Edgar Filing: AMERICAN BILTRITE INC

eps3179.htm

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For Quarter Ended September 30, 2008

Commission File Number 1-4773

AMERICAN BILTRITE INC.

(Exact name of registrant as specified in its charter)

Delaware	04-1701350
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

57 River Street

Wellesley Hills, Massachusetts 02481-2097

(Address of Principal Executive Offices)

(781) 237-6655

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year if changed since last report)

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

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company x

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

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 November 7, 2008

Common Stock		3,441,551 shares

FORWARD LOOKING STATEMENTS

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 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 American Biltrite Inc.’s expectations and American Biltrite Inc.’s understanding of its majority-owned subsidiary Congoleum Corporation’s expectations, as of the date of this report, of future events, and American Biltrite Inc. undertakes no obligation to update any of these forward-looking statements, except as required by federal securities laws. Although American Biltrite Inc. 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 this report unless the statement indicates that another date applies. 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 American Biltrite Inc.’s actual results differing from its expectations include those factors discussed in Item 1A of Part II of this Quarterly Report on Form 10-Q and in American Biltrite Inc.’s other filings with the Securities and Exchange Commission.

AMERICAN BILTRITE INC.

INDEX

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidating Condensed Balance Sheets – Assets as of September 30, 2008 (Unaudited) and December 31, 2007	1

		Consolidating Condensed Balance Sheets – Liabilities and Stockholders’ Equity as of September 30, 2008 (Unaudited) and December 31, 2007	2

		Consolidating Condensed Statements of Operations (Unaudited) For the Three Months Ended September 30, 2008 and 2007	3

		Consolidating Condensed Statements of Operations (Unaudited) For the Nine Months Ended September 30, 2008 and 2007	4

		Consolidating Condensed Statements of Cash Flows – Operating Activities (Unaudited) For the Nine Months Ended September 30, 2008 and 2007	5

		Consolidating Condensed Statements of Cash Flows – Investing & Financing Activities (Unaudited) For the Nine Months Ended September 30, 2008 and 2007	6

		Notes to Unaudited Consolidating Condensed Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

	Item 4T.	Controls and Procedures	44

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	45

	Item 1A.	Risk Factors	45

	Item 3.	Defaults Upon Senior Securities	54

	Item 6.	Exhibits	55

	Signature		57

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED BALANCE SHEETS – ASSETS

(In thousands of dollars)

	ABI Consolidated				Eliminations						Congoleum				American Biltrite
	September 30, 2008		December 31, 2007		September 30, 2008			December 31, 2007			September 30, 2008		December 31, 2007		September 30, 2008		December 31, 2007
	(Unaudited)				(Unaudited)						(Unaudited)				(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	26,632	$	30,185							$	23,757	$	26,327	$	2,875	$	3,858
Restricted cash		29,538		6,501								29,538		6,501
Accounts receivable, net		41,091		41,345	$	(572	)	$	(316	)		15,971		14,162		25,692		27,499
Inventories		82,177		78,401		(107	)		(125	)		36,730		35,182		45,554		43,344
Deferred income taxes		992		961												992		961
Prepaid expense & other current assets		7,835		20,001								4,490		13,138		3,345		6,863
Total current assets		188,265		177,394		(679	)		(441	)		110,486		95,310		78,458		82,525

Property, plant & equipment, net		91,218		99,153								57,132		61,993		34,086		37,160

Other assets:
Insurance for asbestos-related liabilities		11,140		11,140												11,140		11,140
Goodwill, net		11,605		11,605												11,605		11,605
Other assets		14,326		19,014		(117	)		(126	)		7,561		11,909		6,882		7,231
		37,071		41,759		(117	)		(126	)		7,561		11,909		29,627		29,976

Total assets	$	316,554	$	318,306	$	(796	)	$	(567	)	$	175,179	$	169,212	$	142,171	$	149,661

