-----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, SM3zZYIhhSsJwDFq/OLHA0SfvQ7PN/zi3iADF1R6pG41JvuQ2m41e4y2el4OPe1x +1WHQZ1Od0xKMPQ2KoiaeA== 0000950109-00-000964.txt : 20000316 0000950109-00-000964.hdr.sgml : 20000316 ACCESSION NUMBER: 0000950109-00-000964 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG WORLD INDUSTRIES INC CENTRAL INDEX KEY: 0000007431 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 230366390 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02116 FILM NUMBER: 569433 BUSINESS ADDRESS: STREET 1: 2500 COLUMBIA AVE CITY: LANCASTER STATE: PA ZIP: 17603 BUSINESS PHONE: 7173970611 MAIL ADDRESS: STREET 1: 2500 COLUMBIA AVE CITY: LANCASTER STATE: PA ZIP: 17603 FORMER COMPANY: FORMER CONFORMED NAME: ARMSTRONG CORK CO DATE OF NAME CHANGE: 19800611 10-K405 1 FORM 10-K405 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 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 1-2116 ------ ARMSTRONG WORLD INDUSTRIES, INC. -------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-0366390 --------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P. O. Box 3001, Lancaster, Pennsylvania 17604 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (717) 397-0611 ------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ------------------------------------------- Common Stock ($1 par value) New York Stock Exchange, Inc. (a) Preferred Stock Purchase Rights Pacific Stock Exchange, Inc. (b) 9-3/4% Debentures Due 2008 Philadelphia Stock Exchange, Inc. (b) 7.45% Senior Quarterly Interest Bonds Due 2038 (a) All Classes (b) Common Stock and Preferred Stock Purchase Rights only Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- -1- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock of registrant held by non- affiliates of the registrant based on the closing price ($20.00 per share) on the New York Stock Exchange on February 18, 2000, was approximately $0.7 billion. As of February 18, 2000, the number of shares outstanding of registrant's Common Stock was 40,217,225. This amount includes the 2,467,759 shares of Common Stock as of December 31, 1999, held by Chase Manhattan Bank, as Trustee for the employee stock ownership accounts of the Company's Retirement Savings and Stock Ownership Plan. Documents Incorporated by Reference Portions of the Proxy Statement dated March 22, 2000, relative to the May 1, 2000, annual meeting of the shareholders of registrant (the "Company's 2000 Proxy Statement") have been incorporated by reference into Part III of this Form 10-K Report. -2- PART I ------ Item 1. Business - ----------------- Armstrong World Industries, Inc. (Armstrong, which may be referred to as we, us or our) is a Pennsylvania corporation incorporated in 1891. We design, manufacture and sell interior finishings, most notably floor coverings and ceiling systems, around the world. Our products are sold primarily for use in the finishing, refurbishing and repair of residential, commercial and institutional buildings. We also design, manufacture and sell other products, including kitchen and bathroom cabinets and pipe insulation. Industry Segments Financial Information About Industry Segments See Item 8, Note 2 to Consolidated Financial Statements for financial information on our reportable industry segments. -3- Narrative Description of Business Armstrong designs, manufactures and sells interior finishings, including floor coverings, building products (primarily ceiling systems), wood products (primarily wood flooring and cabinets), and insulation products for the building and other industries. Our activities extend worldwide. Floor Coverings We are a worldwide manufacturer of floor coverings for the interiors of homes and commercial and institutional buildings, with a broad range of resilient flooring together with adhesives, installation and maintenance materials and accessories. Resilient flooring, in both sheet and tile forms, together with laminate flooring and linoleum, is made in a wide variety of types, designs, and colors. Included are types of flooring that offer such features as ease of installation, reduced maintenance (no-wax), and cushioning for greater underfoot comfort. Floor covering products are sold to the commercial, residential and institutional market segments through wholesalers, retailers (including large home centers and buying groups), contractors, and to the hotel/motel and manufactured homes industries. Building Products As a major producer of ceiling materials in the United States and abroad, we market both residential and commercial ceiling systems. Ceiling materials for the home are offered in a variety of types and designs. Most provide noise reduction and incorporate features intended to permit ease of installation. These residential ceiling products are sold through wholesalers and retailers (including large home centers). Commercial -4- suspended ceiling systems, designed for use in shopping centers, offices, schools, hospitals, and other commercial and institutional settings, are available in numerous colors, performance characteristics and designs and offer characteristics such as acoustical control, accessibility to the plenum (the area above the ceiling), rated fire protection, and aesthetic appeal. We sell commercial ceiling materials and accessories, along with acoustical wall panels, to ceiling systems contractors and to resale distributors. Framework (grid) for our suspension ceiling systems products are manufactured and sold through a joint venture with Worthington Industries. Wood Products Armstrong, through our Triangle Pacific subsidiary, manufactures and sells hardwood flooring and other flooring, kitchen and bathroom cabinets and related products. These products are used primarily in residential new construction and remodeling, with some commercial applications such as retail stores and restaurants. Flooring sales are generally made through independent wholesale flooring distributors and retailers (including large home centers and buying groups). Cabinets are sold through both independent or company owned distributors. Insulation Products We manufacture insulation products for the technical insulation market. Insulation products are made in a wide variety of types and designs to satisfy various industrial and commercial applications with the majority of the products comprising closed cell flexible foams. A broad range of cladding and other related materials for the insulation contracting market are also produced. Insulation products are sold primarily throughout Europe and North America, with growing markets in Asia and South America. All Other During most of 1999, the "All Other" category in our financial reports included business units making a variety of specialty products for the automotive, textile and other industries worldwide. Gasket materials were manufactured for new and replacement use in the automotive, farm equipment, appliance, small engine, compressor and other industries. On June 30, 1999, we sold the gaskets operation, retaining a 35% interest in the business. Since the divestiture, we have accounted for the gaskets business under the equity method within the "All Other" segment. Textile products include parts and equipment sold to textile equipment manufacturers and textile mills. On September 30, 1999, we sold that business. From 1996 to 1998, we owned an equity interest in Dal-Tile International, Inc. which manufactured and sold ceramic tile products. Major Customers Our businesses principally sell our products through building products distributors, who re-sell our products to retailers, builders, contractors, installers and others. We also sell a significant portion of our products to home center chains and industry buying groups. For example, during 1999, we sold approximately $348 million of products to The Home Depot, Inc. These sales included floor coverings, building products, wood products and insulation products. Raw Materials Raw materials essential to our businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The principal raw materials used by the Floor Coverings business include synthetic resins, plasticizers, PVC, latex, linseed oil, limestone, films, pigments and inks. The principal raw materials used by the Building Products business include mineral fibers and fillers, clays, starches, newspaper and perlite, as well as steel used in the ceiling grid manufacturing process. The principal raw materials used by the Wood Products business include oak lumber, veneer, acrylics, plywood, particleboard and fiberboard. The principal raw materials used by the Insulation business are rubber, fillers like antimontryoxid and foaming agents. We also purchase significant amounts of packaging materials for all of our products. In general, adequate supplies of raw materials were available to all of our businesses. No serious shortages or delays were encountered in 1999, and none are expected in 2000. We cannot guarantee that a significant shortage of one raw material or another will not occur, however. Customers' orders for our products are typically for immediate shipment. Thus, in each business group, we keep sufficient inventory on hand to satisfy orders, or manufacture product to meet delivery dates specified in orders. As a result, there historically has been no material backlog in any industry segment. -5- Patents and Intellectual Property Rights Patent protection is important to our business in the United States and other markets. Our competitive position has been enhanced by U.S and foreign patents on products and processes developed or perfected within Armstrong or obtained through acquisition or license. In addition, we also benefit from our trade secrets for certain products and processes. Patent protection extends for varying periods according to the date of patent filing or grant and the legal term of a patent in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in the country. Although we consider that, in the aggregate, our patents and trade secrets constitute a valuable asset of material importance to our business, we do not regard any of our businesses as being materially dependent upon any single patent or trade secret, or any group of related patents or trade secrets. Our products are sold around the world under numerous brand-name trademarks we consider in the aggregate to be of material importance. Certain of our trademarks, including without limitation house marks Armstrong, Bruce, Hartco, Robbins, and DLW, and product line marks Armaflex, Cirrus, Corlon, Execlon, Henry, Medintech, Natural Reflections, Solarian, ToughGuard, Traffic Zone, Ultima and WearMaster are important to our business because of their significant brand name recognition. Trademark protection continues in some countries as long as the mark is used; in other countries, as long as it is registered. Registrations are generally for fixed, but renewable, terms. Competition There is strong competition in all of the industry segments in which we do business. Competition in each industry segment and each geographic area where we do business includes numerous companies. Principal methods of competition include price, product performance and service. In addition, with the exception of insulation, product styling is a significant component of competition in our industry segments. Increasing competition in the U.S. from worldwide producers is apparent in our businesses. There is currently excess production capacity in various geographic markets, which tends to increase price competition. Research & Development Research and development activities are important and necessary in helping us to improve our products. Principal research and development functions include the development and improvement of products and manufacturing processes. We spent $58.5 in 1999, $46.0 million in 1998 and $47.8 million in 1997 on research and development activities worldwide for our continuing businesses. -6- Environmental Matters Most of Armstrong's manufacturing and certain of Armstrong's research facilities are affected by federal, state and local environmental laws. These laws relate to the discharge of materials or otherwise relate to the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable laws. Armstrong incurred capital expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and $1.2 million in 1997 for environmental compliance and control facilities and anticipates annual expenditures for those purposes to continue within this range for the years 2000 and 2001. Armstrong does not anticipate that it will incur significant capital expenditures in order to meet the requirements of the Clean Air Act of 1990 and the final implementing regulations promulgated by various state agencies. Until all new regulatory requirements are known, uncertainty will remain regarding future estimates of capital expenditures. As with many industrial companies, Armstrong is currently involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund"), and similar state laws at approximately 22 sites. In most cases, Armstrong is one of many potentially responsible parties ("PRPs") who have voluntarily agreed to jointly fund the required investigation and remediation of each site. