2012.








Item
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.





42




Item 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA




Consolidated
Balance Sheets


(dollars
in thousands, except per share amounts)





December
      31,
            
            
            December
      31,2007
            
            
            2006ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            26,327
            
            
            $
            18,591Restricted
      cash
            
            
            6,501
            
            
            
            9,656Accounts
      receivable, less allowances of $1,017 and $1,142as
      of December 31, 2007 and  2006
            
            
            14,162
            
            
            
            17,598Inventories
            
            
            35,182
            
            
            
            34,220Prepaid
      expenses and other current assets
            
            
            13,138
            
            
            
            25,610Total
      current assets
            
            
            95,310
            
            
            
            105,675Property,
      plant and equipment, net
            
            
            61,993
            
            
            
            67,757Other
      assets, net
            
            
            15,402
            
            
            
            10,770Total
      assets
            
            $
            172,705
            
            
            $
            184,202LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
            
            $
            10,399
            
            
            $
            10,428Accrued
      liabilities
            
            
            20,933
            
            
            
            22,263Asbestos-related
      liabilities
            
            
            31,207
            
            
            
            13,950Revolving
      credit loan
            
            
            10,551
            
            
            
            12,715Accrued
      taxes
            
            
            7,850
            
            
            
            264Liabilities
      subject to compromise – current
            
            
            4,997
            
            
            
            34,602Total
      current liabilities
            
            
            85,937
            
            
            
            94,222Liabilities
      subject to compromise - long term
            
            
            133,224
            
            
            
            136,533Total
      liabilities
            
            
            219,161
            
            
            
            230,755STOCKHOLDERS’
      EQUITY (DEFICIT)Class
      A common stock, par value $0.01; 20,000,000 shares
    authorized;4,736,950
      shares issued and 3,663,390 shares outstanding atDecember
      31, 2007 and 2006
            
            
            47
            
            
            
            47Class
      B common stock, par value $0.01; 4,608,945 shares
    authorized,issued
      and outstanding at December 31, 2007 and 2006
            
            
            46
            
            
            
            46Additional
      paid-in capital
            
            
            49,368
            
            
            
            49,349Retained
      deficit
            
            
            (65,417
            )
            
            
            (64,726
            )Accumulated
      other comprehensive loss
            
            
            (22,687
            )
            
            
            (23,456
            )(38,643
            )
            
            
            (38,740
            )Less
      Class A common stock held in treasury, at cost; 1,073,560 shares
      atDecember
      31, 2007 and 2006
            
            
            7,813
            
            
            
            7,813Total
      stockholders’ equity (deficit)
            
            
            (46,456
            )
            
            
            (46,553
            )Total
      liabilities and stockholders’ equity (deficit)
            
            $
            172,705
            
            
            $
            184,202





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


43


Consolidated
Statements of Operations


(in
thousands, except per share amounts)





For
      the years endedDecember
      31,2007
            
            
            2006Net
      sales
            
            $
            204,262
            
            
            $
            219,474Cost
      of sales
            
            
            153,809
            
            
            
            169,023Selling,
      general and administrative expenses
            
            
            37,469
            
            
            
            39,906Asbestos-related
      reorganization charges
            
            
            41,315
            
            
            
            —(Loss)
      income from operations
            
            
            (28,331
            )
            
            
            10,545Other
      income (expense):Interest
      income
            
            
            1,224
            
            
            
            515Bond
      interest (expense) reversal
            
            
            29,603
            
            
            
            (10,612
            )Interest
      expense
            
            
            (1,027
            )
            
            
            (775
            )Other
      income
            
            
            564
            
            
            
            746Other
      expense
            
            
            (1,011
            )
            
            
            (584
            )Income
      (loss) before income taxes
            
            
            1,022
            
            
            
            (165
            )Provision
      for (benefit from) income taxes
            
            
            1,713
            
            
            
            (844
            )Net
      (loss) income
            
            $
            (691
            )
            
            $
            679Net
      (loss) income  per common shareBasic
            
            $
            (0.08
            )
            
            $
            0.08Diluted
            
            
            (0.08
            )
            
            
            0.08Weighted
      average number of common shares outstandingBasic
            
            
            8,272
            
            
            
            8,272Diluted
            
            
            8,272
            
            
            
            8,293





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





44


Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)


(dollars
in thousands)





Common
              Stock
              Class
      A
            
            
            Common
              Stock
              Class
      B
            
            
            Additional
              Paid-in
              Capital
            
            
            Retained
              Deficit
            
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            
            Treasury
              Stock
            
            
            Total
      Stockholders'
              Equity
              (Deficit)
            
            
            Comprehensive
              Income
      (Loss)Balance,
      December 31, 2005
            
            $
            47
            
            
            $
            46
            
            
            $
            49,126
            
            
            $
            (65,405
            )
            
            $
            (20,961
            )
            
            $
            7,813
            
            
            $
            (44,960
            )Stock
      based compensation expense
            
            
            —
            
            
            
            —
            
            
            
            223
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            223Minimum
      pension liability
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,296
            
            
            
            —
            
            
            
            1,296
            
            
            $
            1,296Adoption
      of SFAS 158
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,791
            )
            
            
            —
            
            
            
            (3,791
            )Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            679
            
            
            
            —
            
            
            
            —
            
            
            
            679
            
            
            
            679Net
      comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            1,975Balance
      at December 31, 2006
            
            $
            47
            
            
            $
            46
            
            
            $
            49,349
            
            
            $
            (64,726
            )
            
            $
            (23,456
            )
            
            $
            7,813
            
            
            $
            (46,553
            )Stock
      based compensation expense
            
            
            —
            
            
            
            —
            
            
            
            19
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            19Minimum
      pension liability
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —
            
            
            
            769
            
            
            
            —
            
            
            
            769
            
            
            $
            769Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (691
            )
            
            
            —
            
            
            
            —
            
            
            
            (691
            )
            
            
            (691
            )Net
      comprehensive income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            78Balance
      at December 31, 2007
            
            $
            47
            
            
            $
            46
            
            
            $
            49,368
            
            
            $
            (65,417
            )
            
            $
            (22,687
            )
            
            $
            7,813
            
            
            $
            (46,456
            )





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








45


Consolidated
Statements of Cash Flows


(dollars
in thousands)





For
      the years endedDecember
      31,2007
            
            
            2006Cash
      flows from operating activities:Net
      (loss) income
            
            $
            (691
            )
            
            $
            679Adjustments
      to reconcile net (loss) income to net cash provided
              by  (used
      in) operating  activities:Depreciation
            
            
            10,305
            
            
            
            10,092Amortization
            
            
            385
            
            
            
            386Gain
      on insurance recovery in excess of book value
            
            
            —
            
            
            
            (1,266
            )Asbestos-related
      charges
            
            
            41,315
            
            
            
            —Bond
      interest (expense) reversal
            
            
            (29,603
            )
            
            
            10,612Stock
      based compensation expense
            
            
            19
            
            
            
            223Changes
      in certain assets and liabilities:Accounts
      and notes receivable
            
            
            3,436
            
            
            
            (506
            )Inventories
            
            
            (962
            )
            
            
            387Prepaid
      expenses and other assets
            
            
            1,965
            
            
            
            (347
            )Accounts
      payable
            
            
            (29
            )
            
            
            (1,341
            )Accrued
      liabilities
            
            
            (1,068
            )
            
            
            (3,609
            )Asbestos-related
      liabilities.
            
            
            (13,048
            )
            
            
            (22,373
            )Asbestos-related
      reimbursement from insurance settlement
            
            
            —
            
            
            
            3,684Reimbursement
      from other insurance settlements
            
            
            1,498
            
            
            
            —Other
      liabilities
            
            
            (2,236
            )
            
            
            (4,784
            )Net
      cash provided by (used in)operating
      activities
            
            
            11,286
            
            
            
            (8,163
            )Cash
      flows from investing activities:Capital
      expenditures, net
            
            
            (4,541
            )
            
            
            (4,642
            )Insurance
      proceeds for oven line replacement
            
            
            —
            
            
            
            1,586Net
      cash used in investing activities
            
            
            (4,541
            )
            
            
            (3,056
            )Cash
      flows from financing activities:Net
      short-term borrowings
            
            
            (2,164
            )
            
            
            3,311Net
      change in restricted cash
            
            
            3,155
            
            
            
            1,988Net
      cash provided by financing activities
            
            
            991
            
            
            
            5,299Net
      increase (decrease) in cash and cash equivalents
            
            
            7,736
            
            
            
            (5,920
            )Cash
      and cash equivalents:Beginning
      of year
            
            
            18,591
            
            
            
            24,511End
      of year.
            
            $
            26,327
            
            
            $
            18,591





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


46


Notes
to Consolidated Financial Statements





1.    
   Basis of Presentation:





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





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


47
  shareholder,
ABI, on certain terms of the Ninth Plan, which Congoleum filed and proposed
jointly with the ACC in August 2006.  CNA and the Bondholders’
Committee jointly filed a new, competing plan in August 2006 and each withdrew
its prior plan of reorganization.  Following further mediated
negotiations, Congoleum, the ACC, the FCR, ABI and the Bondholders’ Committee
reached agreement on the terms of the Tenth Plan, which Congoleum filed jointly
with the ACC in September 2006.  Following the Bondholders’
Committee’s withdrawal of support for CNA’s plan, CNA filed the CNA
Plan.  In October 2006, Congoleum and the ACC jointly filed the
Eleventh Plan, a revised version of the Tenth Plan which reflected minor
technical changes agreed to by the various parties supporting Congoleum’s
plan.  In October 2006, the Bankruptcy Court held a hearing to
consider the adequacy of the disclosure statements with respect to the Tenth
Plan and the CNA Plan and to hear arguments on respective summary judgment
motions as to whether the Tenth Plan and the CNA Plan were confirmable as a
matter of law.  The Bankruptcy Court provisionally approved the
disclosure statements for both the Tenth Plan and the CNA Plan subject to the
Bankruptcy Court’s ruling on the respective summary judgment
motions.  In February 2007, the Bankruptcy Court issued two separate
opinions ruling that the Tenth Plan and the CNA Plan were not confirmable as a
matter of law.  In March 2007, Congoleum resumed global plan mediation
discussions with the various parties seeking to resolve the issues raised in the
Bankruptcy Court’s ruling with respect to the Tenth Plan.  In July
2007, the FCR filed a plan of reorganization and proposed disclosure
statement.   After extensive further mediation sessions, on
February 5, 2008 the FCR, the ACC, the Bondholders’ Committee and Congoleum
jointly filed the Joint Plan.  The Bankruptcy Court approved the
disclosure statement for the Joint Plan in February 2008, and a confirmation
hearing is scheduled for June 26, 2008.