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED BALANCE SHEETS – LIABILITIES AND STOCKHOLDERS’ EQUITY

(In thousands of dollars)

	ABI Consolidated						Eliminations						Congoleum						American Biltrite
	September 30, 2008			December 31, 2007			September 30, 2008			December 31, 2007			September 30, 2008			December 31, 2007			September 30, 2008			December 31, 2007
	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)
Liabilities
Current liabilities:
Accounts payable	$	20,269		$	22,570		$	(572	)	$	(316	)	$	9,294		$	10,715		$	11,547		$	12,171
Accrued expenses		33,890			37,035									17,135			20,742			16,755			16,293
Asbestos-related liabilities		53,254			31,207									53,254			31,207
Deferred income taxes		3,005			7,725									3,005			7,725
Notes payable		27,885			30,309									12,637			10,551			15,248			19,758
Current portion of long-term debt		2,134			2,376															2,134			2,376
Liabilities subject to compromise		4,997			4,997									4,997			4,997
Total current liabilities		145,434			136,219			(572	)		(316	)		100,322			85,937			45,684			50,598

Long-term debt, less current portion		5,649			6,725															5,649			6,725
Asbestos-related liabilities		12,880			12,600															12,880			12,600
Other liabilities		11,881			12,195															11,881			12,195
Noncontrolling interests		913			1,093															913			1,093
Liabilities subject to compromise		129,416			129,605			(117	)		(126	)		129,533			129,731
Total liabilities		306,173			298,437			(689	)		(442	)		229,855			215,668			77,007			83,211

Stockholders’ equity
Common stock		46			46			(93	)		(93	)		93			93			46			46
Additional paid-in capital		19,700			19,607			(49,382	)		(49,368	)		49,382			49,368			19,700			19,607
Retained earnings		21,384			30,835			35,444			35,413			(73,651	)		(65,417	)		59,591			60,839
Accumulated other comprehensive loss		(15,617	)		(15,487	)		6,111			6,110			(22,687	)		(22,687	)		959			1,090
Less treasury shares		(15,132	)		(15,132	)		7,813			7,813			(7,813	)		(7,813	)		(15,132	)		(15,132	)
Total stockholders’ equity		10,381			19,869			(107	)		(125	)		(54,676	)		(46,456	)		65,164			66,450
Total liabilities and stockholders’ equity	$	316,554		$	318,306		$	(796	)	$	(567	)	$	175,179		$	169,212		$	142,171		$	149,661

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended September 30, 2008 and 2007

(In thousands of dollars, except number of shares and per share amounts)

	ABI Consolidated						Eliminations						Congoleum						American Biltrite
	2008			2007			2008			2007			2008			2007			2008			2007

Net sales	$	97,351		$	107,403		$	-		$	-		$	46,085		$	53,588		$	51,266		$	53,815

Cost of products sold		75,330			79,240			(377	)		(125	)		37,765			39,365			37,942			40,000
Selling, general & administrative expenses		21,269			23,625									7,768			9,829			13,501			13,796
Asbestos-related reorganization charges		11,491			-									11,491			-
(Loss) income from operations		(10,739	)		4,538			377			125			(10,939	)		4,394			(177	)		19
Other income (expense)
Interest income		64			212									49			185			15			27
Interest expense		(360	)		(3,675	)								(43	)		(3,146	)		(317	)		(529	)
Other (expense) income		(945	)		(109	)		(360	)		(146	)		(377	)		(213	)		(208	)		250
		(1,241	)		(3,572	)		(360	)		(146	)		(371	)		(3,174	)		(510	)		(252	)
(Loss) income before taxes and other items		(11,980	)		966			17			(21	)		(11,310	)		1,220			(687	)		(233	)

(Benefit from) provision for income taxes		(1,631	)		212									(1,185	)		20			(446	)		192
Noncontrolling interests		(17	)		(79	)														(17	)		(79	)
(Loss) income from continuing operations		(10,366	)		675			17			(21	)		(10,125	)		1,200			(258	)		(504	)
Discontinued operation		-			-															-			-