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs. Armstrong may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. Armstrong is also remediating environmental contamination resulting from past industrial activity at certain of its current and former plant sites. Estimates of future liability are based on an evaluation of currently available facts regarding each individual site and consider factors including existing technology, presently enacted laws and regulations and prior company experience in remediation of contaminated sites. Although current law imposes joint and several liability on all parties at any Superfund site, Armstrong's contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site costs. As a result, Armstrong's estimated liability reflects only Armstrong's expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether responsibility is being disputed, the terms of any existing agreements and experience regarding similar matters. Liabilities of $14.7 million at December 31, 1999, and $18.3 million at December 31, 1998, were for potential environmental liabilities that Armstrong considers probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the amount of the liability, that estimate has been used; where only a range of probable liability is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each individual site, these liabilities are reviewed to reflect additional information as it becomes available. The estimated liabilities do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or probable of recovery through negotiation or litigation. Actual costs to be incurred at identified sites in the future may vary from the estimates, given the inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future period. Employees As of December 31, 1999, we had approximately 18,300 employees around the world, of whom approximately 6,600 are located outside of the United States. About 57% of our approximately 12,400 hourly or salaried production and maintenance employees in the United States are represented by labor unions. -7- Geographic Areas See Item 8, Note 2 to Consolidated Financial Statements for financial information by geographic areas. Our non-U.S. operations are subject to local government legislation involving restrictions on and transfers of investments, tariff restrictions, personnel administration, and other actions by foreign governments. In addition, consolidated earnings are subject to both U.S. and non-U.S. tax laws where those earnings originated outside of the U.S., and to the effects of currency fluctuations. -8- CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS - ------------------------------------------------- (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) Our disclosure and analysis in this report and in our 1999 Annual Report to Shareholders contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with discussions of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report, in the 1999 Annual Report and in any other public statements we make may turn out to be wrong. --- ---- --- -- -- ----- They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. However, you should consult any further disclosures we make on related subjects in our 10-Q, 8-K, 10-K or other reports filed with the SEC. Also note that we provide the following cautionary discussion of risks and uncertainties relevant to our businesses. These are some of the factors that we think could potentially cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is provided in accordance with the Private Securities Litigation Reform Act of 1995. . Claims have been brought against us and our subsidiaries for various legal, environmental and tax matters. In particular, claims have been brought against us for alleged asbestos related personal injury and property damage. The ultimate outcome and impact of these claims could differ from the amounts recorded as liabilities on our balance sheet. Resolution of these cases affects cash flows, and future increases in the recorded liability could affect future results of operations. For more information on these matters, see the discussion of Legal Proceedings in Item 3 in this report. . Balancing investment to create future growth with the constraints of a price competitive market is a challenge. Our investments in research and development for future products could exceed corresponding sales growth. . Revenues and earnings could be affected by the level of success of new product introductions, as well as potential impacts from announced and potential future price increases for our exisiting products. . Much of our revenues and earnings are exposed to changes in foreign exchange rates. Almost one third of our revenues arise from international operations, and we expect that revenues and net income in 2000 will be affected by changes in exchange rates. Where practical, we try to reduce these effects by matching local currency revenues with costs and local currency assets with liabilities. We also manage foreign exchange risk with foreign currency forward contracts, and with purchased foreign currency options. We are subject to interest rate risk on our debt. However, we monitor interest rate trends and try to minimize the impact of rate changes. Due to our major acquisitions in 1998, and even after our debt reduction accomplishments since completion of the acquisitions, our debt level is higher than in prior years, and a good portion of it is financed through short term borrowings. A significant increase in interest rates would increase our borrowing costs. Notwithstanding our efforts to foresee and plan for the effects of changes in fiscal circumstances, we cannot predict with certainty all changes in currency and interest rates, inflation or other related -9- factors affecting our businesses. For more information on these matters, see the discussion of Market Risk in Item 7A of this report. . International operations could be affected by changes in intellectual property legal protections and remedies, trade regulations, and procedures and actions affecting production, pricing and marketing of products, as well as by unstable governments and legal systems, intergovernmental disputes and possible nationalization. . Business combinations among our competitors could affect our competitive position in the hard surface floor covering, ceiling system and wood products businesses. Similarly, combinations or alliances among our major customers could increase their purchasing power in dealing with us. And, of course, if we ourselves should enter into one or more business combinations, our business, finances and capital structure could be affected. . Growth in costs and expenses, raw material price increases (for example increases in wood prices or in petroleum-based raw materials such as plasticizers or PVCs), energy cost increases, changes in distribution and product mix, and the impact of divestitures, restructuring and other unusual items that could result from evolving business strategies, and organizational restructuring could affect future results. . Revenues and earnings could be affected by various worldwide economic and political factors, including variations in residential and commercial building rates and economic growth rates in various areas of the world in which we do business. These factors could affect the end-use markets for our products in various parts of the world. . Revenues and earnings could be affected by the extent to which we successfully realize savings from the continued integration of our 1998 acquisitions of Triangle Pacific and DLW. -10- Item 2. Properties - -------------------- Our world headquarters are in Lancaster, Pennsylvania. We own a 100 acre, multi-building campus comprising the site of our corporate headquarters, most operational headquarters, and our R&D operations. Altogether, our headquarters operations occupy over 986,000 square feet of floor space. We produce and market our products and services throughout the world, owning and operating 58 manufacturing plants in 15 countries. Thirty-eight of these facilities are located throughout the United States. We also have an interest through joint ventures in 15 additional plants in 7 countries. Floor covering products and adhesives are produced at 24 plants, with principal manufacturing facilities located in Pennsylvania, Illinois, Oklahoma, the U.K., and Germany. Building products are produced at 21 plants with principal facilities in Georgia, the Florida-Alabama Gulf Coast area, Pennsylvania, the U.K., and China. Wood products are produced at 16 plants, with principal facilities located in West Virginia, Tennessee and Pennsylvania. Insulation products are produced at 12 plants with principal facilities located in North Carolina and Germany. Sales offices are leased and owned worldwide, and leased facilities are utilized to supplement Armstrong's owned warehousing facilities. Productive capacity and the extent of utilization of our facilities are difficult to quantify with certainty because in any one facility, maximum capacity and utilization vary periodically depending upon the product that is being manufactured, and individual facilities manufacture multiple products. In this context, we estimate that the production facilities in each industry segment were effectively utilized during 1999 at 80% to 90% of overall productive capacity. Remaining productive capacity is sufficient to meet expected customer demands. We believe that our various facilities are adequate and suitable. Additional incremental investments in plant facilities are made as appropriate to balance capacity with anticipated demand, improve quality and service, and reduce costs. Item 3. Legal Proceedings - -------------------------- ASBESTOS-RELATED LITIGATION Armstrong is a defendant in personal injury claims and property damage claims related to asbestos containing products. PERSONAL INJURY CLAIMS Nearly all claims seek general and punitive damages arising from alleged exposures, at various times, from World War II onward, to asbestos-containing products. Claims against Armstrong, which can involve allegations of negligence, strict liability, breach of warranty and conspiracy, primarily relate to Armstrong's involvement with asbestos-containing insulation products. Armstrong discontinued the sale of all such insulation products in 1969. In addition, other Armstrong products, such as gasket materials, have been named in some litigation. Claims may arise many years after first exposure to asbestos in light of the long latency period (up to 40 years) for asbestos-related injury. Product identification and determining exposure periods are difficult and uncertain. Armstrong believes that many current plaintiffs are unimpaired. Armstrong is involved in all stages of claims resolution and litigation, including individual trials, consolidated trials and appeals. -11- Over the long history of asbestos litigation involving hundreds of companies, attention has been given by various parties to securing a comprehensive resolution of the litigation. In 1991, the Judicial Panel for Multidistrict Litigation ordered the transfer of federal cases to the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. Armstrong supported this transfer. Some cases are periodically released for trial, although the issue of punitive damages is retained by the transferee court. That court has been instrumental in having the parties resolve large numbers of cases in various jurisdictions and has been receptive to different approaches to the resolution of claims. Claims filed in state courts have not been directly affected by the transfer. Asbestos Claims Facility ("Facility") and Center for Claims Resolution ("Center") The Facility was established to evaluate, settle, pay and defend all personal injury claims against member companies. Resolution and defense costs were allocated by formula. The Facility subsequently dissolved, and the Center was created in October 1988 by 21 former Facility members, including Armstrong. At December 31, 1999 there were 19 members of the Center. In January 2000, membership was reduced to 16 members. Insurance carriers, while not members, are represented ex officio on the Center's governing board and have agreed annually to provide a portion of the Center's operational costs. The Center adopted many of the conceptual features of the Facility and has addressed the claims in a manner consistent with the prompt, fair resolution of meritorious claims. Resolution and defense costs are allocated by formula to each of the member companies; adjustments over time have resulted in some increased share for Armstrong. Amchem Settlement Class Action Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern District of Pennsylvania on January 15, 1993, that included essentially all future personal injury claims against members of the Center for Claims Resolution ("Center"), including Armstrong. It was designed to establish a nonlitigation system for the resolution of those claims, and offered a method for prompt compensation to claimants who were occupationally exposed to asbestos if they met certain exposure and medical criteria. Compensation amounts were derived from historical settlement data and no punitive damages were to be paid. The settlement was designed to, among other things, minimize transactional costs, including attorneys' fees; expedite compensation to claimants with qualifying claims; and relieve the courts of the burden of handling future claims. -12- The District Court, after exhaustive discovery and testimony, approved the settlement class action and issued a preliminary injunction that barred class members from pursuing claims against Center members in the tort system. The U.S. Court of Appeals for the Third Circuit reversed that decision, and the reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding that the settlement class did not meet the requirements for class certification under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a loss of the bar against the filing of claims in the tort system. Post Amchem Claim Developments Armstrong is a defendant in approximately 175,600 pending personal injury claims as of December 31, 1999. During 1999, the Center received and verified approximately 51,000 claims naming Armstrong as a defendant (of which approximately 10,200 were received and verified in the fourth quarter). Armstrong continues to seek broad-based settlements of claims through the Center. The Center has recently reached agreements with several law firms that cover approximately 82,000 claims (or 41% of current claims) some of which are currently pending and some of which have yet to be filed. These agreements typically provide for multiyear payments for settlement of current claims and establish specific medical and other criteria for the settlement of future claims as well as annual limits on the number of claims that can be filed by these firms. These agreements also establish fixed settlement values for different asbestos-related medical conditions which are subject to periodic renegotiation over a period of 2 to 5 years. The plaintiff law firms are required to recommend settlements to their clients although future claimants are not legally obligated to accept the settlements. These agreements also provide for nominal payments to future claimants who are unimpaired but who are eligible for additional compensation if they develop a more serious asbestos-related illness. The Center can terminate an agreement with an individual law firm if a significant number of that firm's clients elect not to participate under the agreement. Negotiations with additional plaintiff law firms engaged in asbestos-related litigation that would resolve a substantial portion of the remaining pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain. Asbestos-Related Liability In continually evaluating its estimated asbestos liability, Armstrong reviews, among other things, its recent and historical settlement amounts, the incidence of past and recent claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against it and the status and results of broad-based settlement discussions. Based on this review, Armstrong has estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. Armstrong will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable. In the fourth quarter of 