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





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





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








48


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





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





2.  Summary of
Significant Accounting Policies:





Nature of Business -
Congoleum manufactures resilient sheet and tile flooring
products.  These products, together with a limited quantity of related
products purchased for resale, are sold primarily to wholesale distributors and
major retailers in the United States and Canada.  Based upon the
nature of the Company’s operations, facilities and management structure, the
Company considers its business to constitute a single segment for financial
reporting purposes.





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





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





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







49


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





Selling, General and Administrative
Expenses -Selling, general and administrative expenses are charged to
income as incurred.  Expenses promoting and selling products are
classified as selling expenses and include such items as advertising, sales
commissions and travel.  Advertising expense amounted to $1.0 million
and $1.1 million in 2007 and 2006.  General and administrative
expenses include such items as officers’ salaries, office supplies, insurance
and office rental.  In addition, general and administrative expenses
include other operating items such as provision for doubtful accounts,
professional (accounting and legal) fees, purchasing and environmental
remediation costs.





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





Restricted Cash – Under the
terms of its revolving credit agreement, payments on the Company’s accounts
receivable are deposited in an account assigned by the Company to its lender and
the funds in that account are used by the lender to pay down any loan
balance.  Restricted cash represents funds deposited in this account
but not immediately applied to the loan balance.  At December 31, 2007
and 2006, cash of approximately $0.0 million and $3.6 million, respectively, was
restricted under this financing agreement. Additionally, $6.5 million remaining
from a $14.5 million settlement received in August 2004 from an insurance
carrier is included as restricted cash at December 31, 2007 and
2006.





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





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







50


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





Debt Issue Costs - Costs
incurred in connection with the issuance of debt have been capitalized and are
being amortized over the life of the related debt. Such costs at December 31,
2007 and 2006 amounted to $0.1 million and $0.4 million, respectively, net of
accumulated amortization of $3.2 million and $2.8 million, respectively, and are
included in other non-current assets.





Environmental Remediation -
The Company is subject to federal, state and local environmental laws and
regulations.  The Company records a liability for environmental
remediation claims when a cleanup program or claim payment becomes probable and
the costs can be reasonably estimated.  The recorded liabilities are
not discounted for delays in future payments (see Note 16).





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





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





51


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





Product Warranties – The
Company provides product warranties for specific product lines and accrues for
estimated future warranty cost in the period in which the revenue is
recognized.  The following table sets forth activity in the Company’s
warranty reserves (in millions):





December
      31,2007
            
            
            2006Beginning
      balance
            
            $
            2.0
            
            
            $
            2.1Accruals
            
            
            3.2
            
            
            
            3.8Charges
            
            
            (3.4
            )
            
            
            (3.9
            )Ending
      balance
            
            $
            1.8
            
            
            $
            2.0





Shipping and Handling Costs -
Shipping costs for the years ended December 31, 2007 and 2006, were $0.6 million
and are included in selling, general and administrative expenses.





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





Long-lived Assets- The
Company periodically considers whether there has been a permanent impairment in
the value of its long-lived assets, primarily property and equipment, in
accordance with Financial Accounting Standards Board ("FASB") Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets."  The Company evaluates various factors, including current and
projected future operating results and the undiscounted cash flows for the
under-performing long-lived assets. The Company then compares the carrying
amount of the asset to the estimated future undiscounted cash flows expected to
result from the use of the asset. To the extent that the estimated future
undiscounted cash flows are less than the carrying amount of the asset, the
asset is written down to its estimated fair market value and an impairment loss
is recognized. The value of impaired long-lived assets is adjusted periodically
based on changes in these factors.  At December 31, 2007, the
Company determined, based on its evaluation, that the carrying value of its
long-lived assets was appropriate. No adjustments to the carrying costs were
made.




52


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





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





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





At December 31,2007, there was$28thousand of unrecognized compensation
expense related to share-based payments, which is expected to be
recognized over a
weighted-average period of 3.5 years.





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





New
Accounting Standards





In
February 2007, the FASB issued SFAS No. 159, ‘‘The Fair Value Option for
Financial Assets and Liabilities, Including an amendment of FASB Statement No.
115’’, (‘‘SFAS 159’’). SFAS 159 permits companies to choose to measure certain
financial instruments and other items at fair value. SFAS 159 is effective as of
the beginning of 2008. The Company does not believe that SFAS 159 will have a
significant impact on its results of operations and financial position upon
adoption.




53


In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 provides a common fair value hierarchy for companies to follow in
determining fair value measurements in the preparation of financial statements
and expands disclosure requirements relating to how such fair value measurements
were developed. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions that the marketplace would use when pricing an asset or
liability, rather than company-specific data. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007.  However, on February
12, 2008, the FASB issued Staff Position 157-2 which delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis. For items within its scope, this Staff Position
defers the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008. The Company is currently evaluating the impact, if any, that
the adoption of SFAS No. 157 would have on its financial position or results of
operations.





Reclassifications -Certain
amounts appearing in the prior years’ financial statements have been
reclassified to conform to the current year’s presentation.  In 2006,
the Company presented the gain on insurance recovery in excess of book value as
other income.  In 2007, the gain has been reclassified to general and
administrative expenses.





3.         Inventories:





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





December 31,
            
            
            December 31,2007
            
            
            2006Finished
      goods
            
            $
            28,445
            
            
            $
            26,515Work-in-process
            
            
            1,108
            
            
            
            1,912Raw
      materials and supplies
            
            
            5,629
            
            
            
            5,793Total
      inventories
            
            $
            35,182
            
            
            $
            34,220





If the FIFO (first in, first out)
inventory method, which approximates replacement cost, had been used to value
these inventories, they would have been $4,825 higher at December 31, 2007 and
$2,700 higher at December 31, 2006.  During 2007, inventory quantities
were increased. During 2006 certain inventory quantities were reduced, which
resulted in liquidations of LIFO (last in, first out) inventory
layers.  The effect of the liquidations was to increase cost of sales
by $28 in 2006.  The LIFO method is utilized in determining inventory
values as it results in better matching of costs and revenue.





54


4.         Property,
Plant, and Equipment:





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





December 31,
            
            
            December 31,2007
            
            
            2006Land
            
            $
            2,931
            
            
            $
            2,931Buildings
      and improvements
            
            
            47,697
            
            
            
            47,136Machinery
      and equipment
            
            
            193,627
            
            
            
            187,583Construction-in-progress
            
            
            2,047
            
            
            
            4,111246,302
            
            
            
            241,761Less
      accumulated depreciation
            
            
            184,309
            
            
            
            174,004Total
      property, plant, and equipment, net
            
            $
            61,993
            
            
            $
            67,757





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. There were no
capitalized interest costs in 2007 and $0.1 million in 2006.





5.         Liabilities
Subject to Compromise:





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








55


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





December
      31,
            
            
            December
      31,2007
            
            
            2006CurrentPre-petition
      other payables and accrued interest
            
            $
            4,997
            
            
            $
            34,602Non-currentDebt
      (at face value)
            
            
            100,000
            
            
            
            100,000Pension
      liability
            
            
            10,772
            
            
            
            15,494Other
      post-retirement benefit obligation
            
            
            9,337
            
            
            
            9,249Pre-petition
      other liabilities
            
            
            13,115
            
            
            
            11,790Total
      liabilities subject to compromise
            
            $
            138,221
            
            
            $
            171,135





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





6.         Accrued
Liabilities:





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





December
      31,
            
            
            December
      31,2007
            
            
            2006Accrued
      warranty, marketing andsales
      promotion
            
            $
            16,636
            
            
            $
            18,429Employee
      compensation andrelated
      benefits
            
            
            3,584
            
            
            
            3,333Other
            
            
            713
            
            
            
            501Total
      accrued liabilities
            
            $
            20,933
            
            
            $
            22,263





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











56


7.         Debt:





In January 2004, the Bankruptcy Court
authorized entry of a final order approving Congoleum’s debtor-in-possession
financing, which replaced its pre-petition credit facility on substantially
similar terms.  The debtor-in-possession financing agreement (as
amended and approved by the Bankruptcy Court to date) provides a revolving
credit facility expiring on (i) the earlier of June 30, 2008 and (ii) the date
the plan of reorganization in Congoleum’s bankruptcy cases as confirmed by the
Bankruptcy Court becomes effective. Total borrowing under the facility may not
exceed $30 million.  Interest is based on 0.25% above the prime
rate.  This financing agreement contains certain covenants, which
include the maintenance of minimum earnings before interest, taxes, depreciation
and amortization (“EBITDA”).  It also includes restrictions on the
incurrence of additional debt and limitations on capital
expenditures.  The covenants and conditions under this financing
agreement must be met in order for the Company to borrow from the facility. The
Company was in compliance with these covenants at December 31,
2007.  Borrowings under this facility are collateralized by inventory
and receivables.  At December 31, 2007, based on the level of
receivables and inventory, $14.2 million was available under the facility, of
which $2.2 million was utilized for outstanding letters of credit and $10.5
million was utilized by the revolving loan.  The Company anticipates
that its debtor-in-possession financing facility (including anticipated
extensions thereof) together with cash from operations will provide it with
sufficient liquidity to operate during 2008 while under Chapter 11
protection.  There can be no assurances that the Company will continue to
be in compliance with the required covenants under this facility or that the
debtor-in-possession facility (as extended) will be renewed prior to its
expiration if a plan of reorganization is not confirmed before that time.
 For a plan of reorganization to be confirmed, the Company will need to
obtain and demonstrate the sufficiency of exit financing.  The Company
cannot presently determine the terms of such financing, nor can there be any
assurances of its success obtaining it.





On August 3, 1998, the Company issued
$100 million of the Senior Notes priced at 99.505% to yield 8.70%. The Senior
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after August 1, 2003 at predetermined redemption prices (ranging from
104% to 100%), plus accrued and unpaid interest to the date of redemption. The
indenture governing the Senior Notes includes certain restrictions on additional
indebtedness and uses of cash, including dividend payments.  The
commencement of the Chapter 11 proceedings constituted an event of default under
the indenture governing the Senior Notes.  During 2003, the Company
and the trustee under the indenture governing the Senior Notes amended the
indenture, and sufficient note holders consented, to explicitly permit the
Company to take steps in connection with preparing and filing its prepackaged
plan of reorganization under Chapter 11 of the Bankruptcy Code.  The
amount of accrued interest on the Senior Notes that was not paid as of the
bankruptcy filing on December 31, 2003 was approximately $3.6 million. The
accrued interest and the principal amount of the Senior Notes, are
included in “Liabilities Subject to Compromise” (see Note 5) as of December 31,
2007.