Net (loss) income	$	(10,366	)	$	675		$	17		$	(21	)	$	(10,125	)	$	1,200		$	(258	)	$	(504	)

	Basic					Diluted
	2008			2007		2008			2007
(Loss) income per common share from continuing operations	$	(3.01	)	$	0.20	$	(3.01	)	$	0.20
Discontinued operation		-			-		-			-

Net (loss) income per common share	$	(3.01	)	$	0.20	$	(3.01	)	$	0.20

Weighted average number of common and equivalent shares outstanding		3,441,551			3,441,551		3,441,551			3,441,796

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

For the Nine Months Ended September 30, 2008 and 2007

(In thousands of dollars, except number of shares and per share amounts)

	ABI Consolidated						Eliminations						Congoleum						American Biltrite
	2008			2007			2008			2007			2008			2007			2008			2007

Net sales	$	294,347		$	322,992		$	-		$	-		$	140,948		$	160,444		$	153,399		$	162,548

Cost of products sold		225,600			239,493			(1,077	)		(679	)		111,866			120,478			114,811			119,694
Selling, general & administrative expenses		67,234			71,854									26,138			29,243			41,096			42,611
Asbestos-related reorganization charges		11,491			-									11,491			-
(Loss) income from operations		(9,978	)		11,645			1,077			679			(8,547	)		10,723			(2,508	)		243
Other income (expense)
Interest income		1,427			548									1,241			439			186			109
Interest expense		(1,679	)		(10,910	)								(240	)		(9,204	)		(1,439	)		(1,706	)
Other (expense) income		(858	)		39			(1,059	)		(695	)		(791	)		(247	)		992			981
		(1,110	)		(10,323	)		(1,059	)		(695	)		210			(9,012	)		(261	)		(616	)
(Loss) income before taxes and other items		(11,088	)		1,322			18			(16	)		(8,337	)		1,711			(2,769	)		(373	)

(Benefit from) provision for income taxes		(549	)		153									(103	)		27			(446	)		126
Noncontrolling interests		50			(104	)														50			(104	)
(Loss) income from continuing operations		(10,489	)		1,065			18			(16	)		(8,234	)		1,684			(2,273	)		(603	)
Discontinued operation		1,025			-															1,025			-

Net (loss) income	$	(9,464	)	$	1,065		$	18		$	(16	)	$	(8,234	)	$	1,684		$	(1,248	)	$	(603	)

	Basic					Diluted
	2008			2007		2008			2007
(Loss) income per common share from continuing operations	$	(3.05	)	$	0.31	$	(3.05	)	$	0.31
Discontinued operation		0.30			-		0.30			-

Net (loss) income per common share	$	(2.75	)	$	0.31	$	(2.75	)	$	0.31

Weighted average number of common and equivalent shares outstanding		3,441,551			3,441,551		3,441,551			3,442,149

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS – OPERATING ACTIVITIES (Unaudited)

For the Nine Months Ended September 30, 2008 and 2007

(In thousands of dollars)