1999, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $425.4 million. The revision in the estimated liability is attributable to many factors. The actual number of claims received in 1999 was higher than anticipated. Although we expect the number of claims to decrease in future years, we now expect that the total number of claims received will be higher than previously anticipated. Further, the Center has recently settled with some law firms at amounts higher than our original estimates pursuant to our broad-based settlement plan. In consideration of these factors, management has concluded that an increase in the estimated probable liability is required. Armstrong's estimate of such liability that is probable and estimable through 2005 ranges from $681.5 million to $1,337.9 million as of December 31, 1999. The range of probable and estimable liability reflects uncertainties in the number of future claims that will be filed, the outcome of the broad-based settlement negotiations and Armstrong's overall effective share of the Center's liabilities. Armstrong has concluded that no amount within that range is more likely than any other, and therefore has reflected $681.5 million as a liability in the consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $175.0 million over the next 12 months and has reflected $175.0 million as a current liability. Armstrong's estimated range of liability is primarily based on known claims and an estimate of future claims that are likely to occur and can be reasonably estimated through 2005. This estimated range of liability assumes that the number of new claims filed annually will be less than the number filed in 1999. For claims that may be filed beyond 2005, management believes that the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. Accordingly, it is reasonably possible that the total exposure to personal injury claims may be greater than the estimated range of liability. Although some settlements have already been reached, Armstrong is currently uncertain as to the ultimate success and timing of the remaining broad-based settlement discussions. However, if those discussions are unsuccessful or if unfavorable claims experiences continue, significant changes in the assumptions used in the estimate of Armstrong's liability may result. Those changes, if any, could lead to increases in the recorded liability. Because of the uncertainties related to the number of claims, the ultimate settlement amounts, and similar matters, it is extremely difficult to obtain reasonable estimates of the amount of the ultimate liability. As additional experience is gained regarding claims and such settlement discussions or other new information becomes available regarding the potential liability, Armstrong will reassess its potential liability and revise the estimates as appropriate. Because, among other things, payment of the liability will extend over many years, management believes that the potential additional costs for claims, net of any potential insurance recoveries, will not have a material after-tax effect on the financial condition of Armstrong or its liquidity, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. Codefendant Bankruptcies Certain codefendant companies have filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on the litigation cannot be predicted. Letters of Credit As of December 31, 1999, Armstrong entered into $36.2 million of letters of credit to meet minimum collateral requirements established by the Center. Property Damage Litigation Armstrong is also one of many defendants in five pending claims as of December 31, 1999, that were filed by public and private building owners. These cases present allegations of damage to the plaintiffs' buildings caused by asbestos-containing products and generally seek compensatory and punitive damages and equitable relief, including reimbursement of expenditures, for removal and replacement of such products. Armstrong vigorously denies the validity of the allegations against it in these claims. These claims are not handled by the Center. Insurance coverage has been resolved and is expected to cover almost all costs of these claims. -13- Insurance Coverage During relevant time periods, Armstrong purchased primary and excess insurance policies providing coverage for personal injury claims and property damage claims. Certain policies also provide coverage to ACandS, Inc., a former subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage on a first-come first-served basis and to reserve for ACandS a certain amount of excess coverage. Wellington Agreement In 1985, Armstrong and 52 other companies (asbestos defendants and insurers) signed the Wellington Agreement. This Agreement settled disputes concerning personal injury insurance coverage with signatory carriers. It provides broad coverage for both defense and indemnity and applies to both products hazard and nonproducts (general liability) coverages. Armstrong has resolved most asbestos-related personal injury products hazard coverage matters with its solvent carriers through the Wellington Agreement or other settlements. Insurance Recovery Proceedings A substantial portion of Armstrong's primary and excess remaining insurance asset is nonproducts (general liability) insurance for personal injury claims including, among others, those that involve alleged exposure during Armstrong's installation of asbestos materials. An alternative dispute resolution ("ADR") procedure under the Wellington Agreement is under way against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to that coverage and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits. The carriers have raised various defenses, including waiver, laches, statutes of limitations and contractual defenses. One primary carrier alleges that it is no longer bound by the Wellington Agreement, and another alleges that Armstrong agreed to limit its claims for nonproducts coverage against that carrier when the Wellington Agreement was signed. The ADR process is in the trial phase of binding arbitration. One insurer has taken the position that it is entitled to litigate in court certain issues in the ADR proceeding. During 1999, Armstrong received preliminary decisions in the initial phases of the trial proceeding of the ADR which were generally favorable to Armstrong on a number of issues related to insurance coverage. Because of the continuing ADR process and the possibilities for further proceedings on certain matters, Armstrong has not yet completely determined the financial implications of the decisions. Armstrong has entered into settlements with a number of the carriers resolving coverage issues. -14- Other proceedings against non-Wellington carriers may become necessary. Insurance Asset As with its estimated asbestos-related liability, Armstrong continually evaluates the probable insurance asset to be recorded. An insurance asset in the amount of $296.0 million is recorded as of December 31, 1999. Approximately $58.7 million was received in 1999 pursuant to existing settlements. The asset was also increased by $90.0 million in the fourth quarter of 1999 primarily as a result of insurance coverage in place related to the increase in the probable and estimable liability and recent settlements with certain carriers. Of the total insurance asset amount, approximately $78.3 million represents partial settlement for previous claims which will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.70%. The total amount recorded reflects Armstrong's belief in the availability of insurance in this amount, based upon Armstrong's success in insurance recoveries, recent settlement agreements that provide that coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. This insurance is either available through settlement or probable of recovery through negotiation, litigation or resolution of the ADR process that is in the trial phase of binding arbitration. Depending on further progress of the ADR, and activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, Armstrong may revise its estimate and additional insurance assets may be recorded in a future period. Of the $296.0 million asset, $26.0 million has been recorded as a current asset reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. However, the actual amount of payments to be received in the next 12 months could increase depending upon the nature and result of settlement discussions. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to $101.5 million in 1998. Armstrong received $58.7 million in asbestos-related insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong currently expects to pay approximately $95.0 million to $115.0 million for asbestos-related claims and expenses in 2000, net of expected insurance recoveries and taxes. CONCLUSION In the fourth quarter of 1999, Armstrong recorded a net pretax charge of $335.4 million. This charge is the net of an increase in its estimated asbestos-related liability of $425.4 million and a $90.0 million increase in related insurance recoveries. While some successful broad-based settlements have been reached with plaintiff law firms, Armstrong is uncertain as to the timing and number of any additional settlements to be reached. Since many uncertainties exist surrounding asbestos litigation, Armstrong will continue to evaluate its asbestos-related estimated liability and corresponding estimated insurance recoveries asset as well as the underlying assumptions used to derive these amounts. The recorded liability and asset reflect the most recent available information as of this filing. However, it is reasonably possible that Armstrong's total exposure to personal injury claims may be greater than the recorded liability, and, accordingly future charges to income may be necessary. While Armstrong believes that potential future charges may be material to the periods in which they are taken, Armstrong does not believe the charges will have a material adverse effect on its financial position or liquidity. -15- ENVIRONMENTAL MATTERS Most of Armstrong's manufacturing and certain of Armstrong's research facilities are affected by federal, state and local environmental laws. These laws relate to the discharge of materials or otherwise relate to the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable laws. Armstrong incurred capital expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and $1.2 million in 1997 for environmental compliance and control facilities and anticipates annual expenditures for those purposes to continue within this range for the years 2000 and 2001. Armstrong does not anticipate that it will incur significant capital expenditures in order to meet the requirements of the Clean Air Act of 1990 and the final implementing regulations promulgated by various state agencies. Until all new regulatory requirements are known, uncertainty will remain regarding future estimates of capital expenditures. As with many industrial companies, Armstrong is currently involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund"), and similar state laws at approximately 22 sites. In most cases, Armstrong is one of many potentially responsible parties ("PRPs") who have voluntarily agreed to jointly fund the required investigation and remediation of each site. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs. Armstrong may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. Armstrong is also remediating environmental contamination resulting from past industrial activity at certain of its current and former plant sites. Estimates of future liability are based on an evaluation of currently available facts regarding each individual site and consider factors including existing technology, presently enacted laws and regulations and prior company experience in remediation of contaminated sites. Although current law imposes joint and several liability on all parties at any Superfund site, Armstrong's contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site costs. As a result, Armstrong's estimated liability reflects only Armstrong's expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether responsibility is being disputed, the terms of any existing agreements and experience regarding similar matters. Liabilities of $14.7 million at December 31, 1999, and $18.3 million at December 31, 1998, were for potential environmental liabilities that Armstrong considers probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the amount of the liability, that estimate has been used; where only a range of probable liability is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each individual site, these liabilities are reviewed to reflect additional information as it becomes available. The estimated liabilities do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or probable of recovery through negotiation or litigation. Actual costs to be incurred at identified sites in the future may vary from the estimates, given the inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future period. -16- Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ Not applicable. PART II ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters - ------- Armstrong's Common Stock is traded on the New York Stock Exchange, Inc., the Philadelphia Stock Exchange, Inc., and the Pacific Stock Exchange, Inc. As of March 1, 2000, there were approximately 6,500 holders of record of Armstrong's Common Stock. During 1999, Armstrong issued a total of 2,400 shares of restricted Common Stock to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock Plan for Nonemployee Directors. Given the small number of persons to whom these shares were issued, applicable restrictions on transfer and the information regarding Armstrong possessed by the directors, these shares were issued without registration in reliance on Section 4(2) of the Securities Act of 1933, as amended.
- ------------------------------------------------------------------------------------------------------------------------- First Second Third Fourth Total year - ------------------------------------------------------------------------------------------------------------------------- Dividends per share of common stock 0.48 0.48 0.48 0.48 1.92 Price range of common stock--high 64 5/16 59 11/16 60 7/8 45 1/8 64 5/16 Price range of common stock--low 44 5/8 45 44 1/8 29 29 - -------------------------------------------------------------------------------------------------------------------------- Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88 Price range of common stock--high 87 7/8 90 68 3/8 70 1/4 90 Price range of common stock--low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16 - --------------------------------------------------------------------------------------------------------------------------