57


8.         Other
Liabilities:





As a result of the Company’s Chapter 11
bankruptcy filing and in accordance with SOP 90-7, certain liabilities are
included in liabilities subject to compromise on the balance sheet as of
December 31, 2007and 2006 (see Note 5).





9.         Research
and Development Costs:





Total research and development costs
charged to operations amounted to $4.2 million for the years ended December 31,
2007 and 2006.





10.       Operating
Lease Commitments and Rent Expense:





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





Future minimum lease payments of
non-cancelable operating leases having initial or remaining lease terms in
excess of one year as of December 31, 2007 are as follows (in
thousands):





Years
      Ending:2008
            
            $
            2,4262009
            
            
            2,5832010
            
            
            2,0382011
            
            
            73Thereafter
            
            
            —Total
      minimum lease payments
            
            $
            7,120





Rent expense was $3.1 million and $3.2
million  for the years ended December 31, 2007 and 2006,
respectively.





11.       Pensions
and Other Postretirement Plans:





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











58


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




Obligations
      and Funded Status:
              
              At
      December 31,Pension
      Benefits
              
              
              Other
      Benefits(in
      thousands)
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Change
      in Benefit Obligation:Benefit
      obligation at beginning of  year
              
              $
              79,821
              
              
              $
              75,245
              
              
              $
              9,664
              
              
              $
              8,988Service
      cost
              
              
              1,381
              
              
              
              1,327
              
              
              
              213
              
              
              
              194Interest
      cost
              
              
              4,559
              
              
              
              4,485
              
              
              
              566
              
              
              
              537Actuarial
      gain (loss)
              
              
              (1,378
              )
              
              
              3,826
              
              
              
              (137
              )
              
              
              420Benefits
      paid
              
              
              (4,596
              )
              
              
              (5,062
              )
              
              
              (380
              )
              
              
              (475
              )Benefit
      obligation at end of year
              
              $
              79,787
              
              
              $
              79,821
              
              
              $
              9,926
              
              
              $
              9,664Change
      in Plan Assets:Fair
      value of plan assets at beginning of year
              
              $
              64,319
              
              
              $
              55,970
              
              
              $
              —
              
              
              $
              —Actual
      return on plan assets
              
              
              2,514
              
              
              
              6,837
              
              
              
              —
              
              
              
              —Employer
      contribution
              
              
              6,779
              
              
              
              6,574
              
              
              
              —
              
              
              
              —Benefits
      paid
              
              
              (4,596
              )
              
              
              (5,062
              )
              
              
              —
              
              
              
              —Fair
      value of plan assets at end of year
              
              $
              69,016
              
              
              $
              64,319
              
              
              $
              —
              
              
              $
              —Unfunded
      status
              
              $
              (10,771
              )
              
              $
              (15,502
              )
              
              $
              (9,926
              )
              
              $
              (9,664
              )Unrecognized
      net actuarial loss
              
              
              —
              
              
              
              22,711
              
              
              
              250
              
              
              
              458Unrecognized
      prior service cost
              
              
              —
              
              
              
              76
              
              
              
              3
              
              
              
              13Net
      amount recognized
              
              $
              (10,771
              )
              
              $
              7,285
              
              
              $
              (9,673
              )
              
              $
              (9,193
              )
 
 Amounts
      recorded in the balance sheets consist of:Pension
      Benefits
              
              
              Other
      Benefits(in
      thousands)
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Accrued
      benefit cost
              
              $
              (10,771
              )
              
              $
              (15,502
              )
              
              $
              (9,926
              )
              
              $
              (9,664
              )Intangible
      asset
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Accumulated
      other comprehensive loss
              
              
              22,098
              
              
              
              22,787
              
              
              
              253
              
              
              
              471Net
      amounts recorded
              
              $
              11,327
              
              
              $
              7,285
              
              
              $
              (9,673
              )
              
              $
              (9,913
              )





59


Included in accumulated other
comprehensive loss at December 31, 2007 and 2006 was the tax effect of $0.2
million for the changes in minimum pension liability recorded in prior
years.





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





December
      31,(in
      thousands)
            
            2007
            
            
            2006Projected
      benefit obligation
            
            $
            79,787
            
            
            $
            79,821Accumulated
      benefit obligation
            
            
            76,916
            
            
            
            76,549Fair
      value of plan assets
            
            
            69,016
            
            
            
            64,319





Components
      of Net Periodic Benefit Cost:





Pension
      Benefits
                
                
                Other
      Benefits(in
      thousands)
                
                2007
                
                
                2006
                
                
                2007
                
                
                2006Service
      cost
                
                $
                1,381
                
                
                $
                1,327
                
                
                $
                213
                
                
                $
                194Interest
      cost
                
                
                4,559
                
                
                
                4,485
                
                
                
                566
                
                
                
                537Expected
      return on plan assets
                
                
                (4,590
                )
                
                
                (3,985
                )
                
                
                —
                
                
                
                —Recognized
      net actuarial loss
                
                
                1,340
                
                
                
                1,676
                
                
                
                71
                
                
                
                80Amortization
      of prior service cost
                
                
                46
                
                
                
                (215
                )
                
                
                10
                
                
                
                34Net
      periodic benefit cost
                
                $
                2,736
                
                
                $
                3,288
                
                
                $
                860
                
                
                $
                845





For the Company's pension plans, the
estimated net loss and prior service cost to be amortized from accumulated other
comprehensive loss during 2008is expected to be $1.4 million and
$24 thousand, respectively.  For
the Company's post-retirement benefit plans, the estimated net loss and prior
service cost to be amortized from accumulated other comprehensive loss during
2008is expected to be $71 thousand and $10
thousand, respectively.





Additional
Information:





Prior to the adoption of SFAS No. 158,
the Company recorded an increase to the additional minimum pension liability of
$1.3 million and $2.4 million for the years ended December 31, 2006 and 2005,
respectively.








60


The Company adopted SFAS No. 158 as of
December 31, 2006.  The impact from recognizing the funded status of
the defined benefit plans, representing the fair value of the plan assets versus
the projected benefit obligation, was a decrease to Stockholders’ Equity of $3.8
million.  No tax effect was recorded for the cumulative adjustment to
equity because the Company has a full valuation allowance recorded against its
net deferred tax assets.  The Company uses a fiscal year-end date to
value all plans.  The following table summarized the impact of
adopting SFAS No. 158 on the Consolidated Balance Sheet at December 31,
2006:





(in
      thousands)
            
            Defined
      Benefit
              Plans
      Before
              Adoption
      of
              SFAS
      No. 158
            
            Impact
      of
              SFAS
      No. 158
              Adoption
            
            Defined
      Benefit
              Plans
      After
              Adoption
      of
              SFAS
      No. 158Benefit
      liability
            
            $(21,376)
            
            $
      (3,790)
            
            $  (25,166)Accumulated
      other comprehensive loss
            
            19,666
            
            3,790
            
            23,456





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





Pension
      Benefits
            
            Other
      Benefits2007
            2006
            
            2007
            2006Discount
      rate
            6.00%
            6.00%
            
            6.00%
            6.00%Rate
      of compensation increase
            5.00%
            5.00%
            
            —
            —





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




Pension
      Benefits
            
            Other
      Benefits2007
            2006
            
            2007
            2006Discount
      rate
            6.00%
            6.00%
            
            6.00%
            6.00%Expected
      long-term return on plan assets
            7.00%
            7.00%
            
            —
            —Rate
      of compensation increase
            5.00%
            5.00%
            
            —
            —





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





61


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





December
      31,2007
            2006Healthcare
      cost trend rate assumed for next year
            9.5%
            9.0%Ultimate
      healthcare cost trend rate
            5.0%
            5.0%Year
      that the assumed rate reaches ultimate rate
            2012
            2011





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





December
      31,2007
            2006(in
      thousands)
            1
      Percentage
              Point
              Increase
            1
      Percentage
              Point
              DecreaseEffect
      on total of service and interest cost components
            $   70
            $   62Effect
      on post-retirement benefit obligation
            734
            667





Plan Assets:





For the pension plans, the
weighted-average asset allocation at December 31, 2007 and 2006 by asset
category is as follows:




Plan
      Assets atDecember
      31,Asset
      Category:
            2007
            2006Equity
      securities
            61%
            63%Debt
      securities
            38%
            36%Other
            1%
            1%Total
            100%
            100%





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





The primary objective for the plans is
to provide long-term capital appreciation through investment in equity and debt
securities. The Company’s target asset allocation is consistent with the
weighted – average allocation at December 31, 2007.


62


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





Contributions:





The Company expects to contribute $3.5
million to its pension plan and $0.6 million to its other postretirement plan in
2008.





Estimated Future Benefit
Payments:





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





(in
      thousands)
            Pension
              Benefit
            
            Other
      Benefits
              Projected
      Net
              Benefit Payments2008
            $   5,043
            
            $    6062009
            5,200
            
            6612010
            5,385
            
            7192012
            5,486
            
            7942012
            5,729
            
            8272013-2017
            30,332
            
            4,765





Defined
Contribution Plan:





The
Company also has two 401(k) defined contribution retirement plans that cover
substantially all employees.  Eligible employees may contribute up to
50% of compensation, with partially matching Company contributions. The charge
to income relating to the Company match was $0.4 million for the years ended
December 31, 2007 and 2006.





12.
            Income
      Taxes:





The Company recorded a tax expense of
$1.7 million on income before income taxes of $1.0 million in
2007.  The main component of the tax provision was an increase in
deferred taxes primarily due to non-deductibility, for tax purposes, of legal
reserves in the amount of $1.6 million, for the balance of the Company’s
reorganization plan.  In 2006 the Internal Revenue Service (IRS)
completed and closed its audit of the Company's income tax returns for the years
2000 to 2003 and the Company entered into a closing agreement with the IRS in
October2006,
after which it reversed previously established reserves for the years under
audit, resulting in the tax benefit recorded in 2006.