	ABI Consolidated						Eliminations						Congoleum						American Biltrite
	2008			2007			2008			2007			2008			2007			2008			2007
Operating activities
Net (loss) income	$	(9,464	)	$	1,065		$	18		$	(16	)	$	(8,234	)	$	1,684		$	(1,248	)	$	(603	)
Net income from discontinued operation		(1,025	)		-															(1,025	)		-
(Loss) income from continuing operations		(10,489	)		1,065			18			(16	)		(8,234	)		1,684			(2,273	)		(603	)
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Depreciation and amortization		11,686			12,146									7,781			8,003			3,905			4,143
Asbestos-related reorganization charges		11,491			-									11,491			-
Stock compensation expense		107			22									14			14			93			8
Change in operating assets and liabilities:
Accounts and notes receivable		34			(4,341	)		247			242			(1,809	)		(1,600	)		1,596			(2,983	)
Inventories		(4,447	)		(1,336	)		(18	)		16			(1,548	)		(1,181	)		(2,881	)		(171	)
Prepaid expenses and other assets		(1,499	)		2,450									(946	)		2,114			(553	)		336
Proceeds from legal fees disgorgement		9,168			-									9,168			-
Accounts payable and accrued expenses		(4,318	)		8,081			(247	)		(242	)		(5,209	)		8,574			1,138			(251	)
Asbestos-related expenses		(12,519	)		(10,752	)								(12,519	)		(10,752	)
Noncontrolling interests		(180	)		(21	)														(180	)		(21	)
Other		(228	)		(2,635	)								(137	)		(2,227	)		(91	)		(408	)
Net cash (used) provided by operating activities of continuing operations	$	(1,194	)	$	4,679		$	-		$	-		$	(1,948	)	$	4,629		$	754		$	50

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS – INVESTING & FINANCING ACTIVITIES (Unaudited)

For the Nine Months Ended September 30, 2008 and 2007

(In thousands of dollars)

	ABI Consolidated						Eliminations				Congoleum						American Biltrite
	2008			2007			2008		2007		2008			2007			2008			2007
Investing activities
Investments in property, plant and equipment	$	(3,749	)	$	(3,569	)	$	-	$	-	$	(2,746	)	$	(2,263	)	$	(1,003	)	$	(1,306	)
Net cash used by investing activities of continuing operations		(3,749	)		(3,569	)		-		-		(2,746	)		(2,263	)		(1,003	)		(1,306	)

Financing activities
Net short-term (repayments) borrowings		(2,162	)		5,222							2,086			1,364			(4,248	)		3,858
Payments on long-term debt		(1,320	)		(1,227	)												(1,320	)		(1,227	)
Collection on Janus note receivable		4,034			-													4,034			-
Net change in restricted cash		38			3,231							38			3,231
Net cash provided (used) by financing activities of continuing operations		590			7,226			-		-		2,124			4,595			(1,534	)		2,631
Effect of foreign exchange rate changeson cash		800			(1,157	)												800			(1,157	)
Net (decrease) increase in cash		(3,553	)		7,179			-		-		(2,570	)		6,961			(983	)		218
Cash and cash equivalents at beginningof period		30,185			21,180							26,327			18,591			3,858			2,589

Cash and cash equivalents at end of period	$	26,632		$	28,359		$	-	$	-	$	23,757		$	25,552		$	2,875		$	2,807

See accompanying notes to consolidating condensed financial statements.

AMERICAN BILTRITE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATING CONDENSED

FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note A - Basis of Presentation

The accompanying unaudited consolidating condensed financial statements which include the accounts of American Biltrite Inc. and its wholly owned subsidiaries (and including, unless the context otherwise indicates, its majority-owned subsidiary K&M Associates L.P., are referred to herein as "ABI", "American Biltrite" or the "Company") as well as entities over which it has voting control have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Form 10-Q and 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 recurring adjustments, provisions for discontinued operations and provisions to effect a plan of reorganization under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") of Congoleum Corporation ("Congoleum"), a majority-owned subsidiary of the Company, to settle asbestos liabilities) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for future periods, including the year ending December 31, 2008. For further information, refer to the consolidating financial statements and the notes to those financial statements included in American Biltrite Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007.

