-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UHmK+VVXxSAZWZoKC8O/tE2JQ6U4h9UCwjh6B5GvGPodakibsv6LI1/NXwIbEh41 VrhKpex+C1r5ixXEWLnPRg== 0001171520-05-000397.txt : 20051114 0001171520-05-000397.hdr.sgml : 20051111 20051114170728 ACCESSION NUMBER: 0001171520-05-000397 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONGOLEUM CORP CENTRAL INDEX KEY: 0000023341 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 020398678 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13612 FILM NUMBER: 051202692 BUSINESS ADDRESS: STREET 1: 3500 QUAKERBRIDGE RD STREET 2: PO BOX 3127 CITY: MERCERVILLE STATE: NJ ZIP: 08619-0127 BUSINESS PHONE: 6095843000 MAIL ADDRESS: STREET 1: 3500 QUAKERBRIDGE RD STREET 2: PO BOX 3127 CITY: MERCERVILLE STATE: NJ ZIP: 08619-0127 FORMER COMPANY: FORMER CONFORMED NAME: BATH INDUSTRIES INC DATE OF NAME CHANGE: 19750528 FORMER COMPANY: FORMER CONFORMED NAME: BATH IRON WORKS CORP DATE OF NAME CHANGE: 19670907 10-Q 1 eps1932.txt CONGOLEUM CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 -------------------------- FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 or |_| 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, including zip code) (609) 584-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 2005 ----------------------------- -------------------------------- Class A Common Stock 3,662,790 Class B Common Stock 4,608,945 1 CONGOLEUM CORPORATION Index Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 2005 (unaudited) and December 31, 2004.................................... 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2005 and 2004 (unaudited)........ 4 Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004 (unaudited)........................ 5 Notes to Unaudited Condensed Consolidated Financial Statements (unaudited).......................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 27 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 40 Item 4. Controls and Procedures............................................. 41 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................... 42 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 42 Item 3. Defaults Upon Senior Securities..................................... 42 Item 4. Submission of Matters to a Vote of Security Holders................. 42 Item 5. Other Information................................................... 42 Item 6. Exhibits............................................................ 43 Signature.................................................................... 44 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements
Consolidated Balance Sheets (In thousands, except per share amounts) September 30, December 31, 2005 2004 (unaudited) - ------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ............................................................ $ 17,658 $ 29,710 Restricted cash ...................................................................... 11,334 15,682 Accounts receivable, less allowances of $1,509 and $1,174 as of September 30, 2005 and December 31, 2004, respectively ............................................... 26,159 17,621 Inventories .......................................................................... 37,065 39,623 Prepaid expenses and other current assets ............................................ 7,302 5,124 Deferred income taxes ................................................................ 10,678 10,678 - ------------------------------------------------------------------------------------------------------------------- Total current assets ............................................................ 110,196 118,438 Property, plant, and equipment, net .................................................... 75,107 79,550 Other assets, net ...................................................................... 14,642 14,894 - ------------------------------------------------------------------------------------------------------------------- Total assets .................................................................... $ 199,945 $ 212,882 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable ..................................................................... $ 9,583 $ 10,296 Accrued liabilities .................................................................. 22,694 26,395 Asbestos-related liabilities ......................................................... 18,771 21,079 Revolving credit loan ................................................................ 12,595 9,500 Accrued taxes ........................................................................ 1,282 1,670 Liabilities subject to compromise - current ............................................ 21,377 14,225 - ------------------------------------------------------------------------------------------------------------------- Total current liabilities ....................................................... 86,302 83,165 Asbestos-related liabilities ............................................................................ 2,738 2,738 Deferred income taxes .................................................................. 10,678 10,678 Liabilities subject to compromise - long term .......................................... 135,841 137,290 - ------------------------------------------------------------------------------------------------------------------- Total liabilities ............................................................... 235,559 233,871 - ------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (DEFICIT) Class A common stock, par value $0.01; 20,000,000 shares authorized; 4,736,950 shares issued and 3,652,190 shares outstanding as of September 30, 2005 and December 31, 2004 ................................................................... 47 47 Class B common stock, par value $0.01; 4,608,945 shares authorized, issued and outstanding at September 30, 2005 and December 31, 2004 ............................. 46 46 Additional paid-in capital ............................................................. 49,106 49,106 Retained deficit ....................................................................... (58,455) (43,830) Accumulated other comprehensive loss ................................................... (18,545) (18,545) --------- --------- (27,801) (13,176) Less Class A common stock held in treasury, at cost; 1,085,760 shares at September 30, 2005 and December 31, 2004 ............................................ 7,813 7,813 - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity (deficit) .............................................. (35,614) (20,989) --------- --------- - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity ........................................ $ 199,945 $ 212,882 - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 CONGOLEUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 2005 2004 2005 2004 (In thousands, except per share amounts) Net sales ..................................... $ 60,507 $ 58,871 $ 176,245 $ 173,822 Cost of sales ................................. 47,270 41,812 135,577 126,326 Selling, general and administrative expenses .. 10,556 12,959 48,416 37,961 -------- -------- --------- --------- Income (loss) from operations .............. 2,681 4,100 (7,748) 9,535 Other income (expense): Interest income ............................ 91 26 273 26 Interest expense ........................... (2,670) (2,417) (7,788) (6,976) Other income ............................... 223 212 638 877 -------- -------- --------- --------- Income (loss) before taxes ................. 325 1,921 (14,625) 3,462 Provision for income taxes .................... -- 768 -- 1,384 -------- -------- --------- --------- Net income (loss) ............................. $ 325 $ 1,153 $ (14,625) $ 2,078 ======== ======== ========= ========= Net income (loss) per common share, basic ..... $ 0.04 $ 0.14 $ (1.77) $ 0.25 ======== ======== ========= ========= Net income (loss) per common share, diluted ... $ 0.04 $ 0.13 $ (1.77) $ 0.25 ======== ======== ========= ========= Weighted average number of common shares outstanding, basic ........................ 8,261 8,260 8,261 8,260 ======== ======== ========= ========= Weighted average number of common shares outstanding, diluted ...................... 8,642 8,583 8,261 8,422 ======== ======== ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 CONGOLEUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ---------------------- 2005 2004 (In thousands) Cash flows from operating activities: Net (loss) income ......................................................... $(14,625) $ 2,078 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation ........................................................... 8,083 8,126 Amortization ........................................................... 288 419 Asbestos-related charge ................................................ 15,454 -- Deferred income taxes .................................................. -- 550 Changes in certain assets and liabilities: Accounts receivable ................................................ (8,538) (5,009) Inventories ........................................................ 2,558 1,899 Prepaid expenses and other assets .................................. 577 3,498 Accounts payable ................................................... (712) 8,990 Accrued expenses ................................................... 3,415 14,526 Asbestos-related expenses .......................................... (20,819) (4,500) Asbestos-related expense reimbursements from insurance settlement .. 6,091 -- Other liabilities .................................................. (1,838) 504 -------- -------- Net cash (used in) provided by operating activities ............. (10,066) 31,081 -------- -------- Cash flows from investing activities: Capital expenditures ................................................... (3,640) (2,246) Proceeds from asset retirement ......................................... -- 30 -------- -------- Net cash used in investing activities ........................... (3,640) (2,216) Cash flows from financing activities: Net short-term borrowings .............................................. 3,095 (1,594) Net change in restricted cash .......................................... (1,441) (1,854) -------- -------- Net cash provided by financing activities ....................... 1,654 (3,448) -------- -------- Net (decrease) increase in cash and cash equivalents ......................... (12,052) 25,417 Cash and cash equivalents: Beginning of period ....................................................... 29,710 2,169 -------- -------- End of period ............................................................. $ 17,658 $ 27,586 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 CONGOLEUM CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments as well as provisions to effect its plan to settle asbestos liability) considered necessary for a fair presentation of Congoleum Corporation's (the "Company" or "Congoleum") condensed consolidated financial position, results of operations and cash flows have been included. Operating results for the three and nine months period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. Based upon the nature of the Company's operations, facilities and management structure, the Company considers its business to constitute a single segment for financial reporting purposes. Certain amounts appearing in the prior period's condensed consolidated financial statements have been reclassified to conform to the current period's presentation. The financial statements of 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 and in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements, 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 United States Bankruptcy Code (the "Bankruptcy Code"). On December 31, 2003, Congoleum filed a voluntary petition with the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court") (Case No. 03-51524) seeking relief under Chapter 11 of the 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 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 reflecting the result of further negotiations with representatives of the Asbestos Claimants' Committee, the Future Claimants' Representative 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 modified 6 plan. In April 2005, Congoleum announced that it had reached an agreement in principle with representatives of the Asbestos Claimants' Committee and the Future Claimants' Representative 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. In October 2005, Congoleum sought and obtained an extension of the voting deadline to December 14, 2005 to allow time to address this issue. Congoleum is presently in negotiations with these claimants, as well as other constituencies, to determine the modifications of the Sixth Plan and other steps that may be appropriate for the implementation of the plan. The Bankruptcy Court has given Congoleum permission to file a new amended plan and disclosure statement by December 2, 2005. On November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive right to file a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that other parties may file proposed reorganization plans by December 2, 2005. It is unclear whether any person other than Congoleum will attempt to propose a plan or what any such plan would provide or propose. There can be no assurance that the Company will finalize the terms of a new amended plan by that date, that the Company will receive the acceptances necessary for confirmation of a new amended plan of reorganization, that a new amended plan will not be modified further, that a new amended plan will receive necessary court approvals from the Bankruptcy Court or the Federal District Court, or that such approvals will be received in a timely fashion, that a new amended plan will be confirmed, or that a new amended plan, if confirmed, will become effective. 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 may file objections to any new amended plan. Certain other parties have also filed various objections to Congoleum's previously proposed plans of reorganization and may file objections to any new amended plan. Although the terms of a new amended plan have not been determined, the Company is negotiating amendments and modifications with reference to the terms of the Sixth Plan. Any descriptions of the Sixth Plan provided in these Notes to Unaudited Condensed Consolidated Financial Statements are provided to assist the reader in understanding the basis from which any further amended plan may be negotiated. There can be no assurance that the terms of any new amended plan will not materially differ from the terms of the Sixth Plan or that Congoleum will reach agreement on a new amended plan on or before December 2, 2005. 7 The Sixth Plan would leave the Company's non-asbestos creditors unimpaired and would resolve all pending and future asbestos claims against the Company. The Sixth Plan provides, among other things, for an assignment of certain rights in, and proceeds of, Congoleum's applicable insurance to the Plan Trust that would fund the settlement of all pending and future asbestos claims and protect the Company from future asbestos-related litigation by channeling all asbestos claims to the Plan Trust under Section 524(g) of the Bankruptcy Code. The Bankruptcy Court has authorized the Company to pay its trade creditors in the ordinary course of business. The Company expects that it will take until some time in the second or third quarter of 2006 at the earliest to obtain confirmation of any new amended plan of reorganization. Based on the Sixth Plan, the Company has made provision in its financial statements for the minimum amount of the range of estimates for its contribution to effect its plan to settle asbestos liabilities through the Plan Trust. The Company recorded charges aggregating approximately $26 million in prior years and a further approximately $15.5 million in the second quarter of 2005, to provide for the estimated minimum costs of completing its reorganization given the revised timeline then assumed in the second quarter of 2005 for anticipated confirmation and as based on the Sixth Plan. The Company is not yet able to determine the additional costs that may be required to effect a new amended plan, and actual amounts that will be contributed to the Plan Trust and costs for pursuing and implementing any plan of reorganization could be materially higher than currently recorded. Delays in proposing, filing and obtaining approval of any new amended plan of reorganization could result in a proceeding that takes longer and is more costly than the Company has estimated. The Company may record significant additional charges should the minimum estimated cost increase. For more information regarding the Company's asbestos liability and plan for resolving that liability, please refer to Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements. AICPA 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. 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. 8 2. Recent Accounting Principles: Stock Based Compensation In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Pro forma disclosure is no longer an alternative to financial statement recognition. SFAS No. 123(R) was originally effective for public companies at the beginning of the first interim or annual period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission ("SEC") provided for a phased-in implementation process for public companies. Based on the Company's year end of December 31, the Company must adopt SFAS No. 123(R) on January 1, 2006. SFAS No. 123(R) allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods and determining the effect on the Company's consolidated results of operations and whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123. For 2005, the Company will continue to disclose stock-based compensation information in accordance with FASB Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123," and Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." A reconciliation of consolidated net income (loss), as reported, to pro forma consolidated net income (loss) including compensation expense for the Company's stock-based plans as calculated based on the fair value at the grant dates for awards made under these plans in accordance with the provisions of SFAS 123 as amended by SFAS 148, as well as a comparison of as reported and pro forma basic and diluted earnings per share, follows:
For the Three Months For the Nine Months Ended September 30, Ended September 30, 2005 2004 2005 2004 ---------- ---------- ---------- ---------- (Dollars in thousands, except per share amounts) Net income (loss): As reported $ 325 $ 1,153 $ (14,625) $ 2,078 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (59) (57) (173) (161) ---------- ---------- ---------- ---------- As adjusted $ 266 $ 1,096 $ (14,798) $ 1,917 ========== ========== ========== ========== Net ncome (loss) per share: As reported basic $ .04 $ 0.14 $ (1.77) $ 0.25 Pro forma compensation expense (.01) (0.01) (.02) (0.02) ---------- ---------- ---------- ---------- Pro forma basic $ .03 $ 0.13 $ (1.79) $ 0.23 ========== ========== ========== ========== Net Income / (Loss) per share: As reported diluted $ 0.04 $ 0.13 $ (1.77) $ 0.25 Pro forma compensation expense (0.01) (0.01) (0.02) (0.02) ---------- ---------- ---------- ---------- As adjusted diluted $ 0.03 $ 0.12 $ (1.79) $ 0.23 ========== ========== ========== ==========
9 3. Inventories A summary of the major components of inventories is as follows (in thousands): September 30, December 31, 2005 2004 ------------- ------------ Finished goods $ 28,126 $ 32,811 Work-in-process 2,041 1,415 Raw materials and supplies 6,898 5,397 ----------------------------------------------------------------- Total inventories $ 37,065 $ 39,623 ----------------------------------------------------------------- 4. Income / (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period, unless their effect is anti-dilutive. 5. Environmental and Other Liabilities The Company records a liability for environmental remediation claims when a cleanup program or claim payment becomes probable and the costs can be reasonably estimated. As assessments and cleanup programs progress, these liabilities are adjusted based upon the progress in determining the timing and extent of remedial actions and the related costs and damages. The recorded liabilities, totaling $4.6 million at September 30, 2005 and at December 31, 2004, are not reduced by the amount of insurance recoveries. Such estimated insurance recoveries approximated $2.1 million at September 30, 2005 and at December 31, 2004, and are reflected in other noncurrent assets and are considered probable of recovery. 10 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 to which the Company has been named a PRP relates to a recycling facility site in Elkton, Maryland. 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. EPA recently selected a remedy for the soil and shallow groundwater; however, the remedial investigation/feasibility study related to the deep groundwater has not been completed. The PRP group estimates that future costs of the remedy recently selected by EPA based on engineering estimates would be approximately $11 million. Congoleum's proportionate share, based on waste disposed at the site, is estimated to be approximately 5.7%, or $0.7 million. The majority of Congoleum's share of costs is presently being paid by one of its insurance carriers, whose remaining policy limits for this claim will cover approximately half this amount. Congoleum expects the balance to be funded by other insurance carriers and the Company. 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 $ 1.7 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 $1.4 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. 11 6. Asbestos Liabilities Claims Settlement and Chapter 11 Reorganization In early 2003, the Company announced a strategy for resolving current and future asbestos claims liability through confirmation of a pre-packaged plan of reorganization under Chapter 11 of the Bankruptcy Code. Later in 2003, the Company entered into a settlement agreement with various asbestos personal injury claimants (the "Claimant Agreement"). As contemplated by the Claimant Agreement, the Company 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 the Company's rights under its applicable insurance coverage and payments from the Company's insurers for asbestos claims. Under the terms of the Sixth Plan, participants in the Claimant Agreement who vote in favor of the plan agree to forbear from exercising the security interest in and priority rights to distributions from the Collateral Trust. As discussed below, in September 2005 certain asbestos claimants indicated that they are not willing to agree to forbear from exercising their security interest as contemplated by the Sixth Plan. The Company is presently in negotiations with these claimants, as well as other constituencies, to determine the modifications of the Sixth Plan and other steps that may be appropriate for the implementation of the plan. Although the terms of any new amended plan have not been determined, the Company is negotiating amendments and modifications with reference to the terms of the Sixth Plan. There can be no assurance that the terms of any new amended plan will not materially differ from the terms of the Sixth Plan. The Claimant Agreement established a compensable disease valuation matrix (the "Matrix") and allowed claimants who qualified to participate in the Claimant Agreement (the "Qualifying Claimants") to settle their claims for the Matrix value, secured in part (75%) by a security interest in the collateral granted to the Collateral Trust. The Collateral Trust provides for distribution of trust assets according to various requirements that give priority (subject to aggregate distribution limits) to participating claimants who had pre-existing unfunded settlement agreements ("Pre-Existing Settlement Agreements") with the Company and participating claimants who qualified for payment under unfunded settlement agreements entered into by the Company with plaintiffs that had asbestos claims pending against the Company and which claims were scheduled for trial after the effective date of the Claimant Agreement but prior to the commencement of the Company's anticipated Chapter 11 reorganization case ("Trial-Listed Settlement Agreements"). The Claimant Agreement incorporated Pre-Existing Settlement Agreements and the settlement of certain Trial-Listed Settlement Agreement claims for a fully secured claim against the Collateral Trust, and it settled all other claims for a secured claim against the Collateral Trust equal to 75% of the claim value and an unsecured claim for the remaining 25%. Under the Sixth Plan, after the establishment of the Plan Trust, the assets in the Collateral Trust would be transferred to the Plan Trust and any claims subject to the Claimant Agreement would be channeled to the Plan Trust and paid in accordance with the terms of the Sixth Plan, which incorporates the forbearance. 12 In October 2003, the Company began soliciting acceptances for its proposed pre-packaged plan of reorganization and the Company received the votes necessary for acceptance of the plan in late December 2003. 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 Bankruptcy Code. 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 reflecting the result of further negotiations with representatives of the Asbestos Claimants' Committee, the Future Claimants' Representative 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 modified plan. In April 2005, Congoleum announced that it had reached an agreement in principle with representatives of the Asbestos Claimants' Committee and the Future Claimants' Representative 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. 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. In October 2005, Congoleum sought and obtained an extension of the voting deadline to December 14, 2005 to allow time to address this issue. Congoleum is presently in negotiations with these claimants, as well as other constituencies, to determine the modifications of the Sixth Plan and other steps that may be appropriate for the implementation of the plan. The Bankruptcy Court has given Congoleum permission to file a new amended plan and disclosure statement by December 2, 2005. On November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive right to file a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that other parties may file proposed reorganization plans by December 2, 2005. It is unclear whether any person other than Congoleum will attempt to propose a plan or what any such plan would provide or propose. There can be no assurance that the Company will finalize the terms of a new amended plan by that date, that the Company will receive the acceptances necessary for confirmation of a new amended plan of reorganization, that a new amended plan will not be modified further, that a new amended plan will receive necessary court approvals from the Bankruptcy Court or the Federal District Court, or that such approvals will be received in a timely fashion, that a new amended plan will be confirmed, or that a new amended plan, if confirmed, will become effective. 13 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 may file objections to any new amended plan. Certain other parties have also filed various objections to Congoleum's previously proposed plans of reorganization and may file objections to any new amended plan. During 2005, the Company has 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, and is subject to 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 has appealed the approval order granted by the Bankruptcy Court to the U.S. District Court, where it is pending. 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 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. In August 2005, the Company entered into a settlement agreement with Federal Insurance Company pursuant to which Federal will pay $4 million 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. A motion to reconsider the Bankruptcy Court's approval of the settlement with Federal is scheduled to be heard by the Bankruptcy Court on November 21, 2005. In October 2005, Congoleum entered into a settlement agreement with Mt. McKinley Insurance Company and Everest Reinsurance Company pursuant to which Mt. McKinley and Everest has paid $21.5 million into an escrow account. The escrow agent will transfer the funds to the Plan Trust once a plan goes effective and the Bankruptcy Court approves the transfer of the funds. Court approval of these settlement agreements may be appealed by other insurance carriers who are not party to the agreements, or by other parties. It also is possible that a settling insurer may argue that any new amended plan is not substantially similar to the Sixth Plan and therefore is relieved of its settlement obligation. Although the terms of a new amended plan have not yet been determined, the Company is negotiating amendments and modifications with reference to the terms of the Sixth Plan. There can be no assurance that terms of any new amended plan will not materially differ from the terms of the Sixth Plan or that the Company will reach agreement on a new amended plan before December 2, 2005. The following description of the Sixth Plan is provided to assist the reader in understanding the basis from which any further amended plan may be negotiated. There can be no assurance that the terms of any new amended plan will not materially differ from the terms of the Sixth Plan or that the Company will reach agreement on a new amended plan on or before December 2, 2005. The Company expects that it will take until some time in the second or third quarter of 2006 at the earliest to obtain confirmation of any new amended plan of reorganization. Under the Sixth Plan and related documents, Congoleum's assignment of insurance recoveries to the Plan Trust is net of costs incurred by Congoleum in connection with insurance coverage litigation. Congoleum is entitled to withhold from recoveries, or seek reimbursement from the Plan Trust, for coverage litigation costs incurred after January 1, 2003 in excess of $6 million. Furthermore, once insurance recoveries exceed $375 million, Congoleum is entitled to withhold from recoveries, or seek reimbursement from the Plan Trust, for the first $6 million of such costs for which it could not presently seek reimbursement due to the above items of the Sixth Plan. Congoleum also paid 14 $1.3 million in claims processing fees in connection with claims settled under the Claimant Agreement. Under the Sixth Plan, Congoleum is entitled to withhold from recoveries, or seek reimbursement from the Plan Trust, for the $1.3 million claims processing fee once insurance recoveries exceed $375 million. There can be no assurance that any future plan will provide for Congoleum to recover any coverage litigation costs or claims processing fees. In connection with modifications to the Sixth Plan and certain prior proposed plans and to the Collateral Trust, Congoleum agreed to indemnify the Claimants Counsel and the trustee of the Collateral Trust for all acts relating to the modifications of such plan, and the Collateral Trust made on or after April 1, 2005, including attorneys' fees, up to a maximum of $3 million. The Sixth Plan provides for the channeling of asbestos property damage claims in addition to asbestos personal injury claims to the Plan Trust. There were no property damage claims asserted against the Company at the time of its bankruptcy filing. The Bankruptcy Court approved an order establishing a bar date of May 3, 2004 for the filing of asbestos property damage claims. The claims agent appointed in the Company's bankruptcy proceeding advised the Company that, as of the bar date, it received 35 timely filed asbestos property damage claims asserting liquidated damages in the amount of approximately $0.8 million plus additional unspecified amounts. The Company objected to certain claims on various grounds, and the Bankruptcy Court ultimately allowed 19 claims valued at $133 thousand. The Sixth Plan provides that the Company will issue a promissory note (the "Company Note") to the Plan Trust. Under the terms of the Sixth Plan, the original principal amount of the Company Note will be $2,738,234.75 (the "Original Principal Amount") and will be subject to increase as of the last trading day of the 90 consecutive trading day period commencing on the first anniversary of the effective date of the Company's confirmed Chapter 11 plan of reorganization (the "Principal Adjustment Date") in an amount equal to the excess, if any, of the amount by which 51% of the Company's market capitalization as of the Principal Adjustment Date (based upon (subject to certain exceptions) the total number of shares of the Company's common stock outstanding as of such date multiplied by the average of the closing trading prices of the Company's Class A common stock for the 90 consecutive trading days ending on the Principal Adjustment Date) exceeds the Original Principal Amount (the "Additional Principal Amount"), plus any accrued but unpaid interest or other amounts that may be added to such principal amount pursuant to the terms of the Company Note. This adjustment amount could result in the principal amount of the note increasing materially. For example, if the adjustment amount were calculated during the 90 consecutive day trading period ended September 30, 2005, the resulting adjustment amount would be $14.9 million. Under the terms of the Sixth Plan, interest on the outstanding principal of the Company Note will accrue at a rate of 9% per annum, with interest on the Original Principal Amount payable quarterly and interest on the Additional Principal Amount added to the Additional Principal Amount as additional principal. Upon the earlier of August 1, 2008 and the date that all of the Company's outstanding 8-5/8% Senior Notes due 2008 (the "Senior Notes") are repaid in full, interest on the then outstanding Additional Principal Amount will become payable quarterly. Under the terms of the Sixth Plan, all principal on the Company Note then outstanding together with any accrued but unpaid interest will be payable in full on the tenth anniversary of the date of the Company Note, subject to the right of the Plan Trust to accelerate all amounts then owed on the Company Note following an uncured event of default under the Company Note. Events of default under the Company Note would include the failure to pay interest and principal prior to the expiration of a 10-day grace period following the applicable due date, the occurrence of an event of default under the indenture governing the 15 Senior Notes, the breach by the Company of any covenant or agreement contained in the Company Note which remains uncured 30 days following notice by the Plan Trust to the Company and its controlling shareholder, American Biltrite Inc. ("ABI"), of the breach and a material breach of the pledge agreement (the "ABI Pledge Agreement") by ABI (which agreement is discussed below) which remains uncured 30 days following notice by the Plan Trust to ABI and the Company of the breach. The terms of the Company Note would provide that, upon the occurrence of an event of default under the Company Note, the Company and ABI would have 10 days from the date they receive notice that an event of default has occurred to cure the event of default. If the event of default remains uncured after the 10-day cure period, the aggregate outstanding principal amount of the Company Note together with any accrued but unpaid interest thereon would become immediately due and payable if the event of default relates to an uncured event of default under the indenture governing the Senior Notes, and with regard to other events of default under the Company Note, the Plan Trust may, upon notice to the Company and ABI, declare the aggregate outstanding principal amount of the Company Note together with any accrued but unpaid interest thereon to be immediately due and payable. The Plan Trust's rights to payment under the Company Note will be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable pursuant to the Senior Notes and the Company's credit facility, except that regularly scheduled interest payments under the Company Note are expected to be payable by the Company so long as no default or event of default has occurred or is continuing under the indenture governing the Senior Notes or the Company's credit facility. The Sixth Plan contemplates that, pursuant to the ABI Pledge Agreement, ABI will pledge all of the shares of the Company's common stock that ABI owns, together with any other equity interests and rights ABI may own or hold in the Company, as of the date of the Company Note, as collateral for the Company's obligations under the Company Note. As additional security for the Company Note, the ABI Pledge Agreement and the terms of the Sixth Plan provide that any amounts that the Company would be obligated to pay ABI pursuant to any rights of indemnity that ABI may have against the Plan Trust for asbestos-related claims pursuant to the Sixth Plan or a certain Joint Venture Agreement, entered into in 1992, to which both the Company and ABI are parties (as amended, the "Joint Venture Agreement"), will not be paid by the Plan Trust until after any amounts due and payable to the Plan Trust under the Company Note have been paid in full to the Plan Trust. Until such time, any such indemnity payments that would otherwise have been payable by the Plan Trust to ABI would be set aside by the Plan Trust and held in escrow by the Plan Trust for ABI's benefit and pledged by ABI as additional collateral securing the Company's obligations under the Company Note until released from such escrow and paid to ABI, as further provided under the Sixth Plan, the Company Note and the ABI Pledge Agreement. The Company Note, the ABI Pledge Agreement and the Sixth Plan also provide that the Company would be prohibited from making any payments to ABI pursuant to any rights of indemnity that ABI may have against the Company for claims pursuant to the Joint Venture Agreement until after any amounts due and payable to the Plan Trust under the Company Note have been paid in full to the Plan Trust. Until such time, any such indemnity payments that would otherwise have been payable to ABI by the Company will be paid by the Company to the Plan Trust and the Plan Trust will set aside and hold in escrow such amounts for ABI's benefit and ABI will pledge such amounts as additional collateral securing the Company's obligations under the Company Note until released from such escrow and paid to ABI, as further provided under the Sixth Plan, the Company Note and the ABI Pledge Agreement. 