63


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





For
      the years ended December 31,2007
            
            
            2006Current:Federal
            
            $
            1,276
            
            
            $
            (877
            )State
            
            
            112
            
            
            
            33Deferred:Federal
            
            
            1,759
            
            
            
            (524
            )State
            
            
            (289
            )
            
            
            116Valuation
      allowance
            
            
            (1,145
            )
            
            
            408Provision
      (benefit) for income taxes
            
            $
            1,713
            
            
            $
            (844
            )





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 31,2007
            
            
            2006Statutory
      federal income tax rate
            
            
            34.0
            %
            
            
            34.0
            %State
      income taxes, net of federal benefit
            
            
            (12.1
            )
            
            
            (7.4
            )Non-deductible
      expenses
            
            
            265.8
            
            
            
            (78.8
            )Change
      in valuation allowance
            
            
            (118.3
            )
            
            
            12.7Tax
      credits
            
            
            (3.9
            )
            
            
            28.9Change
      in prior year estimates
            
            
            16.1
            
            
            
            (259.3
            )Adjustment
      to current tax reserve
            
            
            (15.8
            )
            
            
            782.0Other
            
            
            1.8
            
            
            
            (0.6
            )Effective
      tax rate
            
            
            167.6
            %
            
            
            511.5
            %





During 2007 and 2006, the Company made
payments for income taxes of $4 thousand and $77 thousand.





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




64


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





December
      31,
            
            
            December
      31,2007
            
            
            2006Deferred
      tax assets:Accounts
      receivable
            
            $
            120
            
            
            $
            121Environmental
      remediation andproduct-related
      reserves
            
            
            13,073
            
            
            
            8,267Postretirement
      benefit obligations
            
            
            3,930
            
            
            
            3,740Tax
      credit and other carryovers
            
            
            18,408
            
            
            
            16,192Other
      accruals
            
            
            1,680
            
            
            
            1,215Deferred
      tax assets
            
            
            37,211
            
            
            
            29,535Valuation
      allowances
            
            
            (3,876
            )
            
            
            (5,021
            )Net
      deferred tax asset
            
            
            33,335
            
            
            
            24,514Deferred
      tax liabilities:Depreciation
      and amortization
            
            
            (6,685
            )
            
            
            (8,489
            )Inventory
            
            
            (586
            )
            
            
            (1,779
            )Unfunded
      pension
            
            
            (4,313
            )
            
            
            (3,209
            )Casualty
      insurance receivable
            
            
            (6,780
            )
            
            
            (11,037
            )Accrued
      interest expense
            
            
            (15,296
            )
            
            
            —Total
      deferred tax liabilities
            
            
            (33,660
            )
            
            
            (24,514
            )Net
      deferred tax (liability)
            
            $
            (325
            )
            
            $
            —





At December 31, 2007 and 2006, the
Company had available federal net operating loss carry forwards of approximately
$31.9 million and $31.2 million, respectively, to offset future taxable
income.  The federal loss carry forwards will begin to expire in
2023.  At December 31, 2007 and 2006, the Company had available state
net operating loss carry forwards of approximately $41.2 million and $44.8
million, respectively, to offset future taxable income.  The state
loss carry forwards will begin to expire in 2008.  At
both December 31, 2007 and 2006, the Company had available federal tax
credit carry forwards of $2.1 million, which will begin to expire in
2018.  Additionally, the Company has state tax credit carry forwards
of $1.6 million and $1.5 million at December 31, 2007 and 2006, respectively,
which will begin to expire in 2008.








65


Accounting
for Uncertainty in Income Taxes





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





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





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





The Company anticipates decreases in
unrecognized tax benefits of approximately $704 thousand related to accounting
method changes during 2008.





The Company's policy is to report
interest expense (and penalties, if applicable) as tax provision (benefit),
and interest earned as interest income in the Consolidated Statements
of Operations.  During the years ended December 31, 2007 and 2006, the
Company recognized approximately $31 thousand and $19 thousand in interest and
penalties, respectively.  Congoleum had approximately $50 thousand and
$19 thousand accrued for the payment of interest and penalties at December 31,
2007 and 2006, respectively.





66


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





13.       Supplemental
Cash Flow Information:





Cash payments for interest were $0.9
million and $0.8 million for the years ended December 31, 2007 and 2006. Net
cash refunds for income taxes were $2.2 million and $0.0 million for the years
ended December 31, 2007 and 2006.





14.       Related
Party Transactions:





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





For
      the years ended December 31,2007
            
            
            2006Sales
      made to ABI
            
            $
            —
            
            
            $
            14Sales
      commissions earned by ABI
            
            
            865
            
            
            
            525Raw
      material transfers to ABI
            
            
            1,108
            
            
            
            1,109Computer
      service income earned from ABI
            
            
            55
            
            
            
            50Material
      purchases from ABI
            
            
            4,656
            
            
            
            5,290Management
      fees paid to ABI
            
            
            696
            
            
            
            674





There were no amounts due from ABI on
December 31, 2007 and December 31, 2006, respectively. Amounts as of December
31, 2007 and 2006 due to ABI totaled $0.0 million and $0.4 million,
respectively, and are included in accounts payable and accrued
expenses.





15.       Major
Customers:





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





Two customers, LaSalle-Bristol
Corporation and Mohawk Industries, Inc., accounted for approximately 25% and
40%, respectively, of the Company’s net sales for the year ended December 31,
2007, and 27% and 40%, respectively, for the year ended December 31,
2006.  Mohawk Industries accounted for 38% and 48% of accounts
receivable at December 31, 2007 and 2006, respectively, while LaSalle–Bristol
Corporation accounted for 5% and 6%, respectively, of accounts receivable at
December 31, 2007 and 2006.


67


16.       Environmental
and Other Liabilities





The
Company records a liability for environmental remediation claims when a cleanup
program or claim payment becomes probable and the costs can be reasonably
estimated.  As assessments and cleanup programs progress, these
liabilities are adjusted based upon the progress in determining the timing and
extent of remedial actions and the related costs and damages. The recorded
liabilities, totaling $4.4 million at December 31, 2007 and December 31, 2006,
are not reduced by the amount of insurance recoveries.  Such estimated
insurance recoveries approximated $2.1 million at December 31, 2007 and $2.2
million at December 31, 2006, and are reflected in other non-current assets.
Receivables for expected insurance recoveries are recorded if the related
carriers are solvent and paying claims under a reservation of rights or under an
obligation pursuant to coverage in place or a settlement
agreement.  Substantially all of Congoleum’s recorded insurance asset
for environmental matters is collectible from a single carrier.





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





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


68
  fluctuation
in the Company’s share. Fifty percent (50%) of Congoleum’s share of the costs is
presently being paid by one of its insurance carriers, Liberty Mutual Insurance
Company, whose remaining policy limits for this claim are expected to cover
approximately $0.3 million in additional costs.  Congoleum expects to
fund the balance to the extent further insurance coverage is not
available.





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





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





The Company anticipates that these
matters will be resolved over a period of years and that after application of
expected insurance recoveries, funding the costs will not have a material
adverse impact on the Company’s liquidity or financial
position.  However, unfavorable developments in these matters could
result in significant expenses or judgments that could have a material adverse
effect on the financial position of the Company.





17.       Asbestos
Liabilities:





Claims Settlement and Chapter 11
Reorganization





On
December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy
Court (Case No. 03-51524) seeking relief under Chapter 11 of the Bankruptcy Code
as a means to resolve claims asserted against it related to the use of asbestos
in its products decades ago.  During 2003, Congoleum had obtained the
requisite votes of asbestos personal injury claimants necessary to seek approval
of a proposed, pre-packaged Chapter 11 plan of reorganization. In January 2004,
the Company filed its proposed plan of reorganization and disclosure statement
with the Bankruptcy Court. In November 2004, Congoleum filed the Fourth Plan
with the Bankruptcy Court reflecting the result of further negotiations with
representatives of the ACC, the FCR and other asbestos claimant representatives.
The Bankruptcy Court approved the disclosure statement and plan voting
procedures in December 2004 and Congoleum obtained the requisite votes of
asbestos personal injury claimants necessary to seek approval of the Fourth
Plan.  In April 2005, Congoleum announced that it had reached an
agreement in principle with representatives of the ACC and the FCR to make
certain modifications to its proposed plan of





69
  pari passu





70




If the
Joint Plan is approved by the Bankruptcy Court and accepted by the requisite
creditor constituencies, it will permit Congoleum to exit Chapter 11 free
of liability for existing or future asbestos claims.  Under the terms
of the Joint Plan, a trust will be
created that will assume the liability for Congoleum’s current and future
asbestos claims.  That trust will receive the proceeds of various
settlements Congoleum has reached with a number of insurance carriers, and will
be assigned Congoleum’s rights under its remaining policies covering asbestos
product liability.  The trust will also receive 50.1% of the newly
issued common stock in reorganized Congoleum when the Joint Plan takes effect
(the “Trust Shares”).




Holders of Congoleum’s $100 million in
8.625% Senior Notes due in August 2008 will receive on a pro rata basis $80
million in new 9.75% senior secured notes that mature five years from
issuance.  The new senior secured notes will be subordinated to the
working capital facility that provides Congoleum’s financing upon exiting
reorganization.  In addition, holders of the $100 million in 8.625%
Senior Notes due in August 2008 will receive 49.9% of the common stock in
reorganized Congoleum.  Congoleum’s obligations for the $100 million
in 8.625% senior notes due in August 2008, including accrued interest (which
amounted to $44.6 million at December 31, 2007) will be satisfied by the new
senior secured notes and the common stock issued when the Joint Plan takes
effect.




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




In
connection with the Joint Plan, Congoleum and certain parties have entered into
an agreement (the “Put/Call Agreement”).  Pursuant to the Put/Call
Agreement, for the first 60 days after the date the Joint Plan is effective (the
“Effective Date”), the Plan Trust may, at its sole option, elect to cause
participating holders of Senior Notes (the “Backstop Participants”) to purchase
all, but not less than all, of the Trust Shares for an aggregate purchase price
equal to $5.25 million. Similarly, for the first 90 days after the Effective
Date, the Backstop Participants will have the right to cause the Plan Trust to
sell all, but not less than all, of the Trust Shares to the Backstop
Participants for an aggregate purchase price equal to $7.5 million.