The consolidating balance sheet at December 31, 2007 has been derived from the audited financial statements as of that date but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

During 2003, the Company decided to discontinue the operations of its Janus Flooring Corporation subsidiary ("Janus"), a manufacturer of pre-finished hardwood flooring, and sell the related assets. Historical financial results were restated to reflect the classification of Janus as a discontinued operation in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. Results of Janus, including charges resulting from the shutdown, are being reported as a discontinued operation. In April 2006, the Company completed the sale of Janus’ remaining building and land (see Note C). As a result of the sale of property, the discontinued operation was effectively dissolved during 2006. As of December 31, 2006, the Company merged Janus with and into American Biltrite Inc.’s subsidiary, American Biltrite (Canada) Ltd. ("AB Canada"), primarily for the purposes of utilizing Janus’ prior years’ net operating losses against future taxable income.

Note A - Basis of Presentation (continued)

As discussed more fully below and elsewhere in these notes to consolidating condensed financial statements, the Company's subsidiary Congoleum filed for bankruptcy protection on December 31, 2003 in the United States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court"). The accompanying consolidated financial statements include the results for Congoleum for all periods presented. Congoleum’s results include losses (including other comprehensive losses) of $54.7 million and $46.5 million in excess of the value of ABI’s investment in Congoleum at September 30, 2008 and December 31, 2007, respectively. ABI owns a majority of the voting stock of Congoleum, and expects to continue doing so until Congoleum’s reorganization proceedings are concluded, at which time ABI expects its ownership interests in Congoleum will be eliminated and no longer included in the consolidated results of the Company. The Company has elected to continue to consolidate the financial statements of Congoleum in its consolidated results because it believes that is the appropriate presentation given its current voting control of Congoleum. However, the accompanying financial statements also present the details of consolidation to separately show the financial condition, operating results and cash flows of ABI (including its non-debtor subsidiaries) and Congoleum (and its debtor subsidiaries), which may be more meaningful for certain analyses.

For more information regarding Congoleum’s asbestos liability and plan for resolving that liability, please refer to Note K.

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 Congoleum be unable to continue as a going concern. In light of Congoleum’s substantial asbestos liabilities, which are further described in Note K, there is substantial doubt about Congoleum’s ability to continue as a going concern unless it timely obtains relief from those liabilities through a successful reorganization under Chapter 11 of the Bankruptcy Code.

The American Institute of Certified Public Accountants 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. Congoleum has implemented this guidance in its consolidated financial statements for periods commencing after December 31, 2003. Pursuant to SOP 90-7, companies in reorganization under the Bankruptcy Code 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. Liabilities for asbestos claims are recorded based upon the minimum amount Congoleum expects to spend for its contribution to, and costs to settle asbestos liabilities through, the Plan Trust (as described in Note K). Obligations arising post-petition and pre-petition obligations that are secured or that the Bankruptcy Court has authorized Congoleum to pay, are not classified as liabilities subject to compromise. Other pre-petition claims (which would be classified as liabilities subject to compromise) may arise due to the rejection by

Note A - Basis of Presentation (continued)

Congoleum of executory contracts or unexpired leases pursuant to the Bankruptcy Code or as a result of the allowance by the Bankruptcy Court of contingent or disputed claims related to pre-petition matters.

Recently Issued Accounting Principles

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company-specific data. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued Staff Position 157-2 which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. For items within its scope, this Staff Position defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. The Company does not believe that the adoption of SFAS No. 157 for its non-financial assets and liabilities, effective January 1, 2009, will have a material impact to the consolidated financial statements. The Company adopted SFAS No. 157 effective January 1, 2008 for its financial assets and liabilities. The adoption has not had a material impact to the consolidated financial statements (See Notes E and F).

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 effective January 1, 2007. As a result of the adoption, the Company determined that no cumulative effect adjustment was necessary to the opening balance of retained earnings as of January 1, 2007. The Company’s unrecognized tax benefits as of January 1, 2007 were immaterial, and recognition of such tax benefits is not expected to have a material impact on the Company’s income tax provision in future periods. Changes in the Company’s unrecognized tax benefits during the nine months ended September 30, 2008 were immaterial. Furthermore, the Company does not expect such changes in the next twelve months to be material to the Company’s financial position or results of operation.