16 Under the Sixth Plan, ABI would be permitted to prepay the principal amount of the Company Note, in whole but not in part, without any penalty or premium at any time following the Principal Adjustment Date and any interest that may have accrued but not yet paid at the time of any principal repayment would be due and payable at the time of the principal repayment. The Company would be obligated to repay ABI for any amounts paid by ABI pursuant to the Company Note, which repayment obligation would by evidenced by a promissory note or notes to be issued by the Company to ABI. Any such note would have similar payment terms as those expected to be afforded to the Plan Trust with regard to the Company Note, which rights of repayment are expected to be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable to the Plan Trust with regard to the Company Note and with regard to amounts owing and payable pursuant to the Senior Notes and credit facility, except that the right of full subordination with regard to the Senior Notes and credit facility would contain an exception that would allow the Company to make regularly scheduled interest payments to ABI pursuant to any such note so long as no default or event of default has occurred or is continuing under the indenture governing the Senior Notes or the Company's credit facility. The Sixth Plan also provides that if ABI prepays the Company Note and ABI sells all or substantially all of the shares of the Company's stock that it holds as of the Principal Adjustment Date during the three-year period following such date, ABI would be obligated to make a contribution to the Plan Trust if the equity value of the Company implied by the price paid to ABI for the shares of the Company's stock exceeded the greater of $2,738,234.75 or 51% of the Company's market capitalization as of the Principal Adjustment Date (based upon (subject to certain exceptions) the total number of shares of the Company's common stock outstanding as of such date multiplied by the average of the closing trading prices of the Company's Class A common stock for the 90 consecutive trading days ending on the Principal Adjustment Date). In such instance, the Sixth Plan would obligate ABI to pay to the Plan Trust an amount equal to 50% of such excess amount. Under the terms of the Sixth Plan, the Company would be obligated to repay ABI for any amounts paid by ABI to the Plan Trust pursuant to this obligation. In satisfaction of this repayment obligation, the Company would issue a promissory note to ABI in a principal amount equal to the amount of any such payments made by ABI plus any accrued but unpaid interest or other amounts that may be added to such principal amount pursuant to the terms of the promissory note which would be subordinate and subject in right of payment to the prior payment in full of all amounts owing and payable pursuant to the Senior Notes and credit facility, except that regularly scheduled interest payments could be paid on such note so long as no default or event of default has occurred or is continuing under the indenture governing the Senior Notes or the Company's credit facility. The Sixth Plan provides that the Plan Trust would be able to transfer the Company Note, in whole but not in part, at any time following the Principal Adjustment Date. Upon any transfer of the Company Note, the amounts pledged by ABI and held in escrow by the Plan Trust for ABI's benefit with regard to ABI's indemnity rights discussed above will be paid by the Plan Trust, first, to the Plan Trust in repayment of principal then outstanding on the Company Note together with any accrued but unpaid interest thereon and, second, any amounts remaining would be distributed by the Plan Trust to ABI. 17 Under the Sixth Plan and related documents, ABI has agreed to make a cash contribution in the amount of $250 thousand to the Plan Trust upon the formation of the Plan Trust. Under the Sixth Plan, ABI would receive certain relief as may be afforded under Section 524(g)(4) of the Bankruptcy Code from asbestos claims that derive from claims made against the Company, which claims are expected to be channeled to the Plan Trust. However, the Sixth Plan does not provide that any other asbestos claims that may be asserted against ABI would be channeled to the Plan Trust. While the Company believes that it will be able to negotiate a new amended plan which is feasible and should be confirmed by the Bankruptcy Court, there are sufficient risks and uncertainties such that no assurances of the outcome can be given. In addition, the remaining costs to effect the reorganization process, consisting principally of legal and advisory fees and contributions to the Plan Trust, including one or more notes expected to be contributed to the Plan Trust by the Company, are expected to be approximately $12.7 million at a minimum, not including any Additional Principal Amount arising from revaluation of the Company Note, and could be materially higher. The Company is not yet able to determine the additional costs that may be required to effect a new amended plan, and actual amounts that will be contributed to the Plan Trust and costs for pursuing and implementing any plan of reorganization could be materially higher. Based on the Sixth Plan, the Company has made provision in its financial statements for the minimum amount of the range of estimates for its contribution to effect its plan to settle asbestos liabilities through the Plan Trust. The Company recorded charges aggregating approximately $26 million in prior years and a further approximately $15.5 million in the second quarter of 2005, to provide for the estimated minimum costs of completing its reorganization given the revised timeline then assumed in the second quarter of 2005 for anticipated confirmation and as based on the Sixth Plan. The Company is not yet able to determine the additional costs that may be required to effect a new amended plan, and actual amounts that will be contributed to the Plan Trust and costs for pursuing and implementing any plan of reorganization could be materially higher than currently recorded. Delays in proposing, filing and obtaining approval of any new amended plan of reorganization could result in a proceeding that takes longer and is more costly than the Company has estimated. The Company may record significant additional charges should the minimum estimated cost increase. Pending Asbestos Claims In 2003, the Company was one of many defendants in approximately 22 thousand pending lawsuits (including workers' compensation cases) involving approximately 106 thousand individuals, alleging personal injury or death from exposure to asbestos or asbestos-containing products. Claims involving approximately 80 thousand individuals have been settled pursuant to the Claimant Agreement and litigation related to unsettled or new claims is presently stayed by the Bankruptcy Code. The Company expects unsettled and future claims to be handled in accordance with the terms of a plan of reorganization and the Plan Trust. 18 Nearly all asbestos-related claims that have been brought against the Company to date allege that various diseases were caused by exposure to asbestos-containing products, including resilient sheet vinyl and tile manufactured by the Company (or, in the workers' compensation cases, exposure to asbestos in the course of employment with the Company). The Company discontinued the manufacture of asbestos-containing sheet products in 1983 and asbestos-containing tile products in 1974. In general, governmental authorities have determined that asbestos-containing sheet and tile products are nonfriable (i.e., cannot be crumbled by hand pressure) because the asbestos was encapsulated in the products during the manufacturing process. Thus, governmental authorities have concluded that these products do not pose a health risk when they are properly maintained in place or properly removed so that they remain nonfriable. The Company has issued warnings not to remove asbestos-containing flooring by sanding or other methods that may cause the product to become friable. 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. 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 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 ("Insurance 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 Insurance Settlement, net of any fees and expenses it may be entitled to deduct, to the Collateral Trust. Payment of such fees and expenses are subject to Bankruptcy Court order or approval. The Company does not expect the Insurance Settlement to have a material effect on its financial condition or results of operations. As of December 31, 2002, the Company had entered into additional settlement agreements with asbestos claimants exceeding the amount of previously disputed coverage. 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. The excess insurance carriers have also raised various objections to the Company's previously proposed plans of reorganization and may raise objections to any new amended plan that is proposed. 19 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 Claimant Agreement is not fair, reasonable or in good faith. Congoleum disputes the allegations and contentions of the excess insurance carriers. In November 2003, the 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 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 argues, 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 Court entered a case management order that divides the trial into three phases. A new judge was assigned to the case effective February 23, 2005 and the schedule was modified as a result. In February 2005, the Court ruled on a series of summary judgment motions filed by various insurers. The 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 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 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. The first phase of the trial began on August 2, 2005 and will address all issues and claims relating to whether the insurers are obligated to provide coverage under the policies at issue in this litigation for the global Claimant Agreement entered into by Congoleum, including but not limited to all issues and claims relating to both Congoleum's decision and conduct in entering into the Claimant Agreement and filing a pre-packaged bankruptcy and the insurance company defendants' decisions and conduct in opposing the Claimant Agreement and Congoleum's pre-packaged bankruptcy, the reasonableness and good faith of the Claimant Agreement, whether the Claimant Agreement breached any insurance 20 policies and, if so, whether the insurance companies suffered any prejudice, and whether the insurance companies' opposition to the Claimant Agreement and bankruptcy and various other conduct by the insurers has breached their duties of good faith and fair dealing such that they are precluded from asserting that Congoleum's decision to enter into the Claimant Agreement constitutes any breach(es) on the part of Congoleum. The Company believes, however, that even if the insurers were to succeed in the first phase of the Coverage Action, such result would not deprive individual claimants of the right to seek payment from the insurers who issued the affected insurance policies. Additionally, Congoleum could negotiate settlements with some or all of the signatories to the Claimant Agreement and seek payment from its insurers for such settlements. Such result would not preclude the Company from attempting to amend the Claimant Agreement and thereafter seek recovery under the Claimant Agreement as amended; moreover, the Company does not believe that it would be deprived of coverage-in-place insurance for future obligations of or demands upon the insurers under the applicable insurance policies. However, there can be no assurances of the outcome of these matters or their potential effect on the Company's ability to obtain approval of its plan of reorganization. The second phase of the trial will address all coverage issues, including but not limited to trigger and allocation. The final phase of the trial will address bad faith punitive damages, if appropriate. 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. In October 2005, a federal appeals court ruled that the law firm of Gilbert Heintz & Randolph, 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, Gilbert Heintz & Randolph has filed a motion to withdraw as coverage counsel and 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 Gilbert Heintz. The retention of Covington & Burling is subject to Bankruptcy Court approval. A Bankruptcy Court hearing on Covington & Burling's retention was held on November 7, 2005 and has been adjourned to November 29, 2005, pending certain additional disclosures requested by the Bankruptcy Court. Given the actions of its excess insurance carriers, the Company believes it likely that it would currently have to fund any asbestos-related expenses for defense expense and indemnity itself. However, litigation by asbestos claimants against the Company is stayed pursuant to the Company's bankruptcy proceedings, and the Company does not anticipate its future expenditures for defense and indemnity of asbestos-related claims, other than expenditures pursuant to a plan of reorganization, will be significant. 21 Accounting for Asbestos-Related Claims Under the terms of the Claimant Agreement, the Company's claims processing agent processed 79,630 claims meeting the requirements of the Claimant Agreement with a settlement value of approximately $466 million. In addition, Pre-Existing Settlement Agreements and Trial-Listed Settlement Agreements with claims secured by the Collateral Trust total approximately $25 million. As a result of tabulating ballots on its fourth amended 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. The Company's gross liability of approximately $491 million for these settlements and contingent liability for the additional approximately $512 million in unsettled claims is substantially in excess of the total assets of the Company. The Company believes that it does not have the necessary financial resources to litigate and/or fund judgments and/or settlements of the asbestos claims in the ordinary course of business. Therefore, the Company believes the most meaningful measure of its probable loss due to asbestos litigation is the amount it will have to contribute to the Plan Trust plus the costs to effect its reorganization under Chapter 11. At September 30, 2005, the Company estimates the minimum remaining amount of the contributions and costs to be $12.7 million, of which it has recorded $10.0 million as a current liability and $2.7 million as a non-current liability. These amounts do not include the liability associated with a $14.5 million insurance settlement recorded as restricted cash, which the Company expects to contribute, less any amounts withheld pursuant to reimbursement arrangements, to the Plan Trust. At September 30, 2005 this liability (comprised of the original settlement plus interest to date, less $6.1 million in reimbursements approved by the bankruptcy court) amounted to $8.7 million and is included in current asbestos-related liabilities. The Company is not yet able to determine the additional costs that may be required to effect a new amended plan, and actual amounts that will be contributed to the Plan Trust and costs for pursuing and implementing any plan of reorganization could be materially higher. The Company recorded charges aggregating approximately $26 million in prior years and a further approximately $15.5 million in the second quarter of 2005, to provide for the estimated minimum costs of completing its reorganization given the revised timeline then assumed in the second quarter of 2005 for anticipated confirmation and based on the Sixth Plan. Additional charges may be required in the future should the minimum estimated cost increase. The maximum amount of the range of possible asbestos-related losses is limited to the going concern or liquidation value of the Company, an amount which the Company believes is substantially less than the minimum gross liability for the known claims against it. The Company has not attempted to make an estimate of its probable insurance recoveries for financial statement purposes given the accounting for its estimate of future asbestos-related costs. Substantially all future insurance recoveries have been assigned to the Collateral Trust or Plan Trust. 22 Amounts Recorded in Financial Statements The table below provides an analysis of changes in the Company's asbestos reserves and related receivables from December 31, 2004 to September 30, 2005:
Reimbursement From Balance at Reserve Insurance Balance at (In thousands) 12/31/04 Spending Addition Settlements 9/30/05 ----------------------------------------------------------- Reserves Current $ 6,550 $ (9,610) $13,092 -- $ 10,032 Long-Term 2,738 -- -- -- 2,738 Receivables Current (1,509) (11,209) 2,362 $6,091 (4,265) Long-Term (7,300) -- -- -- (7,300) ----------------------------------------------------------- Net Asbestos Liability $ 479 $(20,819) $15,454 $6,091 $ 1,205 ======== ======== ======= ====== ======== Restricted Cash Insurance Proceeds $ 14,530 (6,091) 302 -- $ 8,741
7. Product Warranties The Company provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the revenue is recognized. The following table sets forth activity in the Company's warranty reserves (in millions) for the: Nine Months Ended Nine Months Ended September 30, September 30, 2005 2004 ---- ---- Beginning balance $ 2.8 $ 2.7 Accruals 2.5 4.4 Charges (3.2) (4.2) ----- ----- Ending balance $ 2.1 $ 2.9 ===== ===== 8. Liabilities Subject to Compromise As a result of the Company's Chapter 11 filing (see Notes 1 and 6 to the Unaudited Condensed Consolidated Financial Statements), 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. In addition, the Company's accrued interest expense on its Senior Notes is also recorded in liabilities subject to compromise. 23 Liabilities subject to compromise at September 30, 2005 and December 31, 2004 are as follows: (In thousands) September 30, December 31, 2005 2004 - -------------------------------------------------------------------------------- Current Other pre-petition payables and accrued interest $ 21,377 $ 14,225 Non-current Debt (at face value) 100,000 100,000 Pension liability 15,490 16,936 Other post-retirement benefit obligation 8,067 8,303 Other pre-petition liabilities 12,284 12,051 --------- --------- - -------------------------------------------------------------------------------- Non-current 135,841 137,290 - -------------------------------------------------------------------------------- Total liabilities subject to compromise $ 157,218 $ 151,515 ========= ========= - -------------------------------------------------------------------------------- Additional pre-petition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. 9. Accrued Liabilities A summary of the significant components of accrued liabilities consists of the following: (In thousands) September 30, December 31, 2005 2004 - -------------------------------------------------------------------------------- Accrued warranty, marketing and sales promotion $ 17,864 $ 18,487 Employee compensation and related benefits 3,576 4,735 Other 1,254 3,173 - -------------------------------------------------------------------------------- Total accrued liabilities $ 22,694 $ 26,395 - -------------------------------------------------------------------------------- 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 September 30, 2005 (see Note 8). 24 10. Pension Plans The Company sponsors several non-contributory defined benefit pension plans covering most of the Company's employees. Benefits under the plans are based on years of service and employee compensation. Amounts funded annually by the Company are actuarially determined using the projected unit credit and unit credit methods and are equal to or exceed the minimum required by government regulations. The Company also maintains health and life insurance programs for retirees (reflected in the table below in "Other Benefits"). The following summarizes the components of the net periodic benefit cost for the Pension and Other Benefit Plans for the three months ended September 30, 2005 and 2004:
(In thousands) Three Months Ended Three Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Other Other Pension Benefits Pension Benefits ------- -------- ------- -------- Components of Net Periodic Benefit Cost: Service cost $ 285 $ 46 $ 312 $ 50 Interest cost 1,092 130 1,052 140 Expected return on plan assets (976) -- (842) -- Recognized net actuarial loss 280 15 349 11 Amortization of transition obligation (9) -- (18) -- Amortization of prior service cost (72) (47) (72) (116) ------- ----- ------- ----- Net periodic benefit cost $ 600 $ 144 $ 781 $ 85 ======= ===== ======= =====
The weighted average assumptions used to determine net periodic benefit cost were as follows:
September 30, 2005 September 30, 2004 ------------------ ------------------ Other Other Pension Benefits Pension Benefits ------- -------- ------- -------- Discount rate 6.25% 6.25% 6.25% 6.75% Expected long-term return on plan assets 7.00% -- 7.00% -- Rate of compensation increase 4.00% -- 4.00% -- 5.50% 5.50%
25 The following summarizes the components of the net periodic benefit cost for the Pension and Other Benefit Plans for the nine months ended September 30, 2005 and 2004:
(In thousands) Nine Months Ended Nine Months Ended September 30, 2005 September 30, 2004 ------------------ ------------------ Other Other Pension Benefits Pension Benefits ------- -------- ------- -------- Components of Net Periodic Benefit Cost: Service cost $ 995 $ 138 $ 982 $ 150 Interest cost 3,280 390 3,212 420 Expected return on plan assets (2,738) -- (2,538) -- Recognized net actuarial loss 1,049 45 1,098 33 Amortization of transition obligation (45) -- (54) -- Amortization of prior service cost (216) (141) (214) (348) ------- ----- ------- ----- Net periodic benefit cost $ 2,325 $ 432 $ 2,486 $ 255 ======= ===== ======= =====
The weighted average assumptions used to determine net periodic benefit cost were as follows:
September 30, 2005 September 30, 2004 ------------------ ------------------ Other Other Pension Benefits Pension Benefits ------- -------- ------- -------- Discount rate 6.25% 6.25% 6.25% 6.75% Expected long-term return on plan assets 7.00% -- 7.00% -- Rate of compensation increase 4.00% -- 4.00% -- 5.50% 5.50%
26 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Results of Operations The Company's business is cyclical and is affected by the same economic factors that affect the remodeling and housing industries in general, including the availability of credit, consumer confidence, changes in interest rates, market demand and general economic conditions. 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 United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court") (Case No. 03-51524) seeking relief under Chapter 11 of the 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 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 reflecting the result of further negotiations with representatives of the Asbestos Claimants' Committee, the Future Claimants' Representative 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 modified plan. In April 2005, Congoleum announced that it had reached an agreement in principle with representatives of the Asbestos Claimants' Committee and the Future Claimants' Representative 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. In October 2005, Congoleum sought and obtained an extension of the voting deadline to 27 December 14, 2005 to allow time to address this issue. Congoleum is presently in negotiations with these claimants, as well as other constituencies, to determine the modifications of the Sixth Plan and other steps that may be appropriate for the implementation of the Plan. The Bankruptcy Court has given Congoleum permission to file a new amended plan and disclosure statement by December 2, 2005. On November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive right to file a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that other parties may file proposed reorganization plans by December 2, 2005. It is unclear whether any person other than Congoleum will attempt to propose a plan or what any such plan would provide or propose. There can be no assurance that the Company will finalize the terms of a new amended plan by that date, that the Company will receive the acceptances necessary for confirmation of a new amended plan of reorganization, that a new amended plan will not be modified further, that a new amended plan will receive necessary court approvals from the Bankruptcy Court or the Federal District Court, or that such approvals will be received in a timely fashion, that a new amended plan will be confirmed, or that a new amended plan, if confirmed, will become effective. 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 may file objections to any new amended plan. Certain other parties have also filed various objections to Congoleum's previously proposed plans of reorganization and may file objections to any new amended plan. Although the terms of a new amended plan have not been determined, the Company is negotiating amendments and modifications with reference to the terms of the Sixth Plan. Any descriptions of the Sixth Plan provided in this Quarterly Report on Form 10-Q are provided to assist the reader in understanding the basis from which any further amended plan may be negotiated. There can be no assurance that the terms of any new amended plan will not materially differ from the terms of the Sixth Plan or that the Company will reach agreement on a new amended plan on or before December 2, 2005. The Company expects that it will take until some time in the second or third quarter of 2006 at the earliest to obtain confirmation of any new amended plan of reorganization. In anticipation of Congoleum's commencement of the Chapter 11 cases, Congoleum entered into a settlement agreement with various 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 of approximately $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. Under the terms of the Sixth Plan, after the establishment of the Plan Trust, the assets in the Collateral Trust would be transferred to the Plan Trust and any claims subject to the Claimant Agreement would be channeled to the Plan Trust and paid in accordance with the terms of the Sixth Plan. As a result of tabulating ballots on its fourth amended 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. Based on 28 the Sixth Plan, the Company has made provision in its financial statements for the minimum amount of the range of estimates for its contribution to effect its plan to settle asbestos liabilities through the Plan Trust. The Company recorded charges aggregating approximately $26 million in prior years and a further approximately $15.5 million in the second quarter of 2005, to provide for the estimated minimum costs of completing its reorganization given the revised timeline then assumed in the second quarter of 2005 for anticipated confirmation and as based on the Sixth Plan. The Company is not yet able to determine the additional costs that may be required to effect a new amended plan, and actual amounts that will be contributed to the Plan Trust and costs for pursuing and implementing any plan of reorganization could be materially higher than currently recorded. The Company may record significant additional charges should the minimum estimated cost increase. Delays in proposing, filing and obtaining approval of any new amended plan of reorganization could result in a proceeding that takes longer and is more costly than the Company has estimated. For more information regarding the Company's asbestos liability and plan for resolving that liability, please refer to Notes 1 and 17 of the Notes to Consolidated Financial Statements contained in Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004. In addition, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors That May Affect Future Results - The Company has significant asbestos liability and funding exposure, and any plan of reorganization may not be confirmed" 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. Three and nine months ended September 30, 2005 as compared to three and nine months ended September 30, 2004. Net sales for the quarter ended September 30, 2005 were $60.5 million as compared to $58.9 million for the quarter ended September 30, 2004, an increase of $1.6 million or 2.7%. The increase resulted primarily from the impact of higher sales to the manufactured housing industry reflecting hurricane-related orders for both mobile homes and RV trailers (up 17.5%) and the impact of price increases taken in late 2004 and early 2005 (up 5.5%) partially offset by lower sales of residential products (down 3.0%), the reduction in inventory by a major customer during the quarter (down 3.0%) and lower sales of do-it-yourself tile to mass merchandisers (down 33%). Net sales for the nine months ended September 30, 2005 totaled $176.2 million as compared to $173.8 million for the same period in the prior year, an increase of $2.4 million or 1.4%. The increase reflects higher sales to the manufactured housing category (up 12.0%) and the impact of selling price increases instituted in late 2004 and 2005 (up 7%) partially offset by lower sales of do-it-yourself tile to the mass merchandiser category (down 36%) and sales of residential products (down 6.0%) 29 Gross profit for the quarter ended September 30, 2005 totaled $13.2 million, or 21.9% of net sales, compared to $17.1 million, or 29.0% of net sales, for the same period last year. The major factor leading to the deterioration in gross margin percent was the sharp rise in raw material costs experienced during the second half of 2004 and ongoing through 2005, which reduced margins by 7.5 percentage points of net sales, coupled with a poorer sales mix (3.5 percentage points of net sales) and the unfavorable absorption impact of lower production volumes (1.5 percentage points of net sales). This was partially mitigated by the 5.5 percentage point increase in selling prices. Gross profit for the nine months ended September 30, 2005 was $40.7 million or 23.1% of net sales, compared to $47.5 million, or 27.3% of net sales for the same period in the prior year. The lower gross profit dollars and margin percent reflect higher raw material costs (9 percentage points of net sales) and the unfavorable absorption impact of lower production volumes (2.5 percentage points of net sales) partially offset by higher selling prices (7.0 percentage points of net sales). Raw material costs are expected to remain high in 2005 and until additional capacity becomes available. Selling, general and administrative expenses were $10.6 million for the quarter ended September 30, 2005 as compared to $13.0 million for the quarter ended September 30, 2004, a decrease of $2.4 million. The decrease in expenses reflects lower sales support and merchandising expenses of $1.1 million, lower incentive compensation related expenses of $0.6 million and lower insurance costs of $0.5 million. As a percent of net sales, selling, general and administrative costs were 17.4% for the quarter ended September 30, 2005 compared to 22.0% for the same period last year. Selling, general and administrative expenses for the nine months ended September 30, 2005 totaled $48.4 or 27.5% of sales as compared to $38.0 million or 21.8% for the same period last year. The increase in expenses reflects a $15.5 million charge taken during the second quarter of 2005 for reorganization expenses partially offset by the factors outlined for the third quarter of 2005. Income from operations was $2.7 million for the quarter ended September 30, 2005 compared to income of $4.1 million for the quarter ended September 30, 2004. The reduction in operating income was a result of the lower gross margin dollars partially offset by lower operating expenses. For the nine months ended September 30, 2005 loss from operations totaled $7.7 million as compared to income from operations of $9.5 million for the same period in the prior year. The decline in income from operations reflected the impact of the reorganization charge and higher raw material costs. 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 unaudited condensed 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 the Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, there is substantial doubt about the Company's ability to continue as a going concern unless it obtains relief from its substantial asbestos liabilities through a successful reorganization under Chapter 11 of the Bankruptcy Code. 30 On December 31, 2003, Congoleum filed a voluntary petition with the Bankruptcy Court (Case No. 03-51524) seeking relief under the Bankruptcy Code. See Notes 1 and 6 of the Notes to the Unaudited Condensed Consolidated Financial Statements, which are contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, for a discussion of the Company's bankruptcy proceedings. These matters will have a material adverse impact on liquidity and capital resources. During the third quarter of 2005, the Company paid $7.9 million in fees and expenses related to implementation of its planned reorganization under Chapter 11 and litigation with certain insurance companies, bringing the total year to date spending in connection with these matters to $20.8 million. Pursuant to terms of the Claimant Agreement and related documents, Congoleum is entitled to reimbursement for certain expenses it incurs for claims processing costs and expenses in connection with pursuit of insurance coverage. At September 30, 2005, Congoleum had $11.6 million recorded as a receivable for such reimbursements. The amount and timing of reimbursements that will be received will depend on when the trust receives funds from insurance settlements or other sources and whether the insurance proceeds exceed $375 million, which is the required threshold for reimbursement of the first $7.3 million spent by Congoleum relating to these reimbursable costs and expenses. Congoleum believes this threshold will eventually be met, although there can be no assurances to that effect. Congoleum expects to spend a further $12.7 million at a minimum in fees, expenses, and trust contributions in connection with obtaining confirmation of its plan, which amount is recorded in its reserve for asbestos-related liabilities (in addition to the $8.7 million insurance settlement being held as restricted cash). It also expects to spend a further $11.6 million at a minimum in connection with pursuit of insurance coverage, for which it expects to be reimbursed as discussed above. The Company currently holds $3.7 million in restricted cash that may be available to offset future costs incurred pursuing insurance coverage, subject to approval by the Bankruptcy Court. Required expenditures could be materially higher than these estimates. Due to the Chapter 11 proceedings, the Company has been precluded from making interest payments on its outstanding 8-5/8% Senior Notes due 2008 (the "Senior Notes") since January 1, 2004. The amount of accrued interest that is due but has not been paid on the Senior Notes during this period is approximately $18.6 million, including interest on the unpaid interest due. Pursuant to the terms of the Sixth Plan, payment of such accrued interest would be required for such plan to go effective. While Congoleum is not yet able to determine the effect, if any, that the terms of any new amended plan of reorganization may have on its liquidity and capital resources, it is the Company's intent to seek plan terms that would not have a materially different impact on its liquidity and capital resources than the terms of the Sixth Plan, although there can be no assurances to that effect. On November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive right to file a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that other parties may file proposed reorganization plans by December 2, 2005. It is unclear whether any person other than Congoleum will attempt to propose a plan or what any such plan would provide or propose. As part of the Sixth Plan, Congoleum expects that it will issue a promissory note (the "Company Note") to the Plan Trust Under the terms of the Sixth Plan, the original principal amount of the Company Note will be approximately $2.7 million and will be subject to increase as of the last trading day of the 90 consecutive trading day period commencing on the first anniversary of the effective date of the Company's plan of reorganization in an amount equal to the excess, if any, of the amount by which 51% of the Company's market capitalization as of that date exceeds $2.7 million, as determined in 31 accordance with the terms of the Sixth Plan. This adjustment amount could result in the principal amount of the note increasing materially. For example, if the adjustment amount were calculated for the period ended September 30, 2005, the resulting adjustment amount would be $14.9 million. Although the scheduled repayment date for this note does not occur until its tenth anniversary of issuance, this debt may affect Congoleum's ability to obtain other sources of financing or refinance existing obligations. In addition, it is expected that the terms of the Note will require the Company to make regularly scheduled interest payments prior to such note's maturity date. The Sixth Plan would obligate Congoleum, together with the Plan Trust, to indemnify certain asbestos claimant representatives for all costs and liabilities (including attorneys' fees) relating to the negotiation of the modification of the Sixth Plan and certain prior proposed plans and the collateral trust made on or after April 1, 2005. Congoleum's indemnification obligations in this regard are capped under the Sixth Plan and Plan Trust agreement at $3.0 million. In addition, the Sixth Plan would further obligate Congoleum to fund any actual costs in excess of $2.0 million incurred by such asbestos claimant representatives in connection with the confirmation of the Sixth Plan, subject to Bankruptcy Court approval of those costs. Unrestricted cash and cash equivalents, including short-term investments at September 30, 2005, were $17.7 million, a decrease of $12.1 million from December 31, 2004. Net cash used by operations during the first nine months of 2005 was $10.1 million, as compared to $31.0 million of cash provided by operations in the first nine months of 2004. The increase in cash used by operations in the first nine months of 2005 versus the first nine months of 2004 was primarily due to higher receivables, higher asbestos related payments, higher payments of accrued liabilities, and lower accounts payable. 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 $2.6 million and $1.2 million at September 30, 2005 and December 31, 2004, respectively, are recorded as restricted cash. Additionally, $8.7 million of a $14.5 million settlement received in August 2004 from an insurance carrier, which is subject to the lien of the Collateral Trust, is included as restricted cash at September 30, 2005. The Company expects to contribute these funds, less any amounts withheld pursuant to reimbursement arrangements, to the Plan Trust upon confirmation of its plan of reorganization. Working capital was $23.8 million at September 30, 2005, down from $35.3 million at December 31, 2004. The ratio of current assets to current liabilities at September 30, 2005 was 1.3 versus 1.4 at December 31, 2004. Capital expenditures for the nine months ended September 30, 2005 totaled $3.6 million. The Company is currently planning capital expenditures of approximately $5.5 million in 2005 and between $6 million and $7 million in 2006, 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 December 31, 2005 with borrowings up to $30.0 million. A further amendment extending the term to December 31, 2006 has been executed and is subject to Bankruptcy Court approval. Interest is based on 0.75% above the prime rate. This financing agreement contains certain covenants, which include the maintenance of 32 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 September 30, 2005. Borrowings under this facility are collateralized by inventory and receivables. At September 30, 2005, based on the level of receivables and inventory, $27.0 million was available under the facility, of which $4.4 million was utilized for outstanding letters of credit and $12.6 million was utilized by the revolving loan. The Company anticipates that its debtor-in-possession financing facility will be replaced with a revolving credit facility on substantially similar terms upon confirmation of a new amended plan of reorganization. While the Company expects the facilities discussed above will provide it with sufficient liquidity, there can be no assurances that it will continue to be in compliance with the required covenants, that the Company will be able to obtain a similar or sufficient facility upon exit from bankruptcy, or that the debtor-in-possession facility (as extended) will be renewed prior to that facility's expiration. The Company's principal sources of capital are net cash provided by operating activities and borrowings under its financing agreement. The Company believes that net cash provided by operating activities and borrowings under its financing agreement will be adequate to fund working capital requirements, debt service payments, and planned capital expenditures for the foreseeable future, plus its current estimates for costs to settle and resolve its asbestos liabilities through its Sixth Plan. The Company's inability to obtain confirmation of an amended plan in a timely manner would have a material adverse effect on the Company's ability to fund its operating, investing and financing requirements. The Company also anticipates it will be able to obtain suitable exit financing upon confirmation of an amended plan although there can be no assurance that such financing will be obtained. Such financing will be required to replace its debtor-in-possession credit facility and permit the Company to pay accrued interest on its Senior Notes and other obligations needed to be satisfied in connection with the confirmation of an amended plan of reorganization. If the Company's cash flow from operations is materially less than anticipated, and/or if the costs in connection with seeking confirmation of an amended plan of reorganization or in connection with the insurance coverage litigation are materially more than anticipated, or if sufficient funds from insurance proceeds are not available at confirmation to reimburse coverage litigation costs as expected, the contemplated exit financing, when combined with net cash provided from operating activities, may not provide sufficient funds for its and the Company may not be able to obtain confirmation of and go effective with an amended plan of reorganization. In addition to the provision for asbestos litigation discussed previously, the Company has also recorded what it believes are adequate provisions for environmental remediation and product-related liabilities (other than asbestos-related claims), including provisions for testing for potential remediation of conditions at its own facilities. The Company is subject to federal, state and local environmental laws and regulations and certain legal and administrative claims are pending or have been asserted against the Company. Among these claims, the Company is a named party in several actions associated with waste disposal sites (more fully discussed in Note 5 to the Unaudited Condensed Consolidated Financial Statements). These actions include possible obligations to remove or mitigate the effects on the environment of wastes deposited at various sites, including Superfund sites and certain of the Company's owned and previously owned facilities. The contingencies also include claims for personal injury and/or property damage. The exact amount of such future cost and timing of payments are indeterminable due to such unknown 33 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. Risk 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 Company's expectations, 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 statements made in this report speak 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 below and in the Company's other filings with the Securities and Exchange Commission. The Company has significant asbestos liability and funding exposure, and any plan of reorganization may not be confirmed. As more fully set forth in Notes 1 and 6 of the Notes to Unaudited Condensed Consolidated Financial Statements, which are included in this Quarterly Report on Form 10-Q, the Company has significant liability and funding exposure for asbestos claims. The Company has entered into settlement agreements with various asbestos claimants totaling approximately $491 million and is aware 34 of additional unsettled claims with a proposed settlement value of approximately $512 million. Satisfaction of this obligation pursuant to the terms of an amended plan of reorganization is dependent on a determination by the Bankruptcy Court that the plan has satisfied certain criteria under the Bankruptcy Code, among other things. There can be no assurance that the Company will finalize the terms of a new amended plan by December 2, 2005, the current deadline for the Company to submit a new amended plan and disclosure statement, that the Company will receive the acceptances necessary for confirmation of a new amended plan of reorganization, that a new amended plan will not be modified further, that a new amended plan will receive necessary court approvals from the Bankruptcy Court or the Federal District Court, or that such approvals will be received in a timely fashion, that a new amended plan will be confirmed, or that a new amended plan, if confirmed, will become effective. On November 7, 2005, the Bankruptcy Court denied a request to extend Congoleum's exclusive right to file a plan of reorganization and solicit acceptances thereof. The Bankruptcy Court ruled that other parties may file proposed reorganization plans by December 2, 2005. It is unclear whether any person other than Congoleum will attempt to propose a plan or what any such plan would provide or propose. A new amended plan of reorganization and any alternative plan of reorganization pursued by the Company or confirmed by the Bankruptcy Court and the Federal District Court could materially differ from the terms of the Sixth Plan. Furthermore, the estimated costs and contributions to effect an amended plan of reorganization or an alternative plan could be significantly greater than currently estimated. Any plan of reorganization pursued by the Company will be subject to numerous conditions, approvals and other requirements, including Bankruptcy Court and Federal District Court approvals, and there can be no assurance that such conditions, approvals and other requirements will be satisfied or obtained. Confirmation of a plan of reorganization will depend on the Company obtaining exit financing to provide it with sufficient liquidity to pay accrued interest and other obligations upon the plan going 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 an amended plan of reorganization or in connection with the insurance coverage litigation are materially more than anticipated, or if sufficient funds from insurance proceeds are not available at confirmation to reimburse coverage litigation costs as expected, the Company may be unable to obtain sufficient exit financing, when combined with net cash provided from operating activities, to provide sufficient funds and the Company may not be able to obtain confirmation and effectiveness of an amended plan of reorganization. 