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




71


In February 2006, the Bankruptcy Court
ordered GHR to disgorge all fees and certain expenses it was paid by
Congoleum.  The amount of the disgorgement is approximately $9.6
million.  In October 2006, Congoleum and GHR entered into a settlement
agreement (the “GHR Settlement”) under which GHR is to pay Congoleum
approximately $9.2 million plus accruing interest in full satisfaction of the
disgorgement order.  The payment is secured by assets of GHR and is to
be made over time according to a formula based on GHR’s earnings.  The
Bankruptcy Court approved the GHR Settlement in April 2007.  Payments
received pursuant to the GHR settlement in 2007 were not significant. By
correspondence dated March 27, 2008, GHR notified Congoleum of its intention to
pay all sums outstanding under the GHR Settlement in full.  GHR
requested a payoff amount for an April 1, 2008 payment date.





In
anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum
entered into the Claimant Agreement, which provides for an aggregate settlement
value of at least $466 million as well as an additional number of individually
negotiated trial listed settlements with an aggregate value of approximately $25
million, for total settlements in excess of $491
million.  Participants in the Claimant Agreement signed releases
limiting their recourse against Congoleum to what they would receive from the
Plan Trust and Congoleum has therefore estimated its liability under the
Claimant Agreement as the cost of effecting the settlement through confirmation
of a plan of reorganization.  In addition, as a result of tabulating
ballots on the Fourth Plan, the Company is also aware of claims by claimants
whose claims were not determined under the Claimant Agreement but who have
submitted claims with a value of approximately $512 million based on the
settlement values applicable in the Sixth Plan.  It is also likely
that additional new claims will be asserted in connection with solicitation of
acceptances of the Joint Plan.  Congoleum does not believe it can
reasonably estimate the liability associated with claims that may be
pending.





During
2007, the Company paid $13.0 million in fees and expenses related to
implementation of its planned reorganization under Chapter 11 of the Bankruptcy
Code and litigation with certain insurance companies.  Based on the
Joint Plan, Congoleum has made provision in its financial statements for the
minimum estimated cost to effect its plan to settle asbestos liabilities through
confirmation of a plan that complies with section 524(g) of the Bankruptcy Code.
Congoleum recorded charges aggregating approximately $51.3 million in prior
years.  Based on the terms of the Joint Plan, in the fourth quarter of
2007 Congoleum recorded an additional $41.3 million charge.  Of this
charge, $14.9 million related to the write-off of certain insurance litigation
costs receivable that will not be collected under the terms of the Joint Plan
and $26.4 million was an additional provision for estimated costs for the
reorganization proceedings and coverage litigation.  In the fourth
quarter of 2007 Congoleum also recorded a $41.0 million interest expense credit
to reverse post-petition interest accrued on its Senior Notes.  Terms
of previous reorganization plans had provided, among other things, for the
payment of post-petition interest on the Senior Notes and therefore Congoleum
had continued to accrue such interest.  Under the terms of the Joint
Plan, the Senior Noteholders will not receive any post-petition
interest.





72


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





Status
of Insurance Coverage





During the period that Congoleum
produced asbestos-containing products,  the Company purchased primary
and excess insurance policies providing in excess of $1 billion of coverage for
general and product liability claims. These policies did not contain asbestos
exclusions. Through August 2002, substantially all asbestos-related claims and
defense costs were paid through primary insurance coverage. In August 2002, the
Company received notice that its primary insurance limits had been paid in full.
The payment of limits in full by one of the primary insurance companies was
based on its contention that limits in successive policies were not cumulative
for asbestos claims and that Congoleum was limited to only one policy limit for
multiple years of coverage. Certain excess insurance carriers claimed that the
non-cumulation provisions of the primary policies were not binding on them and
that there remained an additional $13 million in primary insurance limits plus
related defense costs before their policies were implicated. There is insurance
coverage litigation currently pending in the New Jersey State Court between
Congoleum and its excess insurance carriers, and the guaranty funds and
associations for the State of New Jersey.  The litigation was
initiated in September 2001, by one of Congoleum’s excess insurers (the
“Coverage Action”).  In April 2003, the New Jersey Supreme Court ruled
in another case involving the same non-cumulation provisions as in the Congoleum
primary policies (the "Spaulding Case") that the non-cumulation provisions are
invalid under New Jersey law and that the primary policies provide coverage for
the full amount of their annual limits for all successive
policies.  Congoleum has reached a settlement agreement (the “Liberty
Settlement”) with the insurance carrier whose policies contained the
non-cumulation provisions, pursuant to which the insurance carrier will pay
Congoleum $15.4 million in full satisfaction of the applicable policy limits, of
which $14.5 million has been paid to date.  Pursuant to the terms of
the Security Agreement, the Company is obligated to pay any insurance proceeds
it receives under the Liberty Settlement, net of any fees and expenses it may be
entitled to deduct, to the Collateral Trust or Plan Trust.  Payment of
such fees and expenses are subject to Bankruptcy Court order or
approval.  As of December 31, 2002, the Company had already entered
into settlement agreements with asbestos claimants exceeding the amount of this
previously disputed primary coverage.  Based on these settlements, the
Company contended that, even allowing for annual limits of all primary policies,
primary coverage was exhausted and the excess policies triggered.  The
excess carriers have objected to the reasonableness of several of these
settlements,  and Congoleum believes that they will continue to
dispute the reasonableness of the settlements and contend that their policies
still are not implicated and will dispute their coverage for that and other
various reasons in ongoing coverage litigation.








73


The excess insurance carriers have
objected to the global settlement of the asbestos claims currently pending
against Congoleum as contemplated by the Claimant Agreement on the grounds that,
among other things, the negotiations leading to the settlement and the Claimant
Agreement violate provisions in their insurance policies, including but not
limited to the carriers' right to associate in the defense of the asbestos
cases, the duty of Congoleum to cooperate with the carriers and the right of the
carriers to consent to any settlement.  The excess insurance carriers
also contend the settlement terms in the Claimant Agreement are not fair or
reasonable and/or that the Claimant Agreement was not negotiated at arm’s length
or in good faith.  Additionally, certain insurers have argued that
Congoleum’s entering into the Claimant Agreement voids the insurance for the
underlying claims in their entirety.  Certain insurers also have
claimed that the Claimant Agreement voids their entire policy obligations.
Congoleum has disputed the allegations and contentions of the excess insurance
carriers. In November 2003, the State Court denied a motion for summary judgment
by the excess insurance carriers that the Claimant Agreement was not fair,
reasonable or in good faith, ruling that material facts concerning these issues
were in dispute.  In April 2004, the State Court denied motions for
summary judgment by the excess carriers that the Claimant Agreement was not
binding on them because Congoleum had breached the consent and cooperation
clauses of their insurance policies by, among other things, entering into the
Claimant Agreement without their consent.  Congoleum has argued, among
other things, that it was entitled to enter into the Claimant Agreement and/or
the Claimant Agreement was binding on the excess insurance carriers because they
were in breach of their policies and/or had denied coverage and/or had created a
conflict with Congoleum by reserving rights to deny coverage and / or the
Claimant Agreement was fair, reasonable and in good faith and/or there was and
is no prejudice to the excess insurance carriers from the Claimant Agreement
and/or the excess insurance carriers had breached their duties of good faith and
fair dealing.





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





In
February 2005, the State Court ruled on a series of summary judgment motions
filed by various insurers.  The State Court denied a motion for
summary judgment filed by certain insurers, holding that there were disputed
issues of fact regarding whether the Claimant Agreement and other settlement
agreements between Congoleum and the claimants had released Congoleum and the
insurers from any liability for the asbestos bodily injury claims of the
claimants who signed the Claimant Agreement and the other settlement
agreements.





The State
Court also denied another motion for summary judgment filed by various insurers
who argued that they did not have to cover the liability arising from the
Claimant Agreement because they had not consented to it.





The State
Court granted summary judgment regarding Congoleum’s bad faith claims against
excess insurers (other than first-layer excess insurers), holding that the
refusal of these excess insurers to cover the Claimant Agreement was at least
fairly debatable and therefore not in bad faith.








74


In March
2005, the Company filed a motion in the Bankruptcy Court asking the Bankruptcy
Court to vacate its prior order lifting the automatic stay in bankruptcy to
permit the Coverage Action to proceed.  The Company requested that the
Coverage Action proceedings be stayed until the Company has completed its plan
confirmation process in the Bankruptcy Court.  A hearing on the
Company’s motion was held in April 2005 and the motion was denied.





The first phase of the Coverage Action
began in August 2005.  Phase 1 was limited to deciding whether the
insurers are obligated to provide coverage under the policies at issue in this
litigation for the asbestos claims settled under the terms of the global
Claimant Agreement.  Three months into the trial, in October 2005, a
federal appeals court ruled that GHR, which had been acting as the Company’s
insurance co-counsel in the Coverage Action, had other representations which
were in conflict with its representation of Congoleum.  As a result of
this ruling, with Bankruptcy Court approval, Congoleum retained the firm of
Covington & Burling to represent it as co-counsel with Dughi & Hewit in
the insurance coverage litigation and insurance settlement matters previously
handled by GHR.





In the middle of Congoleum presenting
its case, in or about mid-November 2005 and  early December 2005,
certain insurers filed motions for summary judgment on the grounds, inter alia, that the Federal
Appeals Court decision regarding GHR and/or Congoleum’s filing of the Avoidance
Actions in the Bankruptcy Court, entitled them to judgment as a matter of law on
the Phase 1 issues.  Congoleum opposed the motions.  The
motions were argued in January 2006, and in March 2006 the State Court denied
the motions for summary judgment.





Congoleum completed the presentation of
its case in April 2006.  Certain insurers moved for a directed verdict
in their favor during the first week of May 2006. Hearings of arguments on the
directed verdict motion took place in June 2006.  In July 2006 the
State Court denied the motion for a directed verdict.  The trial
resumed in September 2006.  Defendant insurers presented their case,
for the most part, through documents and deposition
designations.  Post-trial briefs were submitted by the parties in
November 2006.  In May 2007, the State Court issued a decision ruling
that the defendant insurers have no coverage obligations for the Claimant
Agreement under New Jersey law.





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


75


jurisdiction
over all the affected claimants and that their due process rights are otherwise
protected.  The Company amended the Omnibus Avoidance Action to seek
the same relief requested in the Omnibus Objection.