Item 6. Selected Financial Data - ---------------------------------
- ------------------------------------------------------------------------------------------------------------------------- (Dollars in millions except for per-share data) For year 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Net sales 3,443.8 2,746.2 2,198.7 2,156.4 2,325.0 Cost of goods sold 2,290.3 1,838.6 1,461.7 1,459.9 1,581.1 Total selling, general and administrative expenses and goodwill amortization 708.5 532.7 385.3 413.2 457.0 Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7 (19.1) (6.2) Reorganization and restructuring charges (reversals) (1.4) 74.6 -- 46.5 71.8 Charge for asbestos liability, net 335.4 274.2 -- -- -- Loss from ceramic tile business formation/ (gain) from sales of woodlands -- -- -- -- 177.2 Operating income (loss) 127.8 39.9 322.0 255.9 44.1 Interest expense 105.2 62.2 28.0 22.6 34.0 Other expense (income), net (6.6) (1.7) (2.2) (6.9) 1.9 Earnings (loss) from continuing businesses before income taxes 29.2 (20.6) 296.2 240.2 8.2 Income tax expense (benefit) 14.9 (11.3) 111.2 75.4 (5.4) Earnings (loss) from continuing businesses 14.3 (9.3) 185.0 164.8 13.6 As a percentage of sales 0.4% -0.3% 8.4% 7.6% 0.6% As a percentage of average monthly assets (a) 0.3% -0.3% 9.0% 8.5% 0.7% Earnings (loss) from continuing businesses
-17- applicable to common stock (b) 14.3 (9.3) 185.0 158.0 (0.7) Per common share -- basic (c) 0.36 (0.23) 4.55 4.04 (0.02) Per common share -- diluted (c) 0.36 (0.23) 4.50 3.82 (0.02) Net earnings (loss) 14.3 (9.3) 185.0 155.9 123.3 As a percentage of sales 0.4% -0.3% 8.4% 7.2% 5.3% Net earnings (loss) applicable to common stock (b) 14.3 (9.3) 185.0 149.1 109.0 As a percentage of average shareholders' equity 1.8% -1.2% 22.3% 19.6% 15.0% Per common share -- basic (c) 0.36 (0.23) 4.55 3.81 2.94 Per common share -- diluted (c) 0.36 (0.23) 4.50 3.61 2.68 Dividends declared per share of common stock 1.92 1.88 1.72 1.56 1.40 Capital expenditures 195.2 184.3 160.5 228.0 182.7 Aggregate cost of acquisitions 3.8 1,175.7 4.2 -- 20.7 Total depreciation and amortization 169.2 142.7 132.7 123.7 123.1 Average number of employees -- continuing businesses 18,419 13,881 10,643 10,572 13,433 Average number of common shares outstanding (millions) 39.9 39.8 40.6 39.1 37.1 - -------------------------------------------------------------------------------------------------------------------------- Year-end position Working capital -- continuing businesses 244.9 367.8 128.5 243.5 346.8 Net property, plant and equipment -- continuing businesses 1,439.1 1,502.0 972.2 964.0 878.2 Total assets 4,164.5 4,273.2 2,375.5 2,135.6 2,149.8 Net long-term debt 1,412.9 1,562.8 223.1 219.4 188.3 Total debt as a percentage of total capital (d) 71.2 73.1% 39.2% 37.2% 38.5% Shareholders' equity 679.2 709.7 810.6 790.0 775.0 Book value per share of common stock 16.87 17.57 20.20 19.19 20.10 Number of shareholders (e) 6,515 6,868 7,137 7,424 7,084 Common shares outstanding (millions) 40.3 39.8 40.1 41.2 36.9 Market value per common share 33 3/8 60 5/16 74 3/4 69 1/2 62 - --------------------------------------------------------------------------------------------------------------------------
Notes: (a) Assets exclude insurance recoveries for asbestos-related liabilities. (b) After deducting preferred dividend requirements and adding the tax benefits for unallocated preferred shares. (c) See definition of basic and diluted earnings per share on page 39. (d) Total debt includes short-term debt, current installments of long-term debt, long-term debt and ESOP loan guarantee. Total capital includes total debt and total shareholders' equity. (e) Includes one trustee who is the shareholder of record on behalf of approximately 6,000 to 6,500 employees for years 1988 through 1996. -18- From 1996 to July 1998, ceramic tile results were reported under the equity method, whereas prior to 1996, ceramic tile operations were reported on a consolidated or line item basis. From July 1998 to November 1998, ceramic tile operations were reported under the cost method. Beginning in 1998, consolidated results include Armstrong's acquisitions of Triangle Pacific and DLW. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - -------------- MANAGEMENT'S DISCUSSION AND ANALYSIS 1999 COMPARED WITH 1998 DIVESTITURES On May 28, 1999, Armstrong sold DLW Aktiengesellschaft's ("DLW") furniture business for total cash proceeds of $38.1 million. Armstrong acquired this business as part of the acquisition of DLW in the third quarter of 1998 and had classified the business as held for sale. There was no gain or loss on the transaction. -19- On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing, Inc. Armstrong acquired this interest as part of its acquisition of DLW during the third quarter of 1998. There was no material gain or loss on the transaction. On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of investors including Citicorp Venture Capital Ltd. and the management of AISI for a cash purchase price of approximately $36.1 million. The sale resulted in a gain of approximately $6.0 million, or $0.15 per share, which was recorded in other income. On September 30, 1999, Armstrong completed the sale of its Textile Products Operations to Day International Group, Inc. The sale resulted in a pretax loss of $5.0 million ($3.2 million after tax, or $0.08 per diluted share) which was recorded in other income. -20- FINANCING On March 16, 1999, Armstrong filed a shelf registration statement for $1 billion of combined debt and equity securities. On May 19, 1999, Armstrong completed an offering under the shelf registration statement of $200 million aggregate principal amount of 7.45% Senior Notes due 2029. The net proceeds from this offering were used to repay other indebtedness of Armstrong. On October 21, 1999, Armstrong renewed a bank credit facility for $450 million that expires in 364 days and cancelled a $300 million line of credit which was due to expire in 2001. Armstrong also has a $450 million line of credit which expires in 2003. There were no borrowings under these facilities at December 31, 1999. FINANCIAL CONDITION As shown on the Consolidated Balance Sheets on page 36, Armstrong had cash and cash equivalents of $35.6 million at December 31, 1999, compared with $38.2 million recorded at the end of 1998. The ratio of current assets to current liabilities was 1.31 to 1 as of December 31, 1999, compared with 1.49 to 1 as of December 31, 1998. Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased $149.9 million in 1999. At December 31, 1999, long-term debt of $1,412.9 million, or 60.0 percent of total capital, compared with $1,562.8 million, or 59.3 percent of total capital, at the end of 1998. At December 31, 1999, and December 31, 1998, ratios of total debt (including Armstrong's guarantee of an ESOP loan) as a percent of total capital were 71.2 percent and 73.1 percent, respectively. As shown on the Consolidated Statements of Cash Flows on page 37, net cash provided by operating activities for the year ended December 31, 1999, was $344.2 million compared with $240.8 million in 1998. The increase is due to changes in working capital components, primarily an increase in accounts payable and accrued expenses. Net cash used for investing activities was $62.0 million for the year ended December 31, 1999, compared with $1,198.3 million in 1998. The decrease was primarily due to expenditures for acquisitions in 1998 and the proceeds from the sales of businesses in 1999. Net cash used for financing activities was $281.9 million for the year ended December 31, 1999, compared with net cash provided by financing activities of $937.3 million in 1998. The decrease was primarily due to the $202.1 million net reduction of debt during 1999 compared to the $1,039.5 million net increase in debt during 1998. On October 15, 1999, Armstrong's ceiling grid joint venture with Worthington Industries, WAVE, made a $25 million payment to each partner. Armstrong applied the proceeds to debt reduction. -21- Armstrong is constantly evaluating its various business units and may from time to time dispose of, or restructure, those units. Armstrong is currently at different levels of divestiture discussions and evaluations related to three of its business units: insulation, floor installation products and its European carpet business. The anticipated after-tax proceeds from these divestitures is estimated to be $350 million to $450 million. See Divestitures section for discussion of businesses sold during 1999. [GRAPH] -22- ASBESTOS-RELATED LITIGATION Armstrong is involved in significant asbestos-related litigation which is described more fully in Note 26 on pages 52-54 and which should be read in connection with this discussion and analysis. Armstrong is a defendant in approximately 175,600 pending personal injury claims as of December 31, 1999. During 1999, the Center for Claims Resolution ("Center") received and verified approximately 51,000 claims naming Armstrong as a defendant (of which approximately 10,200 were received and verified in the fourth quarter). Armstrong continues to seek broad-based settlements of claims through the Center. The Center has recently reached agreements with several law firms that cover approximately 82,000 claims (or 41% of current claims) some of which are currently pending, and some of which have yet to be filed. These agreements typically provide for multiyear payments for settlement of current claims and establish specific medical and other criteria for the settlement of future claims as well as annual limits on the number of claims that can be filed by these firms. These agreements also establish specific settlement values for different asbestos-related medical conditions which are subject to periodic renegotiation over a period of 2 to 5 years. The plaintiff law firms are required to recommend settlements to their clients although future claimants are not legally obligated to accept the settlements. These agreements also provide for nominal payments to future claimants who are unimpaired but who are eligible for additional compensation if they develop a more serious asbestos-related illness. The Center can terminate an agreement with an individual law firm if a significant number of that firm's clients elect not to participate under the agreement. Negotiations with additional plaintiff law firms engaged in asbestos-related litigation that would resolve a substantial portion of the remaining pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain. In continually evaluating its estimated asbestos liability, Armstrong reviews, among other things, its recent and historical settlement amounts, the incidence of past and recent claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against it and the status and results of broad-based settlement discussions. Based on this review, Armstrong has estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. Armstrong will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable. In the fourth quarter of 1999, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $425.4 million. The revision in the estimated liability is attributable to many factors. The actual number of claims received in 1999 was higher than anticipated. Although we expect the number of claims to decrease in future years, we now expect that the total number of claims received will be higher than previously anticipated. Further, the Center has recently settled with some law firms at amounts higher than our original estimates pursuant to our broad-based settlement plan. In consideration of these factors, management has concluded that an increase in the estimated probable liability is required. Armstrong's estimate of such liability that is probable and estimable through 2005 ranges from $681.5 million to $1,337.9 million as of December 31, 1999. The range of probable and estimable liability reflects uncertainties in the number of future claims that will be filed, the outcome of the broad-based settlement negotiations and Armstrong's overall effective share of the Center's liabilities. Armstrong has concluded that no amount within that range is more likely than any other, and therefore has reflected $681.5 million as a liability in the consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $175.0 million over the next 12 months and has reflected $175.0 million as a current liability. Armstrong's estimated range of liability is primarily based on known claims and an estimate of future claims that are likely to occur and can be reasonably estimated through 2005. This estimated range of liability assumes that the number of new claims filed annually will be less than the number filed in 1999. For claims that may be filed beyond 2005, management believes that the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. Accordingly, it is reasonably possible that the total exposure to personal injury claims may be greater than the estimated range of liability. Because of the uncertainties related to the number of claims, the ultimate settlement amounts, and similar matters, it is extremely difficult to obtain reasonable estimates of the amount of the ultimate liability. As additional experience is gained regarding claims and such settlement discussions or other new information becomes available regarding the potential liability, Armstrong will reassess its potential liability and revise the estimates as appropriate. Although some settlements have already been reached, Armstrong is currently uncertain as to the ultimate success and timing of the remaining broad-based settlement discussions. However, if those discussions are unsuccessful or if unfavorable claims experiences continue, significant changes in the assumptions used in the estimate of Armstrong's liability may result. Those changes, if any, could lead to increases in the recorded liability. Because, among other things, payment of the liability will extend over many years, management believes that the potential additional costs for claims, net of any potential insurance recoveries, will not have a material after-tax effect on the financial condition of Armstrong or its liquidity, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. As with its estimated asbestos-related liability, Armstrong continually evaluates the probable insurance asset to be recorded. An insurance asset in the amount of $296.0 million is recorded as of December 31, 1999. Approximately $58.7 million was received in 1999 pursuant to existing settlements. The asset was also increased by $90.0 million in the fourth quarter of 1999 primarily as a result of insurance coverage in place related to the increase in the probable and estimable liability and recent settlements with certain carriers. Of the total insurance asset amount, approximately $78.3 million represents partial settlement for previous claims which will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.70%. The total amount recorded reflects Armstrong's belief in the availability of insurance in this amount, based upon Armstrong's success in insurance recoveries, recent settlement agreements that provide that coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. This insurance is either available through settlement or probable of recovery through negotiation, litigation or resolution of the Alternative Dispute Resolution ("ADR") process that is in the trial phase of binding arbitration. Depending on further progress of the ADR, and activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, Armstrong may revise its estimate and additional insurance assets may be recorded in a future period. Of the $296.0 million asset, $26.0 million has been recorded as a current asset reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. However, the actual amount of payments to be received in the next 12 months could increase depending upon the nature and result of settlement discussions. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to $101.5 million in 1998. Armstrong received $58.7 million in asbestos-related insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong currently expects to pay approximately $95.0 million to $115.0 million for asbestos-related claims and expenses in 2000, net of expected insurance recoveries and taxes. Since many uncertainties exist surrounding asbestos litigation, Armstrong will continue to evaluate its asbestos-related estimated liability and corresponding estimated insurance recoveries asset as well as the underlying assumptions used to derive these amounts. The recorded liability and asset reflect the most recent available information as of this filing. However, it is reasonably possible that Armstrong's total exposure to personal injury claims may be greater than the recorded liability and, accordingly, future charges to income may be necessary. While Armstrong believes that potential future charges may be material to the periods in which they are taken, Armstrong does not believe the charges will have a material adverse effect on its financial position or liquidity. -23- CONSOLIDATED RESULTS Net sales in 1999 of $3.44 billion were 25.4% higher when compared with net sales of $2.75 billion in 1998. Triangle Pacific contributed $822.6 million and $346.0 million of sales in 1999 and 1998 respectively, while DLW contributed $513.1 million and $193.0 million during the same periods. Excluding these recent acquisitions, Armstrong sales of $2,108.1 million were $99.1 million, or 4.5%, below prior year of which $45.4 million related to the absence of gasket and textile sales, following the sale of those units in 1999. Floor coverings sales decreased 4.0%; Insulation products sales declined 1.9%; and Building products sales were down 0.6%. Further excluding the impact of the gaskets and textiles divestitures, Americas sales growth of 1.1% was offset by the European sales decline of 11.1% and the Pacific Area sales decline of 1.9%. Armstrong reported net earnings of $14.3 million, or $0.36 per share, compared to a net loss of $9.3 million, or $0.23 per share in 1998. The 1999 and 1998 results include net after-tax charges of $218.0 million and $178.2 million, respectively, for increases in the estimated liability for asbestos-related claims, and the 1998 results include after-tax charges of $48.5 million for reorganization charges. Cost of goods sold in 1999 was 66.5% of sales, lower than cost of goods sold of 67.0% in 1998. Excluding the effect of recent acquisitions, Armstrong's cost of goods sold was 63.5% in 1999 compared to 65.9% in 1998, due to cost reductions, manufacturing efficiencies and lower raw material costs. Selling, general and administrative (SG&A) expenses in 1999 were $683.0 million, or 19.8% of sales. In 1998, SG&A expenses were $522.0 million, or 19.0% of sales. Equity earnings from affiliates of $16.8 million improved $3.0 million reflecting primarily an improvement in the WAVE grid joint venture and the equity method accounting of AISI for the post sale period in 1999. Goodwill amortization was $25.5 million for 1999 compared to $10.7 million in 1998 due to a full year of amortization related to the Triangle Pacific and DLW acquisitions. Interest expense of $105.2 million in 1999 was higher than interest expense of $62.2 million in 1998 due to higher levels of short- and long-term debt due to a full year of acquisition related debt. Other income includes a gain of $6.0 million on the divestiture of 65% of AISI and a loss of $5.0 million on the divestiture of Textile Products. Other income also reflects proceeds from the settlement of various legal actions totaling $3 million and a gain of $2.6 million resulting from the receipt of cash and stock in connection with the demutualization of an insurance company with whom Armstrong has company-owned life insurance policies and other items. Armstrong's 1999 effective tax rate, excluding the effects of the asbestos charge, was 36.3% which was affected by nondeductible goodwill amortization. Armstrong's 1998 tax benefit was generated by the charge for the increase in asbestos liability, cost reduction and reorganization charges, and a tax benefit associated with the gain on the sale of the Dal-Tile shares, partially offset by the nondeductibility of goodwill. -24- INDUSTRY SEGMENT RESULTS FLOOR COVERINGS Worldwide floor coverings sales in 1999 of $1,593.0 million included sales of $513.1 million from DLW. Excluding DLW, sales were $1,079.9 million, or 4.0% below last year. Sales in the Americas were essentially flat versus 1998 as increased sales of commercial tile, installation products, and laminate were almost offset by declines of residential tile and residential and commercial sheet. The residential sheet decline was primarily due to lower sales in the manufactured homes channel and Canada. Sales in the traditional retail channel increased on higher unit volumes and improved product mix resulting from the success of new product introductions. Both residential and commercial channels experienced competitive pricing pressures during the year. European sales were 24.3% below prior year reflecting weak economic conditions and residential pricing pressure resulting from excess capacity and the lack of business in Russia. Pacific area sales were 2.0% ahead of last year. [GRAPH] [GRAPH] Operating income of $217.4 million in 1999 compared to $176.5 million in 1998, excluding reorganization charges and reversals. Higher operating margins were primarily due to implementation of actions related to the 1998 cost reduction activities, lower raw material and other costs, an improved mix of residential sheet products. Additionally, operating results include $4.8 million for insurance settlements for past product claims, net of inventory write-offs mostly offset by $3.3 million of costs associated with changes in the production location for some product lines. The impact of changes in employee compensation policies resulted in a net benefit of $3.0 million. Outlook Sales in 2000 are expected to increase modestly due to a better mix and new products in the Americas in sheet flooring and laminates. European sales are anticipated to be slightly higher than 1999 due to some economic recovery. Operating income should remain stable as significant raw material price increases will offset most of the sales increases. BUILDING PRODUCTS Building products sales of $752.1 million compared to $756.8 million in 1998 as strong performance from the U.S. commercial business was offset by lower European sales and price pressure across most markets. Operating income of $119.7 million compared to $116.6 million in 1998, excluding reorganization charges and reversals. The operating income increase reflected the impact of 1998 cost reduction activities and lower raw material and other costs. Results from Armstrong's WAVE grid joint venture with Worthington Industries continue to be strong, showing a 13% improvement over 1998. Outlook Sales in 2000 are expected to increase modestly in the Americas and Europe primarily due to anticipated volume and price increases. Operating income should increase in 2000 as higher volume offsets increasing manufacturing and SG&A costs. WOOD PRODUCTS Wood products sales of $822.6 million compared to $346.0 million in 1998. The increase is primarily due to a full year's sales in 1999 compared with about 5 months of sales in 1998 following the acquisition of Triangle Pacific. Operating income of $85.0 million compared to $38.6 million from the date of acquisition in 1998. On a comparable basis, sales and operating income for Triangle Pacific in 1999 were approximately 14.5% and 16.1% above the respective amounts reported by Triangle Pacific in 1998. Outlook Sales in 2000 are expected to increase significantly through a combination of volume and price increases. Although it is anticipated that lumber cost increases will exceed sales price increases, operating income should increase from the leveraging of sales over indirect operating costs. -25- INSULATION PRODUCTS Sales of $225.7 million decreased from $230.0 million in 1998. Sales in Europe declined 5.5% while the Americas increased 11.6%. Operating income of $45.7 million decreased from $46.3 million in 1998, excluding reorganization charges, primarily due to lower sales. Outlook Modest sales volume growth is expected despite continuing price pressure. Operating income should remain close to the 1999 amount as the overall margins will be negatively impacted by lower prices and inflationary cost increases. Armstrong continues to pursue divestiture strategies for this business. ALL OTHER Sales reported in this segment comprise gasket materials and textile mill supplies. As discussed previously, Armstrong sold the textiles business and 65% of the gaskets business during 1999. Sales of $50.4 million decreased 47% compared to 1998. Operating income of $6.0 million compared with $9.1 million in 1998, excluding reorganization charges. GEOGRAPHIC AREAS Net sales in the Americas in 1999 were $2.39 billion, compared to $1.92 billion recorded in 1998. The increase in sales to customers in the United States and Canada was primarily due to a full year of Triangle Pacific sales. Net sales in Europe in 1999 were $905.8 million, compared to $699.3 million in 1998. Additional sales from DLW were somewhat offset by lower sales to Eastern Europe. Sales to the Pacific area and other foreign countries of $143.1 million were higher than sales of $124.9 million in 1998. Long-lived assets in the Americas in 1999 were $1.00 billion compared to $1.01 billion in 1998. Long-lived assets in Europe in 1999 were $401.3 million compared to $451.7 million in 1998. The decrease primarily relates to currency exchange rate effects on German assets. Long-lived assets in the Pacific area in 1999 were $41.3 million compared to $41.2 million in 1998. MARKET RISK Armstrong is exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices that could impact its results of operations and financial condition. Armstrong uses financial instruments, including fixed and variable rate debt, as well as swap, forward and option contracts to finance its operations and to hedge interest rate, currency and commodity exposures. Swap, forward and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures. Armstrong uses derivative financial instruments as risk management tools and not for speculative trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage Armstrong's exposure to nonperformance on such instruments. -26- INTEREST RATE SENSITIVITY The table below provides information about Armstrong's long-term debt obligations as of December 31, 1999, and December 31, 1998. The table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is Armstrong's reporting currency.
- --------------------------------------------------------------------------------------- Expected maturity date After ($ millions) 1999 2000 2001 2002 2003 2004 2004 Total - --------------------------------------------------------------------------------------- As of December 31, 1999 - --------------------------------------------------------------------------------------- Long-term debt: Fixed rate -- $31.1 $8.7 $0.8 $202.1 $1.3 $729.5 $973.5 Avg. interest rate -- 7.73% 8.66% 7.23% 6.36% 3.51% 7.48% 7.26% - --------------------------------------------------------------------------------------- Variable rate -- $5.0 $2.0 -- $450.0 -- $18.5 $475.5 Avg. interest rate -- 7.65% 7.65% -- 6.20% -- 4.89% 6.17% - --------------------------------------------------------------------------------------- Expected maturity date After ($ millions) 1999 2000 2001 2002 2003 2003 Total - --------------------------------------------------------------------------------------- As of December 31, 1998 - --------------------------------------------------------------------------------------- Long-term debt: Fixed rate $28.9 $46.2 $ 29.7 $5.5 $206.5 $507.9 $824.7 Avg. interest rate 5.19% 6.38% 5.46% 6.42% 6.36% 7.50% 6.99% - --------------------------------------------------------------------------------------- Variable rate $ 4.0 $ 5.0 $302.0 -- $450.0 $ 10.0 $771.0 Avg. interest rate 7.0% 7.0% 5.71% -- 5.90% 4.00% 5.81% - ---------------------------------------------------------------------------------------