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 reaching 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 Company's and ABI's lenders, customers, suppliers and other constituencies to the ongoing process arising from the Company's strategy to settle its asbestos liability, (vii) the Company's ability to maintain 35 debtor-in-possession financing sufficient to provide it with funding that may be needed during the pendency of its Chapter 11 case and to obtain exit financing sufficient to provide it with funding that may be needed for its operations after emerging from the bankruptcy process, in each case, on reasonable terms, (viii) timely obtaining sufficient creditor and court approval of any reorganization plan pursued by it and the court overruling any objections to the plan that may be filed, (ix) costs of, developments in and the outcome of insurance coverage litigation pending in New Jersey State Court involving Congoleum and certain insurers, (x) the extent to which the Company is able to obtain reimbursement for costs of the coverage litigation, and (xi) compliance with the Bankruptcy Code, including Section 524(g). 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. In addition, there has been federal legislation proposed that, if adopted, would establish a national trust to provide compensation to victims of asbestos-related injuries and channel all current and future asbestos-related personal injury claims to that trust. Due to the uncertainties involved with the pending legislation, the Company does not know the effects that any such legislation, if adopted, may have upon its business, results of operations or financial condition, or upon any plan that may be proposed in the future. To date, the Company has expended significant amounts pursuant to resolving its asbestos liability relating to its Chapter 11 plan of reorganization. To the extent any federal legislation is enacted, which does not credit the Company for amounts paid by the Company pursuant to its plan of reorganization or requires the Company to pay significant amounts to any national trust or otherwise, such legislation could have a material adverse effect on the Company's business, results of operations and financial condition. As a result of the Company's significant liability and funding exposure for asbestos claims, there can be no assurance that if it were to incur any unforecasted or unexpected liability or disruption to its business or operations it would be able to withstand that liability or disruption and continue as an operating company. For further information regarding the Company's asbestos liability, insurance coverage and strategy to resolve its asbestos liability, please see Notes 1 and 6 of Notes to Unaudited Condensed Consolidated Financial Statements, which are included in this Quarterly Report on Form 10-Q. 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 or regulations, including environmental remediation costs at both third-party sites and Company-owned 36 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; 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 or regulations may require or cause the Company to modify or curtail its operations, which could have a material adverse effect on the Company's business, results of operations and financial condition. Product and General Liabilities. In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, product liability claims (in addition to asbestos-related claims) and other matters. In some of these proceedings, plaintiffs may seek to recover large and sometimes unspecified amounts and the matters may remain unresolved for several years. These matters could have a material adverse effect on the Company's business, results of operations and financial condition if the Company is unable to successfully defend against or settle these matters, its insurance coverage is insufficient to satisfy unfavorable judgments or settlements relating to these matters, or the Company is unable to collect insurance proceeds relating to these matters. The Company is dependent upon a continuous supply of raw materials from third party suppliers and would be harmed if there were a significant, prolonged disruption in supply or increase in its raw material costs. The Company's business is dependent upon a continuous supply of raw materials from third party suppliers. The principal raw materials used by the Company in its manufacture of sheet and tile flooring are vinyl resins, plasticizers, latex, limestone, stabilizers, cellulose paper fibers, urethane and transfer print paper. 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 occasionally experienced significant price increases for some of these materials. Raw material prices in 2004 and 2005 increased significantly and recent industry supply conditions for specialty resins used in flooring have been very tight, despite significant price increases, in part due to an explosion at a large resin plant in 2004 that destroyed the plant and due to the effect of hurricanes in 2005. 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 have difficulty in the future, particularly if global supply conditions deteriorate. 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. However, the Company does not have readily available alternative sources of supply for specific designs of transfer print paper, 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. However, there is no certainty that the Company's maintenance of its raw material inventory or its ongoing efforts to develop new sources of supply would be successful in avoiding a material adverse effect on its business, results of operations and financial condition if it were to realize an extended interruption in the supply of its raw materials. 37 In addition, the Company could incur significant increases in the costs of its raw materials. 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. During those periods of time, there could be a material adverse effect on the Company's business, results of operations and financial condition. 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, like the Company, one of the Company's major competitors has sought protection under Chapter 11 of the Bankruptcy Code. When such competitor emerges from bankruptcy as a continuing operating company it may have shed much of its pre-filing liabilities and have a competitive cost advantage over the Company as a result of having shed those liabilities. In addition, in order to maintain its competitive position, the Company may need to make substantial investments in its business, including its product development, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products and in the loss of the Company's market share for its products. Moreover, due to the competitive nature of the Company's industry, the Company may be commercially restricted from raising or even maintaining the sales prices of its products, which could result in the Company incurring significant operating losses if its expenses were to increase or otherwise represent an increased percentage of the Company's sales. The Company's business is subject to general economic conditions and conditions specific to the remodeling and housing industries. The Company is subject to the effects of general economic conditions. 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 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. 38 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 of the Company 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 17 distributors providing approximately 76 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 materially 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 distributor in the manufactured housing market, and Mohawk Industries, Inc. serves as a retail market distributor of the Company. These two distributors accounted for 70% of the Company's net sales for the year ended December 31, 2004 and 65% of the Company's net sales for the year ended December 31, 2003. Stockholder votes are controlled by ABI; the Company's interests may not be the same as ABI's interests. ABI owns a majority (approximately 55% as of December 31, 2004) of the outstanding shares of the Company's common stock, representing a 70.1% voting interest. As a result, ABI can elect all of the Company's directors and can control the vote on all matters, including determinations such as: approval of mergers or other business combinations, sales of all or substantially all of the Company's assets, any matters submitted to a vote of the Company's stockholders, issuance of any additional common stock or other equity securities, incurrence of debt other than in the ordinary course of business, the selection and tenure of the Company's Chief Executive Officer, payment of dividends with respect to common stock or other equity securities and other matters that might be favorable to ABI. ABI's ability to prevent an unsolicited bid for us or any other change in control could have an adverse effect on the market price for the Company's common stock. In addition, certain officers of Congoleum are officers of ABI and members of the family group that owns a controlling interest in ABI. 39 Possible future sales of shares by ABI could adversely affect the market for our stock. ABI may sell shares of the Company's common stock in compliance with the federal securities laws. By virtue of ABI's current control of Congoleum, ABI could sell large amounts of shares of the Company's common stock by causing the Company to file a registration statement that would allow them to sell shares more easily. In addition, ABI could sell shares of the Company's common stock without registration. Although the Company can make no prediction as to the effect, if any, that such sales would have on the market price of the Company's common stock, sales of substantial amounts of the Company's common stock, or the perception that such sales could occur, could adversely affect the market price of the Company's common stock. If ABI sells or transfers shares of the Company's common stock as a block, another person or entity could become the Company's controlling stockholder. The Company depends on key executives to run its business, and the loss of any of these executives would likely harm the Company's business. The Company depends on key executives to run its business. The Company's future success will depend largely upon the continued service of these key executives, all whom have no employee contract with the Company, and may terminate their employment at any time without notice. Although certain key executives of the Company are, directly or indirectly, large shareholders of the Company, and thus are less likely to terminate their employment, the loss of any key executive, or the failure by the key executive to perform in his current position, could have a material adverse effect on the Company's business, results of operations or financial condition. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in prevailing market interest rates affecting the return on its investments but does not consider this risk exposure to be material to its financial condition or results of operations. The Company invests primarily in highly liquid debt instruments with strong credit ratings and short-term (less than one year) maturities. The carrying amount of these investments approximates fair value due to the short-term maturities. Over 90% of the Company's outstanding long-term debt as of December 31, 2004 consisted of indebtedness with a fixed rate of interest which is not subject to change based upon changes in prevailing market interest rates. Under its current policies, the Company does not use derivative financial instruments, derivative commodity instruments or other financial instruments to manage its exposure to changes in interest rates, foreign currency exchange rates, commodity prices or equity prices and does not hold any instruments for trading purposes. 40 Item 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on this evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company required to be included in the Company's reports filed or submitted under the Exchange Act. (b) Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting during the last quarter covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 41 PART II. OTHER INFORMATION Item 1. Legal Proceedings: The information contained in Note 1 "Basis of Presentation", Note 5 "Environmental and Other Liabilities" and Note 6 "Asbestos Liabilities" of the Notes to Unaudited Condensed Consolidated Financial Statements is incorporated herein by reference. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: None Item 3. Defaults Upon Senior Securities: The commencement of the Chapter 11 proceedings constituted an event of default under the indenture governing the Company's 8 5/8% Senior Notes. In addition, due to the Chapter 11 proceedings, the Company was precluded from making the interest payments due February 1, 2004, August 1, 2004, February 1, 2005 and August 1, 2005 on the Senior Notes. The aggregate amount of accrued interest that was not paid on the Senior Notes on those dates is approximately $17.3 million. As of September 30, 2005, the principal amount of the Senior Notes is approximately $100 million. These amounts, plus $1,363,000 of accrued interest on the interest due but not paid in the aggregate on February 1, 2004, August 1, 2004, February 1, 2005 and August 1, 2005 are included in "Liabilities Subject to Compromise." Item 4. Submission of Matters to a Vote of Security Holders: None Item 5. Other Information: None 42 Item 6. Exhibits: (a) Exhibits Exhibit Number Exhibits ------ -------- 3.1 Amended Certificate of Incorporation of the Company 3.2 Amended and Restated Bylaws of the Company 10.1 Form of Stock Option Agreement Under the Congoleum Corporation 1999 Stock Option Plan for Non-Employee Directors 10.2 Form of Nonqualified Stock Option Award Agreement Under the Congoleum Corporation 1995 Stock Option Plan 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 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated as of July 22, 2005 99.2 Proposed Disclosure Statement with respect to the Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated as of July 22, 2005 99.3 Settlement Agreement and Release by and between Congoleum Corporation and Liberty Mutual Insurance Company 99.4 Settlement Agreement and Release by, between and among Congoleum Corporation and certain AIG Member Companies 99.5 Confidential Settlement Agreement and Release among Congoleum Corporation, The Plan Trust and Certain Underwriters at Lloyd's, London 99.6 Amendment to the Confidential Settlement Agreement and Release among Congoleum Corporation, The Plan Trust and Certain Underwriters at Lloyd's, London, dated June 22, 2005 99.7 Settlement Agreement and Release by, between and among Congoleum Corporation and Federal Insurance Company 99.8 Confidential Settlement Agreement and Release among Congoleum Corporation, the Plan Trust and Mt. McKinley Insurance Company and Everest Reinsurance Company 43 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONGOLEUM CORPORATION (Registrant) Date: November 14, 2005 By: /s/ Howard N. Feist III --------------------------------- (Signature) Howard N. Feist III Chief Financial Officer (Duly Authorized Officer and Principal Financial & Accounting Officer) 44 Exhibit Index Exhibit Number Exhibits ------ -------- 3.1 Amended Certificate of Incorporation of the Company (1) 3.2 Amended and Restated Bylaws of the Company (1) 10.1 Form of Stock Option Agreement Under the Congoleum Corporation 1999 Stock Option Plan for Non-Employee Directors 10.2 Form of Nonqualified Stock Option Award Agreement Under the Congoleum Corporation 1995 Stock Option Plan 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 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated as of July 22, 2005 (2) 99.2 Proposed Disclosure Statement with respect to the Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated as of July 22, 2005 (2) 99.3 Settlement Agreement and Release by and between Congoleum Corporation and Liberty Mutual Insurance Company (3) 99.4 Settlement Agreement and Release by, between and among Congoleum Corporation and certain AIG Member Companies (3) 99.5 Confidential Settlement Agreement and Release among Congoleum Corporation, The Plan Trust and Certain Underwriters at Lloyd's, London (3) 99.6 Amendment to the Confidential Settlement Agreement and Release among Congoleum Corporation, The Plan Trust and Certain Underwriters at Lloyd's, London, dated June 22, 2005 (3) 99.7 Settlement Agreement and Release by, between and among Congoleum Corporation and Federal Insurance Company 99.8 Confidential Settlement Agreement and Release among Congoleum Corporation, the Plan Trust and Mt. McKinley Insurance Company and Everest Reinsurance Company (1) Incorporated by reference to the exhibit bearing the same description filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1996. (2) Incorporated by reference to the exhibit bearing the same description filed with the Company's Current Report on Form 8-K/A filed with the Securities and Exchange Commission on July 29, 2005. (3) Incorporated by reference to the exhibit bearing the same description filed with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2005. 45 EX-10.1 2 ex10-1.txt Exhibit 10.1 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made this ___st day of ___, 200_, between Congoleum Corporation, a Delaware corporation (the "Company"), and ________________(the "Optionee"). Pursuant to the Congoleum Corporation 1999 Stock Option Plan for Non-Employee Directors (the "Plan"), the Committee (as described below) has determined that the Optionee is to be awarded, on the terms and conditions set forth herein (and subject to the terms and provisions of the Plan), a nonqualified stock option (an "Option") to purchase Stock, and hereby grants such Option. Capitalized terms which are not defined in this Option Agreement will have the meanings set forth in the Plan. 1. Number of Shares of Stock and Purchase Price. The Optionee is hereby granted an Option to purchase ____ shares of Stock (the "Option Shares") at a purchase price equal to $_____ per Share (the "Option Price"), pursuant to the terms of this Option Agreement and the provisions of the Plan. 2. Period of Option and Conditions of Exercise. (a) The Option shall be deemed to have been granted on the date hereof (the "Date of Grant") and, unless the Option is previously terminated pursuant to this Option Agreement, the Option shall terminate upon the expiration of ten years from the date hereof (the "Expiration Date"). Upon the termination of the Option, all rights of the Optionee hereunder shall cease. (b) Subject to the provisions of the Plan and this Option Agreement, the Option shall become exercisable as to all of the Option Shares on the date which is six months after the date hereof. 3. Termination of Service. Notwithstanding any provision of this Agreement or the Plan to the contrary, Options shall become exercisable in full on the date the Optionee ceases to serve as a member of the Board for any reason. Options may not be exercised, and such Options shall terminate, as of the third anniversary of the date the Optionee ceases to serve as a member of the Board for any reason, provided, however, that if the Optionee dies within the nine-month period ending on the third anniversary of the date on which the Optionee ceases to serve as a member of the Board, the Optionee's legal representative may, at any time within nine months after the Optionee's death, exercise any Options granted to the Optionee, further provided, however, that in no event may an Option be exercised following the Expiration Date. 1 4. Exercise of Option. (a) The Option shall be exercised in the following manner: the Optionee, or the person or persons having the right to exercise the Option upon the death or disability of the Optionee, shall deliver to the Company written notice, in substantially the form of the notice attached hereto, specifying the number of Option Shares which the Optionee elects to purchase. The Optionee must include with the notice full payment for any Option Shares being purchased under an Option. (b) Payment of the Option Price for any Option Shares being purchased must be made in cash, by certified or cashier's check, or by delivering to the Company Stock which the Optionee already owns. If the Optionee pays by delivering Stock, the Optionee must include with the notice of exercise the certificates for such Stock either duly endorsed for transfer or accompanied by an appropriately executed stock power in favor of the Company. The Stock delivered by the Optionee will be valued by the Company at its Fair Market Value on the day preceding the date of exercise of the Option. (c) The Option may be exercised only to purchase whole shares of Stock, and in no case may a fractional share be purchased. The right of the Optionee to purchase shares of Stock with respect to which the Option has become exercisable may be exercised, in whole or in part at any time or from time to time, prior to the Expiration Date or such earlier date on which the Option terminates. (d) The Company may require an Optionee to pay, prior to the delivery of any Option Shares to which such Optionee shall be entitled upon exercise of any Option, an amount equal to the federal, state and local income taxes and other amounts required by law to be withheld by the Company with respect to any Option. Alternatively, the Optionee may authorize the Company to withhold from the number of Option Shares he or she would otherwise receive upon exercise of an Option, that number of Option Shares having a Fair Market Value equal to the amount of such required tax. 5. Miscellaneous. (a) Entire Agreement. This Option Agreement and the Plan contain all of the understandings and agreements between the Company and the Optionee concerning this Option and supersedes all earlier negotiations and understandings, written or oral, between the parties with respect thereto. The Company and the Optionee have made no promises, agreements, conditions or understandings, either orally or in writing, that are not included in this Option Agreement or the Plan. (b) Captions. The captions and section numbers appearing in this Option Agreement are inserted only as a matter of convenience. They do not define, limit, construe or describe the scope or intent of the provisions of this Option Agreement. 2 (c) Counterparts. This Option Agreement may be executed in counterparts each of which when signed by the Company or the Optionee will be deemed an original and all of which together will be deemed the same Agreement. (d) Notices. Any notice or communication having to do with this Option Agreement must be given by personal delivery or by certified mail, return receipt requested, addressed, if to the Company or the Committee, to the attention of the Secretary of the Company at the principal office of the Company, and, if to the Optionee, to the Optionee's last known address contained in the personnel or other records of the Company. (e) Succession and Transfer. Each and all of the provisions of this Option Agreement are binding upon and inure to the benefit of the Company and the Optionee and their respective estate, successors and assigns; provided, however, that the Option granted hereunder shall not be transferable by the holder thereof other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee or by his or her guardian, custodian or legal representative. (f) Amendments. Subject to the provisions of the Plan, this Option Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto. (g) Governing Law. This Option Agreement and the rights of all persons claiming hereunder will be construed and determined in accordance with the laws of the State of Delaware without giving effect to the choice of law principles thereof. (h) Benefits of this Agreement. Nothing in this Option Agreement shall be construed to give to any person or entity other than the Company and the Optionee any legal or equitable right, remedy or claim under this Option Agreement; but this Option Agreement shall be for the sole and exclusive benefit of the Company and the Optionee. (i) Option Agreement Subject to Plan. This Option Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are hereby incorporated herein as provisions of this Agreement. If there is a conflict between the provisions of this Option Agreement and the provisions of the Plan, the provisions of the Plan will govern. By signing this Agreement, the Optionee confirms that he or she has received a copy of the Plan and has had an opportunity to review the contents thereof. 3 IN WITNESS WHEREOF, the parties have executed this Option Agreement on the date and year first above written. CONGOLEUM CORPORATION By:_____________________________ Name: H. N. Feist Title: Chief Financial Officer The Option has been accepted by the undersigned, subject to the terms and provisions of the Plan and of this Option Agreement. ______________________________ Optionee 4 EX-10.2 3 ex10-2.txt Exhibit 10.2 NONQUALIFIED STOCK OPTION AWARD AGREEMENT UNDER THE CONGOLEUM CORPORATION 1995 STOCK OPTION PLAN Congoleum Corporation, a Delaware corporation (the "Company"), hereby grants to ________________ (the "Optionee"), an employee of the Company, an option (the "Option") to purchase from the Company up to, but not exceeding, in the aggregate, ______ shares (the "Shares") of Class A Common Stock, par value $.01 per share, of the Company ("Stock") at $____ per share (the "Option Price"), subject to the following terms and conditions: 1. The Option is granted pursuant to the Congoleum Corporation 1995 Stock Option Plan (the "Plan"), as established by certain resolutions adopted by the Board of Directors and stockholders of the Company. By executing this Agreement, the Optionee acknowledges that he or she has received a copy of, and is familiar with the terms of, the Plan, which is incorporated herein by reference. Any capitalized terms not defined herein shall have the same meanings assigned to them in the Plan. 2. The Option shall not be treated as an "incentive stock option" within the meaning of Section 422 of the Code. 3. (a) Subject to the terms of the Plan and the other terms of this Agreement regarding the exercisability of the Option, the Option may be exercised with respect to 20% of the Shares upon each anniversary of the date of grant of the Option (February 1, 2003), commencing on the first anniversary of the date of grant of the Option. Once available for purchase in accordance with the foregoing, unpurchased Shares shall remain subject to purchase until the Option terminates in accordance with the terms of Sections 3(b), 3(c), 3(d) or 4 hereof. (b) In the event of the Optionee's employment by the Company shall terminate for any reason other than for cause, death, disability or retirement, the Optionee may exercise the Option within one month after the termination of employment, but only to the extent that the Optionee may be entitled to do so at the date of termination of employment, except as may otherwise be determined by the Committee. In the event of the Optionee's employment by the Company shall terminate for cause, the Option shall cease to be exercisable from and after the date of termination of employment, except as may otherwise be determined by the Committee. (c) In the event of the death of the Optionee (i) while an employee of the Company or any Subsidiary or Affiliate of the Company, (ii) within three months after termination of employment with the Company or any Subsidiary or Affiliate of the Company because of retirement or (iii) within twelve months after termination of such employment because of disability, the Option may be exercised, notwithstanding any installment schedule otherwise applicable to the Option, by the person or persons to whom the Optionee's rights under the Option pass by will or applicable law or, if no such person has such right, by his or her executors or administrators, at any time, or from time to time, within twelve months after the Optionee's death, but not later than ten years after the date of the granting of the Option. (d) In the event the Optionee's employment by the Company shall terminate because of disability or retirement, the Optionee may exercise the Option, notwithstanding any installment schedule otherwise applicable to the Option, at any time, or from time to time, within three months after the termination of employment because of retirement or within twelve months after the termination of employment because of disability, but not later than ten years after the date of the granting of the Option. (e) The Option Price of the Shares as to which the Option shall be exercised shall be paid to the Company at the time of exercise in (i) cash, (ii) Stock already owned by the Optionee having a total fair market value on the date of such exercise equal to the Option Price, or (iii) a combination of cash and Stock having a total fair market value on the date of such exercise equal to the Option Price. The Committee, in its sole discretion, may also provide that the Option Price may be paid by delivering a properly executed exercise notice in a form approved by the Committee, together with irrevocable instructions to a broker to promptly deliver to the Company, against receipt of the certificates representing the shares of Stock issuable upon such exercise, the amount of the applicable sale or loan proceeds to pay the Option Price. 4. The Option shall terminate and be of no force or effect with respect to any Shares not previously purchased by the Optionee upon the expiration of ten years following the date the Option was granted. 5. Subject to the limitations set forth herein and in the Plan, the Option may be exercised by written notice mailed or delivered to Congoleum Corporation, 3705 Quakerbridge Road, P.O. Box 3127, Mercerville, New Jersey 08619-0127, Attention: Corporate Secretary, which notice shall (a) state the number of Shares with respect to which the Option is being exercised and (b) be accompanied by payment of the full amount of the Option Price for the Shares being purchased as set forth in Section 3(e) hereof. The Optionee shall not be or have any of the rights or privileges of a stockholder of the Company in respect of any Shares unless and until certificates representing such Shares shall have been issued or transferred by the Company to the Optionee. The Company may require an Optionee to pay, prior to the delivery of any Option Shares to which such Optionee shall be entitled upon exercise of any Option, an amount equal to the federal, state and local income taxes and other amounts required by law to be withheld by the Company with respect to any Option. Alternatively, the Optionee may authorize the Company to withhold from the number of Option Shares he or she would otherwise receive upon exercise of an Option, that number of Option Shares having a Fair Market Value equal to the amount of such required tax. 6. The Optionee hereby represents and acknowledges that he or she is acquiring the Option and the underlying Shares for his or her own account for investment and not with a view to, or for sale in connection with, the distribution of any interest therein or part thereof, provided that nothing shall prohibit or restrict the sale of such Shares by the Optionee in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. If any law or regulation requires the Company to take any action with respect to the Option or the Shares, the time for delivery thereof, which would otherwise be as promptly as possible, shall be postponed for the period of time necessary to take such action. 7. The Option shall not be transferable, other than under a qualified domestic relations order (as defined under Section 414(p) of the Code) (a "QDRO"), by will or by the laws of descent and distribution, and no transfer under a QDRO, by will or by the laws of descent and distribution shall be effective to bind the Company, unless the Committee shall have been furnished with a copy of such QDRO, such will or such other evidence as the Committee may deem necessary to establish the validity of the transfer. During the lifetime of the Optionee, only the Optionee or his or her guardian, custodian or legal representative may exercise the Option and receive cash payments and deliveries of Shares of Stock pursuant to the Option. 8. (a) Neither the existence of the Plan nor the existence of the Option shall affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) In the event of any change in the Stock by reason of any stock dividend, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, or any rights offering to purchase Stock at a price substantially below fair market value, or of any similar change affecting the Stock, the number and kind of Shares subject to the Option and the Option Price per Share thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to the Optionee hereunder. The Committee shall give notice to the Optionee of any adjustment made pursuant to this Section 8(b), and, upon notice, such adjustment shall be effective and binding for all purposes of the Option and the Plan. (c) Notwithstanding any other provision of the Option, in the event of a Change in Control, the following rules shall apply: i. The Option shall be accelerated immediately prior to or concurrently with the occurrence of the Change in Control and the Optionee shall have the right to exercise the Option notwithstanding any installment schedule otherwise applicable to the Option, at any time, or from time to time. ii. The obligations of the Company under the Plan and this Agreement shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company and upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company. The Company agrees that it will make appropriate provisions for the preservation of Optionee's rights under the Plan and this Agreement in any agreement or plan which it may enter into or adopt to effect any such merger, consolidation, reorganization or transfer of assets. iii. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class, rights or warrants to purchase shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to the Option. iv. Neither the Plan nor any action taken thereunder, including the grant of the Option, shall be construed as giving the Optionee the right to be retained in the employ of the Company, nor shall they interfere in any way with the right of the Company to terminate the Optionee's employment at any time. Dated as of ________________ CONGOLEUM CORPORATION By: ____________________________________ Name: Howard N. Feist Title: Chief Financial Officer The Option has been accepted by the undersigned, subject to the terms and provisions of the Plan and of this Award Agreement. _________________________________ Optionee EX-31.1 4 ex31-1.txt EXHIBIT 31.1 CERTIFICATION I, Roger S. Marcus, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Congoleum Corporation (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Roger S. Marcus -------------------- Roger S. Marcus Chief Executive Officer EX-31.2 5 ex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Howard N. Feist III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Congoleum Corporation (the "registrant"): 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986]; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Howard N. Feist III ------------------------ Howard N. Feist III Chief Financial Officer EX-32.1 6 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Congoleum Corporation (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger S. Marcus, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 14, 2005 /s/ Roger S. Marcus - ---------------------- Roger S. Marcus Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Congoleum Corporation and will be retained by Congoleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. EX-32.2 7 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Congoleum Corporation (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Howard N. Feist III, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 14, 2005 /s/ Howard N. Feist III - -------------------------- Howard N. Feist III Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Congoleum Corporation and will be retained by Congoleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. EX-99.7 8 ex99-7.txt Exhibit 99.7 SETTLEMENT AGREEMENT AND RELEASE BY, BETWEEN AND AMONG CONGOLEUM CORPORATION AND FEDERAL INSURANCE COMPANY This Settlement Agreement and Release (the "Agreement") is made by, between and among (a) each of the following (each, a "Debtor" and, collectively, the "Debtors"): Congoleum Corporation (together with its affiliates, predecessors, successors and assigns, collectively "Congoleum"), Congoleum Sales, Inc., and Congoleum Fiscal, Inc., as debtors and debtors-in-possession, and their affiliates, predecessors, successors and assigns, (b) Federal Insurance Company and its parents, affiliates, predecessors, successors and assigns (collectively, "Federal"); and (c) upon its creation, the Plan Trust. The Debtors, Federal and the Plan Trust, upon its creation, are each referred to herein in their individual capacity as a "Party" and collectively as the "Parties." RECITALS WHEREAS, numerous "Asbestos Claims" (as defined herein) have been asserted against Congoleum; and WHEREAS, Federal issued to Congoleum the liability insurance policies listed on Attachment A hereto (the "Subject Policies," as defined herein); and WHEREAS, there is a dispute between the Debtors and Federal regarding their respective rights and obligations with respect to insurance coverage for Asbestos Claims (the "Coverage Dispute"); and WHEREAS, Congoleum and Federal are parties to a lawsuit styled Congoleum Corporation v. ACE American Insurance Company, et al., Docket No. MID-L-8908-01 pending in the Superior Court of New Jersey, Law Division, Middlesex County (the "Coverage Action"); and WHEREAS, the "Plan Proponents" (as defined herein) distributed their Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Congoleum Corporation, et al., dated October 27, 2003, as amended (the "Original Plan"); and WHEREAS, on or about December 31, 2003, the Debtors filed reorganization Case No. 03-51524 (KCF) jointly administered pursuant to chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Chapter 11 Case"), and the Debtors continue to operate their businesses as debtors and debtors-in-possession; and WHEREAS, Congoleum seeks in the Coverage Action declaratory relief, actual compensatory and consequential damages, plus interest thereon, among other relief, and Federal denies that it owes any damages as alleged and has defended against Congoleum's claims in the Coverage Action; and WHEREAS, on or about July 22, 2005, the Debtors filed with the Bankruptcy Court the Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al. (the "Sixth Modified Plan"); and WHEREAS, the Debtors and Federal entered into settlement negotiations to resolve the Coverage Dispute and to further define their respective rights and obligations under the Subject Policies and (a) the Debtors and Federal agreed to a settlement involving the "Settlement Amount" (as defined herein) (less any credits that may apply pursuant to Paragraph II.K below); (b) and Federal agreed to pay to the Plan Trust or as otherwise directed by the Bankruptcy Court the Settlement Amount (plus any and all interest accrued thereon as provided for herein), provided that Federal is designated as a Settling Asbestos Insurance Company under the Plan and the other conditions to the Trigger Date are satisfied; and 2 WHEREAS, subject to the terms of this Agreement, the Debtors and Federal now wish to enter into an agreement, as set forth below, to settle and resolve the Coverage Dispute as between them, to provide for mutual releases of their claims under the Subject Policies, to provide for dismissals with prejudice of the Coverage Action as between them, to provide for a permanent withdrawal of all of Federal's claims, objections and appeals, if any, in the Chapter 11 Case, and to resolve certain other matters, all as set forth below; and WHEREAS, the Debtors and Federal desire that, upon creation of the Plan Trust, the Plan Trust shall become a Party to this Agreement; and WHEREAS, the Parties now wish to enter into an agreement, as set forth below, to settle and resolve the outstanding disputes referred to above; NOW, THEREFORE, in consideration of the foregoing facts and the mutual covenants contained herein, and intending to be legally bound hereby, the Parties hereby agree as follows: AGREEMENT I. DEFINITIONS A. For purposes of this Agreement, the following definitions apply to the capitalized terms herein wherever those terms appear in this Agreement, including the prefatory paragraph, recitals, the sections below and any attachments hereto. Capitalized terms in the prefatory paragraph, recitals, the sections below and any attachments hereto have the meanings ascribed to them therein to the extent they are not otherwise defined in this Definitions section. Capitalized terms that are not defined in this Agreement are given the meanings designated in the Plan. Moreover, each defined term stated in the singular shall include the plural and each defined term stated in the plural shall include the singular. The word "including" means "including but not limited to." 3 B. "Approval Order" means a Final Order (as defined herein) of a court of competent jurisdiction approving this Agreement and the compromise and settlement memorialized herein between the Debtors and Federal, which order shall be in the form of Attachment A hereto or such other order that is in a form and substance acceptable to the Debtors and Federal. C. "Asbestos Claims" means any and all past, present and future Claims (as defined herein), demands, actions, suits, proceedings, notices of partial or total responsibility, whether presently known or unknown, that seek compensatory, punitive or statutory damages, declaratory judgment, injunctive relief, medical monitoring, or any other form of relief whatsoever, on account of alleged bodily injury, personal injury, fear of future injury, medical monitoring, mental injury or anguish, emotional distress, shock, sickness, disease, or any other illness or condition, death, property damage, loss of use of property, or diminution in the value of property arising from alleged, potential or actual exposure of any type or nature whatsoever to asbestos, an asbestos-containing product, and/or any other substance, product, matter or material in any form or state that contains or is alleged to contain asbestos, either alone or in combination with any other substance. The term "Asbestos Claims" also includes, without limitation, claims or suits alleging in whole or in part exposure to asbestos and/or asbestos containing products in addition to any other substance, chemical, pollutant, waste, or material of any nature as well as claims that involve, in whole or in part, alleged exposure to asbestos or asbestos containing products relating to or arising out of or from the installation, removal, manufacture, distribution, sale, re-sale, existence or presence (whether on premises owned or controlled by the Debtors or otherwise) 4 of asbestos or an asbestos-containing product, either alone or in combination with any other substance. The term "Asbestos Claims" also includes the definitions of the following terms, as set forth in Section 1.2 of the Plan: ABI Asbestos Claim, Asbestos Personal Injury Claim, Asbestos Property Damage Claim, Asbestos Property Damage Contribution Claim, Indirect Asbestos Claim, and Unknown Asbestos Claim. D. "Asbestos Legislation" means any legislation enacted by the United States Congress and signed by the President of the United States by no later than January 3, 2006, or that becomes law without the President's signature by no later then January 3, 2006, that (1) regulates, limits or controls the prosecution of substantially all Plan Trust Asbestos Claims in the state or federal courts; (2) creates or purports to create an obligation on Federal to pay money pursuant to the legislation for the benefit of asbestos claimants; and (3) replaces, at least in part, Federal's obligations to policyholders under policies of insurance covering or alleged to cover Asbestos Claims. The term "Asbestos Legislation" is intended to encompass what is commonly understood to be "asbestos reform" legislation and is not intended to encompass general tort reform, class action reform, malpractice reform, or tax reform, or any other legislation that would regulate, limit or control Claims without regard to whether they arise from or attributable to exposure to asbestos or asbestos-containing products. For the avoidance of doubt, the fact that legislation alters or modifies the requirements or standards for establishing liability against the Debtors and/or the Plan Trust (including legislation that imposes medical and/or exposure criteria, imposes strict liability on the Debtors and/or the Plan Trust, or regulates or limits the jurisdiction or forum in which an Asbestos Claim may be brought) does not make such legislation "Asbestos Legislation" under this Paragraph I.D. 5 E. "Claim" means any of the following: (1) "Claim" as that term is defined in the United States Bankruptcy Code, 11 U.S.C. ss. 101(5); (2) Demand; or (3) any claim, whether past, present or future, known or unknown, asserted or unasserted, foreseen or unforeseen, fixed or contingent, or direct or indirect, and whether in law, equity, admiralty or otherwise (including any claim (a) arising out of, related to, or involving asbestos or any other substance, product, matter or material in any form or state, any cumulative or other injury or damage, any activity, operation, premises, or exposure or any alleged bad faith, unfair claim practices, unfair trade practices, deceptive trade practices, insurance code violations, fraud, misrepresentation, non-disclosure, breach of fiduciary duty, conspiracy, or extra-contractual or tort liability; (b) for any form of damages, indemnity or defense obligations, insurance premiums (whether retrospectively rated or otherwise), deductibles, self-insured retentions, costs, expenses, contribution or subrogation (except as specified in Paragraph II.I, below); or (c) pursuant to or under a contract, other agreement, promise, representation or warranty; or (d) pursuant to any direct action or statutory or regulatory right of action, assertion of right, complaint, cross-complaint, counterclaim, affirmative defense, writ, demand, inquiry, request, suit, lawsuit, liability, action, cause of action, administrative proceeding, governmental action, order, judgment, settlement, lien, loss, cost or expense. F. "Confirmation Order" means an order entered by the Bankruptcy Court in the Chapter 11 Case confirming the Plan, together with any order of the United States District Court issued pursuant to section 524(g)(3)(A) of the Bankruptcy Code confirming or affirming such order. 6 G. "Congoleum" means (1) the corporation now named Congoleum Corporation that was incorporated in the State of Delaware in 1986 ("Congoleum Corporation"); (2) Congoleum Corporation's predecessors, successors and past and present assigns, all its past and present subsidiaries and the predecessors, successors and past and present assigns of such subsidiaries, any person in which Congoleum Corporation has an ownership interest, directly or indirectly, of fifty percent (50%) or more, and any Persons; provided that as to each of the foregoing, Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf (3) any Persons that have been acquired by, merged into or combined with any of the Persons identified in sub-paragraph I.G(1) above, provided that Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf; (4) any and all Persons named as insureds, other insureds, or otherwise insured or claimed to be insured under the Subject Policies, provided that, as to each of the foregoing, Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf; (5) Congoleum Sales, Inc. and Congoleum Fiscal, Inc., debtors and debtors-in-possession; and (6) the directors, officers, agents, employees, representatives and attorneys of any of the foregoing Persons, solely in their respective capacities as such, provided that, as to each of the foregoing, Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf. H. "Congoleum Releasees" means (i) Congoleum and each of the other Debtors; (ii) each of their respective parents, subsidiaries, divisions, holding companies, merged companies, companies acquired before the Execution Date, predecessors-in-interest, successors-in-interest and assigns, solely in their capacities as such; (iii) the directors, members, officers, shareholders, agents and employees of the foregoing, solely in their capacities as such; and (iv) its attorneys and agents. 7 I. "Creditors' Committee" means the Official Committee of Unsecured Asbestos Claimants initially appointed by the United States Trustee in the Reorganization Cases on or about April 21, 2004. J. "Entity" means "Entity" as that term is defined in the Plan, as amended. K. "Execution Date" means the earliest date on which this Agreement is signed by the Debtors and Federal. L. "Federal Releasees" means (i) Federal; (ii) each of Federal's parents, subsidiaries, divisions, holding companies, merged companies, acquired companies, predecessors-in-interest, successors-in-interest and assigns, solely in their capacities as such; (iii) each of the directors, officers, shareholders, agents and employees of the foregoing, solely in their capacities as such; and (iv) its attorneys and agents. M. "Final Order" means an order or judgment of a court, the implementation, operation or effect of which has not been stayed and as to which the time to appeal, seek review, petition for certiorari, or move for reargument, reconsideration or rehearing has expired and as to which no appeal, petition for review, reconsideration, rehearing or certiorari or other proceedings for reargument or rehearing shall then be pending; provided, however, if an appeal, writ of certiorari, reargument, reconsideration or rehearing thereof has been filed or sought, such order of the court shall have been affirmed by the highest court to which such order was appealed, or certiorari shall have been denied or reargument or rehearing shall have been 8 denied or resulted in no modification of such order, and the time to take any further appeal, petition for certiorari, or move for reargument, reconsideration or rehearing shall have expired; provided, further, that, for the avoidance of doubt, the Parties acknowledge and agree that the possibility that a motion filed with respect to such order under Rule 59 or Rule 60 of the Federal Rules of Civil Procedure, or other analogous rule under the Bankruptcy Rules, may be filed, does not cause such order not to be a Final Order (provided, further, that such a motion has not been filed as of a date that such order would otherwise be considered a Final Order. N. "FCR" means the Futures Representative appointed pursuant to the Bankruptcy Court's February 18, 2004 Order in the Chapter 11 Case, solely in his capacity as such. O. "Motion" has the meaning ascribed to such term in sub-paragraph III.E.c of this Agreement. P. "Percentage of Undisputed Limits Resolved" means, for each insurer party in the Coverage Action (1) whose only insurance policies issued to Congoleum were issued at the $21,000,000 attachment point or higher; and (2) that executes a Asbestos Insurance Settlement Agreement with Congoleum, which settlement resolves said insurer's disputes with Congoleum in the Coverage Action and the Chapter 11 case and grants such insurer the injunctive protection afforded under section 524(g) of the Bankruptcy Code, the percentage calculated by dividing the settlement amount required to be paid by said settling insurer under such Asbestos Insurance Settlement Agreement by the total amount of undisputed limits applicable and available to pay Asbestos Claims under the insurance policy(ies) that are the subject of such Asbestos Insurance Settlement Agreement. With respect to a settling insurer whose settlement requires multiple 9 payments over time, for purposes of calculating the Percentage of Undisputed Limits Resolved, the settlement amount shall be the net present value of the sum of all such required payments under the settlement agreement, utilizing a 5% discount rate, present valued as of the date on which such settlement was executed. Q. "Person" means any natural person, corporation, limited liability company, syndicate, trust, joint venture, association, company, partnership, governmental authority or other entity. R. "Plan" means the Sixth Modified Plan, as such Sixth Modified Plan may be further modified from time to time in accordance with the terms thereof; provided, however, that (i) such modifications are consistent with the terms of this Agreement and do not adversely affect the interests of Federal under this Agreement and such modifications do not revise or delete the Claimant Agreement (Exhibit "E" to the Disclosure Statement), and (ii) the Sixth Modified Plan, as so further modified, provides an injunction at least as broad and inclusive as the "Asbestos Channeling Injunction" (as defined in the Fourth Modified Plan) that applies to Settling Asbestos Insurance Companies. S. "Plan Proponents" means the Debtors in the Chapter 11 cases jointly administered under Case No. 03-51524 (KCF) in the United States Bankruptcy Court for the District of New Jersey. T. "Plan Trust" means the Plan Trust as defined in the Plan. U. "Subject Policies" means any known or unknown policies issued by Federal to the Debtors, including but not limited to policy number 7932-98-47 effective from January 1, 1977 to January 1, 1978 and policy number (79)7932-98-47 effective from January 1, 1978 to January 1, 1979. 10 V. "Termination Event" means the occurrence for any reason of any of the contingencies set forth in Paragraph III.H below and/or the subsequent declaration of this Agreement as null and void in accordance with Paragraph III.H below. W. "Trigger Date" means the earliest date upon which written notice is sent to Federal by the Debtors, pursuant to Section V below, stating that all of the following events have occurred, if ever: (1) the Approval Order is a Final Order; (2) the "Effective Date," as defined in the Plan, has occurred; (3) the Confirmation Order is a Final Order; and (4) Federal has been designated as a Settling Asbestos Insurance Company (entitled to all of the rights and protections of a Settling Asbestos Insurance Company, including an injunction under section 524(g) of the Bankruptcy Code under the Plan) in the schedule of Settling Asbestos Insurance Companies filed by the Plan Proponents prior to the conclusion of the Confirmation Hearing, pursuant to the Plan. X. "Variable Amount" means the product of (i) the weighted average of the Percentage of Undisputed Limits Resolved for all insurer parties in the Coverage Action (a) whose only insurance policies issued to Congoleum were issued at the $21,000,000 attachment point or higher; and (b) that execute Asbestos Insurance Settlement Agreements with Congoleum, which Asbestos Insurance Settlement Agreements resolve said insurers' disputes with Congoleum in the Coverage Action and the Chapter 11 case and grant such insurers the injunctive protection afforded under section 524(g) of the Bankruptcy Code, multiplied by (ii) Ten Million Dollars ($10,000,000.00) (the nominal value of the undisputed limits applicable and available to pay Asbestos Claims under each of the Subject Insurance Policies). 11 II. PAYMENT BY FEDERAL A. Within thirty (30) Business Days of the Trigger Date, Federal shall pay to the Plan Trust or as otherwise directed by the Bankruptcy Court, the total amount of Four Million Dollars ($4,000,000.00) (the "Settlement Amount") (less any credits that may apply pursuant to Paragraph II.K below) representing costs associated with Asbestos Claims. B. The proceeds of Federal's payment in full of the Settlement Amount hereunder shall be used only to pay Asbestos Claims and/or to pay other amounts payable by the Plan Trust pursuant to the Plan and the Trust Distribution Procedures for the Congoleum Plan Trust, as may be amended. C. Federal covenants and agrees that it shall not, without the written consent of the Debtors, and after the Effective Date, the Plan Trust, consent to, the entry of any order, decree, judgment or injunction that would require Federal to make payment of the Settlement Amount (or any interest accrued thereon as provided for herein) to, or for the benefit of, a Person other than the Plan Trust or as directed by the Bankruptcy Court, as applicable, or that would prohibit, divert, channel or otherwise limit or restrict payment of the Settlement Amount (together with any and all interest accrued thereon as provided for herein) to the Plan Trust or to such other Person as may be directed by the Bankruptcy Court, or which would have any such effect. D. The Debtors covenant and agree that they shall not, without the written consent of Federal, (1) serve any subpoena upon Federal; or (2) designate the deposition testimony of Federal or any Federal employee in his or her individual capacity (if any), in connection with the Coverage Action or the Chapter 11 Case. 12 E. Time is of the essence with respect to payment of the Settlement Amount (together with any and all interest accrued thereon as provided for herein). Subject to the provisions of Paragraphs II.A and II.B above, all payments made by Federal pursuant hereto shall be made no later than the date when due, without any set off, counterclaim, dimunition or any other deduction except for reductions or deductions that may apply pursuant to Paragraph II.K below, provided, however, that if such applicable date is not a Business Day, then such payment shall be made on the next Business Day. F. In the event that the Settlement Amount is not paid in full when due, the Settlement Amount shall bear interest from (and including) the date that is three days after the date of notice of such overdue payment to Federal in the manner specified in Section V herein to (but excluding) the date said Settlement Amount plus all interest accrued thereon is actually paid in full, at an interest rate equal to the prime rate of Citibank, N.A. in effect on the date such payment was due plus two percent (2%), compounded daily. No interest shall apply to any amounts in dispute under Paragraph II.K below. G. From and after the Trigger Date, and unless this Agreement is declared null and void pursuant to Paragraph III.H below, any and all payments by Federal shall be deemed final and irrevocable payments. H. Federal shall have the right to allocate the Settlement Amount, or any portions thereof, solely for its own purposes, in its own books and records, to the various types and classifications of claims released by the Debtors pursuant to Section IV, below; provided, however, that neither the Debtors nor the Plan 13 Trust shall be bound by or be deemed to agree with any such allocation for any reason or purpose and that Federal's allocation shall not, in any way, limit its obligation to pay the Settlement Amount in full (less any deductions that may apply pursuant to Paragraph II.K below) when due or limit the Debtors' or the Plan Trust's use or allocation of the Settlement Amount. I. Federal shall not seek reimbursement of any payments that it has made or is obligated to make under this Agreement or otherwise, whether by way of a claim for contribution or subrogation, or otherwise, from any Entity other than Federal's reinsurers in their capacity as such. Each of the Debtors shall use its reasonable best efforts to obtain from all insurers with which it settles an agreement similar to that set forth in the preceding sentence; provided that, notwithstanding anything to the contrary herein, the failure of the Debtors to obtain such an agreement from any other insurer with which it settles shall not constitute a breach of this Agreement. Notwithstanding the foregoing, subject to the effect of any injunction issued pursuant to section 524(g) of the Bankruptcy Code, Federal may file a cross-complaint or counterclaim against any Entity that has first asserted a claim seeking reimbursement for any payment that it has paid or is required to pay, whether by way of a claim for contribution and/or subrogation or otherwise, against Federal in connection with any Claims released hereunder; provided that, to the extent Federal recovers any amount in respect of such cross-complaint or counterclaim from such third party, the proceeds of such recovery shall be paid by Federal per the instruction of the Debtors or the Plan Trust, (as the case may be) after Federal is reimbursed from such proceeds for their reasonable fees, costs and expenses incurred in prosecuting and defending such claim. For the avoidance of doubt, any payment of such proceeds per the Debtors' or the Plan Trust's instructions shall not reduce or count towards Federal's obligation to pay the Settlement Amount (plus any and all interest accrued thereon as provided for herein). 14 J. In the event that any insurer of the Debtors obtains a binding arbitration award or final judgment against or a settlement with Federal (with the consent of the Debtors prior to the "Effective Date" (as defined in the Plan) or with the consent of the Plan Trust following said Effective Date (which consent in either case shall not be unreasonably withheld) entitling it to obtain a sum certain from Federal as a result of said insurer's claim for contribution, subrogation, indemnification, reimbursement or other similar claim, against Federal for Federal's alleged share or equitable share of the defense and/or indemnity of the Debtors for any Claims released pursuant to this Agreement, the Debtors or the Plan Trust (as the case may be) shall voluntarily reduce the amount of any such final judgment or settlement payment that they have obtained or may obtain from such other insurer by the amount of such other insurer's binding arbitration award or final judgment awarded against or settlement with Federal in connection with such contribution, subrogation, indemnification or other similar claim and shall direct that Federal shall not be subject to liability for such judgment, arbitration award or settlement. Such a reduction in judgment or arbitration award or settlement will be accomplished by subtracting from the judgment, arbitration award or settlement against the other insurers the share of the judgment, arbitration award or settlement attributable to Federal. K. In the event that the Settlement Amount exceeds One Hundred Five percent (105%) of the Variable Amount, then the Settlement Amount shall be reduced to equal the Variable Amount. 15 L. If any Party believes that the provisions of Paragraph II.K above are triggered, the Parties shall meet and confer in good faith to attempt to reach an agreement as to the appropriate adjustment of the Settlement Amount. In the event that the Parties are unable to reach an agreement as to an appropriate adjustment of the Settlement Amount, then the Parties agree to resolve the dispute by binding arbitration by a mutually-selected single arbitrator from a list provided by Jams/Endispute in New York, New York. Each Party shall bear its own costs in the arbitration. M. Solely in the event that Asbestos Legislation (if any) does not entitle Federal to receive (or Federal does not in fact otherwise receive, for any reason whatsoever) a setoff or other decrease in its payment or contribution or liability to pay or contribute under such Asbestos Legislation that is (1) equal to or greater than the Settlement Amount; and (2) attributable to and based upon its payment of the Settlement Amount, then the Parties intend that Federal will not be required to pay under this Agreement any portion of the Settlement Amount that Federal will be required to pay (or does in fact pay) with respect to the Subject Policies pursuant to the Asbestos Legislation. If, however, Asbestos Legislation (if any) permits a setoff or other decrease in Federal's payment or contribution or liability to pay or contribute under such Asbestos Legislation that is (x) equal to or greater than the Settlement Amount; and (y) attributable to and based upon its payment of the Settlement Amount, then the Parties intend that Federal shall pay the Settlement Amount in full to the Plan Trust, or as otherwise directed by the Court, pursuant to the terms of this Agreement. In the event of Asbestos Legislation, the Parties promptly will meet and confer in good faith, and will exercise their reasonable best efforts to agree to a method to effectuate their intent as stated in this Paragraph II.M. In the event that the 16 Parties have met and conferred in good faith pursuant to this Paragraph II.M and are unable to agree to a method to effectuate the intent of this Paragraph II.M, each Party shall reserve its rights to as to the application and enforcement of this Paragraph II.M. Nothing in this Settlement Agreement or in this Paragraph II.M shall require or be construed to require Federal to violate the terms of any Asbestos Legislation. N. Notwithstanding the provisions of Paragraph II.M above, only in the event that any of the Debtors enters into a final, written Asbestos Insurance Settlement Agreement with any other Settling Asbestos Insurance Company prior to the time that the Confirmation Order becomes a Final Order, and if such Asbestos Insurance Settlement Agreement contains a provision that allows such Settling Asbestos Insurance Company to void or nullify that Asbestos Insurance Settlement Agreement because of the enactment of federal legislation designed to resolve the asbestos-related bodily injury Claims that are the subject of this Agreement (a "Legislation Clause"), then Federal shall have, and shall be deemed to have, the same right to void or nullify this Agreement as is provided in the Legislation Clause of that other Asbestos Insurance Settlement Agreement; provided, however, that, that any such right to void or nullify this Agreement shall terminate on the date on which the Confirmation Order becomes a Final Order. III. BANKRUPTCY OBLIGATIONS A. In consideration for the promises and covenants hereunder, the Plan Proponents shall (i) designate Federal as a Settling Asbestos Insurance Company (entitled to all of the rights and protections of Settling Asbestos Insurance Companies under the Plan) in the schedule of Settling Asbestos Insurance Companies filed by the Plan Proponents prior to the conclusion of the 17 Confirmation Hearing, pursuant to the Plan; and (ii) file, within ten (10) Business Days of the Execution Date, the Motion (as defined herein) pursuant to Federal Rule of Bankruptcy Procedure 9019 seeking entry of the Approval Order, and Federal will support the Plan Proponents' efforts to obtain such approval. B. Upon the later of (1) the Effective Date or (2) the Confirmation Order becoming a Final Order, if any Claim released under the Subject Policies pursuant to this Agreement, or that is subject to the Asbestos Channeling Injunction or any other injunctive protection provided for in the Plan or Confirmation Order, is brought against Federal, then the Plan Trust will cooperate with Federal in establishing that Federal is a Settling Asbestos Insurance Company entitled to the protections afforded Settling Asbestos Insurance Companies under the Plan. C. Congoleum and the Plan Trust shall not seek to terminate, reduce or limit the scope of the Asbestos Channeling Injunction with respect to Federal after the Confirmation Order becomes a Final Order. Notwithstanding the foregoing, Congoleum and the Plan Trust may seek to modify the Asbestos Channeling Injunction, provided such modifications do not terminate, reduce or limit the scope of such injunction, after first obtaining the written consent of Federal, which consent shall not be unreasonably withheld. D. Federal will not assert, file, or pursue any motions, objections, claims, proofs of claim, or appeals in the Chapter 11 Case and shall support and not oppose entry of the Approval Order. However, nothing in this paragraph shall require Federal to join in each factual assertion or legal argument propounded by Congoleum. 18 E. Federal will not object to or oppose confirmation of the Plan (or of any subsequently modified plan(s) of reorganization in the Chapter 11 Case), and Federal will not appeal the Confirmation Order provided that the Plan does not in any way impair, diminish or detract from the benefit to Federal of this Agreement and provided further that the Approval Order includes findings that: a. Federal's payment in full of the Settlement Amount together with any and all interest accrued thereon as provided for in Paragraph II.F, above, (less any credits that may apply pursuant to Paragraph II.K. above), shall satisfy and extinguish in full Federal's obligation for Claims under the Subject Policies. b. Federal's payment in full of the Settlement Amount, together with any and all interest accrued thereon as provided for in Paragraph II.F, above, (less any credits that may apply pursuant to Paragraph II.K above) shall be made to the Plan Trust or as otherwise directed by the Bankruptcy Court. The proceeds of the Settlement Amount shall be paid only to pay Asbestos Claims and/or to pay other amounts payable by the Trust pursuant to the Plan and the Trust Distribution Procedures for the Congoleum Plan Trust, as may be amended. c. Adequate notice of the Debtors' Motion for Approval of the Settlement Agreement Between the Debtors and Federal Insurance Company (the "Motion") and of the hearing on the Motion was given by mailing a copy of the Motion and notice of the hearing on the Motion to: (a) the members of the Official Committee of Asbestos Claimants (the "Committee") and the Committee's counsel; (b) the FCR and the counsel for the FCR; (c) the Claimants' Counsel; (d) all other Persons or Entities, including but not limited to Congoleum's insurers, that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case; (e) Congoleum's insurers that are or were parties to the Coverage Action; (f) the United States Trustee; (g) the Collateral Trustee (the "Collateral Trustee") of the Congoleum Collateral Trust (the "Collateral Trust") established pursuant to a Collateral Trust Agreement dated April 17, 2003; (h) Congoleum Corporation's majority shareholder, American Builtrite, Inc.; (i) any other presently existing Entities that are insureds under the Subject Policies; (j) counsel to all known holders of Asbestos Claims as reflected in the claims filed in this case, claims 19 submitted in connection with the Settlement Between Congoleum Corporation and Various Asbestos Claimants attached as Exhibit E to the Disclosure Statement with respect to the Fourth Modified Plan (the "Claimant Agreement"), or ballots submitted in connection with this case; and (k) to all known holders of Asbestos Claims whose counsel is not included within the preceding clause who, as of at least five (5) days prior to the Hearing, became known through filing of a proof of claim or otherwise. d. Notice to an attorney for the holder of an Asbestos Claim constitutes notice to the claimant for purposes of the Agreement. e. Notice of the Agreement, the Motion and the Hearing is sufficient to bind the Creditors' Committee and its members, all known creditors and claimants, the FCR and all future claimants and demand holders whose interests are represented by the FCR, and all other Persons or Entities, including but not limited to the Debtors' insurers, that, as of the date the Motion was filed, had filed a notice of appearance and demand for service of papers in the Debtors' Chapter 11 Case. f. The Approval Order and each of its Findings and Conclusions are binding upon the Creditors' Committee and its members, all known creditors and claimants, the FCR and all future claimants and demand holders whose interests are represented by the FCR, and all other Persons or Entities, including but not limited to the Debtors' insurers, that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case. Federal will not object to or oppose confirmation of the Plan (or confirmation of any subsequently modified plan(s) of reorganization in the Chapter 11 Case), and Federal will not appeal the Confirmation Order provided that the Plan does not in any way impair, diminish or detract from the benefit to Federal of this Agreement and provided further that the Approval Order includes a provision acknowledging that the Plan, as amended, states that any right, claim or cause of action that an Asbestos Insurance Company may have been entitled to assert against a Settling Asbestos Insurance Company under the Federal Policies based on or relating to Asbestos Claims shall be channeled to and become a right, claim or cause of action against the Plan Trust and not against the Settling Asbestos Insurance Company in question and that all persons, including any Asbestos Insurance Company, shall be enjoined from asserting any such right, claim or cause of action against a Settling Asbestos Insurance Company under the Federal Policies, which Settling Asbestos Insurance Company shall be protected by injunction from assertion against it, by an Asbestos Insurance Company, of any Asbestos Claims. 20 F. Upon its creation, the Plan Trust (1) automatically and without need for further action shall become a Party to this Agreement; and (2) promptly shall execute this Agreement. Upon the Trigger Date, and without limiting the obligations of the Debtors under this Agreement, the Plan Trust automatically shall succeed to all of the rights and be bound by all of the obligations of the Debtors under this Agreement without necessity of further action; provided, however, that the release provisions of Section IV below shall be binding on and inure to the benefit of the Debtors, the Plan Trust and Federal. The Debtors shall include in the Plan Trust Agreement as an obligation of the Plan Trust, effective from the creation of the Plan Trust, that such trust shall be subject to and bound by this Agreement and the Approval Order. G. Upon the occurrence of the Trigger Date, all of the Debtors' Asbestos Insurance Rights under this Agreement shall be assigned to the Plan Trust pursuant to the Plan and the Plan Documents, automatically and without need of further action by any Party or Entity; provided that the provisions of Sections IV and IX below shall remain binding on and shall continue to inure to the benefit of the Debtors and Federal, and in addition shall be binding on and inure to the benefit of the Plan Trust. The Plan Proponents shall propose to the Bankruptcy Court technical modifications to the Plan providing that the provisions of the Asbestos Insurance Settlement Agreements shall be binding on the Plan Trust with the same force and effect as if the Plan Trust were a party to the Asbestos Insurance Settlement Agreements. H. Notwithstanding Paragraph III.G above, and subject to Paragraph III.I below, any Party may declare this Agreement, except for the provisions in Paragraph III.I and Sections I and V herein, to be null and void upon the 21 occurrence of any of the following contingencies: (i) the entry of an order by the Bankruptcy Court (or the District Court exercising its original bankruptcy jurisdiction) denying approval of this Agreement; (ii) the entry of an order by the Bankruptcy Court (or the District Court exercising its original bankruptcy jurisdiction) converting the Chapter 11 Case into a Chapter 7 case or dismissing the Chapter 11 Case prior to the Approval Order becoming a Final Order or prior to the Confirmation Order becoming a Final Order; (iii) the failure of the Bankruptcy Court (or the District Court exercising its original bankruptcy jurisdiction) to find in the Approval Order that Federal's payment in full of the Settlement Amount, together with any and all interest accrued thereon as provided for herein, satisfies in full and extinguishes Federal's obligation for Claims under the Subject Policies; (iv) if the Plan as confirmed does not contain a provision stating that any right, claim or cause of action that an Asbestos Insurance Company may have been entitled to assert against a Settling Asbestos Insurance Company under the Subject Policies based on or relating to Asbestos Claims shall be channeled to and become a right, claim or cause of action against the Plan Trust and not against the Settling Asbestos Insurance Company in question and that all persons, including any Asbestos Insurance Company, shall be enjoined from asserting any such right, claim or cause of action against a Settling Asbestos Insurance Company (including Federal), which Settling Asbestos Insurance Company shall be protected by injunction from assertion against it, by an Asbestos Insurance Company, of any Asbestos Claims under the Subject Policies; (v) the failure of the Confirmation Order to become a Final Order within twenty-four (24) months of the Execution Date; or (vi) the confirmation of a plan of reorganization that is not substantially similar to the Sixth Modified Plan. Any such declaration pursuant to this Paragraph III.H must be made in writing and sent to all Parties in the manner set forth in Section V below. 