In
September 2007, Congoleum filed the Third Amended Complaint in the Omnibus
Adversary Proceeding adding new counts that encompass the subject matter and
relief requested in the Omnibus Objection. The Third Amended Complaint remains
pending.  In October 2007, Congoleum filed a motion for summary
judgment in the Omnibus Adversary Proceeding seeking a ruling that all of the
pre-petition settlement agreements, including the Claimant Agreement, were null
and void or should be rescinded.  Argument on the summary judgment
motion was heard in November 2007 and by opinion dated December 28, 2007, the
Bankruptcy Court denied the motion for summary judgment.  Congoleum
and the Bondholders' Committee have filed notice of appeal from this decision to
the District Court.





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




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





76


Amounts
Recorded in Financial Statements





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





(in
      thousands)
              
              Balance
      at
                12/31/2006
              
              
              Additions
                (Deletions)
              
              
              Spending
                Against
                Reserve
              
              
              Recoveries
                From
                Insurance
              
              
              Balance
      at
                12/31/2007ReservesCurrent
              
              $
              7,800
              
              
              
              26,448
              
              
              $
              (9,504
              )
              
              
              —
              
              
              $
              24,744ReceivablesCurrent
              
              
              (21,813
              )
              
              
              14,867
              
              
              
              (3,544
              )
              
              
              —
              
              
              
              (10,490
              )Net Asbestos
      Liability
              
              $
              (14,013
              )
              
              $
              41,315
              
              
              $
              (13,048
              )
              
              $
              —
              
              
              $
              14,254Restricted
      CashInsurance
      Proceeds
              
              $
              6,149
              
              
              $
              314
              
              
              
              
              
              
              
              
              
              
              $
              6,463
 
 The table below provides an analysis of
changes in the Company’s asbestos reserves and related receivables from December
31, 2005 to December 31, 2006:
 
 (in
      thousands)
                
                Balance
      at
                  12/31/2005
                
                
                Additions
                  (Deletions)
                
                
                Spending
                  Against
                  Reserve
                
                
                Recoveries
                  From
                  Insurance
                
                
                Balance
      at
                  12/31/2006ReservesCurrent
                
                $
                19,469
                
                
                $
                —
                
                
                $
                (11,669
                )
                
                $
                —
                
                
                $
                7,800ReceivablesCurrent
                
                
                (14,793
                )
                
                
                —
                
                
                
                (10,704
                )
                
                
                3,684
                
                
                
                (21,813
                )Net
      Asbestos Liability (Asset)
                
                $
                4,676
                
                
                $
                —
                
                
                $
                (22,373
                )
                
                $
                3,684
                
                
                $
                (14,013
                )Restricted
      CashInsurance
      Proceeds
                
                $
                8,901
                
                
                $
                932
                
                
                $
                —
                
                
                $
                (3,684
                )
                
                $
                6,149







77


18.      Stock
Option Plans:





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





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





In
December 2001, the Company offered its eligible option holders an exchange of
all options then outstanding and granted to them under the 1995 Plan or the 1999
Plan for new stock options to be granted under those plans not earlier than six
months and one day after the date the Company canceled any options tendered to
and accepted by it pursuant to the offer to exchange.  On January 4,
2002, the Company accepted and canceled 667,500 options that had been previously
granted under the 1995 Plan and 9,500 options that had been previously granted
under the 1999 Plan that were tendered to and accepted by the Company pursuant
to the offer to exchange.





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





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





78





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





Stock option information related to
non-vested shares for the Congoleum Stock Option Plans for the year ended
December 31, 2007, was as follows:





1995
      Plan:
            
            Number
      of
              Shares
            
            
            Weighted
      Average
              Grant-Date
              Fair
      ValueNon-vested  stock
      options at January 1, 2007
            
            
            148,800
            
            
            $
            1.55Granted
            
            
            —
            
            
            
            —Forfeited
            
            
            (300
            )
            
            
            1.65Vested
            
            
            (126,300
            )
            
            
            1.78Non-vested
      stock options at December 31, 2007
            
            
            22,200
            
            
            $
            1.76





1999
      Plan:
            
            Number
      of
              Shares
            
            
            Weighted
      Average
              Grant-Date
              Fair
      ValueNon-vested  stock
      options at January 1, 2007
            
            
            2,500
            
            
            $
            1.68Granted
            
            
            2,500
            
            
            
            0.75Forfeited
            
            
            —
            
            
            
            —Vested
            
            
            (2,500
            )
            
            
            1.68Non-vested
      stock options at December 31, 2007
            
            
            2,500
            
            
            $
            0.75





79


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





(in
      thousands)
            Intrinsic
      ValueExercised
      during 2007
            NAOutstanding
      at December 31, 2007
            NAExercisable
      at December 31, 2007
            NA





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





19.       Stockholders’
Equity:





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





In November 1998, the Board of
Directors authorized the Company to repurchase an additional $5.0 million of the
Company’s common stock (Class A and Class B shares) through the open market or
through privately negotiated transactions, bringing the total authorized common
share repurchases to $15.0 million.  Under the plan, Congoleum has
repurchased shares of its common stock at an aggregate cost of $14.0 million
through December 31, 2007.  No shares were repurchased during 2007 or
2006. Shares of Class B stock repurchased (totaling 741,055 shares) have been
retired.  As of December 31, 2007, ABI owned 69.4% of the voting
interest of the Company.





20.        Fair
Value of Financial Instruments:





The Company’s cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
long-term debt are financial instruments. With the exception of the Company’s
long-term debt, the carrying value of these financial instruments approximates
their fair value at December 31, 2007 and 2006.  The Company’s
long-term debt had a book value of $99.9 million and, based on bid prices quoted
by an investment bank, a fair market value of $72.0 million at December 31,
2007.  The Company’s long-term debt had a book value of $99.9 million
and a fair market value of $91.0 million at December 31, 2006.





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





80


21.       Quarterly
Financial Data (Unaudited):





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





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





Year
      ended December 31, 2006First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              Quarter(2)Net
      sales
            
            $
            57,237
            
            
            $
            58,743
            
            
            $
            57,460
            
            
            $
            46,034Gross
      profit
            
            
            13,277
            
            
            
            13,604
            
            
            
            12,898
            
            
            
            10,673Net
      income (loss)
            
            
            210
            
            
            
            627
            
            
            
            (424
            )
            
            
            266Net
      income (loss) per
              common
      share:Basic
            
            $
            0.03
            
            
            $
            0.08
            
            
            $
            (0.05
            )
            
            $
            0.02Diluted
            
            
            0.03
            
            
            
            0.08
            
            
            
            (0.05
            )
            
            
            0.02





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


(2)
            Includes
      $1.3 million of insurance recoveries in excess of book value of
      assets.





81


Report of
Independent Registered Public Accounting Firm





We have
audited the accompanying consolidated balance sheets of Congoleum Corporation
(the Company) as of December 31, 2007 and 2006, and the related consolidated
statement of operations, stockholders’ equity (deficit), and cash flows for each
of the two years in the period ended December 31, 2007.  Our audits
also included the financial statement schedule listed in the Index at Item
15(a).  These financial statements and schedule are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Congoleum Corporation
at December 31, 2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the two years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





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









Boston,
Massachusetts


March 21,
2008


82


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





None.








Item9A(T).CONTROLS AND
PROCEDURES





(a)
            Evaluation of Disclosure
      Controls and Procedures.The Company’s management, with
      the participation of the Company’s Chief Executive Officer, or CEO, and
      Chief Financial Officer, or CFO, evaluated the effectiveness of the
      Company’s disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
      amended) as of December 31, 2007.  Based on this evaluation, the
      Company’s CEO and CFO concluded that, as of December 31, 2007, the
      Company’s disclosure controls and procedures were effective, in that they
      provide reasonable assurance that information required to be disclosed by
      the Company in the reports that it files or submits under the Securities
      Exchange Act of 1934, as amended, is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and is accumulated and communicated to the
      Company’s management, including the Company’s CEO and CFO, as appropriate
      to allow timely decisions regarding required
  disclosure.





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





The management of Congoleum
Corporationassessed the effectivenessofCongoleumCorporation’sinternal control over financial
reporting as of December 31, 2007.In making this assessment,the management of Congoleum Corporationused the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control—Integrated Framework.Based onitsassessment,the management of Congoleum
Corporationbelievesthat, as of December 31, 2007,Congoleum
Corporation’sinternal control over financial
reporting is effective at a
reasonable assurance level based on these criteria.





83


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








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





(c)
            Changes in Internal
      Controls.No change in the Company’s internal control
      over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
      under the Securities Exchange Act of 1934, as amended) occurred during the
      fiscal quarter ended December 31, 2007 that has materially affected, or is
      reasonably likely to materially affect, the Company’s internal control
      over financial reporting.








Item
9B.   OTHER INFORMATION





None.








PART
III





Item
10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





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





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





The other
information called for by this Item is hereby incorporated by reference to the
Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders
to be held on May 6, 2008.


84
  Item
11.  EXECUTIVE COMPENSATION





The information called for by this Item
is hereby incorporated by reference to the Registrant’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 6,
2008.










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





EQUITY
COMPENSATION PLAN INFORMATION





The following table sets forth
information regarding the Company’s equity compensation plans as of December 31,
2007:




Plan
      Category
            
            Number
      of Securities to be Issued Upon Exercise of Outstanding
      Options, Warrants and Rights
            
            Weighted
      Average Exercise Price of Outstanding Options,
      Warrants and Rights
            
            Number
      of Securities Remaining Available for Future Issuance
      Under Equity Compensation Plans (Excluding Securities
      Reflected in Column (A))(A)
            
            (B)
            
            (C)Equity
      compensation plans approved by security holders
            
            635,500
            
            $2.03
            
            150,300Equity
      compensation plans not approved by security holders
            
            26,500
            
            $2.24
            
            23,500Total
            
            662,000
            
            $2.03
            
            173,800





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


85


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





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





As of December 31, 2007, an aggregate
of 637,300 shares of common stock were issuable upon the exercise of outstanding
vested options under the 1995 Plan and 1999 Plan.





The other information called for by
this Item is hereby incorporated by reference to the Registrant’s definitive
Proxy Statement for its Annual Meeting of Stockholders to be held on May 6,
2008.






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




The information called for by this Item
is hereby incorporated by reference to the Registrant’s definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on May 6,
2008.








Item
14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
information called for by this Item is hereby incorporated by reference to the
Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders
to be held on May 6, 2008.