Armstrong manages its ratio of fixed to floating rate debt with the objective of achieving a mix that management believes is appropriate. To manage this mix in a cost effective manner, Armstrong, from time to time, enters into interest rate swap agreements, in which it agrees to exchange various combinations of fixed and/or variable interest rates based on agreed-upon notional amounts. In order to maintain the ratio of fixed to floating rate debt which management believes is appropriate, Armstrong entered into $150 million of interest rate swaps during 1999. Armstrong receives fixed rates and pays floating rates on these swaps. Details of outstanding swaps as of December 31, 1999 are as follows: - -------------------------------------------------------------------------------- Maturity Date Notional Pays Receives Market ($ millions) Amount Value - -------------------------------------------------------------------------------- Aug. 15, 2005 $100.0 3 mo. LIBOR 6.26% ($3.5) Aug. 15, 2003 50.0 3 mo. LIBOR 6.54% ($0.6) - -------------------------------------------------------------------------------- Total $150.0 3 mo. LIBOR 6.35% ($4.1) - -------------------------------------------------------------------------------- EXCHANGE RATE SENSITIVITY Armstrong manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. To a large extent, Armstrong's global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency revenues are offset by foreign currency expenses. At December 31, 1999, Armstrong's major foreign currency exposures are to the Canadian dollar, the Euro and the British pound. Armstrong uses foreign currency forward exchange contracts and purchased options to reduce its exposure to the risk that the eventual net cash inflows and outflows, resulting from the sale of product to foreign customers and purchases from foreign suppliers, will be adversely affected by changes in exchange rates. These derivative instruments are used for firmly committed or forecasted transactions. These transactions allow Armstrong to further reduce its overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the transactions being hedged. Armstrong also uses foreign currency forward exchange contracts to hedge exposures created by cross-currency inter-company loans. The table below details Armstrong's outstanding currency instruments, all of which mature before December 2000. - -------------------------------------------------------------------------------- Notional Amount (millions) December 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- Forward Contracts $ 309.8 $ 507.5 Purchased Options 8.3 -- - -------------------------------------------------------------------------------- Fair Value (millions) - -------------------------------------------------------------------------------- Forward Contracts $8.9 $6.4 Purchased Options 0.2 -- - -------------------------------------------------------------------------------- -27- COMMODITY PRICE SENSITIVITY Armstrong purchases natural gas for use in the manufacture of ceiling tiles and, as a result, is exposed to movements in the price of natural gas. Armstrong has a policy of minimizing cost volatility by purchasing natural gas swap contracts. The table below provides information about Armstrong's natural gas swap contracts that are sensitive to changes in commodity prices. Notional amounts are in millions of Btu's (MMBtu) and weighted average contract prices. All contracts mature in or before December 2000. - -------------------------------------------------------------------------------- On Balance Sheet Commodity Related Derivatives 1999 2000 Total - -------------------------------------------------------------------------------- As of December 31, 1999 - -------------------------------------------------------------------------------- Swap contracts (long): Contract amounts (MMBtu) -- 950,000 950,000 Weighted average price ($/MMBtu) -- $2.43 $2.43 - -------------------------------------------------------------------------------- As of December 31, 1998 - -------------------------------------------------------------------------------- Swap contracts (long): Contract amounts (MMBtu) 2,350,000 250,000 2,600,000 Weighted average price ($/MMBtu) $2.15 $2.41 $2.17 - -------------------------------------------------------------------------------- YEAR 2000 ACTIVITIES As described in the Form 10-Q for the quarter ended September 30, 1999, Armstrong had developed plans to address potential exposures of its computer systems related to the year 2000. Since entering the year 2000, Armstrong has not experienced any significant disruptions to its business nor is it aware of any significant year 2000-related disruptions impacting its customers and suppliers. Furthermore, Armstrong did not experience any material impact on inventories at calendar year end. Armstrong will continue to monitor its systems and operations until it is reasonably assured that no significant business interruptions will occur as a result of any year 2000 issues. Total costs of the year 2000 project were $19.8 million with no significant additional expense expected in 2000. -28- NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement established accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In May 1999, the FASB delayed the effective date of this statement to fiscal quarters of fiscal years beginning after June 15, 2000. Armstrong is currently analyzing the impact of this statement but the adoption of this statement is not expected to materially impact Armstrong's consolidated results, financial condition or long-term liquidity. Beginning in the first quarter of 1999, Armstrong adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." The adoption of this statement did not materially impact Armstrong's consolidated results, financial condition or long-term liquidity. 1998 COMPARED WITH 1997 ACQUISITIONS On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp. ("Triangle Pacific"). Triangle Pacific is a leading U.S. manufacturer of hardwood flooring and other flooring and related products and a substantial manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under the purchase method of accounting, included the purchase of outstanding shares of common stock of Triangle Pacific at $55.50 per share which, plus acquisition costs, resulted in a total purchase price of $911.5 million. The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on fair market value at the date of acquisition. The balance of $831.1 million was recorded as goodwill and is being amortized over forty years on a straight-line basis. During 1999, purchase price adjustments increased goodwill by $5.3 million. Effective August 31, 1998, Armstrong acquired approximately 93% of the total share capital of DLW Aktiengesellschaft ("DLW"), a leading flooring manufacturer in Germany. The acquisition, recorded under the purchase method of accounting, included the purchase of 93% of the total share capital of DLW which, plus acquisition costs, resulted in a total purchase price of $289.9 million. During 1999, Armstrong increased its ownership percentage of DLW to approximately 96%. A portion of the purchase price has been allocated to assets acquired and liabilities assumed based on fair market value at the date of acquisition, while the balance of $117.2 million was recorded as goodwill and is being amortized over forty years on a straight-line basis. During 1999, purchase price adjustments increased goodwill by $5.2 million. In this purchase price allocation, $49.6 million was allocated to the estimable net realizable value of DLW's furniture business and of a carpet manufacturing business in the Netherlands which Armstrong identified as businesses held for sale. Earnings in these businesses, which have been excluded from Armstrong's operating results, were $0.4 million in 1998. Interest costs of $1.1 million were allocated to these businesses in 1998. The operating results of these acquired businesses have been included in the Consolidated Statements of Earnings from the dates of acquisition. Triangle Pacific results are included in Armstrong's wood products segment and DLW results are included in Armstrong's floor coverings segment. -29- FINANCIAL CONDITION As shown on the Consolidated Statements of Cash Flows on page 37, net cash provided by operating activities for the year ended December 31, 1998, was $240.8 million compared with $240.4 million in 1997. Net cash used for investing activities was $1,198.3 million for the year ended December 31, 1998, compared with $146.6 million in 1997. The increase was primarily due to expenditures for acquisitions and was partially offset by the sale of Armstrong's investment in Dal-Tile. Net cash provided by financing activities was $937.3 million for the year ended December 31, 1998, primarily due to the commercial paper issuance and the three public debt offerings mentioned above. In the prior year, net cash used for financing activities, including a net reduction in debt and the repurchase of common shares, was $98.6 million. Under plans approved by Armstrong's Board of Directors for the repurchase of 5.5 million shares of common stock, Armstrong had repurchased approximately 4,017,000 shares through June 30, 1998. In June 1998, Armstrong halted open market purchases of its common shares upon the announcement of its intent to purchase Triangle Pacific and DLW. -30- CONSOLIDATED RESULTS Net sales in 1998 of $2.75 billion were 24.9% higher when compared with net sales of $2.20 billion in 1997. Triangle Pacific contributed $346.0 million of sales and DLW $193.0 million of sales to Armstrong's business sales figure before acquisitions of $2.21 billion. Sales were affected unfavorably by economic developments in emerging markets. For Armstrong's business before acquisitions, sales increased less than 1% in each of floor coverings, building products and insulation products. Pacific area sales were 13.5% below 1997, although insulation products increased both domestic sales and exports from its Panyu, China, plant. In Europe, despite a cessation of sales to Russia in August by all business units, floor coverings increased sales to other customers including those in Eastern Europe. In total, emerging market turmoil reduced 1998 sales by an estimated $14.7 million versus last year, with over three-quarters of this total from lower Russian sales. Armstrong reported a net loss of $9.3 million, or $0.23 per share, including losses of $1.2 million related to Triangle Pacific and $2.8 million related to DLW as well as after-tax charges of $178.2 million for an increase in the estimated liability for asbestos-related claims and $48.5 million for cost savings and reorganization. These results compare to net earnings of $185.0 million, or $4.50 per diluted share, in 1997. Cost of goods sold in 1998 was 67.0% of sales, higher than cost of goods sold of 66.5% in 1997. The change reflected required purchase price accounting adjustments related to Triangle Pacific and DLW. Armstrong's pre-acquisition business had a cost of goods sold of 65.9% in 1998 due to manufacturing efficiencies and lower raw material costs. The cost of goods sold also benefited from several efficiency and policy savings related to the implementation of the SAP Corporate Enterprise System, including a change in vacation policy resulting in a $5.2 million benefit in the fourth quarter. Selling, general and administrative (SG&A) expenses in 1998 were $522.0 million, or 19% of sales, primarily reflecting higher advertising costs. In 1997, SG&A expenses were $383.5 million, or 17.4% of sales. In the fourth-quarter 1998, a noncash pretax charge of $274.2 million, or $178.2 million after tax, was recorded for an increase in the estimated liability for asbestos-related claims. This change primarily arose from a greater-than-anticipated increase in personal injury filings since the Amchem class settlement was invalidated in 1997, Armstrong's assessment of future claims and recent settlements with plaintiffs' counsels. Armstrong also recognized cost reduction and reorganization charges of $65.6 million, or $42.6 million after tax. This charge encompassed severance and enhanced retirement benefits related to the termination of more than 650 positions, approximately 75% of which were salaried positions. In addition, Armstrong recorded an estimated loss of $9.0 million related to redundant flooring products machinery and equipment held for disposal. Reorganization actions include corporate and business unit staff reductions reflecting reorganization of engineering, research and development and product styling and design; realignment of support activities in connection with implementation of a new corporate logistics and financial software system; changes to production processes in Armstrong's Lancaster flooring plant; and elimination of redundant positions in formation of a new combined business organization for Floor Products, Corporate Retail Accounts and Installation Products. Approximately $28.6 million of the pretax amount is for cash expenditures for severance which will occur over the next 12 months. The remainder is a noncash charge for enhanced retirement benefits. Management believes that anticipated savings from the reorganization should permit recovery of these charges in approximately two years. Severance payments of $10.4 million in 1998 were made for the elimination of 209 positions related to 1996 and 1998 restructuring and reorganization actions. Interest expense of $62.2 million in 1998 was higher than interest expense of $28.0 million in 1997 due to higher levels of short- and long-term debt used to finance acquisitions. Armstrong's 1998 tax benefit was generated by the charge for the increase in asbestos liability, cost reduction and reorganization charges, and a tax benefit associated with the gain on the sale of the Dal-Tile shares, partially offset by the nondeductibility of goodwill in Armstrong's reported earnings. INDUSTRY SEGMENT RESULTS FLOOR COVERINGS Worldwide floor coverings sales in 1998 of $1,317.6 million included sales of $193.0 million from DLW. Excluding DLW, flooring sales grew over 2% in the Americas due to strong laminate sales that more than offset a decline to residential vinyl markets. Sales through the home center channel continued to capture significant volume with sales increases of 16.6% over 1997. In Europe and the Pacific area, sales were down 8%. Sales for installation products rose 3.8% over 1997. Operating income of $176.5 million in 1998, which excluded cost reduction and reorganization charges of $53.5 million and included a loss related to DLW of $0.7 million, compared to $186.5 million in 1997. Lower operating margins were due to pricing pressure in North America, an unfavorable product mix, and higher advertising expenses only partially offset by lower raw material and other costs. The cost reduction and reorganization charges of $53.5 million relate to reductions of hourly and salaried staff in the U.S. and foreign operations and changes to production processes in Armstrong's Lancaster flooring plant. -31- BUILDING PRODUCTS Building products sales of $756.8 million were slightly higher than the $754.5 million in 1997, as strong sales in the U.S. commercial segments and a favorable mix were offset by weakness in emerging markets, principally Russia and the Pacific area, down 29.4% compared to 1997. Operating income of $116.6 million, which excluded cost reduction and reorganization charges of $10.1 million, compared to $122.3 million in 1997. The operating income decline reflected weaker performance by the business's metal and soft fiber joint ventures in Europe and lower volumes to emerging markets, partially offset by lower raw material and other costs. Results from Armstrong's WAVE grid joint venture with Worthington Industries continue to be strong, showing an 11% improvement over 1997. The cost reduction and reorganization charges of $10.1 million relate to reductions of hourly and salaried staff in the U.S. and foreign operations. WOOD PRODUCTS This segment