22 I. Notwithstanding anything in this Agreement to the contrary, in the event that this Agreement is declared null and void pursuant to Paragraph III.H above, (1) this Agreement (except for Sections I and V and Paragraphs III.H and III.I herein) shall be vitiated and shall be a nullity; (2) Federal shall not be obligated to pay or to cause to be paid the Settlement Amount pursuant to this Agreement; (3) no Party shall be bound by the terms of any Approval Order; (4) the Subject Policies shall remain in the same force and effect as if this Agreement had never existed, and the Debtors and Federal shall have all of the rights and obligations under or with respect to the Subject Policies that they would have had if this Agreement had never existed; (5) Federal shall not be entitled to and shall not claim, any right or benefit of a Settling Asbestos Insurance Company; (6) any and all statutes of limitation or repose, or other time-related limitations, shall be deemed to have been tolled for the period from May 23, 2005 through the date that is thirty (30) days following the date on which the Agreement is declared null and void, and no Party shall assert or rely on any time-related defense to any Claim or Demand by any other Party related to such period; and (7) Federal shall be free to pursue their objections to the Plan and to appeal from the Confirmation Order and Congoleum shall be free to oppose any such objections or appeals. IV. RELEASE, DISMISSAL AND WAIVER A. Effective upon payment in full by Federal of the Settlement Amount, together with any and all interest accrued thereon as provided for herein, to or for the benefit of the Plan Trust in the manner contemplated in this Agreement: 1. Each of the Debtors and the Plan Trust releases the Federal Releasees forever from any and all known or unknown, suspected or unsuspected, past, present, existing, potential or future obligations, duties, Claims, 23 demands, penalties, costs, fees, attorneys' fees, debts, actions, causes of action, choses in action, administrative actions or proceedings, suits, arbitrations, mediations or other proceedings, offsets, damages, injuries, rights, agreements, requests for relief, sums of money, losses or liabilities of any kind, nature, character or description, whether fixed or unliquidated, whether conditional or contingent, whether in law or equity (a) for insurance coverage with respect to the applicable products/completed operations hazards limits under the Subject Policies; (b) for insurance coverage for Claims under the Subject Policies; (c) that were asserted or could have been asserted in the Coverage Action; (d) any violation or alleged violation (whether or not in bad faith) of any statute or regulation, including, without limitation Unfair Claim Practices Acts or similar statutes of each of the fifty (50) states (when applicable) concerning, relating to and/or arising out of the Subject Policies; (e) any negligent undertaking or alleged negligent undertaking by or on the part of Federal concerning or relating to the Subject Policies; or (f) any other misconduct committed by Federal prior to the Effective Date concerning, relating to and/or arising out of the Subject Policies. In furtherance of their express intent to effect the release contained in this Section IV, Debtors, as of the Effective Date, expressly waive any and all rights each of them may have under any contract, statute, code, regulation, ordinance, or common law, that may limit or restrict the effect of a general release of Claims or Demands not known to or suspected to exist in their favor at the time of the execution of this Agreement concerning, relating to and/or arising out of the Subject Policies. Without limiting the foregoing releases, Debtors acknowledge and agree that Federal shall have no further obligation whatever to provide coverage, defense, indemnity and/or any other benefits relating to, arising out of, and/or in connection with the Subject Policies. It is expressly agreed and understood that Debtors will assert no other or further Claims whatever against Federal in 24 connection with any liability that has arisen or may arise in the future under the Subject Policies. Notwithstanding anything to the contrary herein, nothing in this Paragraph IV.A shall be construed as releasing Federal from its obligations under this Agreement, including, without limitation, the obligation to pay in full the Settlement Amount less any credits that may apply pursuant to Paragraph II.K above. 2. Federal releases the Congoleum Releasees and the Plan Trust forever from any and all known or unknown, suspected or unsuspected, past, present, existing, potential or future obligations, duties, Claims, demands, penalties, costs, fees, attorneys' fees, debts, actions, causes of action, choses in action, administrative actions or proceedings, suits, arbitrations, mediations or other proceedings, offsets, damages, injuries, rights, agreements, requests for relief, sums of money, losses or liabilities of any kind, nature, character or description, whether fixed or unliquidated, whether conditional or contingent, whether in law or equity relating to, arising out of and/or in connection with (a) the Subject Policies; (b) any Claims under the Subject Policies; and/or (c) any litigation associated with Claims under the Subject Policies. In furtherance of its express intent to effect the release contained in this Section IV, Federal, as of the Effective Date, expressly waives any and all rights it may have under any contract, statute, code, regulation, ordinance, or common law, that may limit or restrict the effect of a general release of Claims or Demands not known to or suspected to exist in its favor at the time of the execution of this Agreement concerning, relating to and/or arising out of the Subject Policies. 25 B. Upon the Execution Date, Congoleum will promptly dismiss Federal and the Subject Policies from the Coverage Action by entering into a stipulation of dismissal, and the Parties shall bear their own fees, costs and expenses incurred in connection with the Coverage Action, the Chapter 11 Case and this Agreement. The stipulation of dismissal shall state that Congoleum's claims are dismissed with prejudice except that such stipulation will provide that, in the event that this Agreement becomes null and void pursuant to Paragraph III.H above, Congoleum may re-join Federal to the Coverage Action and re-assert all claims against Federal in the Coverage Action except claims for bad faith, breach of the implied covenant of good faith and fair dealing or any other extra contractual claim. In such event, the Parties agree that each of Congoleum and Federal will be bound by all issues adjudicated or rulings thereon in the Coverage Action during the period from the date of the stipulation of dismissal to the rejoinder of Federal, despite the fact that Federal did not actually participate in the litigation of such issues during such period. C. The Parties acknowledge that they have been advised by their respective legal counsel and are familiar with the provisions of Section 1542 of the California Civil Code, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of the executing of the release which if known by him or her must have materially affected his or her settlement with the debtor. The Parties hereto expressly consent that this settlement and release shall be given full force and effect according to each and all of its express terms and provisions, including those dealing with unknown and unsuspected claims, and causes of action. The Parties further agree that this reference to the California Civil Code shall not give rise to any argument that California law applies to this Agreement or the disputes resolved pursuant hereto. 26 D. Notwithstanding anything in this Section IV to the contrary, the foregoing release provisions of this Section IV shall not be construed to apply to any breach by a Party of any of its obligations under this Agreement or to discharge any rights that any of the Parties has to enforce this Agreement. V. NOTICES Any and all statements, communications or notices to be provided pursuant to or in connection with this Agreement shall be in writing and sent by facsimile, e-mail and first-class mail, postage prepaid. Such notices shall be sent to the individuals noted below, or to such other individuals as hereafter designated in writing: TO CONGOLEUM CORPORATION AND THE OTHER DEBTORS: Howard N. Feist III Congoleum Corporation 57 River Street Wellesley, MA 02481-2097 Phone: (781) 237-6655 Fax: (781) 237-6880 e-mail: sfeist@alumni.princeton.edu With a copy to Pillsbury Winthrop LLP 1540 Broadway New York, NY 10036-4039 Attn: Richard L. Epling, Esq. Kerry A. Brennan, Esq. Phone: (212) 858-1000 Fax: (212) 858-1500 e-mail: repling@pillsburywinthrop.com kbrennan@pillsburywinthrop.com 27 and Gilbert Heintz & Randolph LLP 1100 New York Avenue, N.W. Washington, D.C. 20005 Attn: Bette Orr, Esq. Phone: (202) 772-2323 Fax: (202) 772-2325 e-mail: orrb@ghrdc.com TO FEDERAL: Thomas R. Kerr, Esquire Vice President, National Specialty Risk Casualty Claims Chubb Group of Insurance Companies 15 Mountain View Road Warren, NJ 07059 With a copy to William P. Shelley, Esquire Cozen O'Connor 1900 Market Street Philadelphia, PA 19103 Phone: (215) 665-4142 Fax: (215) 701-2442 e-mail: wshelley@cozen.com VI. NO ADMISSIONS BY THE PARTIES; RIGHTS OF THIRD PARTIES A. Nothing contained herein is or shall be deemed to be: (1) an admission by Federal that any of the Debtors or any other Entity was or is entitled to any insurance coverage under the Subject Policies, or as to the validity of any of the positions that have been or could have been asserted by any of the Debtors; (2) an admission by any of the Debtors as to the validity of any of the positions or defenses to coverage that have been or could have been asserted by 28 Federal; or (3) an admission by any of the Debtors or Federal of any liability whatsoever with respect to Asbestos Claims or other Claims or Demands. In entering into this Agreement, no Party has waived nor shall be deemed to have waived, modified, or retracted any rights, obligations, privileges, or positions it has asserted or might in the future assert in connection with any Claim or Demand, matter, bankruptcy procedure or process, insurance policy, or Entity outside the scope of this Agreement. B. Notwithstanding anything to the contrary herein, the releases in Section IV above in no way impair any third party or direct claim or action by any Entity against Federal for any wrongful conduct allegedly committed by Federal arising from Federal's insurance of any manufacturer, supplier, distributor, or user of asbestos or asbestos-containing products other than the Debtors or defense of or settlement of any asbestos claims against any manufacturer, supplier, distributor, or user of asbestos or asbestos-containing products other than the Debtors. VII. CONFIDENTIALITY The Parties agree, subject to any disclosure obligations imposed by law, to hold confidential, and not to disclose to third parties, this Agreement unless and until the Debtors file the Motion seeking entry of an Approval Order. Notwithstanding anything to the contrary in this Section VII, any Party may disclose this Agreement at any time (i) to the Party's reinsurers, auditors, regulators, reinsurance intermediaries, creditors, and lenders; (ii) as required to obtain the necessary court approval of this Agreement or the Plan in the Chapter 11 Case; and/or (iii) to Entities by the Plan Trust in connection with the ordinary course of the Plan Trust's operations. 29 VIII. COOPERATION A. Federal shall use its reasonable best efforts to comply with reasonable requests from the Debtors or the Plan Trust for claims payment records or policies issued by Federal required by the Debtors or the Plan Trust in connection with any insurance claims, arbitrations, or litigations related to the Settlement Amount, this Agreement, or the Debtors' Asbestos Claims. B. Each of the Debtors and the Plan Trust shall use their reasonable best efforts to comply with reasonable requests from Federal for documents and other information required by Federal in connection with any reinsurance claims, arbitrations, or litigations relating to the Settlement Amount, this Agreement, or the Debtors' Asbestos Claims. For purposes of this Section VIII, "reasonable best efforts" shall not include disclosure of information that is subject to a confidentiality agreement or privilege. IX. REPRESENTATIONS AND WARRANTIES A. Each of the Debtors represents and warrants that it has full corporate authority to enter this Agreement as a binding and legal obligation of such Debtor, subject to approval by the Bankruptcy Court. The person signing this Agreement on behalf of any of the Debtors represents and warrants that he or she is authorized by such Debtor to execute this Agreement as a binding and legal obligation of such Debtor, subject to approval by the Bankruptcy Court. B. The Plan Trust, upon its execution and delivery of this Agreement, represents and warrants that it has full trust authority to enter this Agreement as a binding and legal obligation of the Plan Trust. The person signing this Agreement on behalf of the Plan Trust represents and warrants that he or she is authorized by the Plan Trust to execute this Agreement as a binding and legal obligation of the Plan Trust, subject to approval by the Bankruptcy Court. 30 C. Federal represents and warrants that Federal has full corporate authority to enter this Agreement as a binding and legal obligation of Federal. The person signing this Agreement on behalf of Federal represents and warrants that he or she is authorized by Federal to execute this Agreement as a binding and legal obligation of Federal. D. Each Party represents and warrants that as of the Execution Date, it is not aware of any the existence of any liability insurance policies issued to Congoleum and subscribed to by Federal other than the Subject Policies. X. JURISDICTION The Bankruptcy Court shall retain exclusive jurisdiction over any dispute relating to this Agreement. XI. NO PREJUDICE AND CONSTRUCTION OF AGREEMENT This Agreement is the product of informed negotiations and involves compromises of the Parties' previously stated legal positions. This Agreement is without prejudice to positions taken by Federal with regard to other insureds or by the Debtors with regard to other insurers. This Agreement is the jointly drafted product of arm's-length negotiations between the Parties with the benefit of advice from counsel, and the Parties agree that it shall be so construed. As such, no Party will claim that any ambiguity in this Agreement shall be construed against any other Party by reason of the identity of the drafter. 31 XII. ENTIRE AGREEMENT AND TERM A. This Agreement and the Approval Order express the entire agreement and understanding between the Debtors, Federal and the Plan Trust. Except as expressly set forth in this Agreement, there are no representations, warranties, promises, or inducements, whether oral, written, expressed or implied, that in any way affect or condition the validity of this Agreement or alter its terms. If the facts or law related to the subject matter of this Agreement are found hereafter to be other than is now believed by any of the Parties, the Parties expressly accept and assume the risk of such possible difference of fact or law and agree that this Agreement nonetheless shall be and remain effective according to its terms. B. Titles and captions contained in this Agreement are inserted only as a matter of convenience and are for reference purposes only. Such titles and captions are intended in no way to define, limit, expand, or describe the scope of this Agreement or the intent of any provision hereof. XIII. MODIFICATION No change or modification of this Agreement shall be valid unless it is made in writing and signed by the Parties hereto. XIV. EXECUTION This Agreement shall be executed in counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument. Upon execution of the counterparts by the Plan Trust, the Plan Trust shall provide its address for notices to the other Parties under Section V. Each counterpart may be delivered by facsimile transmission, and a faxed signature shall have the same force and effect as an original signature. 32 XV. MISCELLANEOUS A. Notwithstanding anything to the contrary herein, the Parties hereby agree that no Party hereto shall have any liability to the other Parties for the occurrence of any Termination Event or the failure of the Trigger Date to occur. B. The settlement negotiations leading up to this Agreement and all related discussions and negotiations shall be deemed to fall within the protection afforded to compromises and to offers to compromise by Rule 408 of the Federal Rules of Evidence and any parallel state law provisions. [The remainder of this page is left blank intentionally.] 33 IN WITNESS WHEREOF, this Agreement, consisting of thirty-four (34) pages, including this signature page, and one (1) Attachment, has been read and signed by the duly authorized representatives of the Parties as of the dates set forth below. August 3, 2005 CONGOLEUM CORPORATION By: /s/ Howard N. Feist --------------------------------------- Name: Howard N. Feist ------------------------------------- Title: Chief Financial Officer ------------------------------------ August 3, 2005 CONGOLEUM SALES, INC. By: /s/ Howard N. Feist --------------------------------------- Name: Howard N. Feist ------------------------------------- Title: Vice President ------------------------------------ August 3, 2005 CONGOLEUM FISCAL, INC. By: /s/ Howard N. Feist --------------------------------------- Name: Howard N. Feist ------------------------------------- Title: Vice President ------------------------------------ July 29, 2005 FEDERAL INSURANCE COMPANY BY: /s/ Thomas R. Kerr --------------------------------------- Name: Thomas R. Kerr ------------------------------------- Title: Vice President, Chubb & Son, ------------------------------------- A division of Federal Insurance Company 34 ATTACHMENT A Insurer Policy No. Policy Period Federal Insurance Company 7932-98-47 01/01/77 to 01/01/78 Federal Insurance Company (79)7932-98-47 01/01/78 to 01/01/79 35 ATTACHMENT B - ------------------------------------------------ UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY - ------------------------------------------------ Caption in Compliance with D.N.J. LBR 9004-2(c) Okin, Hollander & DeLuca L.L.P. Parker Plaza, 400 Kelley Street Fort Lee, NJ 07024 (201) 947-7500 Paul S. Hollander (PH-2681) Pillsbury Winthrop Shaw Pittman LLP 1540 Broadway New York, NY 10036 (212) 858-1000 Richard L. Epling Kerry A. Brennan Attorneys for Debtors and Debtors-In-Possession - ------------------------------------------------ In re: Chapter 11 CONGOLEUM CORPORATION, et al., Case No. 03-51524 (KCF) Debtors. Jointly Administered - ------------------------------------------------ ORDER AUTHORIZING AND APPROVING SETTLEMENT AGREEMENT AND RELEASE BY, BETWEEN AND AMONG CONGOLEUM CORPORATION AND FEDERAL INSURANCE COMPANY The relief set forth on the following pages, numbered two (2) through fifteen (15) is hereby ORDERED. DATED: _______________ _____________________________________ Honorable Kathryn C. Ferguson United States Bankruptcy Judge The Court has considered the Motion to Approve Settlement Agreement and Release By, Between and Among Congoleum Corporation and Federal Insurance Company, dated August 4, 2005 (the "Motion"), filed by Congoleum Corporation, Congoleum Sales, Inc., and Congoleum Fiscal, Inc., the debtors and debtors-in-possession herein (collectively, the "Debtors"), seeking approval, pursuant to Rules 2002(a)(3), 9014 and 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and sections 363(f), 1107, 1108 and1146(c) and other applicable sections of the title 11 of the United States Code, 11 U.S.C. ss.ss. 101 et seq. (the "Bankruptcy Code"), of that certain Settlement Agreement and Release (such agreement, including the exhibits thereto, the "Settlement Agreement") dated as of August 3, 2005, by, between and among (a) Congoleum Corporation, Congoleum Sales, Inc., and Congoleum Fiscal, Inc. as debtors and debtors-in-possession, together with their respective affiliates, predecessors, successors and assigns (collectively, "Congoleum"); (b) Federal Insurance Company and its parents, affiliates, predecessors, successors and assigns (collectively, "Federal"); and (c) upon its creation, the Plan Trust.(1) Capitalized terms used in this Approval Order and not otherwise defined herein shall have the meanings ascribed to such terms in the Settlement Agreement. The Settlement Agreement relates to the Subject Policies. Adequate notice of the Motion was given by individual mailing to: (a) the members of the Official Committee of Asbestos Claimants (the "Committee") and the Committee's counsel; (b) the FCR and the counsel for the FCR; (c) the Claimants' Counsel; (d) all other Persons or Entities, including - ---------- (1) As defined in the Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated June 10, 2005 (the "Sixth Modified Plan"), as presently constituted. 2 but not limited to Congoleum's insurers, that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case; (e) Congoleum's insurers that are or were parties to the Coverage Action; (f) the United States Trustee; (g) the Collateral Trustee (the "Collateral Trustee") of the Congoleum Collateral Trust (the "Collateral Trust") established pursuant to a Collateral Trust Agreement dated April 17, 2003; (h) Congoleum Corporation's majority shareholder, American Biltrite, Inc.; (i) any other presently existing Entities that are insureds under the Subject Policies; (j) counsel to all known holders of Asbestos Claims as reflected in the claims filed in this case, claims submitted in connection with the Settlement Between Congoleum Corporation and Various Asbestos Claimants attached as Exhibit E to the Disclosure Statement with respect to the Plan (the "Claimant Agreement"), or ballots submitted in connection with this case; and (k) to all known holders of Asbestos Claims whose counsel are not included within the preceding clause who, as of at least five (5) days prior to the Hearing, became known through filing of a proof of claim or otherwise. A hearing was held on August __, 2005, ("Hearing") to consider the Motion and the Settlement Agreement, and all interested parties were given an opportunity to be heard and to present evidence. Objections to the Motion, if any, have been resolved by agreement or are overruled, and after due deliberation and sufficient cause appearing therefore, this Court hereby makes the following Findings of Fact and Conclusions of Law: 3 I. FINDINGS OF FACT: IT IS HEREBY FOUND AND DETERMINED THAT:(2) Jurisdiction, Final Order And Statutory Predicates A. This Court has jurisdiction to hear and determine the Motion and to grant the relief requested therein pursuant to 28 U.S.C. ss.ss. 157(b)(1) and 1334(b). This Motion presents a core proceeding pursuant to 28 U.S.C. ss.ss. 157(b)(2)(A), (M) and (O). B. This Approval Order constitutes a final order within the meaning of 28 U.S.C. ss. 158(a). The parties may consummate the Settlement Agreement immediately upon entry of this Approval Order, provided that the other conditions precedent have been satisfied or waived in accordance with the terms of the Settlement Agreement. To any extent necessary under Bankruptcy Rule 9014 and Rule 54(b) of the Federal Rules of Civil Procedure, as made applicable by Bankruptcy Rule 7054, the Court expressly finds that there is no just reason for delay in the implementation of this Approval Order. Notice of the Motion and the Settlement C. The notice of the Motion described above constitutes due, sufficient and timely notice of the Motion, the Hearing, and the Settlement Agreement to all Entities entitled thereto in accordance with the requirements of the Bankruptcy Code, the Bankruptcy Rules, this Court's orders in these Chapter 11 Cases, and of due process. No other or further notice of the Motion, the Hearing, the Settlement Agreement or this Approval Order is necessary. This Court hereby further finds that notice to an attorney for the holder of an - ---------- (2) Findings of fact shall be construed as conclusions of law, and conclusions of law shall be construed as findings of fact when appropriate. See Fed. R. Bankr. P. 7052. 4 Asbestos Claim constitutes notice to such holder for purposes of notice of the Motion, the Hearing, the Settlement Agreement or this Approval Order and any other matters set forth in this Order. The Consent and/or Interposition of No Objection from Claimants Representative, the Committee, the FCR and the Collateral Trustee D. [MAY BE MODIFIED TO REFLECT A DIFFERENT POSITION OF THE CLAIMANTS REPRESENTATIVE AND/OR FCR. WE NEED TO CONFIRM THEIR POSITIONS ONCE THE AGREEMENT IS FINALIZED] The Claimants Representative has expressly consented to the Settlement Agreement. The Committee, the FCR, and the Collateral Trustee have interposed no objection to: (1) the Debtors' and Plan Trust's entry into the Settlement Agreement and (2) the entry of this Approval Order by this Court. Good Faith Nature of Settlement Agreement and Reasonableness of the Terms of the Settlement Agreement E. The Debtors negotiated with Federal at arm's length and in good faith to reach agreement on the matters resolved through the Settlement Agreement. F. Pursuant to Bankruptcy Rule 9019, and in consideration of the terms, compromises and exchanges of consideration contained in the Settlement Agreement and all other facts and circumstances of this Chapter 11 Case, the provisions of the Settlement Agreement are (i) fair and reasonable settlements; (ii) valid and proper exercises of the Debtors' business judgment; (iii) exchanges for reasonably equivalent value; (iv) fair, equitable, and well within the range of reasonableness required for approval of the Settlement Agreement; and (v) considering all the factors set forth in In re Martin, 91 F.3d 389, 393 (3d Cir. 1996), as discussed in the Motion, in the best interests of the Debtors, their Estates, their creditors, the Plan Trust, and other parties-in-interest. 5 G. The Settlement Agreement confers a substantial benefit upon the Debtors' Estates by providing for, among other things: (i) the settlement of complex litigation; and (ii) payment to the Plan Trust of the Settlement Amount, as provided for in the Settlement Agreement (plus interest thereon to the extent provided in the Settlement Agreement and less any credits that may be due pursuant to the Settlement Agreement). H. The payments by Federal under the Subject Policies and pursuant to the Settlement Agreement constitute a reasonable and substantial settlement and fair resolution of the alleged liability of Federal under the Subject Policies for Asbestos Claims and other Claims, and such contributions satisfy the liability of Federal, if any, for Asbestos Claims and other Claims under the Subject Policies. Authority To Enter Into Settlement Agreement And To Effect The Transactions I. Each of the Debtors and, upon its creation, the Plan Trust: (i) has full corporate or trust (as the case may be) power and authority to enter into and perform the Settlement Agreement; and (ii) has the authority to take all corporate or trust action (as the case may be) necessary to authorize and approve the Settlement Agreement. In addition, no consent, authorization or approval, and no filing or registration, of any type or kind, other than those expressly provided for in the Settlement Agreement, is required for the Debtors and the Plan Trust to give effect to the terms of the Settlement Agreement. Further, the consummation of the Settlement Agreement by the Debtors and the Plan Trust does not conflict, contravene, or cause a breach, default or violation of any law, rule, regulation, contractual obligation or organizational or formation document. 6 Releases And Designation Of Federal As A Settling Asbestos Insurance Company J. Subject to the terms and conditions of the Settlement Agreement, each of the Debtors and the Plan Trust releases the Federal Releasees forever from any and all known or unknown, suspected or unsuspected, past, present, existing, potential or future obligations, duties, Claims, demands, penalties, costs, fees, attorneys' fees, debts, actions, causes of action, choses in action, administrative actions or proceedings, suits, arbitrations, mediations or other proceedings, offsets, damages, injuries, rights, agreements, requests for relief, sums of money, losses or liabilities of any kind, nature, character or description, whether fixed or unliquidated, whether conditional or contingent, whether in law or equity (a) for insurance coverage with respect to the applicable products/completed operations hazards limits under the Subject Policies; (b) for insurance coverage for Claims under the Subject Policies; (c) that were asserted or that could have been asserted in the Coverage Action; (d) any violation or alleged violation (whether or not in bad faith) of any statute or regulation, including, without limitation Unfair Claim Practices Acts or similar statutes of each of the fifty (50) states (when applicable) concerning, relating to and/or arising out of the Subject Policies; (e) any negligent undertaking or alleged negligent undertaking by or on the part of Federal concerning or relating to the Subject Policies; and (f) any other misconduct committed by Federal prior to the Effective Date concerning, relating to and/or arising out of the Subject Policies. Notwithstanding anything to the contrary herein, nothing in this paragraph shall be construed as releasing Federal from its obligations under the Settlement Agreement, including, without limitation, its obligation to pay in full the Settlement Amount (plus interest thereon to the extent provided in the Settlement Agreement and less any credits that may be due pursuant to the Settlement Agreement). K. Federal will be entitled to exercise the termination provisions of Paragraph III.H of the Settlement Agreement if the plan of reorganization that is confirmed herein does not: 7 1. Contain an injunction for the benefit of Federal pursuant to section 524(g) that bars any action directed against Federal to the extent that (a) Federal is alleged to be directly or indirectly liable for the conduct of, claims against, or demands on any of the Debtors, and (b) the alleged liability of Federal arises by reason of Federal's provision of insurance to the Debtors; 2. grant Federal all the of the benefits of a Settling Asbestos Insurance Company as described, and as provided for, in the Debtor's Sixth Amended Plan; and 3. provide that any right, claim or cause of action that an Asbestos Insurance Company may have been entitled to assert against Federal under the Subject Policies based on or relating to Asbestos Claims (as defined in the Plan) shall be channeled to and become a right, claim or cause of action against the Plan Trust and not against Federal. Federal may object to any proposed plan of reorganization that would not satisfy the requirements listed above. No Objections Filed L. [TO BE MODIFIED TO THE EXTENT ANY OBJECTIONS ARE FILED] To the extent any Entity (a) either (i) received proper notice of these matters (or is represented by an Entity (including, without limitation, the FCR or counsel) that received such notice) or (ii) having had notice of this Chapter 11 Case, elected not to request notices regarding this Chapter 11 Case, and (b) failed to object to the Motion and the entry of the Approval Order, then such Entities (including, without limitation, the Debtors and the Plan Trust (or, to the extent that it has not yet been formed or does not yet exist, its predecessor(s) in interest), the FCR, the Claimants Representative and the Committee) hereby shall have no right to file or prosecute an appeal of this Approval Order. 8 II. CONCLUSIONS OF LAW NOW, THEREFORE, BASED ON THE FOREGOING FINDINGS OF FACT, IT IS HEREBY ORDERED, ADJUDGED AND DECREED EFFECTIVE IMMEDIATELY, AS FOLLOWS: To the extent any Conclusion of Law set forth below herein constitutes a Finding of Fact, this Court so finds. General Provisions 1. Pursuant to the terms of this Approval Order, the relief requested in the Motion is granted and approved in all respects, and the Settlement Agreement is hereby approved in all respects. 2. All objections, if any, to the Motion or the relief requested therein that have not been withdrawn, waived, or settled, and all reservations of rights included in such objections, are overruled on the merits. Approval of Settlement Agreement 3. The Settlement Agreement and all of the terms and conditions thereof are hereby approved in their entirety and, notwithstanding anything to the contrary in this Approval Order, to the extent of any conflict or inconsistency between the provisions of this Approval Order and the terms and conditions of the Settlement Agreement, as between the Debtors, Plan Trust, and Federal, as the case may be, the Settlement Agreement shall govern and control. 9 4. Each of the Debtors and the Plan Trust are authorized and empowered, and hereby directed, to take any and all actions necessary or appropriate, in accordance with the terms of the Settlement Agreement, and, without further order of the Court, to (a) consummate, carry out and implement the Settlement Agreement, (b) execute and deliver, perform under, consummate, carry out, implement and close fully the Settlement Agreement, together with all additional instruments and documents that may be reasonably necessary or desirable to implement the Settlement Agreement and, and (c) to take all further actions as may be reasonably requested in accordance with the Settlement Agreement by Federal as may be reasonably necessary or appropriate to the performance of the obligations as contemplated by the Settlement Agreement. The Settlement Agreement and this Approval Order constitute valid and binding obligations of the Debtors, their Estates and the Plan Trust, which shall be enforceable in accordance with the terms thereof. The Plan Trust Agreement shall include as an obligation of the Plan Trust, effective from the creation of the Plan Trust, that such trust shall be subject to and bound by the Settlement Agreement and the Approval Order. Upon its creation, the Plan Trust, without further order of any court or action by any Entity, shall be deemed to be automatically a party to the Settlement Agreement. The Debtors are hereby authorized and directed to amend the Plan Trust Agreement (as defined in the Plan) in accordance with Section III.F of the Settlement Agreement to provide that the Plan Trust shall be subject to and bound by the Settlement Agreement and the Approval Order. 5. All of the terms and provisions of this Approval Order shall be binding in all respects upon each of the Debtors, the Plan Trust, any trustees of any of the Debtors, the Debtors' Estates, the FCR and each of the Entities whose interests he represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative, each Asbestos Claimant, all other creditors and shareholders of any of the Debtors, all interested parties, and their respective successors and assigns. 10 Releases 6. Except with respect to any rights, obligations, Claims or liabilities under or relating to the Settlement Agreement, and subject to the limitations set forth in the Settlement Agreement, and subject to all of the provisions of the Settlement Agreement, including provisions rendering the Settlement Agreement null and void in certain circumstances, immediately upon Federal's payment in full of the Settlement Amount to the Plan Trust or as otherwise ordered by this Court, and without the necessity of any further act by the Debtors, Plan Trust or further order of this Court, the releases and provisions set forth in section IV.A of the Settlement Agreement shall be effective and binding upon the Entities set forth therein, and all those who might claim derivatively through such Entities, including, without limitation, any holder of an Asbestos Claim, any other holder of a Claim against any of the Debtors, the Debtors' successors, assigns, affiliates and shareholders, including, but not limited to, American Builtrite, Inc., and any beneficiary of the Plan Trust. 7. Upon the Execution Date, the Debtors on the one hand, and Federal, on the other hand, shall dismiss all Claims against each other in the Coverage Action with prejudice, with each Party bearing its own fees, costs and expenses. The Parties' stipulation of dismissal shall state that Congoleum's claims are dismissed with prejudice except that such stipulation will provide that, in the event that the Settlement Agreement becomes null and void pursuant to Paragraph III.H thereof, Congoleum may re-join Federal to the Coverage Action and re-assert all claims against Federal in the Coverage Action, other than the bad faith claims that have been asserted in the Coverage Action, which bad faith claims shall not be re-asserted against Federal in the Coverage Action or in any 11 new action. The Parties have agreed that in such event, each of Congoleum and Federal will be bound by all issues adjudicated or rulings thereon in the Coverage Action during the period from the date of the stipulation of dismissal to the rejoinder of Federal, despite the fact that Federal did not actually participate in the litigation of such issues during such period. 8. Federal's payment in full of the Settlement Amount, as provided for in Paragraph II.A of the Settlement Agreement, shall satisfy and extinguish in full Federal's obligation for Asbestos Claims and other Claims under the Subject Policies. Additional Provisions 9. The terms and provisions of the Settlement Agreement, together with the terms and provisions of this Approval Order, shall be binding in all respects upon all entities, including the Debtors, the Plan Trust, any trustee of any Debtor, the Debtors' Estates, the FCR and each of the Entities whose interests it represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative, each Asbestos Claimant, the Debtors' other creditors, shareholders of any of the Debtors, and all parties in interest, administrative agencies, governmental units, secretaries of state, federal, state and local officials, maintaining any authority relating to the Settlement Amount, and their respective successors or assigns. 10. Federal's payment of the Settlement Amount shall be made to the Plan Trust or as otherwise directed by the Bankruptcy Court. The proceeds of the Settlement Amount shall be utilized only to pay Asbestos Claims and/or to pay other amounts payable by the Trust pursuant to the Plan and the Trust Distribution Procedures for the Congoleum Plan Trust, as may be amended. 12 11. Nothing contained in the Plan or any other plan of reorganization or liquidation, or order of any type or kind entered in (a) this Chapter 11 Case, (b) any subsequent chapter 7 case into which the chapter 11 case may be converted, or (c) any related proceeding subsequent to entry of this Approval Order, shall conflict with or derogate from the provisions of the Settlement Agreement or the terms of this Approval Order. This Approval Order shall be binding upon and enforceable against, among others, each of the Debtors, their Estates, any and all chapter 7 and chapter 11 trustees thereof, the Plan Trust, the FCR and each of the Entities whose interests it represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative and each Asbestos Claimant. 12. The failure specifically to include any particular provision of the Settlement Agreement in this Approval Order shall not diminish or impair the efficacy of such provision, it being the intent of this Court that the Settlement Agreement and each and every provision, term, and condition thereof be authorized and approved in its entirety. 13. This Approval Order shall be effective immediately upon its entry. The ten (10) day stay provided in Bankruptcy Rule 6004(c) is hereby waived. 14. The Settlement Agreement and other related documents may be modified, amended, or supplemented by the parties thereto, in a writing signed by such parties in accordance with the terms thereof, without further order of the Court, provided that (a) any such modification, amendment, or supplement is not material and (b) to the extent practicable, notice of any modification, amendment, or supplement should be delivered to (i) the Committee, (ii) the FCR and (iii) the Claimants' Counsel at least five (5) days prior to the effective date of any such modification, amendment, or supplement. 13 15. Notwithstanding any other provision of this Approval Order, if the Settlement Agreement is properly terminated under the terms thereof, then this Approval Order, with the exception of sections 7, 16 and 17 hereof, subject to the terms of sections III.H and III.I of the Settlement Agreement, shall be null and void and not be binding on any entity. 16. If the Settlement Agreement is properly terminated under the terms thereof, then any and all statutes of limitation or repose or other time-related limitations, with respect to any Claim by any Entity, shall be deemed to have been tolled for the period from May 23, 2005 through the date that is thirty (30) days following the date on which the Settlement Agreement is declared terminated or null and void, and no Party shall be entitled to assert or rely on any time-related defense to any Claim by any other Party related to such period. 17. The Court shall retain exclusive jurisdiction over any proceeding that involves the validity, application, construction, modification or termination of the Settlement Agreement and this Approval Order, and may make such further orders with respect thereto as are proper and appropriate. 18. The provisions of this Approval Order are non-severable and mutually dependent. 19. In the event that a court with competent jurisdiction over a coverage dispute between an insurer (other than Federal) (an "Other Insurer") and the Debtors (or their successors or assigns) determines that such Other Insurer would have been entitled, but for the terms of this Approval Order, to recover from Federal as a result of said Other Insurer's claim for contribution, subrogation, indemnification, reimbursement or other similar claim, against Federal for Federal's alleged share or equitable share of the defense and/or indemnity of the Debtors (or their successors or assigns), for any claims released pursuant to the Settlement Agreement then, as adequate protection for 14 any interest that such Other Insurer may have had in the Subject Policies, such Other Insurer's obligation to the Debtors (and their successors or assigns) shall be reduced, dollar for dollar, by the amount of said Other Insurer's determined claim against Federal eliminated by this Approval Order. Nothing in this Approval Order is intended to determine or affect the appropriate allocation of claims-related defense costs or liabilities to Congoleum's insurance coverages as provided by applicable law. Nothing in this paragraph limits the relief afforded to Federal under this Approval Order or the Settlement Agreement, or may serve as a basis for or shall be relied upon as imposing liability on Federal for any present or future Asbestos Claims under the Subject Policies or otherwise. 20. Counsel for the Debtors shall immediately serve a copy of this Approval Order on all parties who have filed a request for notice in this case, all parties to the Settlement Agreement, counsel to the Committee, the Claimants' Counsel, the Collateral Trustee, and the FCR and file a certificate of service with the Clerk of the Bankruptcy Court within ten (10) days hereof. 