86


PART
IV





Item
15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





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





Page
      NumbersConsolidated
      Balance Sheets at December 31, 2007 and 2006
            43Consolidated
      Statements of Operations for each of the two years ended December 31, 2007
      and 2006
            44Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for each of the
      two years ended December 31, 2007 and 2006
            45Consolidated
      Statements of Cash Flows for each of the two years ended December 31, 2007
      and 2006
            46Notes
      to Consolidated Financial Statements
            47Supplementary
      Data — Quarterly Financial Data (Unaudited)
            81





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





Schedule
      II - Valuation and Qualifying Accounts
            91All
      other schedules are omitted because they are not required, are
      inapplicable, or the information is otherwise shown in the financial
      statements or notes thereto.





(B)           These
exhibits, required to be filed by Item 601 of Regulation S-K under the Exchange
Act, are listed in the Index to Exhibits included in this Annual Report on Form
10-K beginning on Page 93.





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




87


10.1
            Joint
      Venture Agreement, dated as of December 16, 1992, by and among Resilient
      Holdings, Incorporated, Hillside, the Company (collectively, the
      "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and
      American Biltrite Inc. ("American Biltrite").(1)10.2
            Closing
      Agreement, dated as of March 11, 1993, by and among the Congoleum Group,
      Hillside Capital and American Biltrite.(1)10.3
            Personal
      Services Agreement, dated as of March 11, 1993 (the "Personal Services
      Agreement"), by and between American Biltrite and the Company.(1)10.3.1
            First
      Amendment, dated February 8, 1995, to Personal Services Agreement, by and
      between American Biltrite and the Company.(2)10.3.2
            Second
      Amendment, dated November 15, 1996, to Personal Services Agreement, by and
      between American Biltrite and the Company.(5)10.3.3
            Third
      Amendment, dated as of March 10, 1998, to Personal Services Agreement, by
      and between American Biltrite and the Company.(5)10.3.4
            Fourth
      Amendment, dated as of November 7, 2002, to Personal Services Agreement,
      by and between American Biltrite and the Company.(11)10.3.5
            Fifth
      Amendment, dated as of March 11, 2008, to Personal Services Agreement, by
      and between American Biltrite and the Company.(23)10.4
            Business
      Relations Agreement, dated as of March 11, 1993, by and between American
      Biltrite and the Company.(1)10.4.1
            First
      Amendment, dated August 19, 1997, to Business Relations Agreement, by and
      between American Biltrite and the Company.(5)10.4.2
            Amendment
      to Business Relations Agreement, dated as of March 11, 2008, by and
      between American Biltrite and the Company.(23)10.5
            Tax
      Sharing Agreement, dated as of November 1, 1996, between American Biltrite
      and the Company.(5)10.6
            Trademark
      Purchase Agreement, dated November 29, 1993, by and between the Company
      and The Amtico Company LTD ("Amtico Company").(2)10.7
            First
      Right of Refusal, dated November 29, 1993, by and between American
      Biltrite (Canada) Limited and Amtico Company.(2)10.8
            Undertaking
      Concerning Amtico Trademark, dated November 29, 1993, by and between
      American Biltrite and Amtico Company.(2)10.9
            Form
      of 1995 Stock Option Plan.(2)10.9.1
            Form
      of Amendment to 1995 Stock Option Plan.(6)10.9.2
            Form
      of Nonqualified Stock Option Award Agreement Under the Congoleum 1995
      Stock Option Plan.(15)10.10
            Congoleum
      Corporation 1999 Stock Option Plan for Non-Employee Directors.(8)10.10.1
            Form
      of Amendment to Non-qualified, Non-employee Directors Stock Option
      Plan.(9)10.10.2
            Form
      of Stock Option Agreement Under the Congoleum Corporation 1999 Stock
      Option Plan for Non-Employee Directors.(15)10.11
            Loan
      and Security Agreement, dated December 10, 2001 (the "Congress Financial
      Loan Agreement") by and between Congress Financial Corp. (the "Lender")
      and the Company.(9)10.11.1
            Amendment
      No. 1 to Loan and Security Agreement, dated September 24, 2002,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(10)




88




10.11.2
            Amendment
      No. 2 to Loan and Security Agreement, dated as of February 27, 2003,
      by and between Congress Financial Corporation and Congoleum
      Corporation.(11)10.11.3
            Ratification
      and Amendment Agreement dated January 7, 2004, by and between the Company
      and Congress Financial Corporation.(13)10.11.4
            Amendment
      No. 1 to Ratification and Amendment Agreement and Amendment No. 3 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 14, 2004.(14)10.11.5
            Amendment
      No. 2 to Ratification and Amendment Agreement and Amendment No. 4 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of January 13, 2005.(24)10.11.6
            Amendment
      No. 3 to Ratification and Amendment Agreement and Amendment No. 5 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 7, 2005.(24)10.11.7
            Amendment
      No. 4 to Ratification and Amendment Agreement and Amendment No. 6 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 19, 2005.(24)10.11.8
            Amendment
      No. 5 to Ratification and Amendment Agreement and Amendment No. 7 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of September 27, 2006.(24)10.11.9
            Amendment
      No. 6 to Ratification and Amendment Agreement and Amendment No. 8 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of November 27, 2006.(24)10.11.10
            Amendment
      No. 7 to Ratification and Amendment Agreement and Amendment No. 9 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 12, 2007.(20)10.11.11
            Amendment
      No. 8 to Ratification and Amendment Agreement and Amendment No. 10 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 11, 2007.10.12
            Settlement
      Agreement Between the Company and Various Asbestos Claimants dated April
      10, 2003.(12)10.12.1
            First
      Amendment to Settlement Agreement Between the Company and Various Asbestos
      Claimants dated June 6, 2003.(12)10.13
            Collateral
      Trust Agreement, dated April 16, 2003, by and between the Company, Arthur
      J. Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust, and Wilmington Trust Company, solely in its capacity as
      Delaware Trustee of the Collateral Trust.(12)10.13.1
            First
      Amendment to Collateral Trust Agreement, dated June 6, 2003, by and
      between the Company, Arthur J. Pergament, solely in his capacity as the
      Collateral Trustee of the Collateral Trust, and Wilmington Trust Company,
      solely in its capacity as Delaware Trustee of the Collateral Trust.(12)10.14
            Security
      Agreement, dated April 16, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.1
            Second
      Security Agreement, dated April 17, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral Trustee of
      the Collateral Trust.(12)




89




10.14.2
            Termination
      Agreement, dated June 6, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.3
            Superseding
      Security Agreement, dated June 11, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral
              Trustee
      of the Collateral Trust.(12)10.15
            Purchase
      Agreement, effective as of September 1, 2006, between the Company and
      Armstrong World Industries, Inc.(24)10.16
            Note
      Agreement, dated as of October 12, 2006, by and between Gilbert Heinz
      & Randolph, LLP (“GHR”) and the Company.(25)10.17
            Promissory
      Note dated October 12, 2006 of GHR.(25)10.18
            Security
      Agreement, dated as of October 12, 2006 made by GHR in favor of the
      Company.(25)10.19
            Put/Call
      Agreement, dated as of February 20, 2008, between the Company, the Initial
      Backstop Participants and the Trust to be formed.(22)14.1
            Code
      of Ethics.(14)21.1
            Subsidiaries
      of the Company.(7)23.1
            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP.31.1
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Executive
      Officer.31.2
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Financial
      Officer.32.1
            Section
      1350 Certification of the Chief Executive Officer.32.2
            Section
      1350 Certification of the Chief Financial Officer.99.1
            Settlement
      Agreement and Release by and between Congoleum Corporation and Liberty
      Mutual Insurance Company.(16)99.2
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      certain AIG Member Companies.(16)99.3
            Confidential
      Settlement Agreement and Release among Congoleum Corporation, the Plan
      Trust and Certain Underwriters at Lloyd's, London dated June 22,
      2005.(16)99.3.1
            Amendment
      dated July 29, 2005, to the Confidential Settlement Agreement and Release
      among Congoleum Corporation, the Plan Trust and Certain Underwriters at
      Lloyd's, London, dated June 22, 2005.(16)99.3.2
            Second
      Amendment, dated November 8, 2007, to the Confidential Settlement
      Agreement and Release among Congoleum Corporation, the Plan Trust and
      Certain Undewriters at Lloyd’s, London, dated June 22,
    2005.99.4
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      Federal Insurance Company.(15)99.5
            Amended
      and Restated Settlement Agreement and Release, dated as of January 18,
      2008, among Congoleum Corporation, the Plan Trust and Mt. McKinley
      Insurance Company and Everest Reinsurance Company.99.6
            Settlement
      Agreement and Release by and between Congoleum Corporation and Harper
      Insurance Limited, formerly known as Turegum Insurance Company.(18)99.7
            Settlement
      and Policy Buyback Agreement and Release, dated as of April 25, 2006, by
      and among Congoleum Corporation, the Plan Trust, American Biltrite,
      Travelers Casualty and Surety Co., and St. Paul Fire and Marine Insurance
      Company.(18)




90


99.7.1
            Letter
      Agreement, dated March 18, 2008, amending the Settlement and Policy
      Buyback Agreement and Release, dated as of April 25, 2006, by and among
      Congoleum Corporation, the Plan Trust, American Biltrite, Travelers
      Casualty and Surety Co. and St. Paul Fire and Marine Insurance
      Company99.8
            Settlement
      Agreement, made as of April 27, 2006, by and between Congoleum Corporation
      and Fireman’s Fund Insurance Company.(18)99.9
            Settlement
      and Policy Buyback Agreement and Release, made as of August 17, 2006, by
      and between Congoleum Corporation and Century Insurance Company.(19)99.10
            Disclosure
      Statement with respect to the Amended Plan of Reorganization Under Chapter
      11 of the Bankruptcy Code of the Futures Representative for Congoleum
      Corporation, et
      al., dated as of January 17, 2008.(21)99.11
            Amended
      Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of the
      Futures Representative for Congoleum Corporation, et al., dated as of
      January 17, 2008.(21)





SCHEDULE
II


CONGOLEUM
CORPORATION


VALUATION
AND QUALIFYING ACCOUNTS





(in
      thousands)
            
            Balance
      at
              Beginning
              Of
      Period
            
            
            Reversed
      to
              Income
              Statement
            
            
            Other
              Changes
            
            
            Deductions(a)
            
            
            Balance
              At
      end
              of
      PeriodYear
      ended December 31, 2007:
              Allowance
      for doubtfulaccounts
      and cashdiscounts
            
            $
            (1,142
            )
            
            $
            —
            
            
            $
            125
            (b)
            
            $
            —
            
            
            $
            (1,017
            )Year
      ended December 31, 2006:
              Allowance
      for doubtfulaccounts
      and cashdiscounts
            
            $
            (1,142
            )
            
            $
            —
            
            
            $
            —
            (b)
            
            $
            —
            
            
            $
            (1,142
            )


(a)  Balances
written off, net of recoveries.