Note A - Basis of Presentation (continued)

For tax return purposes, ABI and Congoleum are not part of a consolidated group and, consequently, file separate federal and state tax returns. ABI’s and Congoleum’s federal income tax returns are open and subject to examination from the 2004 and 2003 tax return years and forward, respectively. ABI’s and Congoleum’s various state income tax returns are generally open from the 2002 and later tax return years based on individual state statute of limitations. Congoleum’s tax return net operating loss carryforwards are significant. The tax years in which losses arose may be subject to audit when such carryforwards are utilized to offset taxable income in future periods. AB Canada’s federal and provincial tax returns are open and subject to examination from 2002 and later.

For the nine months ended September 30, 2008, the Company recorded a tax benefit it expects to recover from carrying back current year losses against prior year taxable income. The Company also recorded a benefit of approximately $200 thousand for a change in valuation allowance against foreign tax credits. Congoleum recorded a tax benefit of $1.2 million and $103 thousand for the three and nine months ended September 30, 2008, respectively. The benefit Congoleum recorded during the third quarter of 2008 was due to a reversal of the provision recorded through the second quarter of 2008. Due to uncertainty in Congoleum’s future utilization of net operating losses, Congoleum did not record a tax benefit on its loss in the third quarter of 2008 beyond the reversal of the provision recorded during the first six months of 2008.

The Company records tax penalties and interest as a component of income tax expense.

Note B - Inventories

Inventories at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):

	September 30, 2008		December 31, 2007

Finished goods	$	55,928	$	55,478
Work-in-process		14,087		10,327
Raw materials and supplies		12,162		12,596

	$	82,177	$	78,401

Note C – Sale of Property

In April 2006, the Company completed the sale of a building and land owned by Janus, a discontinued operation (see Note A). The building and land were sold for $5.0 million Canadian dollars ("C$"). The Company received C$1.0 million in cash and a C$4.0 million note. The note was paid in full in May 2008 subsequent to the receipt of an environmental certification on the land sold. The Company recognized a gain of approximately C$1.0 million on the sale of the building and land in May 2008. The gain has been recorded as a gain from the discontinued operation.

Note D – Accrued Expenses

Accrued expenses at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):

	September 30, 2008			December 31, 2007

Accrued advertising and sales promotions	$	15,827		$	20,906
Employee compensation and related benefits		9,178			7,581
Interest		305			7
Environmental matters		849			849
Royalties		1,100			828
Income taxes		(116	)		477
Other		6,747			6,387

	$	33,890		$	37,035

See Note H for Liabilities Subject to Compromise.

Note E – Financing Arrangements

American Biltrite Inc.’s primary source of borrowings are the revolving credit facility (the "Revolver") and the term loan ("Term Loan") it has with Bank of America, National Association ("BofA") and BofA acting through its Canada branch (the "Canadian Lender") pursuant to an amended and restated credit agreement (the "Credit Agreement"). The Credit Agreement provides American Biltrite Inc. and its subsidiary K&M Associates L.P. ("K&M") with (i) a $30.0 million commitment under the Revolver with a $12.0 million borrowing sublimit (the "Canadian Revolver") for American Biltrite Inc.’s subsidiary AB Canada and (ii) a $10.0 million Term Loan. The Credit Agreement also provides for domestic and Canadian letter of credit facilities with availability of up to $5.0 million and $1.5 million, respectively, subject to availability under the Revolver and the Canadian Revolver, respectively.