15 EX-99.8 9 ex99-8.txt Exhibit 99.8 CONFIDENTIAL SETTLEMENT AGREEMENT AND RELEASE AMONG CONGOLEUM CORPORATION, THE PLAN TRUST And MT. McKINLEY INSURANCE COMPANY AND EVEREST REINSURANCE COMPANY September 30, 2005 CONFIDENTIAL SETTLEMENT AGREEMENT AND RELEASE This Confidential Settlement Agreement and Release (the "Agreement") is made this 30th day of September, 2005, by and between Congoleum Corporation, on its own behalf and on behalf of all other "Persons" (as defined herein), including Congoleum Sales, Inc. and Congoleum Fiscal, Inc., within the definition of "Congoleum" (as defined herein) and, upon its creation, the Plan Trust, on the one part, and Mt. McKinley Insurance Company and Everest Reinsurance Company ("Mt. McKinley and Everest," each as hereinafter defined), on the other part, (Congoleum, the Plan Trust, Mt. McKinley and Everest are each referred to herein as a "Party" and collectively as the "Parties"). WITNESSETH THAT: WHEREAS, Mt. McKinley and Everest issued certain policies of insurance that provide insurance to Congoleum (the "Subject Policies," as more fully described and defined herein); and WHEREAS, Persons within the definition of Congoleum have incurred and may incur in the future certain liabilities, expenses and losses arising out of various "Claims" (as defined herein), including asbestos-related bodily injury claims, other asbestos-related claims, environmental claims and/or other types of claims; and WHEREAS, Congoleum asserts that Mt. McKinley and Everest are obligated under the Subject Policies to make liability payments and pay defense costs in connection with Claims, including Claims for asbestos-related bodily injury; and 2 WHEREAS, there are disputes among the Parties regarding their respective rights and obligations with respect to insurance coverage for asbestos-related bodily injury claims and environmental claims (the "Coverage Dispute"); and WHEREAS, the Coverage Dispute is the subject of a pending lawsuit styled Congoleum Corporation v. ACE American Insurance Company, et al., Docket No. MID-L-8908-01 pending in the Superior Court of New Jersey, Law Division, Middlesex County (the "Coverage Action"); and WHEREAS, the "Plan Proponents" (as defined herein) distributed their Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code for Congoleum Corporation, et al., dated October 27, 2003, as amended (the "Original Plan"); and WHEREAS, on or about December 31, 2003, the Debtors filed reorganization Case No. 03-51524 (KCF) jointly administered pursuant to chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey (the "Chapter 11 Case"), and the Debtors continue to operate their businesses as debtors and debtors-in-possession; and WHEREAS, on or about July 22, 2005, the Debtors filed with the Bankruptcy Court the Sixth Modified Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al. (the "Sixth Modified Plan"); and WHEREAS, in consideration of certain monetary payments and other considerations, as more fully set forth herein, by this Agreement, the Parties intend to adopt, by way of compromise, and without (i) prejudice to or waiver of their respective positions in other matters, (ii) trial or adjudication of any 3 issues of fact or law, and (iii) Mt. McKinley's and Everest's admission of liability or responsibility under the Subject Policies, a full and final settlement that releases and terminates all rights, obligations and liabilities (if any) that Mt. McKinley and Everest may owe Congoleum or the Plan Trust under the Subject Policies, any other agreement among or between the Parties concerning the Subject Policies (if any), and/or the Coverage Action. AGREEMENTS: NOW, THEREFORE, in full consideration of the foregoing and of the mutual agreements contained herein, and intending to be legally bound hereby, the Parties agree as follows: 1. Definitions For purposes of this Agreement and the attachments hereto, the following definitions apply to the capitalized terms herein wherever those terms appear in this Agreement, including the prefatory paragraph, recitals, the sections below and any attachments hereto. Capitalized terms in the prefatory paragraph, recitals, the sections below and any attachments hereto have the meanings ascribed to them therein to the extent they are not otherwise defined in this Definitions section. Capitalized terms that are not defined in this Agreement are given the meanings designated in the Sixth Modified Plan, as presently constituted. Moreover, each defined term stated in the singular shall include the plural and each defined term stated in the plural shall include the singular, and each defined term stated in the masculine form or in the feminine form or in the neuter form shall include all others. The word "including" means "including but not limited to." 4 A. Agreement: The term "Agreement" means this Confidential Settlement Agreement and Release, as the same may be amended from time to time in writing in accordance with the provisions thereof. B. Approval Order: The term "Approval Order" means an order of the Bankruptcy Court (or the District Court exercising its original bankruptcy jurisdiction) approving this Agreement and the compromise and settlement memorialized herein between Congoleum and Mt. McKinley and Everest, which order shall be in the form of Attachment B hereto or such other order that is in a form and substance acceptable to Congoleum and Mt. McKinley and Everest. C. Asbestos Claims: The term "Asbestos Claims" means any and all past, present and future claims, demands, actions, suits, proceedings, notices of partial or total responsibility, whether presently known or unknown, that seek compensatory, punitive or statutory damages, declaratory judgment, injunctive relief, medical monitoring, or any other form of relief whatsoever, on account of alleged bodily injury, personal injury, fear of future injury, medical monitoring, mental injury or anguish, emotional distress, shock, sickness, disease, or any other illness or condition, death, property damage, loss of use of property, or diminution in the value of property, arising from alleged, potential or actual exposure of any type or nature whatsoever to asbestos, an asbestos-containing product, and/or any other substance, product, matter or material in any form or state that contains or is alleged to contain asbestos, either alone or in combination with any other substance. The term "Asbestos Claims" also includes, without limitation, claims or suits alleging in whole or in part exposure to asbestos and/or asbestos containing products in addition to any other substance, 5 chemical, pollutant, waste, or material of any nature as well as claims that involve, in whole or in part, alleged exposure to asbestos or asbestos containing products relating to or arising out of or from the installation, removal, manufacture, distribution, sale, re-sale, existence or presence (whether on premises owned or controlled by the Debtors or otherwise) of asbestos or an asbestos-containing product, either alone or in combination with any other substance. The term "Asbestos Claims" also includes, without limitation, Plan Trust Asbestos Claims. D. Business Day: The term "Business Day" means any day that is not a Saturday, a Sunday or a federal holiday in the United States of America. E. Claim: The term "Claim" means any of the following: (1) "Claim" as that term is defined in the United States Bankruptcy Code, 11 U.S.C. ss. 101(5); (2) "Demand" as that term is defined in the United States Bankruptcy Code, 11 U.S.C. Sec. 524(g)(5); or (3) any claim, whether past, present or future, known or unknown, asserted or unasserted, foreseen or unforeseen, fixed or contingent, or direct or indirect, and whether in law, equity, admiralty or otherwise, including without limitation, an Asbestos Claim. The term "Claim" further includes, without limitation any claim (a) arising out of, related to, or involving asbestos or any other substance, product, matter or material in any form or state, any cumulative or other injury or damage, any activity, operation, premises, or exposure or any alleged bad faith, unfair claim practices, unfair trade practices, deceptive trade practices, insurance code violations, fraud, misrepresentation, non-disclosure, breach of fiduciary duty, conspiracy, or extra-contractual or tort liability; (b) for any form of 6 damages, indemnity or defense obligations, insurance premiums (whether retrospectively rated or otherwise), deductibles, self-insured retentions, costs, expenses, contribution or subrogation; or (c) pursuant to or under a contract, other agreement, promise, representation or warranty; or (d) pursuant to any direct action or statutory or regulatory right of action, assertion of right, complaint, cross-complaint, counterclaim, affirmative defense, writ, demand, inquiry, request, suit, lawsuit, liability, action, cause of action, administrative proceeding, governmental action, order, judgment, settlement, lien, loss, cost or expense. F. Confirmation Order: The term "Confirmation Order" means an order entered by the Bankruptcy Court in the Chapter 11 Case confirming the Plan, together with any order of the United States District Court issued pursuant to section 524(g)(3)(A) of the Bankruptcy Code confirming or affirming such order. G. Creditors' Committee: The term "Creditors' Committee" means the Official Committee of Unsecured Asbestos Claimants initially appointed by the United States Trustee in the Reorganization Cases on or about April 21, 2004. H. Execution Date: The term "Execution Date" means the earliest date upon which all of the Parties (or their authorized representatives) have executed this Agreement. I. Escrow Account: The term "Escrow Account" means the account established pursuant to the "Escrow Agreement" (as defined herein). J. Escrow Agent: The term "Escrow Agent" means the Escrow Agent as defined in the Escrow Agreement. K. Escrow Agreement: The term "Escrow Agreement" means the agreement entered into by Congoleum, Mt. McKinley and Everest and the Escrow Agent, which agreement shall be in the form of Attachment C hereto or such other agreement that is in form and substance acceptable to Congoleum and Mt. McKinley and Everest. 7 L. FCR: The term "FCR" means the Futures Representative appointed pursuant to the Bankruptcy Court's February 18, 2004 Order in the Chapter 11 Case, solely in his capacity as such. M. Final Order: The term "Final Order" means an order as to which the time to appeal, petition for certiorari, or move for reargument, rehearing or reconsideration has expired and as to which no appeal, petition for certiorari, or other proceedings for reargument, rehearing, or reconsideration shall then be pending or as to which any right to appeal, petition for certiorari, reargue, rehear or reconsider shall have been waived in writing by the Entity possessing such right, or, in the event that an appeal, writ of certiorari, or reargument, rehearing or reconsideration thereof has been sought, such order shall have been affirmed by the highest court to which such order was appealed, or from which certiorari has been denied or reargument, rehearing or reconsideration was sought and denied, and the time to take any further appeal, petition for certiorari, or move for further reargument, rehearing or reconsideration shall have expired. N. Congoleum: The term "Congoleum" shall mean: (i) the corporation now named Congoleum Corporation that was incorporated in the State of Delaware in 1986 ("Congoleum Corporation"); (ii) all present subsidiaries of Congoleum Corporation, any Persons in which Congoleum Corporation has an ownership interest, directly or indirectly, of fifty percent (50%) or more, and any other Persons on whose behalf Congoleum Corporation has the power and authority to release claims under the Subject Policies; 8 (iii) any Persons that have been acquired by, merged into or combined with any of the Persons identified in sub-paragraph 1.N(i) and (ii) above; (iv) Congoleum Corporation's predecessors, successors, past, present and future assigns, joint ventures, affiliates other than American Biltrite Inc, all of Congoleum Corporation's past subsidiaries and the predecessors, successors and past and present assigns of such past subsidiaries; provided that, as to each of the foregoing, Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf; (v) any and all Persons named as insureds, other insureds, or otherwise insured or claimed to be insured under the Subject Policies; provided that, as to each of the foregoing, Congoleum Corporation has the power and authority to release claims under the Subject Policies on their behalf; (vi) Congoleum Sales, Inc. and Congoleum Fiscal, Inc., debtors and debtors-in-possession; 9 (vii) American Biltrite Inc., solely to the extent that its seeks coverage under insurance policies issued by Everest and/or Mt. McKinley to Congoleum Corporation; and (viii) the directors, officers, agents, employees, representatives and attorneys of any of the foregoing Persons, solely in their respective capacities as such. O. Mt. McKinley and Everest: The term "Mt. McKinley and Everest" shall mean both entities collectively or individually. The term "Mt. McKinley" shall mean Mt. McKinley Insurance Company, formerly known as Gibraltar Casualty Company, all of its corporate predecessors, and all of their former or current corporate parents, subsidiaries and affiliates, and their respective directors, officers, employees, agents, partners, representatives, attorneys, joint venturers and assigns, solely in their respective capacities as such. The term "Everest" shall mean Everest Reinsurance Company, formerly known as Prudential Reinsurance Company, all of its corporate predecessors, and all of their former or current corporate parents, subsidiaries and affiliates, and their respective directors, officers, employees, agents, partners, representatives, attorneys, joint venturers and assigns, solely in their respective capacities as such. P. Person: The term "Person" shall mean an individual, a corporation, a partnership, a joint venture, an association, a trust, any other Entity or organization, and any federal, state or local government or any governmental or quasi-governmental body or political subdivision or any agency, department, board or instrumentality thereof. 10 Q. Plan: The term "Plan" means the Sixth Modified Plan, as such Sixth Modified Plan may be further modified from time to time in accordance with the terms thereof; provided, however, that such modifications: 1. are consistent with the terms of this Agreement; 2. do not materially and adversely affect the interests under this Agreement of Mt. McKinley and Everest or Congoleum; 3. continue to provide for an injunction that is at least as broad and inclusive as the "Asbestos Channeling Injunction" (as defined in the Sixth Modified Plan) that applies to Settling Asbestos Insurance Companies; and 4. continue to provide for a judgment reduction provision consistent with Section 8 of this Agreement; and 5. continue to provide that the Plan Trust shall be bound to the provisions of this Agreement with the same force and effect as if the Plan Trust were a party to this Agreement from the Execution Date. R. Plan Proponents: The term "Plan Proponents" means the Debtors in the Chapter 11 cases jointly administered under Case No. 03-51524 (KCF) in the United States Bankruptcy Court for the District of New Jersey. S. Settlement Amount: The term "Settlement Amount" means the sum of Twenty One Million Five Hundred Thousand United States dollars. (US $21,500,000). T. Subject Policies: The term "Subject Insurance Policies" shall mean: (1) all insurance policies at issue in the Coverage Action, listed in Attachment A hereto and (2) all known and unknown policies issued or allegedly issued by Mt. McKinley and Everest to Congoleum. 11 U. Trigger Date: The term "Trigger Date" means the day on which written notice is provided to Mt. McKinley and Everest in the manner set forth in Section 18 of this Agreement, stating that all of the following have occurred, provided that all of the following have in fact occurred: 1. the Approval Order becomes a Final Order; 2. Mt. McKinley and Everest are (1) designated as Settling Asbestos Insurance Companies (entitled to all the rights and protections afforded Settling Asbestos Insurance Companies under the Plan, including the protection of an injunction under Section 524(g) of the Bankruptcy Code) in the schedule of Settling Asbestos Insurance Companies filed by the Plan Proponents prior to the conclusion of the confirmation hearing and such designation has not been deleted or modified (2) this Agreement is designated as an Asbestos Insurance Settlement Agreement (3) and all requirements necessary to make effective the designation of Mt. McKinley and Everest as Settling Asbestos Insurance Companies have been met. 3. the Confirmation Order becomes a Final Order; and 4. the occurrence of the Plan Effective Date. 12 2. Payment of the Settlement Amount A. Within fifteen (15) Business Days of the Execution Date, Mt. McKinley and Everest agree to pay the Settlement Amount into the Escrow Account by wire transfer as follows: ABA No. 053000219 D/5000000016439 CT/BRANCH 2800 Bank Name: WACHOVIA BANK, NATIONAL ASSOCIATION CHARLOTTE, NC Account No. 2572008669 Acct Name: Congo/EveMck Esc Attn. Rick Barnes Subject to the provisions of Paragraph 2.D below, and provided that no asbestos legislation, as contemplated in Paragraph 2.D below, has been enacted prior to the Trigger Date, then within ten (10) Business Days of the Trigger Date, the Parties shall jointly direct the Escrow Agent to release the Settlement Amount in full, along with any and all interest or investment income accrued thereon (less (a) any expenses that the Escrow Agent incurs; (b) any reserves required under the Approval Order to be held for the payment of taxes, indemnities, or otherwise; and (c) losses incurred under any investment of the Settlement Amount permissible under the terms of the Approval Order and the Escrow Agreement) to the Plan Trust or as otherwise directed by the Court. Subject to the provisions of Paragraph 2.D below, upon the release of the Settlement Amount pursuant to this Paragraph 2.A, legal and equitable title to the Settlement Amount shall pass irrevocably to the Plan Trust or to such other Entity as is directed by the Court. 13 B. Time is of the Essence. Time is of the essence with respect to the payment of the Settlement Amount. C. Finality of Payment. The Settlement Amount is in addition to any and all amounts paid prior to the Execution Date by or on behalf of Mt. McKinley and Everest to or for the benefit of Congoleum in connection with Asbestos Claims or otherwise (the "Prior Payments"). Subject to the provisions of Paragraph 2.D below, relating to Federal Asbestos Legislation, any and all payments by Mt. McKinley and Everest, including, without limitation, the Prior Payments (if any) and the Settlement Amount are deemed final and irrevocable payments upon the occurrence of the Trigger Date. Mt. McKinley's and Everest's payment of the Settlement Amount is in addition to any and all payments made by Mt. McKinley and Everest to or for the benefit of Congoleum prior to the Execution Date, including any Prior Payments. D. Federal Asbestos Legislation 1. Definitions for this Paragraph 2.D a. Asbestos Legislation: The term "Asbestos Legislation" means any legislation enacted by the United States Congress and signed by the President of the United States by no later than the Trigger Date, or that becomes law without the President's signature by no later than the Trigger Date, that (1) regulates, limits or controls the prosecution of Asbestos Claims in the state or federal courts, (2) creates or purports to create an obligation on Mt. McKinley and/or Everest to pay money pursuant to the legislation for the benefit of asbestos claimants; and (3) replaces, at least in part, Mt. McKinley's and/or Everest's obligations to policyholders under policies of insurance covering or alleged to cover Asbestos Claims. The term "Asbestos Legislation" is intended to 14 encompass what is commonly understood to be "asbestos reform" legislation and is not intended to encompass general tort reform, class action reform, malpractice reform, or tax reform, or any other legislation that would regulate, limit or control Claims without regard to whether such claims arise from or are attributable to exposure to asbestos or asbestos-containing products. For the avoidance of doubt, the fact that legislation alters or modifies the requirements or standards for establishing liability against the Debtors and/or the Plan Trust (including legislation that imposes medical and/or exposure criteria, imposes strict liability on the Debtors and/or the Plan Trust, or regulates or limits the jurisdiction or forum in which an Asbestos Claim may be brought) does not, in itself, make such legislation "Asbestos Legislation" under this sub-paragraph 2.D.1.a. b. Federal Fund: "Federal Fund" means the Person to which Mt. McKinley and/or Everest are obligated or purportedly obligated to pay money pursuant to Asbestos Legislation. c. Repayment Amount: "Repayment Amount" means (A + B) - (Y + Z) where: A = the Settlement Amount; B = all interest or other investment return on the Settlement Amount balance from the date that the Settlement Amount is deposited into the Escrow Account to the date the Settlement Amount balance is disbursed pursuant to this Paragraph 2.D; Y = any actual monetary decrease in Mt. McKinley's and/or Everest's payment or contribution or liability to pay or contribute under any Asbestos Legislation that is attributable to their payment of the Settlement Amount under this Agreement; and Z = the reasonable and proper charges, fees and expenses of the Plan Trustee and the Escrow Agent. For purposes of this paragraph, the fees and expenses of the Plan Trustee are limited to those reasonable fees and expenses incurred by the Plan Trustee in the administration of or in connection with the Escrow Account. 15 2. Subject to the provisions of this Paragraph 2.D, the Parties intend that, if Asbestos Legislation is enacted into law, Mt. McKinley and Everest will not be required to pay under this Agreement any portion of the Settlement Amount that Mt. McKinley and Everest will be required to pay (or do in fact pay) to the Federal Fund in their capacity as insurers that issued policies to Congoleum. 3. Solely in the event that Asbestos Legislation (if any) is enacted into law, then, notwithstanding any other provision in this Agreement to the contrary, the Plan Trustee or the Escrow Agent (as the case may be) shall hold the Repayment Amount until one of the following events has occurred: a. Pursuant to the Asbestos Legislation, a date is set on which Mt. McKinley and Everest are legally obligated to pay money to the Federal Fund. In that event, Mt. McKinley and Everest shall have the right, in their sole discretion, to direct the Plan Trustee or the Escrow Agent (as the case may be) to pay the Repayment Amount to the Federal Fund or to Mt. McKinley and Everest on the date and in the manner that Mt. McKinley and Everest are legally obligated to pay money pursuant to the Asbestos Legislation. The Plan Trustee or the Escrow Agent (as the case may be) shall be required under the Trust Agreement or the Escrow Agreement (as the case may be) to pay the Repayment Amount as directed by Mt. McKinley and Everest pursuant to this sub-paragraph 2.D.3.a. b. If the Plan Trustee or the Escrow Agent (as the case may be) has not disbursed money pursuant to Mt. McKinley's and Everest's direction as authorized by sub-paragraph 2.D.3.a above, and there is a legal challenge relating to the Asbestos Legislation that results in a Final Order pursuant to which Mt. McKinley and Everest have no legal obligation to pay money pursuant to the Asbestos Legislation, then the Plan Trustee or the Escrow Agent (as the case may be) shall retain the Repayment Amount and shall disburse such amounts in the case of the Plan Trustee, pursuant to the Plan and the TDPs, or in the case of the Escrow Agent, pursuant to the Escrow Agreement. 16 c. If the Plan Trustee or the Escrow Agent (as the case may be) has disbursed money to the Federal Fund pursuant to Mt. McKinley's and Everest's direction as authorized by sub-paragraph 2.D.3.a above, and there is a legal challenge relating to the Asbestos Legislation that results in a Final Order pursuant to which the Repayment Amount disbursed to the Federal Fund under sub-paragraph 2.D.3.a above is repaid to Mt. McKinley and/or Everest and such repayment is attributable to a disbursement under sub-paragraph 2.D.3.a above, then Mt. McKinley and/or Everest shall, within ten (10) Business Days of receipt of the Repayment Amount, pay the Repayment Amount to the Plan Trust or deposit the Repayment Amount into the Escrow Account, as applicable. 4. Congoleum, the Plan Trust and Mt. McKinley and Everest agree that they shall take such action as is necessary to facilitate payment of the Repayment Amount as authorized by this Paragraph 2.D and expressly agree that they will not take (and shall not be permitted to take, support or sponsor) an action that might directly or indirectly delay such payment. 5. If Asbestos Legislation is enacted into law, at the request of any Party, the Parties shall meet and confer concerning the practical implementation of this Paragraph 2.D in light of the Asbestos Legislation. 6. Any Dispute among the Parties arising out of or relating to this Paragraph 2.D, including the breach, termination or validity thereof, shall be finally resolved by binding arbitration in accordance with the CPR Rules for Non-Administered Arbitration then currently in effect by a sole arbitrator. Such 17 arbitration must be resolved on an expedited basis, and must be completed with an award by the arbitrator entered no more than ninety (90) days from the date any Party demands arbitration pursuant to this sub-paragraph 2.D.6. The arbitration shall be governed by the Federal Arbitration Act, 9 U.S.C. ss.ss.1-16, and judgment upon the award rendered by the arbitrator(s) may be entered by any court having jurisdiction thereof. Each Party shall bear its own fees and costs incurred in connection with the arbitration. 3. Release A. Releases By Congoleum 1. Upon Mt. McKinley's and Everest's payment to the Escrow Agent in full of the Settlement Amount as provided by the terms of this Agreement, and except for the obligations created by this Agreement, Congoleum and the future assigns of all Persons within the definition of Congoleum, in their capacity as such, and the Plan Trust, upon its creation, shall be deemed to release, remise, covenant not to sue and forever discharge Mt. McKinley and Everest from and against all manner of action, causes of action, suits, debts, accounts, promises, warranties, damages (consequential or punitive), agreements, costs, expenses, Claims or Demands whatsoever, in law or in equity, whether presently known or unknown, asserted or unasserted, whether sounding in tort or contract, or arising under the statutes or administrative regulations of any jurisdiction, with respect to any and all past, present or future claims, of any type whatsoever, that Congoleum ever had, now has, or hereafter may have (a) for 18 insurance coverage, including both defense costs and indemnification claims, under the Subject Insurance Policies; (b) arising out of or relating to any act, omission, representation, or conduct of any sort in connection with any of the Subject Policies, including but not limited to the issuance of the Subject Policies and the handling of any claim thereunder; (c) arising out of or in connection with any agreements between or among the Parties relating to the Subject Policies and/or the Coverage Action, other than this Agreement; and (d) arising under or relating in any way to the Subject Policies. 2. The payment of the Settlement Amount in accordance with this Agreement shall be deemed by the Parties to (a) terminate any and all obligations whatsoever of Mt. McKinley and Everest to Congoleum and the Plan Trust arising under or relating to the Subject Policies, (b) exhaust all limits of liability, including without limitation all occurrence and aggregate limits, of the Subject Policies, and (c) constitute a "policy buyback" fully and finally extinguishing and exhausting all rights, duties, limits and coverage under the Subject Policies as if they were never issued. The Parties agree that as to any coverage bought back as set forth in this Agreement, such coverage is henceforth rescinded. If any Person thereafter inquires regarding exhaustion of the Subject Policies, Congoleum, Mt. McKinley and Everest shall represent that all limits of liability of the Subject Policies have been exhausted or are no longer available to Congoleum. It is the intention of Congoleum and the Plan Trust to reserve no rights or benefits whatsoever under the Subject Policies or in connection with any past, present or future claims under the Subject Policies, and to assure Mt. McKinley and Everest their peace and freedom from such claims and from all assertions of rights in connection with such claims. 3. Upon Mt. McKinley's and Everest's payment in full of the Settlement Amount to the Escrow Agent, any and all rights, duties, responsibilities and obligations of Mt. McKinley and Everest created by or in connection with the Subject Policies are hereby terminated. As of the date of 19 such payment in full, Congoleum shall no longer have any insurance coverage from Mt. McKinley and Everest under the Subject Policies. The various releases contained in this Paragraph 3.A are intended to operate as though Mt. McKinley and Everest had never issued the Subject Policies. 4. CONGOLEUM ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY ITS ATTORNEYS CONCERNING, AND IS FAMILIAR WITH, THE CALIFORNIA CIVIL CODE SECTION 1542 AND EXPRESSLY WAIVES ANY AND ALL RIGHTS UNDER CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES THAT "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR," AND UNDER ANY OTHER FEDERAL OR STATE STATUTE OR LAW OF SIMILAR EFFECT. 5. Congoleum expressly assumes the risk that acts, omissions, matters, causes or things may have occurred that they do not know or do not suspect to exist. Congoleum hereby waives the terms and provisions of any statute, rule or doctrine of common law that either: (i) narrowly construes releases purporting by their terms to release claims in whole or in part based upon, arising from, or related to such acts, omissions, matters, causes or things; or, (ii) restricts or prohibits the releasing of such claims. 20 B. Release By Mt. McKinley and Everest 1. At the same time the releases described in Paragraph 3.A above become effective, Mt. McKinley and Everest, and any subsequently appointed trustee or representative acting for Mt. McKinley and Everest, shall remise, release, covenant not to sue and forever discharge Congoleum from and against all manner of action, causes of action, suits, debts, accounts, promises, warranties, damages (consequential or punitive), agreements, costs, expenses, Claims or Demands whatsoever, in law or in equity, whether presently known or unknown, asserted or unasserted, whether sounding in tort or in contract, or arising under the statutes or administrative regulations of any jurisdiction, with respect to any and all past, present or future claims, of any type whatsoever, that Mt. McKinley and Everest ever had, now has, or hereinafter may have arising under or in any way relating to the Subject Policies. 2. MT. McKINLEY AND EVEREST ACKNOWLEDGE THAT THEY HAVE BEEN ADVISED BY THEIR ATTORNEYS CONCERNING, AND ARE FAMILIAR WITH, THE CALIFORNIA CIVIL CODE SECTION 1542 AND EXPRESSLY WAIVE ANY AND ALL RIGHTS UNDER CALIFORNIA CIVIL CODE SECTION 1542, WHICH PROVIDES THAT "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR," AND UNDER ANY OTHER FEDERAL OR STATE STATUTE OR LAW OF SIMILAR EFFECT. 3. Mt. McKinley and Everest expressly assume the risk that acts, omissions, matters, causes or things may have occurred that they do not know or do not suspect to exist. Mt. McKinley and Everest hereby waive the terms and provisions of any statute, rule or doctrine of common law that either: (i) 21 narrowly construes releases purporting by their terms to release claims in whole or in part based upon, arising from, or related to such acts, omissions, matters, causes or things; or, (ii) restricts or prohibits the releasing of such claims. 4. It is the intention of Mt. McKinley and Everest to reserve no rights or benefits whatsoever under or in connection with the Subject Policies, with respect to any past, present or future claims, and to assure Congoleum its peace and freedom from all such claims and from all assertions of rights in connection with such claims. 4. Defense Of The Asbestos Channeling Injunction A. Subject to the provisions of Paragraph 4.D below, in the event that any Claim is brought against Mt. McKinley and/or Everest that is subject to the Asbestos Channeling Injunction, the Plan Trust will exercise its reasonable best efforts (at the expense of the Plan Trust) to establish that such Claim is enjoined as to Mt. McKinley and Everest by operation of the Asbestos Channeling Injunction. To that end, subject to the provisions of Paragraph 4.D below, the Plan Trust will, at its expense, defend the application of the Asbestos Channeling Injunction as to any Claim asserted against Mt. McKinley and Everest that is subject to the Asbestos Channeling Injunction. B. In the event that the Plan Trust is precluded by an order of any court of competent jurisdiction from defending the application of the Asbestos Channeling Injunction as to any Claim asserted against Mt. McKinley and/or Everest that is subject to the Asbestos Channeling Injunction, the Plan Trust shall reimburse Mt. McKinley and/or Everest, subject to the provisions of 22 Paragraph 4.D below, for the reasonable costs they incur in defending the Asbestos Channeling Injunction; provided, however, that the Plan Trust shall have no obligation to pay any internal costs of Mt. McKinley or Everest (including costs associated with time or expenses of Mt. McKinley's and Everest's employees). For the avoidance of doubt, other than the reimbursement obligation provided in this Paragraph 4.B, the Plan Trust has no obligation: 1. to defend any Claim against Mt. McKinley and Everest with respect to any issue, including the application of any defense to insurance coverage or defense to any tort liability; or 2. to indemnify Mt. McKinley and Everest to any extent for any Claims, whether for defense costs, expenses, judgments, settlements, or otherwise. C. Within fifteen (15) Business Days of receipt of any demand, notice, summons or other process received by Mt. McKinley and Everest in connection with any Claim that Mt. McKinley and Everest believe is subject to the Asbestos Channeling Injunction, Mt. McKinley and Everest shall forward such demand, notice, summons or other process to the Plan Trust. The Plan Trust shall notify Mt. McKinley and Everest in writing within fifteen (15) Business Days of receipt of notice of such Claim from Mt. McKinley and Everest whether the Plan Trust agrees that such Claim triggers the Plan Trust's obligations pursuant to Paragraph 4.A above. In the event that there is a dispute whether a Claim triggers the Plan Trust's obligations pursuant to Paragraph 4.A above, the Plan 23 Trust and Mt. McKinley and Everest shall meet and confer to attempt to resolve any such dispute. If they are unable to resolve such dispute by meeting and conferring, they may litigate before the Court (or, if the Court refuses to exercise jurisdiction, before any court of competent jurisdiction) whether the Claim at issue triggers the Plan Trust's obligations pursuant to Paragraph 4.A above. While such dispute remains unresolved, Mt. McKinley and Everest have the right to defend the Asbestos Channeling Injunction as they deem appropriate. Mt. McKinley and Everest shall cooperate reasonably with the Plan Trust with respect to the obligations provided in this Section 4. D. Notwithstanding anything in this Section 4 to the contrary, in no event shall the Plan Trust's obligation pursuant to this Section 4 exceed $500,000 in the aggregate in the defense of Claims brought against the Settling Asbestos Insurance Companies, which Claims are subject to the Asbestos Channeling Injunction. 5. Dismissal of Coverage Action No later than fourteen (14) days after the date that the Court enters the Approval Order: A. Congoleum will dismiss without prejudice its Claims, counterclaims or cross-claims (if any) against Mt. McKinley and Everest in the Coverage Action; B. Mt. McKinley and Everest shall dismiss without prejudice their Claims, counterclaims or cross-claims (if any) against Congoleum in the Coverage Action. C. Upon the occurrence of the Trigger Date, the Parties shall submit a stipulation of dismissal with prejudice with respect to the Claims, counterclaims or cross-claims (if any) each asserted against the other in the Coverage Action. The Parties shall bear their own costs, expenses, and counsel fees in the Coverage Action. Nothing herein shall prevent Congoleum from recovering its costs, expenses and counsel fees in the Coverage Action from any Entity other than Mt. McKinley and Everest; and 24 D. The Parties' stipulation of dismissal with prejudice, as referenced in Paragraph 5.C above, shall state that, in the event that this Agreement becomes null and void pursuant to Section 7 below, Congoleum may re-join Mt. McKinley and Everest to the Coverage Action and re-assert all claims against Mt. McKinley and Everest in the Coverage Action, other than the bad faith claims that have been asserted in the Coverage Action, which bad faith claims shall not be re-asserted against Mt. McKinley and Everest in the Coverage Action or in any new action. In such event, the Parties agree that each of Congoleum and Mt. McKinley and Everest will not be bound by any rulings and or decisions in the Coverage Action made after September 6, 2005. 6. Bankruptcy Obligations A. Pursuant to the Plan, prior to the conclusion of the Confirmation Hearing, the Plan Proponents shall designate Mt. McKinley and Everest as Settling Asbestos Insurance Companies in the schedule of Settling Asbestos Insurance Companies filed by the Plan Proponents. B. Congoleum shall file, no later than ten (10) Business Days after the Execution Date, a motion pursuant to Federal Rule of Bankruptcy Procedure 9019 seeking entry of the Approval Order, which motion shall be in a form and in substance reasonably satisfactory to Mt. McKinley and Everest, and Mt. McKinley and Everest will reasonably support and Mt. McKinley and Everest will not oppose the Plan Proponents' efforts to obtain such approval. 25 C. Promptly following the Execution Date, Mt. McKinley and Everest and the Debtors shall advise the Bankruptcy Court that the Parties have entered into a settlement agreement. Provided that the Approval Order includes the findings set forth in Paragraph 6.E below, promptly following the date on which the Approval Order becomes a Final Order, unless and until this Agreement becomes null and void pursuant to its terms (if ever), Mt. McKinley and Everest shall: 1. not cooperate with any other defendant in the Coverage Action; 2. cease their participation in any and all objections they have made to the Plan and/or to any findings or conclusions of law issued by or recommended by the Bankruptcy Court, other than those findings or conclusions of law consistent with this Agreement, and any and all motions, Claims, and any appeals or notices of appeal that they have filed or made in the Chapter 11 Reorganization Cases; 3. not file any new objections to the Plan or appeal the Confirmation Order (for the avoidance of doubt, this provision does not apply to a plan of reorganization other than the Plan) 4. not pursue any Claims against the Debtors; 5. withdraw their participation in any and all outstanding discovery requests; and 6. serve no new discovery requests in the Debtors' confirmation proceeding. 26 D. Following the Execution Date, Congoleum shall (i) serve no new discovery in the Debtors' confirmation proceeding upon Mt. McKinley and/or Everest and shall not pursue any outstanding discovery in connection with Debtors' confirmation proceeding and (ii) will not seek to introduce evidence in any way related to Mt. McKinley and/or Everest in either the confirmation proceeding or the Coverage Action; provided, however, that Congoleum may seek to introduce as evidence (x) only in the confirmation proceeding, this Agreement and the Settlement Amount to be paid hereunder; (y) the policies of insurance issued by Mt. McKinley and/or Everest to Congoleum Corporation; and (z) such portions of any documents or other materials that are not specific to Mt. McKinley and/or Everest and that do not characterize any act, decision, obligation or position of Mt. McKinley and/or Everest or characterize the terms and conditions of any of the Subject Policies. Notwithstanding anything in this Paragraph 6.D to the contrary, Congoleum may seek to introduce as evidence in the confirmation proceeding and/or the Coverage Action communications with multiple entities that includes Mt. McKinley and/or Everest but Congoleum will not characterize any act, decision, obligation or position of Mt. McKinley and/or Everest. E. As a condition precedent to the obligations of Mt. McKinley and Everest under Paragraph 6.C above, the Approval Order must include findings that: 1. Mt. McKinley's and Everest's payment in full of the Settlement Amount shall satisfy and extinguish in full their obligations under the Subject Policies. 