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





91


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 10th day of
March 2008.





CONGOLEUM
CORPORATION


By: /s/ Roger S.
Marcus


Roger S.
Marcus


President,
Chairman & Chief Executive Officer


(Principal
Executive Officer)





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





Signature
            Title
            Date/s/ Roger S.
      Marcus
            President,
      Chairman, Chief Executive Officer
            March
      10, 2008Roger
      S. Marcus
            and
      Director (Principal Executive Officer)/s/ Howard N. Feist
      III
            Chief
      Financial Officer
            March
      10, 2008Howard
      N. Feist III
            (Principal
      Financial and Accounting Officer)/s/ Richard G.
      Marcus
            Vice
      Chairman and Director
            March
      10, 2008Richard
      G. Marcus/s/ William M.
      Marcus
            Director
            March
      10, 2008William
      M. Marcus/s/ Mark S.
      Newman
            Director
            March
      10, 2008Mark
      S. Newman/s/ Mark N.
      Kaplan
            Director
            March
      10, 2008Mark
      N. Kaplan_______________
            DirectorC.
      Barnwell Straut/s/ Jeffrey H.
      Coats
            Director
            March
      10, 2008Jeffrey
      H. Coats/s/ Adam H.
      Slutsky
            Director
            March
      10, 2008Adam
      H. Slutsky





92


INDEX TO
EXHIBITS





Exhibit
              Number
            Exhibits3.1
            Amended
      Certificate of Incorporation of the Company.(3)3.2
            Amended
      and Restated Bylaws of the Company as of December 12, 2007.(26)4.1
            Registration
      Rights Agreement, dated as of February 8, 1995, by and between the Company
      and Hillside Industries, Incorporated ("Hillside").(2)4.2
            Indenture,
      dated as of August 3, 1998, by and between the Company and First Union
      National Bank, as trustee.(4)4.2.1
            First
      Supplemental Indenture, dated as of March 28, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(11)4.2.2
            Second
      Supplemental Indenture, dated as of August 7, 2003, between the Company
      and Wachovia Bank, National Association (as successor to First Union
      National Bank), as trustee.(12)4.2.3
            Instrument
      of Resignation, Appointment and Acceptance dated as of December 14, 2005
      among the Company, Wachovia Bank, National Association and HSBC Bank USA,
      National Association, as Successor Trustee.(17)10.1
            Joint
      Venture Agreement, dated as of December 16, 1992, by and among Resilient
      Holdings, Incorporated, Hillside, the Company (collectively, the
      "Congoleum Group"), Hillside Capital Incorporated ("Hillside Capital") and
      American Biltrite Inc. ("American Biltrite").(1)10.2
            Closing
      Agreement, dated as of March 11, 1993, by and among the Congoleum Group,
      Hillside Capital and American Biltrite.(1)10.3
            Personal
      Services Agreement, dated as of March 11, 1993 (the "Personal Services
      Agreement"), by and between American Biltrite and the Company.(1)10.3.1
            First
      Amendment, dated February 8, 1995, to Personal Services Agreement, by and
      between American Biltrite and the Company.(2)10.3.2
            Second
      Amendment, dated November 15, 1996, to Personal Services Agreement, by and
      between American Biltrite and the Company.(5)10.3.3
            Third
      Amendment, dated as of March 10, 1998, to Personal Services Agreement, by
      and between American Biltrite and the Company.(5)10.3.4
            Fourth
      Amendment, dated as of November 7, 2002, to Personal Services Agreement,
      by and between American Biltrite and the Company.(11)10.3.5
            Fifth
      Amendment, dated as of March 11, 2008, to Personal Services Agreement, by
      and between American Biltrite and the Company.(23)10.4
            Business
      Relations Agreement, dated as of March 11, 1993, by and between American
      Biltrite and the Company.(1)10.4.1
            First
      Amendment, dated August 19, 1997, to Business Relations Agreement, by and
      between American Biltrite and the Company.(5)10.4.2
            Amendment
      to Business Relations Agreement, dated as of March 11, 2008, by and
      between American Biltrite and the Company.(23)10.5
            Tax
      Sharing Agreement, dated as of November 1, 1996, between American Biltrite
      and the Company.(5)


93





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


94





10.11.10
            Amendment
      No. 7 to Ratification and Amendment Agreement and Amendment No. 9 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of June 12, 2007. (20)10.11.11
            Amendment
      No. 8 to Ratification and Amendment Agreement and Amendment No. 10 to Loan
      and Security Agreement, by and between the Company and Congress Financial
      Corporation dated as of December 11, 2007.10.12
            Settlement
      Agreement Between the Company and Various Asbestos Claimants dated April
      10, 2003.(12)10.12.1
            First
      Amendment to Settlement Agreement Between the Company and Various Asbestos
      Claimants dated June 6, 2003.(12)10.13
            Collateral
      Trust Agreement, dated April 16, 2003, by and between the Company, Arthur
      J. Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust, and Wilmington Trust Company, solely in its capacity as
      Delaware Trustee of the Collateral Trust.(12)10.13.1
            First
      Amendment to Collateral Trust Agreement, dated June 6, 2003, by and
      between the Company, Arthur J. Pergament, solely in his capacity as the
      Collateral Trustee of the Collateral Trust, and Wilmington Trust Company,
      solely in its capacity as Delaware Trustee of the Collateral Trust.(12)10.14
            Security
      Agreement, dated April 16, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.1
            Second
      Security Agreement, dated April 17, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral Trustee of
      the Collateral Trust.(12)10.14.2
            Termination
      Agreement, dated June 6, 2003, by and between the Company and Arthur J.
      Pergament, solely in his capacity as the Collateral Trustee of the
      Collateral Trust.(12)10.14.3
            Superseding
      Security Agreement, dated June 11, 2003, by and between the Company and
      Arthur J. Pergament, solely in his capacity as the Collateral
              Trustee
      of the Collateral Trust.(12)10.15
            Purchase
      Agreement, effective as of September 1, 2006, between the Company and
      Armstrong World Industries, Inc.(24)10.16
            Note
      Agreement, dated as of October 12, 2006, by and between Gilbert Heintz
      & Randolph LLP (“GHR”) and the Company.(25)10.17
            Promissory
      Note dated October 12, 2006 of GHR.(25)10.18
            Security
      Agreement, dated as of October 12, 2006 made by GHR in favor of the
      Company.(25)10.19
            Put/Call
      Agreement, dated as of February 20, 2008, between the Company, the Initial
      Backstop Participants and the Trust to be formed.(22)12.1
            Statement
      Regarding Computation of Ratio of Earnings to Fixed
    Charges.14.1
            Code
      of Ethics.(14)21.1
            Subsidiaries
      of the Company.(7)23.1
            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP.


95





31.1
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Executive
      Officer.31.2
            Rule
      13a-14(a) / 15d-14(a) Certification of Chief Financial
      Officer.32.1
            Section
      1350 Certification of Chief Executive Officer.32.2
            Section
      1350 Certification of Chief Financial Officer.99.1
            Settlement
      Agreement and Release by and between Congoleum Corporation and Liberty
      Mutual Insurance Company.(16)99.2
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      certain AIG Member Companies.(16)99.3
            Confidential
      Settlement Agreement and Release among Congoleum Corporation, the Plan
      Trust and Certain Underwriters at Lloyd's, London dated June 22,
      2005.(16)99.3.1
            Amendment
      dated July 29, 2005, to the Confidential Settlement Agreement and Release
      among Congoleum Corporation, the Plan Trust and Certain Underwriters at
      Lloyd's, London, dated June 22, 2005.(16)99.3.2
            Second
      Amendment, dated November 8, 2007, to the Confidential Settlement
      Agreement and Release among Congoleum Corporation, the Plan Trust and
      Certain Undewriters at Lloyd’s, London, dated June 22,
    2005.99.4
            Settlement
      Agreement and Release by, between and among Congoleum Corporation and
      Federal Insurance Company.(15)99.5
            Amended
      and Restated Settlement Agreement and Release, dated as of January 18,
      2008, among Congoleum Corporation, the Plan Trust and Mt. McKinley
      Insurance Company and Everest Reinsurance Company.99.6
            Settlement
      Agreement and Release by and between Congoleum Corporation and Harper
      Insurance Limited, formerly known as Turegum Insurance Company.(18)99.7
            Settlement
      and Policy Buyback Agreement and Release, dated as of April 25, 2006, by
      and among Congoleum Corporation, the Plan Trust, American Biltrite,
      Travelers Casualty and Surety Co., and St. Paul Fire and Marine Insurance
      Company.(18)99.7.1
            Letter
      Agreement, dated March 18, 2008, amending the Settlement and Policy
      Buyback Agreement and Release, dated as of April 25, 2006, by and among
      Congoleum Corporation, the Plan Trust, American Biltrite, Travelers
      Casualty and Surety Co. and St. Paul Fire and Marine Insurance
      Company.99.8
            Settlement
      Agreement, made as of April 27, 2006, by and between Congoleum Corporation
      and Fireman’s Fund Insurance Company.(18)99.9
            Settlement
      and Policy Buyback Agreement and Release, made as of August 17, 2006, by
      and between Congoleum Corporation and Century Insurance Company.(19)99.10
            Disclosure
      Statement with respect to the Amended Plan of Reorganization Under Chapter
      11 of the Bankruptcy Code of the Futures Representative for Congoleum
      Corporation, et
      al., dated as of January 17, 2008.(21)99.11
            Amended
      Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of the
      Futures Representative for Congoleum Corporation, et al., dated as of
      January 17, 2008.(21)




(1)
              Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company's Registration Statement on Form S-1 (File No. 33-71836) declared
      effective by the Securities and Exchange Commission on January 25,
      1994.
 96




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




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





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





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





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





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





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





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





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





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





97


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





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





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





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





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





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





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


.


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





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





(21)
            Incorporated
      by reference to the exhibit bearing the same description filed with the
      Company’s Current Report on Form 8-K (File No. 001-13612) on January 23,
      2008.





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





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




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





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





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


98