On August 14, 2008, American Biltrite Inc. and its subsidiaries, K&M and AB Canada, entered into an amendment, effective as of June 30, 2008, to the Credit Agreement with BofA and BofA acting through its Canada branch, each in their respective capacities as lenders and administrative agents under the Credit Agreement. The amendment permits the Company to include the principal proceeds it received from the payoff of a note (see Note C) to its Consolidated Adjusted EBITDA (as defined under the Credit Agreement, which includes the Company’s earnings before interest, taxes, depreciation and amortization on a consolidated basis, as adjusted under the Credit Agreement), as determined under the Credit Agreement, for the periods ending June 30, 2008, September 30, 2008 and December 31, 2008. The Credit Agreement includes a financial covenant that requires the Company's Consolidated Adjusted EBITDA for the four consecutive fiscal quarters then ending to exceed 100% of the Company's Consolidated Fixed Charges for the 12-month period ending on such date, as determined under the Credit Agreement (the "Fixed Charge Covenant"). Further, under the amendment, the lenders waived defaults that may have otherwise existed as of June 30, 2008 with respect to the Consolidated Fixed Charges covenant. ABI paid BofA a fee of $50 thousand in connection with this amendment. On March 12, 2008, the same parties entered into an amendment to the Credit Agreement to revise a financial covenant to remove the financial covenant that required the Company not to have any consecutive quarterly net losses from continuing operations (reporting Congoleum on the equity method of accounting). In addition, for purposes of determining the Company's compliance with the financial covenant requiring its Consolidated Adjusted EBITDA to exceed 100% of the Company's Consolidated Fixed Charges (in each case, as determined under the Credit Agreement), the amendment permits the Company to add certain amounts to its Consolidated Adjusted EBITDA to the extent those amounts are deducted in determining the Company's Consolidated Net Income (as determined under the Credit Agreement). Further, under the amendment, the lenders waived defaults that may have otherwise existed as of December 31, 2007 with respect to the financial covenants that were amended by the amendment. ABI paid BofA a fee of $50 thousand in connection with this amendment. On May 14, 2007, the same parties entered into an amendment, effective as of March 31, 2007, to the Credit Agreement to revise a financial covenant to provide that for each of the two

Note E – Financing Arrangements (continued)

consecutive fiscal quarters of the Company ending December 31, 2006 and March 31, 2007, the Company may not have a quarterly net loss from continuing operations in excess of $400 thousand. As a result of the amendments, the Company was in compliance with the Credit Agreement as of each quarter end for the year ended December 31, 2007 and the nine months ended September 30, 2008. The Company may not be able to comply with financial covenants involving the Company's Consolidated Adjusted EBITDA for future periods after December 31, 2008 and may need to obtain a waiver from BofA for any resulting failure to satisfy those financial covenants or seek an amendment to the Credit Agreement to address any such failure so that the Company would not be in breach of the Credit Agreement. Although the Company expects that it would be able to obtain any such amendment or waiver, if necessary, there can be no assurances that it would be successful in obtaining the amendment or waiver.

On September 29, 2006, American Biltrite Inc. entered into swap agreements to convert the interest rates on the Term Loan and $6.0 million of borrowings under the Revolver from floating rates to fixed rates of interest. The swap agreement for the Term Loan (the "Term Loan Swap") has a five year term with the same quarterly payment dates as the Term Loan and reduces proportionately in line with the amortization of the Term Loan. The swap agreement for the $6.0 million outstanding under the Revolver (the "Revolver Swap") has a three year term with quarterly settlement dates beginning December 31, 2006. The Company expects its borrowings under the Revolver to remain above $6.0 million through September 30, 2009, the termination date of the Revolver Swap and the Revolver. The Term Loan Swap and the Revolver Swap are carried at fair value. Changes in the fair value of the swap agreements are recorded in Other Income (Expense). For the three and nine months ended September 30, 2008, the Company recorded a gain and a loss of $61 thousand and $20 thousand, respectively, for the adjustment of the fair values of the swap agreements. For the three and nine months ended September 30, 2007, the Company recorded a loss of $192 thousand and $102 thousand, respectively.