2. The Settlement Amount shall be used only to pay Asbestos Claims and/or to pay other amounts payable by the Plan Trust pursuant to the Plan and the Trust Distribution Procedures for the Congoleum Plan Trust, as may be amended. 27 3. Adequate notice of the Debtors' Motion for Approval of the Settlement Agreement Between the Debtors and Mt. McKinley and Everest (the "Motion") and of the hearing on the Motion was given by mailing a copy of the Motion and notice of the hearing on the Motion to: (a) the members of the Official Committee of Asbestos Claimants (the "Committee") and the Committee's counsel; (b) the FCR and the counsel for the FCR; (c) the Claimants' Counsel; (d) all other Persons or Entities that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case; (e) the United States Trustee; (f) the Collateral Trustee (the "Collateral Trustee") of the Congoleum Collateral Trust (the "Collateral Trust") established pursuant to a Collateral Trust Agreement dated April 17, 2003; (g) Congoleum Corporation's majority shareholder, American Biltrite, Inc.; (h) any other presently existing Entities that are insureds under the Subject Policies; (i) counsel to all known holders of Asbestos Claims as reflected in the claims filed in this case, claims submitted in connection with the Settlement Between Congoleum Corporation and Various Asbestos Claimants attached as Exhibit E to the Disclosure Statement with respect to the Plan (the "Claimant Agreement"), or ballots submitted in connection with this case; and (j) to all known holders of Asbestos Claims whose counsel is not included within the preceding clause who, as of at least five (5) days prior to the Hearing, became known through filing of a proof of claim or otherwise. 28 4. As required by Court order, notice to an attorney for the holder of an Asbestos Claim constitutes notice to the claimant for purposes of the Agreement and the Motion. 5. Notice of the Agreement, the Motion and the Hearing is sufficient to bind the Creditors' Committee and its members, all known creditors and claimants, the FCR and all future claimants and demand holders whose interests are represented by the FCR, and all other Persons, including but not limited to the Debtors' insurers, that, as of the date the Motion was filed, had filed a notice of appearance and demand for service of papers in the Debtors' Chapter 11 case. 6. The Approval Order and each of its Findings and Conclusions are binding upon the Creditors' Committee and its members, all known creditors and claimants, the FCR and all future Claimants and Demand holders whose interests are represented by the FCR, the Plan Trust and all other Persons or Entities, including but not limited to the Debtors' insurers, that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case. 7. The Approval Order includes a provision acknowledging that the Plan, as amended, states that any right, claim or cause of action that an Asbestos Insurance Company may have been entitled to assert against a Settling Asbestos Insurance Company based on or relating to Asbestos Claims shall be channeled to and become a right, claim or 29 cause of action against the Plan Trust and not against the Settling Asbestos Insurance Company in question and that all persons, including any Asbestos Insurance Company, shall be enjoined from asserting any such right, claim or cause of action against a Settling Asbestos Insurance Company which shall be protected by injunction from assertion against it, by an Asbestos Insurance Company, of any Asbestos Claims. F. Upon the occurrence of the Plan Effective Date, all of Congoleum's Asbestos Insurance Rights under this Agreement shall be assigned to the Plan Trust pursuant to the Plan, automatically and without need of further action by any Party or Entity, provided that this Agreement has not then and does not thereafter become null and void pursuant to its terms. G. Upon its creation, the Plan Trust (1) automatically and without need for further action shall become a Party to this Agreement; and (2) promptly shall execute this Agreement. Upon the Trigger Date, and without limiting the obligations of Congoleum under this Agreement, the Plan Trust automatically shall succeed to all the rights and be bound by all of the obligations of the Debtors under this Agreement without necessity of further action. Congoleum shall include in the Plan Trust Agreement as an obligation of the Plan Trust, effective from its creation (in language and terms satisfactory to Mt. McKinley and Everest), that such trust shall be subject to and bound by this Agreement and the Approval Order. 30 H. Congoleum and the Plan Trust shall not seek to terminate, reduce, or limit the scope of the Asbestos Channeling Injunction with respect to Mt. McKinley and Everest after the Confirmation Order becomes a Final Order. 7. Effectiveness Of Agreement And Voidability A. This Agreement is subject to the contingencies set forth in sub-paragraphs 7.A.1 - 7.A.5 below. If any of the following events occurs, any Party may declare this Agreement null and void by providing written notice to the other Parties in the manner provided in Section 18 below, in which case, this Agreement shall terminate, subject to the provisions of Paragraph 7.C below: 1. The Court or a court of competent jurisdiction enters an order confirming a Chapter 11 plan of reorganization for Congoleum or one or more of the other Debtors other than the Plan; 2. The Court or a court of competent jurisdiction enters an order that provides that Mt. McKinley and/or Everest are not Settling Asbestos Insurance Companies or otherwise contravenes the designation of Mt. McKinley and/or Everest as Settling Asbestos Insurance Companies; 3. The Court, or any other court of competent jurisdiction enters an order denying approval of the Agreement; 4. The Court or a court of competent jurisdiction enters an order converting the Chapter 11 Case into a Chapter 7 case or dismissing the Chapter 11 Case; 31 5. The Court or a court of competent jurisdiction enters an order appointing a trustee or examiner substantially possessing the rights, powers and duties of a trustee in the Chapter 11 Case; or 6. The Confirmation Order and the Approval Order do not become Final Orders within two years of the Execution Date. B. In the event that the Court or a court of competent jurisdiction enters an order approving the Agreement, which order is other than an Approval Order that includes the findings set forth in Paragraph 6.E above, then any Party may declare the Agreement to be null and void within sixty (60) days following the entry of such order approving the Agreement. The Parties shall meet and confer at some point during said sixty (60) day period to determine whether the order so entered is satisfactory to each of them and/or to explore whether a proposed order can be fashioned and jointly submitted to the Court for approval. C. Notwithstanding anything in this Agreement to the contrary, in the event this Agreement is declared by any Party to be null and void pursuant to this Section 7: 1. this Agreement, other than Sections 1, 7 and 18 (which sections shall remain in full force and effect), shall be vitiated and shall be a nullity and shall be void ab initio; 2. The Parties shall direct the Escrow Agent to return to or at the direction of Mt. McKinley and Everest, with thirty (30) days prior written notice to the Congoleum and the Plan Trust, if it exists, the Settlement Amount plus any interest or investment income accrued on the Settlement Amount minus: (i) any reasonable and proper costs incurred by the Escrow Agent; (ii) any reserves required under the Escrow Agreement to be held for the payment of taxes, indemnities, or otherwise; or (iii) losses incurred under any investment of the Settlement Amount permissible under the terms of the Approval Order; 32 3. None of the Parties shall be bound by the terms of any Approval Order; 4. Mt. McKinley and/or Everest shall not be designated as Settling Asbestos Insurance Companies, and Mt. McKinley and Everest shall not seek or receive any benefit or protection of a Settling Asbestos Insurance Company; 5. the Parties shall have the rights, defenses and obligations under or with respect to the Subject Policies that they would have had absent this Agreement, 6. the releases provided in Section 3 above shall become null and void ab initio; 7. Mt. McKinley and Everest shall be free to pursue their objections to the Plan, to appeal from the Confirmation Order and otherwise participate in the Bankruptcy Case, Congoleum shall be free to oppose any such objections or appeals and the Parties shall be free to pursue their claims against one another in the Coverage Action; and 8. any otherwise applicable statutes of limitations or repose, or other time-related limitations, shall be deemed to have been tolled for the period from the Execution Date through the date that this Agreement is declared null and void, and no Party shall assert, plead, raise or otherwise rely on or take advantage, whether actively or passively, of any time-related 33 defense to any Claim by any other Party related to such period, and if any Party breaches this obligation, it shall be deemed to have created a new cause of action against it at the time of such breach for which it shall be liable in damages equal to the amount of damages it avoided by reason of the breach. 8. Judgment Reduction In the event that another insurer of the Debtors brings a claim for contribution, subrogation, indemnification, reimbursement or other similar claim, against Everest and/or Mt. McKinley in connection with Claims released in this Agreement, and such insurer obtains a final binding arbitration award or final judgment against or a settlement with Everest and/or Mt. McKinley (with the consent of the Debtors prior to the Effective Date or with the consent of the Plan Trust following said Effective Date, which consent in either case shall not be unreasonably withheld), the Debtors or the Plan Trust (as the case may be) shall voluntarily reduce the amount of any final binding arbitration award, final judgment or settlement payment that they have obtained or may obtain from such other insurer by the amount of such other insurer's final binding arbitration award or final judgment awarded against or settlement with Everest and/or Mt. McKinley in connection with such contribution, subrogation, indemnification or other similar claim and shall direct that Everest and/or Mt. McKinley (as the case may be) shall not be subject to liability for such judgment, arbitration award or settlement. Such a reduction in judgment or arbitration award or settlement will be accomplished by subtracting from the judgment, arbitration award or settlement against the other insurers the share of the judgment, arbitration award or settlement attributable to Everest and/or Mt. McKinley (as the case may be). 34 9. Assignment of Subrogation, Contribution and Reimbursement Rights Against Other Insurers Other than claims against Mt. McKinley's and Everest's reinsurers or retrocessionaires, Mt. McKinley and Everest agree that they shall not pursue subrogation, equitable indemnity, contribution, or reimbursement of the Settlement Amount or any part thereof from any third party, including without limitation any other primary or excess insurer of Congoleum or any other subscriber to any of the Subject Policies. To the extent permitted by law, Mt. McKinley and Everest hereby transfer and assign to Congoleum all such rights, claims, and causes of action relating to subrogation, reimbursement, or contribution that Mt. McKinley and Everest may have, arising out of the Settlement Amount paid hereunder, provided always that if any third-party Person asserts any claim against Mt. McKinley and Everest, Mt. McKinley and Everest shall be permitted to pursue subrogation, equitable indemnity, contribution, or reimbursement of the Settlement Amount or any part thereof from any such third-party Person in any cross-claim, counter-claim or similar procedure. The Parties expressly agree that nothing in this Section 9 or in this Agreement shall limit the rights of Mt. McKinley and Everest to make reinsurance claims and pursue their reinsurance recoveries (if any). 10. Cooperation Congoleum will undertake all reasonable actions to cooperate with Mt. McKinley and Everest in connection with their reinsurers, including (at Mt. McKinley's and Everest's sole expense with respect to services and/or assistance 35 provided by external Congoleum vendors, and out-of-pocket expenses incurred by Congoleum) responding to reasonable requests for information and meeting with representatives of reinsurers. Such cooperation shall include providing Mt. McKinley's and Everest's representative, upon reasonable request, access to all claim files maintained by Congoleum, including but not limited to, all product exposure, medical, claim status, and payment records contained in such files; provided, however, that Mt. McKinley and Everest shall have no obligation to pay any internal costs of Congoleum (including costs associated with time or expense of Congoleum's employees or agents). 11. Reasonably Equivalent Value The Parties acknowledge and agree that: (i) the Agreement was bargained for and entered into in good faith and as the result of arms'-length negotiations; and (ii) the Agreement is based on their respective independent assessments, with the assistance and advice of counsel, that the payments and other benefits to be received by the Parties pursuant to this Agreement constitute a fair and reasonable settlement of the Parties' claims against each other and constitute reasonably equivalent value for the releases, indemnity, and other benefits conveyed under this Agreement. 12. Confidentiality A. The Parties agree that all matters relating to the negotiation of this Agreement shall be confidential and are not to be disclosed except by order of a court of competent jurisdiction or by written agreement of the Parties except to the extent that disclosure of matters relating to the negotiation of this matter is necessary in connection with seeking approval of this Agreement by the Court. 36 B. In the event that a private litigant, by way of document request, interrogatory, subpoena, or questioning at deposition, trial, or other proceeding attempts to compel disclosure of anything protected by this Section 12, the Party from whom disclosure is sought shall decline to provide the requested information on the ground that this Agreement prevents such disclosure. In the event that such private litigant seeks an order from any court or governmental body to compel such disclosure, or in the event that a court, government official, or governmental body (other than the Internal Revenue Service or Securities and Exchange Commission) requests or requires disclosure of anything protected by this Section 12, the Party from whom disclosure is sought shall immediately give written notice by facsimile or hand-delivery to the other Parties, and shall immediately provide copies of all notice papers, orders, requests or other documents in order to allow each Party to take such protective steps as may be appropriate. Notice under this Section 12 shall be made to the Persons identified in Section 18 of this Agreement. C. Material protected by this Section 12 shall be deemed to fall within the protection afforded to compromises and offers to compromise by Rule 408 of the Federal Rules of Evidence and similar provisions of state law or state rules of court. Notwithstanding anything in this Section 12, nothing in this Agreement shall prevent any Party from disclosing or releasing information regarding the negotiation of this Agreement in any form and at any time after the Execution Date to: 1. reinsurers or retrocessionaires of Mt. McKinley and Everest directly or through intermediaries; 2. outside auditors, attorneys or accountants of any Party; 37 3. to the extent required by law, including, to the extent applicable, to the Internal Revenue Service, the Securities and Exchange Commission, or other U.S., or other governmental authority that properly requires disclosure by a Party hereto; 4. to the extent and in any form that such information is required to be disclosed or released to satisfy reporting requirements imposed by law, including any Federal securities laws; and 5. as necessary in connection with the approval of this Agreement by any Court. D. Notwithstanding the foregoing provisions of this Section 12, Congoleum may issue a press release at any time following the filing of a motion with the Bankruptcy Court seeking approval of this Agreement; provided that Congoleum first provides Everest and Mt. McKinley with a copy of the press release and obtains Mt. McKinley's and Everest's consent to said press release (such consent to be provided promptly and not to be unreasonable withheld). 13 Non-Prejudice and Construction of Agreement A. This Agreement is not a contract of insurance. This Agreement is not subject to rules or construction governing contracts of insurance, including without limitation, the doctrine of contra proferentum. This Agreement is a compromise between the Parties and shall not be construed as an admission of coverage under the Subject Policies, nor shall this Agreement or any provision hereof be construed as a waiver, modification or retraction of the positions of the Parties with respect to the interpretation and application of the Subject Policies. 38 B. This Agreement is the product of informed negotiations and involves compromises of the Parties' previously stated legal positions. Accordingly, this Agreement does not reflect upon the Parties' views as to rights and obligations with respect to matters or Persons outside the scope of this Agreement. This Agreement is without prejudice to positions taken by Mt. McKinley and Everest with regard to other insureds, and without prejudice to positions taken by Congoleum with regard to other insurers. C. This Agreement is the jointly-drafted product of arms'-length negotiations between the Parties with the benefit of advice from counsel, and the Parties agree that it shall be so construed. As such, no Party will claim that any ambiguity in this Agreement shall be construed against the other Party. 14. No Modification No change or modification of this Agreement shall be valid unless made in writing and signed by the Parties (or their attorney-in-fact) whose interests are affected by such change or modification. 15. Integration This Agreement, including the Attachments hereto, constitutes the entire agreement among the Parties with respect to the subject matter hereof, and supersedes all discussions, agreements and understandings, both written and oral, among the Parties with respect hereto. 16. Governing Law This Agreement shall be governed by, and shall be construed in accordance with, the laws of New Jersey without regard to its choice of law rules. 39 17. Execution There will be two signed originals of this Agreement, which may be executed in duplicate counterparts. Facsimiles or scanned versions of signatures by the Parties shall be treated as originals. 18. Notices Unless another person is designated, in writing, for receipt of notices hereunder, notices to the respective Parties shall be sent to the following Persons, provided that notices to the Plan Trust, upon its creation, shall be sent to such Person(s) as the Plan Trust then designates in writing. If to Congoleum: Pillsbury Winthrop LLP 1540 Broadway New York, NY 10036-4039 Attn: Richard L. Epling, Esq. Kerry A. Brennan, Esq. Phone: (212) 858-1000 Fax: (212) 858-1500 e-mail: repling@pillsburywinthrop.com kbrennan@pillsburywinthrop.com and Gilbert Heintz & Randolph LLP 1100 New York Avenue, N.W. Washington, D.C. 20005 Attn: Bette Orr, Esq. Phone: (202) 772-2340 Fax: (202) 772-2325 e-mail: orrb@ghrdc.com 40 With a copy to: Howard N. Feist III Congoleum Corporation 57 River Street Wellesley, MA 02481-2097 Phone: (781) 237-6655 Fax: (781) 237-6880 e-mail: sfeist@alumni.princeton.edu If to Mt. McKinley and Everest: David Steiner Associate General Counsel Mt. McKinley Insurance Company Westgate Corporate Center 477 Martinsville Road, P.O. Box 830 Liberty Corner, New Jersey 07938-0830 Phone: (908) 604-3459 Fax: (908) 604-3434 e-mail: david.steiner@everestre.com With a copy to: Fred L. Alvarez Lord Bissell & Brook LLP 115 South LaSalle Street Chicago, Illinois 60603 Phone: (312) 443-1758 Fax: (312) 896-6758 e-mail: falvarez@lordbissell.com and Kevin M. Haas Cozen O'Connor 1085 Raymond Boulevard, Suite 1900 Newark, New Jersey 07102 Phone: (973) 286-1200 Fax: (973) 242-2121 e-mail: e-mail: KHaas@cozen.com and David P. McClain McClain, Leppert & Maney, P.C. 711 Louisiana, Suite 3100 Houston, Texas 77002 Phone: (713) 654-8001 Fax: (713) 654-8818 e-mail: mcclain@mcclainleppert.com 41 19. Representations and Warranties A. Each of the Debtors represents and warrants that it has full corporate authority to enter this Agreement as a binding and legal obligation of such Debtor, subject to approval by the Bankruptcy Court. The person signing this Agreement on behalf of any of the Debtors represents and warrants that he or she is authorized by such Debtor to execute this Agreement as a binding and legal obligation of such Debtor, subject to approval by the Bankruptcy Court. B. The Plan Trust, upon its execution and delivery of this Agreement, represents and warrants that it has full trust authority to enter this Agreement as a binding and legal obligation of the Plan Trust. The person signing this Agreement on behalf of the Plan Trust represents and warrants that he or she is authorized by the Plan Trust to execute this Agreement as a binding and legal obligation of te Plan Trust, subject to approval by the Bankruptcy Court. C. Everest and Mt. McKinley represent and warrant that they have full corporate authority to enter this Agreement as a binding and legal obligation of Everest and Mt. McKinley. The person signing this Agreement on behalf of Everest and Mt. McKinley represents and warrants that he or she is authorized by Everest and Mt. McKinley to execute this Agreement as a binding and legal obligation of Everest and Mt. McKinley. 42 D. Each Party represents and warrants that it has conducted a diligent search for copies or other evidence of the Subject Policies and that, as of the Execution Date, it is not aware of any the existence of any liability insurance policies issued to Congoleum and subscribed to by Everest and/or Mt. McKinley other than the Subject Policies listed on Attachment A hereto. [The remainder of this page is left blank intentionally] 43 IN WITNESS WHEREOF, the Parties have executed this Agreement by their duly authorized representatives. FOR CONGOLEUM CORPORATION, CONGOLEUM SALES, INC. AND CONGOLEUM FISCAL, INC. By: /s/ Howard N. Feist ------------------- Name: Howard N. Feist ---------------- Title: CFO ---------------- Date: 9/30/05 ---------------- FOR MT. McKINLEY INSURANCE COMPANY By: /s/ Adam Kenney ------------------- Name: Adam Kenney ---------------- Title: VP Claims, MMK ---------------- Date: Sept. 30, 2005 ---------------- EVEREST REINSURANCE COMPANY By: /s/ Adam Kenney ------------------- Name: Adam Kenney ---------------- Title: VP Claims, MMK ---------------- Date: Sept. 30, 2005 ---------------- 44 FOR THE PLAN TRUST By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Date: ------------------------------ 45 Attachment A ------------ Known Subject Policies Policy Number Inception Termination - ------------- --------- ----------- DXC 901037 January 1, 1976 January 1, 1977 DXCDX 0067 January 1, 1977 January 1, 1978 DXCDX 0588 January 1, 1978 January 1, 1979 DXCDX 0659 January 1, 1978 January 1, 1979 DXCDX 1356 January 1, 1979 January 1, 1980 DXCDX 1357 January 1, 1979 January 1, 1980 GMX 00451 January 1, 1980 January 1, 1981 GMX 00452 January 1, 1980 January 1, 1981 GMX 00856 January 1, 1981 January 1, 1982 GMX 00857 January 1, 1981 January 1, 1982 GMX 01497 January 1, 1982 January 1, 1983 GMX 01498 January 1, 1982 January 1, 1983 GMX 02027 January 1, 1983 January 1, 1984 GMX 02028 January 1, 1983 January 1, 1984 GMX 02545 January 1, 1984 January 1, 1985 GMX 02546 January 1, 1984 January 1, 1985 ATTACHMENT B ------------ - ------------------------------------------- UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY - ------------------------------------------- Caption in Compliance with D.N.J. LBR 9004-2(c) Okin, Hollander & DeLuca L.L.P. Parker Plaza, 400 Kelley Street Fort Lee, NJ 07024 (201) 947-7500 Paul S. Hollander (PH-2681) Pillsbury Winthrop Shaw Pittman LLP 1540 Broadway New York, NY 10036 (212) 858-1000 Richard L. Epling Kerry A. Brennan Attorneys for Debtors and Debtors-In-Possession - ------------------------------------------- In re: Chapter 11 Case No. 03-51524 (KCF) CONGOLEUM CORPORATION, et al., Jointly Administered Debtors. Honorable Kathryn C. Ferguson - ------------------------------------------- ORDER PURSUANT TO BANKRUPTCY RULE 9019 AUTHORIZING AND APPROVING INSURANCE SETTLEMENT AGREEMENT AMONG DEBTORS, PLAN TRUST, MT. MCKINLEY INSURANCE COMPANY AND EVEREST REINSURANCE COMPANY -------------------------------------------------------------------------- The relief set forth on the following pages, numbered two (2) through sixteen (16) is hereby ORDERED. Page 2 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- The Court has considered the "Motion for Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company," dated September 30, 2005 (the "Motion"), filed by Congoleum Corporation, Congoleum Sales, Inc., and Congoleum Fiscal, Inc., the debtors and debtors-in-possession herein (collectively, the "Debtors"), seeking approval, pursuant to Rules 2002(a)(3), 9014 and 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and sections 363(f), 1107, 1108 and 1146(c) and other applicable sections of the title 11 of the United States Code, 11 U.S.C. ss.ss. 101 et seq. (the "Bankruptcy Code"), of that certain Confidential Settlement Agreement and Release (such agreement, including the exhibits thereto, the "Settlement Agreement") dated as of September 30, 2005, among (a) the Debtors, along with their predecessors, successors and assigns; (b) Mt. McKinley Insurance Company ("Mt. McKinley") and Everest Reinsurance Company ("Everest") and their respective predecessors, successors and assigns and (c) upon its creation, the Plan Trust.(1) Capitalized terms used in this Approval Order and not otherwise defined herein shall have the meanings ascribed to such terms in the Settlement Agreement, and if not defined in the Settlement Agreement, such terms shall have the meaning ascribed in the Plan. The Settlement Agreement relates to the Subject Policies. - ---------- (1) As defined in the Sixth Modified Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code of Congoleum Corporation, et al., dated July 22, 2005 (the "Sixth Modified Plan"), as presently constituted. 2 Page 3 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- Adequate notice of the Motion was given by individual mailing to: (a) the members of the Official Committee of Asbestos Claimants (the "Committee") and the Committee's counsel; (b) the FCR and the counsel for the FCR; (c) the Claimants' Counsel; (d) all other Persons or Entities, including but not limited to Congoleum's insurers, that, as of the date the Motion was filed, had filed a notice of appearance or other demand for service of papers in the Debtors' Chapter 11 Case; (e) Congoleum's insurers that are or were parties to the Coverage Action; (f) the United States Trustee; (g) the Collateral Trustee (the "Collateral Trustee") of the Congoleum Collateral Trust (the "Collateral Trust") established pursuant to a Collateral Trust Agreement dated April 17, 2003; (h) Congoleum Corporation's majority shareholder, American Biltrite, Inc.; (i) any other presently existing Entities that are insureds under the Subject Policies; (j) counsel to all known holders of Asbestos Claims (all references to Asbestos Claims in this Order mean that term as it is defined in the Plan and not as it is defined in the Settlement Agreement) as reflected in the claims filed in this case, claims submitted in connection with the Settlement Between Congoleum Corporation and Various Asbestos Claimants attached as Exhibit E to the Disclosure Statement with respect to the Plan (the "Claimant Agreement"), or ballots submitted in connection with this case; and (k) to all known holders of Asbestos Claims whose counsel is not included within the preceding clause who, as of at least five (5) days prior to the Hearing, became known through filing of a proof of claim or otherwise. A hearing was held on October 31, 2005 the ("Hearing") to consider the Motion and the Settlement Agreement, and all interested parties were given an opportunity to be heard and to present evidence. Objections to the Motion, if any, have been resolved by agreement or are overruled, and after due deliberation and sufficient cause appearing therefore, this Court hereby makes the following Findings of Fact and Conclusions of Law: 3 Page 4 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- I. FINDINGS OF FACT: IT IS HEREBY FOUND AND DETERMINED THAT: (2) Jurisdiction, Final Order And Statutory Predicates A. This Court has jurisdiction to hear and determine the Motion and to grant the relief requested therein pursuant to 28 U.S.C. ss.ss. 157(b)(1) and 1334(b). This Motion presents a core proceeding pursuant to 28 U.S.C. ss.ss. 157(b)(2)(A), (M) and (O). B. This Approval Order constitutes a final order within the meaning of 28 U.S.C. ss. 158(a). The Parties may consummate the Settlement Agreement immediately upon entry of this Approval Order, provided that the other conditions precedent have been satisfied or waived in accordance with the terms of the Settlement Agreement. To any extent necessary under Bankruptcy Rule 9014 and Rule 54(b) of the Federal Rules of Civil Procedure, as made applicable by Bankruptcy Rule 7054, the Court expressly finds that there is no just reason for delay in the implementation of this Approval Order. - ---------- (2) Findings of fact shall be construed as conclusions of law, and conclusions of law shall be construed as findings of fact when appropriate. See Fed. R. Bankr. P. 7052. 4 Page 5 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- Notice of the Motion and the Settlement C. The notice of the Motion described above constitutes due, sufficient and timely notice of the Motion, the Hearing, and the Settlement Agreement to all Entities entitled thereto in accordance with the requirements of the Bankruptcy Code, the Bankruptcy Rules, this Court's orders in the Chapter 11 Case, and due process. No other or further notice of the Motion, the Hearing, the Settlement Agreement or this Approval Order is necessary. This Court hereby further finds that notice to an attorney for the holder of an Asbestos Claim constitutes notice to such holder for purposes of notice of the Motion, the Hearing, the Settlement Agreement or this Approval Order and any other matters set forth in this Order. Good Faith Nature of Settlement Agreement and Reasonableness of the Terms of the Settlement D. The Debtors on the one hand and Everest and Mt. McKinley on the other hand, negotiated at arm's length and in good faith to reach agreement on the matters resolved through the Settlement Agreement. E. Pursuant to Bankruptcy Rule 9019, and in consideration of the terms, compromises and exchanges of consideration contained in the Settlement Agreement and all other facts and circumstances of this Chapter 11 Case, the provisions of the Settlement Agreement are (i) fair and reasonable settlements; (ii) valid and proper exercises of the Debtors' business judgment; (iii) exchanges for reasonably equivalent value; (iv) fair, equitable, and well within the range of reasonableness required for approval of the Settlement Agreement; and (v) considering all the factors set forth in In re Martin, 91 F.3d 389, 393 (3d Cir. 1996), as discussed in the Motion, in the best interests of the Debtors, their Estates, their creditors, the Plan Trust, and other parties-in-interest. 5 Page 6 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- F. The Settlement Agreement confers a substantial benefit upon the Debtors' Estates by providing for, among other things: (i) the settlement of complex litigation; and (ii) payment to the Plan Trust of the Settlement Amount, as provided for in the Settlement Agreement (plus interest thereon to the extent provided in the Settlement Agreement). G. The payments by Everest and Mt. McKinley under the Subject Policies and pursuant to the Settlement Agreement constitute reasonable and substantial settlements and fair resolutions of the alleged liability of Everest and Mt. McKinley under the Subject Policies for Asbestos Claims and other Claims, and such contributions satisfy the liability of Everest and Mt. McKinley, if any, for Asbestos Claims and other Claims under the Subject Policies. Authority To Enter Into Settlement Agreement And To Effect The Transactions H. Each of the Debtors and, upon its creation, the Plan Trust: (i) has full corporate or trust (as the case may be) power and authority to enter into and perform the Settlement Agreement; and (ii) has the authority to take all corporate or trust action (as the case may be) necessary to authorize and approve the Settlement Agreement. In addition, no consent, authorization or approval, and no filing or registration, of any type or kind, other than those expressly provided for in the Settlement Agreement, is required for the Debtors and the Plan Trust to give effect to the terms of the Settlement Agreement. Further, the consummation of the Settlement Agreement by the Debtors and the Plan Trust does not conflict, contravene, or cause a breach, default or violation of any law, rule, regulation, contractual obligation or organizational or formation document. Releases And Designation Of Everest and Mt. McKinley As Settling Asbestos Insurance Companies 6 Page 7 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- I. Pursuant and subject to the terms and conditions of the Settlement Agreement, Everest and Mt. McKinley specifically have contracted to receive, for themselves: (a) all of the benefits of being designated in the Confirmation Order as a Settling Asbestos Insurance Company, including, but not limited to, the channeling injunction and releases set forth in section 11.6 (as presently enumerated) of the Plan, and (b) the releases contained in the Settlement Agreement, and, pursuant and subject to the terms and conditions of the Settlement Agreement, Everest and Mt. McKinley shall be entitled to, upon entry of this Approval Order, the protections provided by such designation and treatment without further order of this Court. J. Pursuant and subject to the terms and conditions of the Settlement Agreement, Everest and Mt. McKinley specifically have agreed not to object to or oppose confirmation of the Plan, and Everest and Mt. McKinley have agreed not to appeal the Confirmation Order. Everest and Mt. McKinley are, however, permitted to object to or oppose confirmation of, and to appeal from confirmation of, a plan of reorganization other than the Plan. A plan of reorganization that differs from the Plan because it contains an asbestos channeling injunction differing from that found in the Plan shall be treated as the Plan for purposes of the preceding sentence and the Settlement Agreement provided that such plan: 7 Page 8 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- 1. Contains an injunction for the benefit of Everest and Mt. McKinley pursuant to section 524(g) of the Bankruptcy Code that bars any action directed against Everest and Mt. McKinley to the extent that (a) Everest and/or Mt. McKinley are alleged to be directly or indirectly liable for the conduct of, claims against, or demands on any of the Debtors, and (b) the alleged liability of Everest and/or Mt. McKinley arises by reason of their provision of insurance to the Debtors; 2. Grants Everest and Mt. McKinley all of the benefits of a Settling Asbestos Insurance Company as described, and as provided for, in the Plan; 3. Provides that any right, claim or cause of action that any Person, including an Asbestos Insurance Company, may have been entitled to assert against Everest and/or Mt. McKinley based on or relating to Asbestos Claims or Demands and any other claims subject to the injunction in favor of Everest and Mt. McKinley described in J.(1) above shall be channeled to and become a right, claim or cause of action against the Plan Trust and not against Everest and/or Mt. McKinley; and 4. Does not provide injunctive protection to any other Asbestos Insurance Company that is broader than the injunctive protection provided to Everest and Mt. McKinley. Objections Overruled 8 Page 9 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- K. All objections filed with respect to the Motion or the entry of this Approval Order and not withdrawn are hereby overruled. To the extent any Entity (a) either (i) received proper notice of these matters (or is represented by an Entity (including, without limitation, the FCR or counsel) that received such notice) or (ii) having had notice of this Chapter 11 Case, elected not to request notices regarding this Chapter 11 Case, and (b) failed to object to the Motion and the entry of the Approval Order, then such Entities (including, without limitation, the Debtors and the Plan Trust (or, to the extent that it has not yet been formed or does not yet exist, its predecessor(s) in interest), the FCR, the Claimants Representative and the Committee) hereby shall have no right to file or prosecute an appeal of this Approval Order. II. CONCLUSIONS OF LAW NOW, THEREFORE, BASED ON THE FOREGOING FINDINGS OF FACT, IT IS HEREBY ORDERED, ADJUDGED AND DECREED EFFECTIVE IMMEDIATELY, AS FOLLOWS: To the extent any Conclusion of Law set forth below herein constitutes a Finding of Fact, this Court so finds. To the extent that any Finding of Fact constitutes a Conclusion of Law, the Court so concludes. General Provisions 1. Pursuant to the terms of this Approval Order, the relief requested in the Motion is granted and approved in all respects, and the Settlement Agreement is hereby approved in all respects. 9 Page 10 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- 2. All objections, if any, to the Motion or the relief requested therein that have not been withdrawn, waived, or settled, and all reservations of rights included in such objections, are overruled on the merits. Approval of Settlement Agreement 3. The Settlement Agreement and all of the terms and conditions thereof are hereby approved in their entirety and, notwithstanding anything to the contrary in this Approval Order, to the extent of any conflict or inconsistency between the provisions of this Approval Order and the terms and conditions of the Settlement Agreement, as between the Debtors, Plan Trust, Everest and Mt. McKinley, as the case may be, the Settlement Agreement shall govern and control. 4. Each of the Debtors and the Plan Trust are authorized and empowered, and hereby directed, to take any and all actions necessary or appropriate, in accordance with the terms of the Settlement Agreement, and, without further order of the Court, to (a) consummate, carry out and implement the Settlement Agreement, (b) execute and deliver, perform under, consummate, carry out, implement and close fully the Settlement Agreement, together with all additional instruments and documents that may be reasonably necessary or desirable to implement the Settlement Agreement, and (c) to take all further actions as may be reasonably requested in accordance with the Settlement Agreement by Everest and Mt. McKinley as may be reasonably necessary or appropriate to the performance of the obligations as contemplated by the Settlement Agreement. The Settlement Agreement and this Approval Order 10 Page 11 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- constitute valid and binding obligations of the Debtors, their Estates and the Plan Trust, which shall be enforceable in accordance with the terms thereof. The Plan Trust Agreement shall include as an obligation of the Plan Trust, effective from the creation of the Plan Trust, that such trust shall be subject to and bound by the Settlement Agreement and the Approval Order. Upon its creation, the Plan Trust, without further order of any court or action by any Entity, shall be deemed to be automatically a party to the Settlement Agreement. The Debtors are hereby authorized and directed to amend the Plan Trust Agreement (as defined in the Plan) to provide that the Plan Trust shall be subject to and bound by the Settlement Agreement and the Approval Order. 5. All of the terms and provisions of this Approval Order shall be binding in all respects upon each of the Debtors, the Plan Trust, any trustees of any of the Debtors, the Debtors' Estates, the FCR and each of the Entities whose interests he represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative, each Asbestos Claimant, all other creditors and shareholders of any of the Debtors, all interested parties, and their respective successors and assigns. 6. No later than fourteen (14) days after the date that this Order is entered: a) Congoleum shall dismiss without prejudice its Claims, counterclaims or cross-claims (if any) against Everest and Mt. McKinley in the Coverage Action; and b) Everest and Mt. McKinley shall dismiss without prejudice their Claims, counterclaims or cross-claims (if any) against Congoleum in the Coverage Action. Upon the occurrence of the Trigger Date, the Parties shall submit a stipulation of dismissal with prejudice. The Parties shall bear their own costs, expenses, and counsel fees in the Coverage Action. Nothing herein shall prevent Congoleum from recovering its costs, expenses and counsel fees in the Coverage Action from any Entity other than Everest and/or Mt. McKinley. The Parties' stipulation of dismissal with prejudice shall state that Congoleum's 11 Page 12 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- claims are dismissed with prejudice except that such stipulation will provide that, in the event that the Settlement Agreement becomes null and void pursuant to Section 7 thereof, Congoleum may re-join Everest and Mt. McKinley to the Coverage Action and re-assert all claims against Everest and Mt. McKinley in the Coverage Action, other than the bad faith claims that have been asserted in the Coverage Action, which bad faith claims shall not be re-asserted against Everest and Mt. McKinley in the Coverage Action or in any new action. The Parties have agreed that in such event, each of Congoleum, Everest and Mt. McKinley will not be bound by any rulings or decisions in the Coverage Action made after September 6, 2005. 7. Everest's and Mt. McKinley's payment in full of the Settlement Amount, as provided for in Paragraph 2.A of the Settlement Agreement, shall satisfy and extinguish in full Everest's and Mt. McKinley's obligations for Asbestos Claims under the Subject Policies as provided in the Settlement Agreement. Pursuant to 11 U.S.C. ss. 363(b)(1) and (f), Congoleum shall be deemed to have sold, and Everest and Mt. McKinley shall be deemed to have purchased, free and clear of any and encumbrances whatsoever pursuant to 11 U.S.C. ss. 363(f) of the Bankruptcy Code, all of Congoleum's rights, title and interests in and to (a) the Subject Policies and (b) any and all claims of 12 Page 13 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- Congoleum with respect to the Subject Policies. Upon confirmation of the Plan and deposit of the Settlement Amount in the Escrow Account by Everest and Mt. McKinley pursuant to the terms of the Settlement Agreement, Everest and Mt. McKinley shall be deemed to be "good faith purchasers" under 11 U.S.C. ss. 363(m) of the Bankruptcy Code of Congoleum's rights and interests in the Subject Policies and are entitled to the protections provided by such designation without further order of the Court. Additional Provisions 8. The terms and provisions of the Settlement Agreement, together with the terms and provisions of this Approval Order, shall be binding in all respects upon all Entities, including the Debtors, the Plan Trust, any trustee of any Debtor, the Debtors' Estates, the FCR and each of the Entities whose interests it represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative, each Asbestos Claimant, the Debtors' other creditors, shareholders of any of the Debtors, and all interested parties, administrative agencies, governmental units, secretaries of state, federal, state and local officials, maintaining any authority relating to the Settlement Amount, and their respective successors or assigns. 9. Everest's and Mt. McKinley's payment of the Settlement Amount shall be made to the Escrow Agent and, after the Trigger Date, the Settlement Amount shall be disbursed by the Escrow Agent to the Plan Trust or as otherwise directed by the Bankruptcy Court. The proceeds of the Settlement Amount shall be utilized only to pay Asbestos Claims and/or to pay other amounts payable by the Plan Trust pursuant to the Plan and the Trust Distribution Procedures for the Congoleum Plan Trust, as may be amended. 13 Page 14 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- 10. Nothing contained in the Plan or any other plan of reorganization or liquidation, or order of any type or kind entered in (a) this Chapter 11 Case, (b) any subsequent chapter 7 case into which the Chapter 11 Case may be converted, or (c) any related proceeding subsequent to entry of this Approval Order, shall conflict with or derogate from the provisions of the Settlement Agreement or the terms of this Approval Order. This Approval Order shall be binding upon and enforceable against, among others, each of the Debtors, their Estates, any and all chapter 7 and chapter 11 trustees thereof, the Plan Trust, the FCR and each of the Entities whose interests it represents, the Collateral Trustee, the Collateral Trust, the Claimants Representative and each Asbestos Claimant. 11. The failure specifically to include any particular provision of the Settlement Agreement in this Approval Order shall not diminish or impair the efficacy of such provision, it being the intent of this Court that the Settlement Agreement and each and every provision, term, and condition thereof be authorized and approved in its entirety. 12. This Approval Order shall be effective immediately upon its entry. The ten (10) day stay provided in Bankruptcy Rule 6004(c) is hereby waived. 13. The Settlement Agreement and other related documents may be modified, amended, or supplemented by the parties thereto, in a writing signed by such parties in accordance with the terms thereof, without further order of the Court, provided that (a) any such modification, amendment, or supplement is not material and (b) to the extent practicable, notice of any modification, amendment, or supplement should be delivered to (i) the Committee, (ii) the FCR and (iii) the Claimants' Counsel at least five (5) days prior to the effective date of any such modification, amendment, or supplement. 14 Page 15 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- 14. Notwithstanding any other provision of this Approval Order, if the Settlement Agreement is properly terminated under the terms thereof, then this Approval Order, with the exception of sections 8, 15 and 16 hereof, subject to the terms of Section 7 of the Settlement Agreement, shall be null and void and not be binding on any entity. 15. If the Settlement Agreement is properly terminated under the terms thereof, then any and all statutes of limitation or repose or other time-related limitations, with respect to any Claim by any Entity, shall be deemed to have been tolled for the period from the Execution Date through the date on which the Settlement Agreement is declared terminated or null and void, and no Party shall be entitled to assert or rely on any time-related defense to any Claim by any other Party related to such period. 16. The Court shall retain exclusive jurisdiction over any proceeding that involves the validity, application, construction, modification or termination of the Settlement Agreement and this Approval Order, and may make such further orders with respect thereto as are proper and appropriate. 17. The provisions of this Approval Order are non-severable and mutually dependent. 15 Page 16 of 16 Debtors: Congoleum Corporation, et al. Case No.: 03-51524 (KCF) (Jointly Administered) Caption: Order Pursuant to Bankruptcy Rule 9019 Authorizing and Approving Insurance Settlement Agreement Among Debtors, Plan Trust, Mt. McKinley Insurance Company and Everest Reinsurance Company - -------------------------------------------------------------------------------- 18. Counsel for the Debtors shall immediately serve a copy of this Approval Order on all parties who have filed a request for notice in this case, all parties to the Settlement Agreement, counsel to the Committee, the Claimants' Counsel, the Collateral Trustee, and the FCR and file a certificate of service with the Clerk of the Bankruptcy Court within ten (10) days hereof. 16 Attachment C ------------ ESCROW AGREEMENT THIS ESCROW AGREEMENT, dated as of September __, 2005 (the "Escrow Agreement") is made by, between and among Congoleum Corporation ("Congoleum"). Everest Reinsurance Company, formerly known as Prudential Reinsurance Company ("Everest") and Mt. McKinley Insurance Company, formerly known as Gibraltar Casualty Company ("Mt. McKinley") (each as defined in the Confidential Settlement Agreement and Release Among Congoleum Corporation, The Plan Trust and Mt. McKinley Insurance Company and Everest Reinsurance Company, dated September 30, 2005 (the "Settlement Agreement")) and Wachovia Bank, National Association, a national banking association, as escrow agent (the "Escrow Agent") (Congoleum, Everest and Mt. McKinley shall be referred to herein separately as a "Party" and collectively as the "Parties"). WITNESSETH: WHEREAS, Everest and Mt. McKinley issued certain policies of insurance to Congoleum (the "Subject Policies," as more fully described and defined in the Settlement Agreement); and WHEREAS, Persons within the definition of Congoleum have incurred and may incur in the future certain liabilities, expenses and losses arising out of various "Claims" (as defined in the Settlement Agreement), including Asbestos-Related Bodily Injury Claims, other asbestos-related claims, environmental claims and/or other types of claims; and WHEREAS, Congoleum asserts that Everest and Mt. McKinley are obligated under the Subject Policies to make liability payments and pay defense costs in connection with Claims, including claims for asbestos-related bodily injury; and WHEREAS, there are disputes between Congoleum on the one hand and Everest and Mt. McKinley on the other hand regarding their respective rights and obligations with respect to insurance coverage for Claims, including Asbestos-Related Bodily Injury Claims, other asbestos-related claims, environmental claims, and/or other types of claims (the "Coverage Dispute"); and WHEREAS, Congoleum, Everest and Mt. McKinley have reached a settlement of the Coverage Dispute and of all other issues relating to the Subject Policies that is embodied in the Settlement Agreement; and WHEREAS, Congoleum, Everest and Mt. McKinley wish to appoint an escrow agent to hold and disburse funds in accordance with the Settlement Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: ARTICLE I SECTION 1. Appointment of Escrow Agent. Congoleum, Everest,and Mt. McKinley hereby appoint Wachovia Bank, National Association as the escrow agent under this Escrow Agreement (the "Escrow Agent"), and the Escrow Agent hereby accepts such appointment. 2 ARTICLE II The Escrow Account SECTION 2.1. Deposit. Congoleum, Everest and Mt. McKinley agree that pursuant to the Settlement Agreement, Everest and Mt. McKinley shall deliver the sum of Twenty One Million, Five Hundred Thousand United States dollars ($21,500,000.00) (the "Settlement Amount") to the Escrow Agent, to be held, invested and disbursed as provided in this Escrow Agreement (as said amount may increase or decrease as a result of the investment and reinvestment thereof and as said amount may be reduced by charges thereto and payments and setoffs therefrom to compensate or reimburse Escrow Agent for amounts owing to it pursuant hereto) (hereafter the "Escrow Funds") to be held by Escrow Agent in accordance with the terms hereof. Subject to and in accordance with the terms and conditions hereof, Escrow Agent agrees that it shall receive, hold in escrow, invest and reinvest, and release or distribute the Escrow Funds. It is hereby expressly stipulated and agreed that all interest and other earnings on the Escrow Funds shall become a part of the Escrow Funds for all purposes, and that all losses resulting from the investment or reinvestment thereof from time to time and all amounts charged thereto to compensate or reimburse the Escrow Agent from time to time for amounts owing to it hereunder shall from the time of such loss or charge no longer constitute part of the Escrow Funds. SECTION 2.2. Distribution of Escrow Funds. The Parties hereto agree that the Escrow Agent shall hold the Escrow Funds and shall disburse the Escrow Funds only upon the occurrence of any one or more of the following events (each, individually, a "Disbursement Event"): 3 (a) Joint written instructions from Congoleum, Everest and Mt. McKinley to the Escrow Agent directing the disbursement of Escrow Funds; (b) Upon the sole instruction of Everest and Mt. McKinley, pursuant to sub-paragraph 2.D.3 of the Settlement Agreement, unless Congoleum objects in writing to such instruction within ten (10) "Business Days" (as defined in Section 2.3 below) of the date on which written notice of such instruction is provided to Congoleum. Everest and Mt. McKinley shall confirm in writing the date on which such written notice was provided to Congoleum, pursuant to the notice provisions set forth in Section 4.3 below. (c) Joint written instructions from the Parties regarding any tax payment as provided in Section 3.9 below; (d) Order of any court of competent jurisdiction directing the disbursement of Escrow Funds; or (e) The decision of the arbitrator appointed pursuant to sub-paragraph 2.D.6 of the Settlement Agreement to resolve disputes concerning certain disbursements of Escrow Funds. Upon the occurrence of any of the foregoing Disbursement Events, the Escrow Agent shall disburse all or part of the Escrow Funds in accordance with such written instruction, notice or Order. SECTION 2.3. Investment of Escrow Funds. The Escrow Agent shall invest and reinvest the Escrow Funds in a Wachovia Trust Money Access Corporate Trust Money Market Account, unless otherwise instructed in writing jointly by Congoleum, Everest and Mt. McKinley. Such written instructions, if any, referred 4 to in the foregoing sentence shall specify the type and identity of the investments to be purchased and/or sold and shall also include the name of the broker-dealer, if any, which Congoleum, Everest, and Mt. McKinley jointly direct the Escrow Agent to use in respect of such investment, any particular settlement procedures required, if any (which settlement procedures shall be consistent with industry standards and practices), and such other information as the Escrow Agent may require. Absent willful misconduct or gross negligence, the Escrow Agent shall not be liable for failure to invest or reinvest funds absent sufficient written direction. Unless the Escrow Agent is otherwise directed in such written instructions, the Escrow Agent may use a broker-dealer of its own selection, including a broker-dealer owned by or affiliated with Escrow Agent or any of its affiliates. The Escrow Agent or any of its affiliates may receive compensation with respect to any investment directed hereunder. It is expressly agreed and understood by the Parties that the Escrow Agent shall not in any way whatsoever be liable for losses on any investments, including, but not limited to losses from market risks due to premature liquidation or resulting from other actions taken pursuant to this Escrow Agreement. Receipt, investment and reinvestment of the Escrow Funds shall be confirmed by the Escrow Agent as soon as practicable by account statement separately to Congoleum and to Everest and Mt. McKinley, and any discrepancies in any such account statement shall be noted by any one or more of Congoleum, Everest and Mt. McKinley to the Escrow Agent within thirty (30) calendar days after receipt thereof. Failure to inform the Escrow Agent in writing of any discrepancies in any such account statement within said 30-day period shall conclusively be deemed confirmation of such account statement in its entirety. For purposes of this paragraph, (a) each account statement shall be deemed to have been received by the party to whom directed on the earlier to occur of: (i) actual receipt thereof; and (ii) three (3) "Business Days" (hereinafter defined) after the deposit thereof in the United States Mail, postage prepaid, and (b) the term "Business Day" shall mean any day of the year, excluding Saturday, Sunday and any other day on which national banks are required or authorized to close in New York, New York. 5 SECTION 2.4. Resignation/Removal and Appointment of Successor Escrow Agent. The Escrow Agent may resign hereunder upon thirty (30) days' prior written notice to Congoleum, Everest and Mt. McKinley, and the Escrow Agent may be removed as escrow agent at any time upon thirty (30) days prior written notice jointly from Congoleum, Everest and Mt. McKinley to the Escrow Agent. A successor escrow agent shall be appointed by agreement between Congoleum, Everest and Mt. McKinley if (a) there is a resignation or removal, or (b) the Escrow Agent is dissolved, taken under the control of any public officer or officers or if a receiver appointed by a court, or otherwise becomes incapable of acting hereunder. If no successor agent shall have been so appointed and have accepted appointment within thirty (30) days of (i) the giving of written notice by the resigning Escrow Agent, (ii) the giving of written notice of removal jointly by Congoleum, Everest and Mt. McKinley, or (iii) any Party's knowledge of any of the events specified in clause (b) of the preceding sentence, Congoleum, Everest and Mt. McKinley together, or the Escrow Agent may petition the United States Bankruptcy Court for the District of New Jersey for the appointment of a successor escrow agent. Upon the acceptance by the successor escrow agent of such appointment, the Escrow Agent shall deliver the Escrow Funds to the successor agent and the Escrow Agent will be released from its obligations hereunder by written instrument, a copy of which shall be delivered to Congoleum, Everest, Mt. McKinley, the resigning Escrow Agent and the successor escrow agent. 6 SECTION 2.5. Term of Escrow Agreement. This Escrow Agreement shall remain in full force and effect until such time as all the amounts in the Escrow Account have been distributed in accordance with Sections 2.2 and 2.3 hereof; provided, however, that in the event all fees, expenses, costs and other amounts required to be paid to Escrow Agent hereunder are not fully and finally paid prior to termination, the provisions of Article III hereof shall survive the termination hereof. SECTION 2.6. Escrow Agent Fees and Expenses. The Escrow Agent shall be paid for its services hereunder in accordance with Escrow Agent's fee schedule as attached as Schedule I hereto as in effect from time to time, together with all expenses incurred by the Escrow Agent in connection with the performance of its duties and otherwise in connection with the preparation, operation, administration and enforcement of this Escrow Agreement, including, without limitation, attorneys' fees, brokerage costs and related expenses incurred by the Escrow Agent from income earned on the Escrow Funds. The Escrow Agent's fees and expenses, as identified in the immediately preceding sentence, shall be paid first from the income earned on the Settlement Amount, and, to the extent such income is not sufficient to pay the Escrow Agent's fees and expenses, then from the funds on deposit in the Escrow Account. ARTICLE III The Escrow Agent SECTION 3.1. Scope of Undertaking. The Escrow Agent's duties and responsibilities in connection with this Escrow Agreement shall be limited to those expressly set forth in this Escrow Agreement. The Escrow Agent is not a principal, participant or beneficiary in any transaction underlying this Escrow Agreement, including, but not limited to, the Subject Policies or the Settlement Agreement, and shall have no duty to inquire beyond the terms and provisions hereof. The Escrow Agent shall have no responsibility or obligation of any kind in connection with this Escrow Agreement or the Escrow Funds other than to receive, hold, invest, reinvest and deliver the Escrow Funds and provided notice and statements as herein provided. Without limiting the generality of the 7 foregoing, it is hereby expressly agreed and stipulated by the Parties hereto that the Escrow Agent shall not be required to exercise any investment discretion hereunder and shall have no investment or management responsibility and, accordingly, shall have no duty to, or liability for its failure to, provide investment recommendations or investment advice to Congoleum, Everest and Mt. McKinley or any of them under this Escrow Agreement. The Escrow Agent shall not be liable for any error in judgment, any act or omission, any mistake of law or fact, or for anything it may do or refrain from doing in connection herewith, except for its own failure to comply with sufficient written instructions, willful misconduct or gross negligence. It is the intention of the Parties hereto that the Escrow Agent shall never be required to use, advance or risk its own funds in the performance of any of its duties. SECTION 3.2. Reliance; Liability. The Escrow Agent may rely on, and shall not be liable for acting or refraining from acting in accordance with, any written notice, instruction or request or other paper furnished to it hereunder or pursuant hereto and reasonably believed by it to have been signed or presented by the proper Party or Parties. The Escrow Agent shall be responsible for holding, investing, reinvesting and disbursing the Escrow Funds pursuant to this Escrow Agreement; provided, however, except in circumstances involving the Escrow Agent's failure to comply with sufficient written instructions, willful misconduct or gross negligence, in no event shall the Escrow Agent be liable for special, indirect or consequential loss or damage of any kind whatsoever 8 (including but not limited to lost profits), even if the Escrow Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. The Escrow Agent is not responsible or liable in any manner whatsoever for the sufficiency, correctness, genuineness or validity of the subject matter of this Escrow Agreement or any part hereof, or for the transaction or transactions requiring or underlying the execution of this Escrow Agreement, the form or execution hereof, or for the identity or authority of any person executing this Escrow Agreement or any part hereof, or depositing the Escrow Funds. SECTION 3.3. None of the provisions of this Escrow Agreement shall require the Escrow Agent to expend or risk its own funds in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. SECTION 3.4. The Escrow Agent shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, entitlement, order, approval or other paper or document presented to the Escrow Agent by Congoleum, Everest and Mt. McKinley. SECTION 3.5. The Escrow Agent may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees appointed with due care, and shall not be responsible for any willful misconduct or gross negligence on the part of any agent, attorney, custodian or nominee acting in such capacity for the Escrow Agent. SECTION 3.6. In conjunction with Section 2.6 of this Escrow Agreement, the Escrow Agent shall be entitled to the fees and expenses as shown on Schedule I hereto. The obligations to pay or reimburse the Escrow Agent for reasonable expenses, disbursements and advances shall survive the satisfaction and discharge of this Escrow Agreement or the earlier resignation or removal of the Escrow Agent. The Escrow Agent agrees to advise Congoleum, Everest and Mt. McKinley in writing of increases in fees and expenses before they take effect and of all new fees and expenses not agreed to prior to execution of this Escrow Agreement. 9 SECTION 3.7. Congoleum agrees to indemnify and defend the Escrow Agent, its officers, directors, partners, employees and agents (each herein called an "Indemnified Party") against, and hold each Indemnified Party harmless from, any and all losses, liabilities and expenses, including, but not limited to, fees and expenses of in-house or outside counsel, court costs, costs, damages and claims, costs of investigation, litigation and arbitration, tax liability (other than for income taxes on fees earned hereunder) and loss on investments suffered or incurred by any Indemnified Party in connection with or arising from or out of (i) the execution, delivery or performance of this Escrow Agreement, or (ii) the compliance or attempted compliance by any Indemnified Party with any instruction or direction upon which the Escrow Agent is authorized to rely under this Escrow Agreement, except to the extent that any such loss, liability or expense may result from the willful misconduct or gross negligence of such Indemnified Party. SECTION 3.8. In the event that instructions to transfer funds are given, whether in writing or facsimile, the Escrow Agent is authorized to seek confirmation of such instructions by telephone call-back to the person or person designated on Schedule II hereto, and the Escrow Agent may rely upon the confirmations of anyone purporting to be the person or persons so designated. It is understood that, absent willful misconduct or gross negligence, in any transfer of Escrow Funds, the Escrow Agent and the beneficiary's bank may rely solely upon any account numbers or similar identifying number provided by either of the other Parties hereto to identify: (i) the beneficiary, (ii) the beneficiary's bank, or (iii) an intermediary bank. The Escrow Agent may apply any of the Escrow Funds for any payment order it executes using any such identifying number, even where its use may result in a person other than the beneficiary being paid, or the transfer of funds to a bank other than the beneficiary's bank or an intermediary bank, designated. 10 SECTION 3.9. Upon execution of this Escrow Agreement, Congoleum, Everest and Mt. McKinley shall provide the Escrow Agent with the applicable respective taxpayer identification number documented by an appropriate Form W-8 or Form W-9. Failure so to provide such information may prevent or delay disbursements from the initial deposit of the Settlement Amount and may also result in the assessment of a penalty and the Escrow Agent's being required to withhold tax on any interest or other income earned on the Escrow Funds. Any payments of income shall be subject to applicable withholding regulations then in force in the United States and any other applicable jurisdiction. Congoleum, Everest and Mt. McKinley agree that any applicable international, federal or other taxes relating to any interest or other income earned on the Escrow Funds shall be paid from the Escrow Funds. ARTICLE IV Miscellaneous SECTION 4.1. Waivers; Amendments; Benefit of Agreement. (a) No failure or delay by any Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No waiver of any provision of this Escrow Agreement or consent to any departure there from shall in any event be effective unless the same shall be authorized as provided 11 in paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances. Except as otherwise expressly provided herein, all rights and remedies existing under this Escrow Agreement are cumulative with, and not exclusive of, any rights or remedies otherwise available. (b) No provision of this Escrow Agreement may be waived, amended, supplemented, or modified except pursuant to an agreement in writing entered into by Congoleum, Everest and Mt. McKinley and the Escrow Agent. (c) Nothing in this Escrow Agreement, expressed or implied, shall give or be construed to give to any person other than the Parties any legal or equitable right, remedy or claim under this Escrow Agreement, or under any covenants and provisions of this Escrow Agreement, each covenant and provision being for the sole benefit of the Parties. SECTION 4.2. Legal Capacity. Congoleum, Everest and Mt. McKinley and the Escrow Agent represent and warrant that they each have the legal capacity to enter into this Escrow Agreement and to perform all obligations undertaken herein as required of them. SECTION 4.3. Notices. All communications or notices provided for hereunder (including a notice of change of address) will be in writing, will be addressed in accordance with the information set forth below and will be deemed given (a) in the case of delivery by hand, when delivered by hand, (b) in the case of delivery by a standard overnight carrier, upon the date of delivery indicated in the records of such carrier, (c) in the case of a facsimile transmission, when received by recipient in legible form (with telephone confirmation), or (d) in the case of delivery by certified mail with return receipt requested, three days after being deposited in the United States mail: 12 If to Congoleum Corporation: Pillsbury Winthrop LLP 1540 Broadway New York, NY 10036-4039 Attn: Richard L. Epling, Esq. Kerry A. Brennan, Esq. Phone: (212) 858-1000 Fax: (212) 858-1500 e-mail: repling@pillsburywinthrop.com kbrennan@pillsburywinthrop.com and Gilbert Heintz & Randolph LLP 1100 New York Avenue, N.W. Washington, D.C. 20005 Attn: Bette Orr, Esq. Phone: (202) 772-2340 Fax: (202) 772-2325 e-mail: orrb@ghrdc.com With a copy to: Howard N. Feist III Congoleum Corporation 57 River Street Wellesley, MA 02481-2097 Phone: (781) 237-6655 Fax: (781) 237-6880 e-mail: sfeist@alumni.princeton.edu 13 If to Mt. McKinley and Everest: David Steiner Associate General Counsel Mt. McKinley Insurance Company Westgate Corporate Center 477 Martinsville Road, P.O. Box 830 Liberty Corner, New Jersey 07938-0830 Phone: (908) 604-3459 Fax: (908) 604-3434 e-mail: david.steiner@everestre.com With a copy to: Fred L. Alvarez Lord Bissell & Brook LLP 115 South LaSalle Street Chicago, Illinois 60603 Phone: (312) 443-1758 Fax: (312) 896-6758 e-mail: falvarez@lordbissell.com and Kevin M. Haas Cozen O'Connor 1085 Raymond Boulevard, Suite 1900 Newark, New Jersey 07102 Phone: (973) 286-1200 Fax: (973) 242-2121 e-mail: e-mail: KHaas@cozen.com and David P. McClain McClain, Leppert & Maney, P.C. 711 Louisiana, Suite 3100 Houston, Texas 77002 Phone: (713) 654-8001 Fax: 713 654-8818 e-mail: mcclain@mcclainleppert.com If to the Escrow Agent: Wachovia Bank, National Association 21 South Street, 3rd Floor Morristown, New Jersey 07960 Attention: Rick Barnes Phone: (973) 898-7161 Fax: (973)-682-4531 E-mail: rick.barnes@wachovia.com 14 With a copy to: Emmet, Marvin & Martin. LLP 120 Broadway New York, New York 10271 Attention: David J. Fernandez, Esq. Phone: (212) 238-3031 Fax: (212) 238-3100 E-mail: dfernandez@emmetmarvin.com or at such other addresses as any Party may designate by notice to the other Parties hereto in accordance with this Section 4.3. SECTION 4.4. Governing Law; Waiver of Jury Trial; Jurisdiction. (a) This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey including all matters of construction, validity and performance. (b) TO THE FULLEST EXTENT PERMITTED BY LAW, EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS ESCROW AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTIES HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO THIS ESCROW AGREEMENT. (c) Congoleum, Everest and Mt. McKinley and the Escrow Agent hereby submit for purposes solely in connection with this Escrow Agreement to the jurisdiction of the United States Bankruptcy Court for the District of New Jersey and for no other purpose. 15 SECTION 4.5. Counterparts. This Escrow Agreement may be executed in three or more counterparts, and by the different Parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all of which together shall constitute one and the same instrument. All signatures of the Parties to this Escrow Agreement may be transmitted by facsimile, and such facsimile will, for all purposes, be deemed to be the original signature of such Party whose signature it reproduces, and will be binding upon such Party. SECTION 4.6. Severability. If any term or provision of this Escrow Agreement or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or such provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable any remaining terms or provisions of this Escrow Agreement or the application of such term or provision to circumstances other than those as to which it is held invalid or unenforceable. To the extent permitted by applicable law, the Parties hereto waive any provision of law that renders any term or provision of this Escrow Agreement invalid or unenforceable in any respect. SECTION 4.7. Rules of Interpretation. This Escrow Agreement shall be construed without regard to any presumption or other rule requiring construction against the party drafting this Escrow Agreement. The headings of the Sections and paragraphs of this Escrow Agreement have been inserted for convenience of reference only and shall in no way restrict or otherwise modify any of the terms or provisions hereof. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 16 SECTION 4.8. Entire Agreement. This Escrow Agreement supersedes all prior agreements, written or oral, between or among any of the Parties relating to the transaction contemplated hereby or thereby and each of the Parties represents and warrants to the others that this Escrow Agreement constitutes the entire agreement among the Parties relating to the transactions contemplated hereby and thereby and supersedes all prior arrangements or understandings with respect thereto, written or oral. SECTION 4.09. Further Cooperation. Each of the Parties hereto agrees to cooperate with the other Parties hereto in effectuating this Escrow Agreement and to execute and deliver such further documents or instruments and to take such further actions as shall be reasonably requested in connection therewith. SECTION 4.10. Assignment Binding Effect. No Party may assign this Escrow Agreement, or any of its rights or obligations hereunder, without the consent of the Parties hereto (which consent shall not be unreasonably withheld). All agreements, representations, warranties and indemnities in this Escrow Agreement and in any agreement, document or certificate delivered concurrently with the execution of this Escrow Agreement, or from time to time hereafter, shall bind the Party making the same and such Party's successors and assigns, and shall inure to the benefit of each Party for whom made and for such Party's permitted successors and assigns. SECTION 4.11. Specific Performance. The rights of the Parties under this Escrow Agreement are unique and each Party hereto acknowledges that the failure of a party to perform its obligations hereunder would irreparably harm the other Parties hereto. Accordingly, the Parties shall, in addition to such other remedies as may be available at law or in equity, have the right to enforce their rights hereunder by actions for specific performance to the extent permitted by law. [The remainder of this page is left blank intentionally.] 17 IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement to be effective as of the date first above written. CONGOLEUM CORPORATION By: /s/ Howard N. Feist ------------------- Name: Howard N. Feist ---------------- Title: CFO ---------------- EVEREST REINSURANCE COMPANY By: /s/ Adam Kenney ------------------- Name: Adam Kenney ---------------- Title: VP Claims, MMK ---------------- MT. MCKINLEY INSURANCE COMPANY By: /s/ Adam Kenney ------------------- Name: Adam Kenney ---------------- Title: VP Claims, MMK ---------------- WACHOVIA BANK, NATIONAL ASSOCIATION, as Escrow Agent By: /s/ Rick Barnes ------------------- Name: Rick Barnes ---------------- Title: Vice President ---------------- 18 - -------------------------------------------------------------------------------- Tax Certification: Taxpayer ID#: 020398678 ------------ NOTE: The following certification shall be used by and for a U.S. resident only. Non-residents must use and provide Form W8-BEN Customer is a (check one): _X_ Corporation ___ Municipality ___ Partnership ___ Non-profit or Charitable Org ___ Individual ___ REMIC ___ Trust ___ Other ___________________ Under the penalties of perjury, the undersigned certifies that: (1) the entity is organized under the laws of the United States (2) the number shown above is its correct Taxpayer Identification Number (or it is waiting for a number to be issued to it); and (3) it is not subject to backup withholding because: (a) it is exempt from backup withholding or (b) it has not been notified by the Internal Revenue Service (IRS) that it is subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified it that it is no longer subject to backup withholding. (If the entity is subject to backup withholding, cross out the words after the (3) above.) Investors who do not supply a tax identification number will be subject to backup withholding in accordance with IRS regulations. - -------------------------------------------------------------------------------- 19 Note: The IRS does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. By: /s/ Howard N. Feist ------------------- Name: Howard N. Feist --------------- Title: CFO --- Congoleum Corporation 20 - -------------------------------------------------------------------------------- Tax Certification: Taxpayer ID#: 22-2207114 ---------- NOTE: The following certification shall be used by and for a U.S. resident only. Non-residents must use and provide Form W8-BEN Customer is a (check one): ___ Corporation ___ Municipality ___ Partnership ___ Non-profit or Charitable Org ___ Individual ___ REMIC ___ Trust ___ Other _______________________ Under the penalties of perjury, the undersigned certifies that: (4) the entity is organized under the laws of the United States (5) the number shown above is its correct Taxpayer Identification Number (or it is waiting for a number to be issued to it); and (6) it is not subject to backup withholding because: (a) it is exempt from backup withholding or (b) it has not been notified by the Internal Revenue Service (IRS) that it is subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified it that it is no longer subject to backup withholding. (If the entity is subject to backup withholding, cross out the words after the (3) above.) Investors who do not supply a tax identification number will be subject to backup withholding in accordance with IRS regulations. - -------------------------------------------------------------------------------- 21 Note: The IRS does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. By: -------------------------- Name: ------------------------ Title: ----------------------- EVEREST REINSURANCE COMPANY By: /s/ Adam Kenney --------------------- Name: Adam Kenney ------------------ Title: VP Claims, MMK ------------------ MT. MCKINLEY INSURANCE COMPANY 22 - -------------------------------------------------------------------------------- Tax Certification: Taxpayer ID#: 22-2005057 ---------- NOTE: The following certification shall be used by and for a U.S. resident only. Non-residents must use and provide Form W8-BEN Customer is a (check one): ___ Corporation ___ Municipality ___ Partnership ___ Non-profit or Charitable Org ___ Individual ___ REMIC ___ Trust ___ Other ________________________ Under the penalties of perjury, the undersigned certifies that: (7) the entity is organized under the laws of the United States (8) the number shown above is its correct Taxpayer Identification Number (or it is waiting for a number to be issued to it); and (9) it is not subject to backup withholding because: (a) it is exempt from backup withholding or (b) it has not been notified by the Internal Revenue Service (IRS) that it is subject to backup withholding as a result of failure to report all interest or dividends, or (c) the IRS has notified it that it is no longer subject to backup withholding. (If the entity is subject to backup withholding, cross out the words after the (3) above.) Investors who do not supply a tax identification number will be subject to backup withholding in accordance with IRS regulations. - -------------------------------------------------------------------------------- 23 Note: The IRS does not require your consent to any provision of this document other than the certifications required to avoid backup withholding. By: /s/ Adam Kenney --------------------- Name: Adam Kenney ------------------ Title: VP Claims, MMK ------------------ EVEREST REINSURANCE COMPANY By: -------------------------- Name: ------------------------ Title: ----------------------- MT. MCKINLEY INSURANCE COMPANY 24 Schedule I FEE SCHEDULE WACHOVIA BANK, NATIONAL ASSOCIATION ESCROW AGENT SERVICES FOR CONGOLEUM CORPORATION AND EVEREST REINSURANCE COMPANY AND MT. MCKINLEY INSURANCE COMPANY I. Acceptance Fee $1,500 II. Annual Administration Fee $2,500 III. Counsel Fees & Expenses Billed @ Cost The above-mentioned fees are basic charges and do not include out-of-pocket expenses, which will be billed in addition to the regular charges as required. Out-of-pocket expenses shall include, but are not limited to: telephone tolls, stationery, postage expenses, and travel expenses. In the event we are required to handle a default situation, we will charge an hourly rate for performing extraordinary services in addition to the services covered by our Annual Fee. The hourly rates charged will be those which are published in the Fee Section of our Bond Administration Policy & Procedure Manual at the time the default occurs. The Acceptance Fee and the Annual Administration Fee are payable at the closing of this transaction. Thereafter the Annual Administration Fee and any out-of-pocket expenses will be billed on the anniversary date of the closing. 25 Schedule II Telephone Number(s) for Call-backs and Person(s) Designated to Confirm Funds Transfer Instructions If to Congoleum Corporation: Name Telephone Number - ---- ---------------- Howard N. Feist III (781) 237-6655 If to Everest Reinsurance Company and Mt. McKinley Insurance Company: Name Telephone Number - ---- ---------------- Adam Kenney (908) 604-3252 Telephone call-backs shall be made to either Congoleum or Everest and Mt. McKinley if joint instructions are required pursuant to the Escrow Agreement. 26 Schedule III Deposits $21,500,000 to be deposited within fifteen (15) Business Days of September 30, 2005. -----END PRIVACY-ENHANCED MESSAGE-----