Note F – Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157, which defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s only financial assets or liabilities subject to SFAS No. 157 are its interest rate swap agreements (see Note E). Prior to the adoption of SFAS No. 157, the Company recorded the swap agreements at fair value. The fair value of the swap agreements is based on quoted prices for similar assets or liabilities in active markets (Level 2). As of September 30, 2008, the Company had recorded an unrealized loss of $347 thousand for its interest rate swap agreements.

Note G – Other Liabilities

Other Liabilities at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):

	September 30, 2008		December 31, 2007

Pension benefits	$	3,174	$	2,817
Environmental remediation and product related liabilities		4,799		5,336
Deferred income taxes		1,339		1,337
Other		2,569		2,705

	$	11,881	$	12,195

See Note H for Liabilities Subject to Compromise.

Note H – Liabilities Subject to Compromise

As a result of Congoleum’s Chapter 11 filing (see Notes A and K), pursuant to SOP 90-7, Congoleum 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 Congoleum’s pre-petition debt is recorded at face value and is classified within liabilities subject to compromise. Prior to the fourth quarter of 2007, Congoleum’s accrued interest expense on its 8.625% Senior Notes due August 2008 was also recorded in liabilities subject to compromise. In the fourth quarter of 2007, Congoleum recorded a $41.0 million interest expense credit to reverse post-petition interest accrued on its Senior Notes. Terms of previously proposed reorganization plans had provided, among other things, for the payment of post-petition interest on the Senior Notes, and therefore Congoleum had continued to accrue such interest. Under the terms of the Joint Plan (described in Note K), as well as the New Plan (described in Note K), the Senior Note holders would not receive any post-petition interest.

Liabilities subject to compromise at September 30, 2008 and December 31, 2007 and included in ABI’s consolidated balance sheet at each such date were as follows (in thousands):

	September 30, 2008			December 31, 2007
Current liability
Pre-petition other payables and accrued interest	$	4,997		$	4,997
Non-current
Debt (at face value)		100,000			100,000
Pension liability		10,942			10,772
Other post-retirement benefit obligation		9,687			9,337
Pre-petition other liabilities		8,904			9,622
		129,533			129,731
Elimination – Payable to American Biltrite		(117	)		(126	)
Total non-current liability		129,416			129,605

Total liabilities subject to compromise	$	134,413		$	134,602

Additional pre-petition claims (which would be classified as liabilities subject to compromise) may arise due to the rejection by Congoleum of executory contracts or unexpired leases pursuant to the Bankruptcy Code, or as a result of the allowance by the Bankruptcy Court of contingent or disputed claims.

Note I – Pension Plans

The Company and Congoleum sponsor several noncontributory defined benefit pension plans covering most of their employees. Benefits under the plans are based on years of service and employee compensation. Amounts funded annually by the Company and Congoleum are actuarially determined using the projected unit credit and unit credit methods and are equal to or exceed the minimum required by government regulations. Congoleum also maintains health and life insurance programs for retirees (reflected in the table below under the columns entitled "Other Benefits").

The table below summarizes the components of the net periodic benefit cost for the Company's and Congoleum's pension and other benefit plans during the three and nine months ended September 30, 2008 and 2007 (in thousands):

	Three Months Ended September 30,
	2008					2007
	Pension			Other Benefits		Pension			Other Benefits
Service cost	$	642		$	56	$	618		$	53
Interest cost		1,652			144		1,615			142
Expected return on plan assets		(1,719	)		-		(1,627	)		-
Recognized net actuarial loss		384			15		337			18
Amortization of prior service cost		31			-		29			3

Net periodic benefit cost	$	990		$	215	$	972		$	216

	Nine Months Ended September 30,
	2008					2007
	Pension			Other Benefits		Pension			Other Benefits
Service cost	$	1,926		$	168	$	1,832		$	159
Interest cost		4,956			432		4,816			426
Expected return on plan assets		(5,157	)		-		(4,838	)		-
Recognized net actuarial loss		1,152			45		1,012			54
Amortization of prior service cost		93			-		83			9

Net periodic benefit cost	$	2,970