contributed $346.0 million to sales for the period from July 22, 1998, from which time Triangle Pacific's results were consolidated in Armstrong's financial statements. Sales for Triangle Pacific in 1998, although approximately 11% ahead of sales reported by Triangle Pacific in the comparable period in 1997, reflected competitive pricing pressures created by falling lumber prices and imported products. Operating income from the date of consolidation of $38.6 million included the amortization of acquisition goodwill and the costs of nonrecurring purchase price adjustments related to inventory. On a comparable basis, operating income for Triangle Pacific in 1998 was approximately 35% above operating income reported by Triangle Pacific in 1997. INSULATION PRODUCTS Sales of $230.0 million increased from $228.4 million in 1997. Sales in Europe and the U.S. were level. Despite difficulties in the Pacific area, sales increased from last year due to strong performance from the business's Panyu, China, plant. Operating income of $46.3 million increased from $45.4 million in 1997, excluding cost reduction and reorganization charges of $0.2 million, primarily due to cost cutting and SG&A expense reductions. ALL OTHER Sales reported in this segment comprise gasket materials and textile mill supplies. Sales of $95.8 million decreased 4% compared to 1997. The major influence on gasket products sales was the General Motors strike. Textile sales declined due to slow sales to European textile machinery manufacturers. Operating income reported in this segment comprises operating income from gasket and textile products and ceramic tile. Operating income of $9.1 million excluding cost reduction and reorganization charges of $1.9 million compared with a loss of $2.6 million in 1997 reflecting the absence of losses from Dal-Tile. GEOGRAPHIC AREAS Net sales in the Americas in 1998 were $1.92 billion, compared to $1.52 billion recorded in 1997. The increase in sales to customers in the United States and Canada was primarily due to the addition of Triangle Pacific sales. For Armstrong's pre-acquisition business, sales growth continued to be strong in the U.S. home center channel. Net sales in Europe in 1998 were $699.3 million, compared to $548.5 million in 1997. Additional sales from DLW were somewhat offset by lower sales to Eastern Europe, most notably Russia. Sales to Scandinavian countries have continued to grow, reflecting increased sales from the Swedish flooring and ceiling joint ventures. Sales to the Pacific area and other foreign countries of $124.9 million were slightly below sales of $132.1 million in 1997. Long-lived assets in the Americas in 1998 were $1.01 billion compared to $0.77 billion in 1997. This increase reflects additional assets from the acquisition of Triangle Pacific. Long-lived assets in Europe in 1998 were $451.7 million compared to $163.1 million in 1997. This increase reflects additional assets from the acquisition of DLW. Long-lived assets in the Pacific area in 1998 were $41.2 million compared to $42.2 million in 1997. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------- (See pages 26 to 28 under Item 7 above.) -32- Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- ARMSTRONG WORLD INDUSTRIES, INC. AND SUBSIDIARIES Index to Financial Statements and Schedule The following consolidated financial statements are filed as part of this Annual Report on Form 10-K: Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Earnings for the Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements Financial Statement Schedule Schedule II - Valuation and Qualifying Reserves The following additional financial data should be read in conjunction with the financial statements. Schedules not included with this additional data have been omitted because they are not applicable or the required information is presented in the financial statements or the financial review. -33- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------- (millions except for per-share data) First Second Third Fourth Total year - ---------------------------------------------------------------------------------------------------------------------------------- 1999 Net sales $ 829.1 $ 883.0 $ 903.8 $ 827.9 $3,443.8 Gross profit 275.3 307.3 315.4 255.5 1,153.5 Net earnings (loss) 48.3 72.8 71.7 (178.5) 14.3 Per share of common stock: Basic: Net earnings (loss) 1.21 1.83 1.80 (4.46) 0.36 Diluted: Net earnings (loss) 1.20 1.81 1.78 (4.46) 0.36 Dividends per share of common stock 0.48 0.48 0.48 0.48 1.92 Price range of common stock--high 64 5/16 59 11/16 60 7/8 45 1/8 64 5/16 Price range of common stock--low 44 5/8 45 44 1/8 29 29 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 Net sales $ 543.1 $ 555.6 $ 821.6 $ 825.9 $2,746.2 Gross profit 180.4 193.8 271.9 261.5 907.6 Net earnings (loss) 46.5 56.1 61.5 (173.4) (9.3) Per share of common stock: Basic: Net earnings (loss) 1.17 1.41 1.55 (4.36) (0.23) Diluted: Net earnings (loss) 1.15 1.38 1.53 (4.36) (0.23) Dividends per share of common stock 0.44 0.48 0.48 0.48 1.88 Price range of common stock--high 87 7/8 90 68 3/8 70 1/4 90 Price range of common stock--low 69 7/8 67 3/8 46 15/16 50 1/2 46 15/16 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
Note: The sum of the quarterly earnings per-share data does not equal the total year amounts due to changes in the average shares outstanding and, for diluted data, the exclusion of the antidilutive effect in certain quarters. The increase in sales and net earnings from the second to the third quarter in 1998 reflects the Triangle Pacific and DLW acquisitions. FOURTH QUARTER 1999 COMPARED WITH FOURTH QUARTER 1998 Net sales of $827.9 million increased from sales of $825.9 million in the fourth quarter of 1998. Excluding the divestitures of the gaskets and textiles businesses, sales increased 3.5%. Wood products sales increased 15.7%. Floor coverings sales increased 1.8% as strong growth in sales to the Americas was offset by slower sales to emerging markets and competitive price pressures in Western Europe. Building products sales decreased 2.3% due to weaker unit volume in all major channels and lower pricing due to competitive pressures. An operating loss of $251.6 million compared to an operating loss of $254.0 million in the fourth quarter of 1998. Noncash pretax net charges of $335.4 million and $274.2 million were recorded in the fourth quarter of 1999 and 1998, respectively, for increases in the estimated liability net of the corresponding insurance asset for asbestos-related claims. An additional 1998 pretax charge of $74.6 million related primarily to reorganization of corporate and business unit staff positions. In 1999, $1.4 million of the 1998 pretax charge was reversed, related to severance accruals that were no longer necessary. For the fourth quarter, the cost of goods sold was 69.1% of sales compared to 68.3% in 1998. Excluding the acquisitions, Armstrong's cost of goods sold was 65.0% of sales, or 2.8 percentage points better than 1998, driven primarily by significant cost reductions in floor coverings and building products primarily arising from 1998's cost reduction activities. Other income includes a $1.5 million reduction of the gain on the second quarter sale of the gaskets business and a $0.7 million reduction of the loss on the third quarter sale of Textile Products. Other income also reflects proceeds from the settlement of various legal actions totaling $3 million, net of other items. Armstrong's effective tax rate in the fourth quarter of 1999 was (35.3)% compared to an effective tax rate of (36.6)% in the fourth quarter of 1998. A net loss of $178.5 million or $4.46 per diluted share compared to a net loss of $173.4 million or $4.36 per diluted share in fourth quarter 1998. -34- CONSOLIDATED STATEMENTS OF EARNINGS
Millions except for per-share data Years ended December 31 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Net sales $3,443.8 $2,746.2 $2,198.7 Cost of goods sold 2,290.3 1,838.6 1,461.7 - --------------------------------------------------------------------------------------------------- Gross profit 1,153.5 907.6 737.0 Selling, general and administrative expenses 683.0 522.0 383.5 Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7 Reorganization charges (reversals) (1.4) 74.6 -- Charge for asbestos liability, net 335.4 274.2 -- Goodwill amortization 25.5 10.7 1.8 - --------------------------------------------------------------------------------------------------- Operating income 127.8 39.9 322.0 Interest expense 105.2 62.2 28.0 Other income, net (6.6) (1.7) (2.2) - --------------------------------------------------------------------------------------------------- Earnings (loss) before income taxes 29.2 (20.6) 296.2 Income tax expense (benefit) 14.9 (11.3) 111.2 - --------------------------------------------------------------------------------------------------- Net earnings (loss) $ 14.3 $ (9.3) $ 185.0 =================================================================================================== Net earnings (loss) per share of common stock: Basic $ 0.36 $ (0.23) $ 4.55 =================================================================================================== Diluted $ 0.36 $ (0.23) $ 4.50 ===================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral part of these statements. -35- CONSOLIDATED BALANCE SHEETS
Millions except for numbers of shares and per-share data As of December 31 1999 1998 - --------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 35.6 $ 38.2 Accounts and notes receivable (less allowance for discounts and losses: 1999--$47.9; 1998--$49.8) 436.0 440.4 Inventories 429.7 465.1 Deferred income taxes 40.6 43.2 Net assets of businesses held for sale 2.2 55.9 Other current assets 85.8 78.3 - --------------------------------------------------------------------------------------------------------- Total current assets 1,029.9 1,121.1 - --------------------------------------------------------------------------------------------------------- Property, plant and equipment (less accumulated depreciation and amortization: 1999--$1,213.0; 1998--$1,121.9) 1,439.1 1,502.0 Insurance for asbestos-related liabilities, noncurrent 270.0 248.8 Investment in affiliates 34.2 41.8 Goodwill, net 935.1 965.4 Other intangibles, net 56.6 63.2 Other noncurrent assets 399.6 330.9 - --------------------------------------------------------------------------------------------------------- Total assets $4,164.5 $4,273.2 ========================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 70.9 $ 149.9 Current installments of long-term debt 36.1 32.9 Accounts payable and accrued expenses 670.7 544.8 Income taxes 7.3 25.7 - --------------------------------------------------------------------------------------------------------- Total current liabilities 785.0 753.3 - --------------------------------------------------------------------------------------------------------- Long-term debt, less current installments 1,412.9 1,562.8 Employee Stock Ownership Plan (ESOP) loan guarantee 155.3 178.6 Deferred income taxes 62.0 107.6 Postretirement and postemployment benefit liabilities 245.2 249.0 Pension benefit liabilities 200.2 235.5 Asbestos-related long-term liabilities, noncurrent 506.5 344.8 Other long-term liabilities 106.4 115.8 Minority interest in subsidiaries 11.8 16.1 - --------------------------------------------------------------------------------------------------------- Total noncurrent liabilities 2,700.3 2,810.2 - --------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9 Capital in excess of par value 176.4 173.0 Reduction for ESOP loan guarantee (190.3) (199.1) Retained earnings 1,196.2 1,257.0 Accumulated other comprehensive loss (16.5) (25.4) - --------------------------------------------------------------------------------------------------------- 1,217.7 1,257.4 - --------------------------------------------------------------------------------------------------------- Less common stock in treasury, at cost: 1999--11,628,705 shares; 1998--11,856,721 shares 538.5 547.7 - --------------------------------------------------------------------------------------------------------- Total shareholders' equity 679.2 709.7 - --------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $4,164.5 $4,273.2 =========================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral part of these statements. -36- CONSOLIDATED STATEMENTS OF CASH FLOWS
Millions Years ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $ 14.3 $ (9.3) $ 185.0 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 169.2 142.7 132.7 Deferred income taxes (38.3) (27.9) 24.2 Equity (earnings) loss from affiliates, net (16.8) (13.8) 29.7 Gain on sale of business, net (1.0) -- -- Gain on sale of investment in affiliates -- (12.8) -- Reorganization charges (reversals) (1.4) 74.6 -- Reorganization and restructuring payments (16.9) (11.2) (18.6) Payments for asbestos-related claims, net of recoveries (114.4) (74.4) (41.4) Charge for asbestos liability 335.4 274.2 -- Changes in operating assets and liabilities net of effects of reorganizations, restructuring, acquisitions and dispositions: (Increase) decrease in receivables (22.1) 3.5 (40.8) (Increase) decrease in inventories (9.9) 44.4 (12.8) (Increase) decrease in other current assets 29.3 (28.2) 10.5 Increase in other noncurrent assets (54.4) (112.0) (69.0) Increase (decrease) in accounts payable and accrued expenses 86.7 (19.4) 16.6 Increase (decrease) in income taxes payable (18.5) (2.7) 11.5 Increase in other long-term liabilities 12.1 26.0 23.2 Other, net (9.1) (12.9) (10.4) - ----------------------------------------------------------------------------------------------------- Net cash provided by operating activities 344.2 240.8 240.4 - ----------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of property, plant and equipment (183.6) (159.7) (141.7) Investment in computer software (11.6) (24.6) (18.8) Proceeds from sales of businesses 88.3 -- -- Proceeds from sale of land and facilities 7.9 2.7 24.3 Acquisitions, net of cash acquired (3.8) (1,175.7) (4.2) Distributions from equity affiliates 40.8 11.4 6.2 Investment in affiliates -- 147.6 (12.4) - ----------------------------------------------------------------------------------------------------- Net cash used for investing activities (62.0) (1,198.3) (146.6) - ----------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in short-term debt (69.7) 24.2 69.3 Issuance of long-term debt 200.0 1,293.9 7.2 Reduction of long-term debt (332.4) (278.6) (17.0) Cash dividends paid (76.9) (75.3) (70.0) Purchase of common stock for the treasury, net (1.3) (31.8) (89.2) Proceeds from exercised stock options 1.2 7.9 7.9 Other, net (2.8) (3.0) (6.8) - ----------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (281.9) 937.3 (98.6) - ----------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (2.9) 0.5 (2.7) - ----------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents $ (2.6) $ (19.7) $ (7.5) ===================================================================================================== Cash and cash equivalents at beginning of year $ 38.2 $ 57.9 $ 65.4 ===================================================================================================== Cash and cash equivalents at end of year $ 35.6 $ 38.2 $ 57.9 =====================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral part of these statements. -37- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Millions except for per-share data Years ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK, $1 PAR VALUE: Balance at beginning and end of year $ 51.9 $ 51.9 $ 51.9 ================================================================================================================================== CAPITAL IN EXCESS OF PAR VALUE: Balance at beginning of year $ 173.0 $ 169.5 $ 169.5 Stock issuances and other 3.4 3.5 -- - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 176.4 $ 173.0 $ 169.5 ================================================================================================================================== REDUCTION FOR ESOP LOAN GUARANTEE: Balance at beginning of year $ (199.1) $ (207.7) $ (217.4) Principal paid 23.3 23.2 19.6 Loans to ESOP (12.8) (10.1) (5.5) Interest on loans to ESOP (1.3) (0.8) (0.3) Accrued compensation (0.4) (3.7) (4.1) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ (190.3) $ (199.1) $ (207.7) ================================================================================================================================== RETAINED EARNINGS: Balance at beginning of year $1,257.0 $1,339.6 $1,222.6 Net earnings (loss) for year 14.3 $14.3 (9.3) $ (9.3) 185.0 $185.0 Tax benefit on dividends paid on unallocated ESOP common shares 1.8 2.0 2.0 - ---------------------------------------------------------------------------------------------------------------------------------- Less: Common stock dividends (per share): $1.92 in 1999; $1.88 in 1998; $1.72 in 1997 76.9 75.3 70.0 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $1,196.2 $1,257.0 $1,339.6 ================================================================================================================================== ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance at beginning of year $ (25.4) $ (16.2) $ 9.9 Foreign currency translation adjustments and hedging activities (3.4) (7.0) (19.1) Minimum pension liability adjustments 12.3 (2.2) (7.0) - ---------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) 8.9 $ 8.9 (9.2) $ (9.2) (26.1) $(26.1) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ (16.5) $ (25.4) $ (16.2) ================================================================================================================================== COMPREHENSIVE INCOME (LOSS) $23.2 $(18.5) $158.9 - ---------------------------------------------------------------------------------------------------------------------------------- LESS TREASURY STOCK AT COST: Balance at beginning of year $ 547.7 $ 526.5 $ 446.5 Stock purchases 1.3 31.8 89.2 Stock issuance activity, net (10.5) (10.6) (9.2) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at end of year $ 538.5 $ 547.7 $ 526.5 - ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity $ 679.2 $ 709.7 $ 810.6 ==================================================================================================================================
The Notes to Consolidated Financial Statements, pages 39-54, are an integral part of these statements. -38- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates. These financial statements are prepared in accordance with - ---------------- generally accepted accounting principles and include management estimates and judgments, where appropriate. Actual results may differ from these estimates. Consolidation Policy. The consolidated financial statements and accompanying - -------------------- data in this report include the accounts of the parent Armstrong World Industries, Inc., and its domestic and foreign subsidiaries. All significant intercompany transactions have been eliminated from the consolidated financial statements. Certain prior year amounts have been reclassified to conform with the current year presentation. Revenue Recognition. Armstrong records revenue from the sale of products and the - ------------------- related accounts receivable as title transfers, generally on the date of shipment. Provision is made for estimated applicable discounts and losses. Earnings per Common Share. Basic earnings per share are computed by dividing the - ------------------------- earnings by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share reflect the potential dilution of securities that could share in earnings. Advertising Costs. Armstrong recognizes advertising expenses as they are - ----------------- incurred. Pension and Postretirement Benefits. Armstrong has plans that provide for - ----------------------------------- pension, medical and life insurance benefits to certain eligible employees when they retire from active service. Generally, Armstrong's practice is to fund the actuarially determined current service costs and the amounts necessary to amortize prior service obligations over periods ranging up to 30 years, but not in excess of the funding limitations. Taxes. Deferred tax assets and liabilities are recognized using enacted tax - ----- rates for expected future tax consequences of events recognized in the financial statements or tax returns. The tax benefit for dividends paid on unallocated shares of stock held by an ESOP is recognized in shareholders' equity. Cash and Cash Equivalents. Short-term investments that have maturities of three - ------------------------- months or less when purchased are considered to be cash equivalents. Inventories. Inventories are valued at the lower of cost or market. - ----------- Approximately 43% of inventories at December 31, 1999 are valued using the last in, first out (LIFO) method. Other inventories are determined on a first in, first out (FIFO) method. Long-Lived Assets. Property, plant and equipment values are stated at - ----------------- acquisition cost less accumulated depreciation and amortization. Depreciation charges for financial reporting purposes are determined on the straight-line basis at rates calculated to provide for the retirement of assets at the end of their useful lives as follows: buildings, 20 to 40 years; machinery and equipment, 3 to 15 years. Impairment losses are recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. When assets are disposed of or retired, their costs and related depreciation are removed from the books, and any resulting gains or losses normally are reflected in "Selling, general and administrative expenses." Costs of the construction of certain long-term assets include capitalized interest which is amortized over the estimated useful life of the related asset. Capitalized interest was $4.3 million in 1999, $5.8 million in 1998 and $1.8 million in 1997. Goodwill and Other Intangibles. Goodwill and other intangibles are amortized on - ------------------------------ a straight-line basis. Goodwill is amortized over periods up to 40 years while other intangibles are amortized over periods up to 7 years. On a periodic basis, Armstrong estimates the future undiscounted cash flows of the businesses to which goodwill relates in order to ensure that the carrying value of goodwill and other intangibles has not been impaired. Financial Instruments and Derivatives. Armstrong uses derivatives and other - ------------------------------------- financial instruments to diversify or offset the effect of currency, interest rate and commodity price variability. Armstrong may enter into foreign currency forward contracts to offset the effect of exchange rate changes on cash flow exposures denominated in foreign currencies. Such exposures include firm commitments with third parties and intercompany financial transactions. Realized gains and losses on contracts are recognized in the Consolidated Statements of Earnings. Unrealized gains and losses on foreign currency options that are designated as effective hedges as well as option premium expense are deferred and included in the statements of earnings as part of the underlying transactions. Unrealized gains and losses on foreign currency contracts used to hedge intercompany transactions having the character of long-term investments are included in other comprehensive income. Armstrong may enter into interest rate swap agreements to alter the interest rate risk profile of outstanding debt, thus altering Armstrong's exposure to changes in interest rates. In these swaps, Armstrong agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to a notional principal amount. Any differences paid or received on interest rate swap agreements, when terminated, are recognized as adjustments to interest expense over the life of associated debt. Armstrong continuously monitors developments in the capital markets and only enters into currency and swap transactions with established counterparties having investment-grade ratings. Exposure to individual counterparties is controlled, and thus Armstrong considers the risk of counterparty default to be negligible. -39- NOTE 2. NATURE OF OPERATIONS INDUSTRY SEGMENTS
- ------------------------------------------------------------------------------------------------------------------ For year ended 1999 - ------------------------------------------------------------------------------------------------------------------ Floor Building Wood Insulation All (millions) coverings products products products other Totals - ------------------------------------------------------------------------------------------------------------------ Net sales to external customers $1,593.0 $752.1 $ 822.6 $225.7 $50.4 $3,443.8 Intersegment sales 2.7 -- -- -- 20.7 23.4 Equity (earnings) loss from affiliates 0.1 (16.1) -- -- (0.8) (16.8) Segment operating income 217.4 119.7 85.0 45.7 6.0 473.8 Reorganization and restructuring reversals (1.1) (0.3) -- -- -- (1.4) Segment assets 1,477.6 535.1 1,308.0 155.8 16.0 3,492.5 Depreciation and amortization 74.7 34.1 36.1 10.8 2.8 158.5 Equity investment 3.3 14.9 -- -- 16.0 34.2 Capital additions 79.9 45.5 41.5 9.1 2.7 178.7 - ------------------------------------------------------------------------------------------------------------------ For year ended 1998 - ------------------------------------------------------------------------------------------------------------------ Floor Building Wood Insulation All (millions) coverings products products products other Totals - ------------------------------------------------------------------------------------------------------------------ Net sales to external customers $1,317.6 $756.8 $ 346.0 $230.0 $95.8 $2,746.2 Intersegment sales -- -- -- -- 39.5 39.5 Equity (earnings) loss from affiliates 0.2 (14.2) -- -- 0.2 (13.8) Segment operating income 176.5 116.6 38.6 46.3 9.1 387.1 Reorganization charges 53.5 10.1 -- 0.2 1.9 65.7 Segment assets 1,359.5 550.1 1,279.0 172.0 67.6 3,428.2 Depreciation and amortization 63.6 39.2 15.3 12.1 7.2 137.4 Equity investment 2.2 39.6 -- -- -- 41.8 Capital additions 93.6 42.5 12.4 11.3 5.9 165.7 - ------------------------------------------------------------------------------------------------------------------ For year ended 1997 - ------------------------------------------------------------------------------------------------------------------ Floor Building Wood Insulation All (millions) coverings products products products other Totals - ------------------------------------------------------------------------------------------------------------------ Net sales to external customers $1,116.0 $754.5 $ -- $228.4 $99.8 $2,198.7 Intersegment sales -- -- -- -- 35.8 35.8 Equity (earnings) loss from affiliates 0.2 (12.9) -- -- 42.4 29.7 Segment operating income (loss) 186.5 122.3 -- 45.4 (2.6) 351.6 Segment assets 713.8 554.9 -- 165.1 219.2 1,653.0 Depreciation and amortization 65.5 37.5 -- 12.0 9.6 124.6 Equity investment 2.5 36.7 -- -- 135.7 174.9 Capital additions 76.6 54.4 -- 13.4 3.1 147.5 - ------------------------------------------------------------------------------------------------------------------
Segment information has been prepared in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Segments were determined based on products and services provided by each segment. Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance of the segments is evaluated on operating income before income taxes, excluding reorganization and restructuring charges, unusual gains and losses, and interest expense. Armstrong accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market prices. The floor coverings segment includes resilient flooring, adhesives, installation and maintenance materials and accessories sold to commercial and residential customers through wholesalers, retailers and contractors. To reduce interchannel conflict, distinctive resilient flooring products have been introduced to allow exclusive product offerings by our customers. Raw materials, especially plasticizers and resins, are a significant cost of resilient flooring products. Armstrong has no influence on the worldwide market prices of these materials and thus is subject to cost changes. The building products segment includes commercial and residential ceiling systems. Grid products, manufactured through Armstrong's WAVE joint venture with Worthington Industries, have become an important part of this business worldwide. Earnings from this joint venture are included in this segment's operating income and in "Equity Earnings from Affiliates" (see "Equity Investments" note on page 43). The major sales activity in this segment is commercial ceiling systems sold to resale distributors and contractors worldwide, with European sales having a significant impact. Ceiling systems for the residential home segment are sold through wholesalers and retailers, mainly in the United States. Through a joint venture with a Chinese partner, a plant in Shanghai manufactures ceilings for the Pacific area. The wood products segment is composed of Triangle Pacific Corp., a wholly owned subsidiary, a leading manufacturer of consumer wood products including hardwood flooring and cabinets. Products in this segment are used primarily in residential new construction and remodeling and commercial applications such as retail stores and restaurants. Approximately 35% of sales are from new construction which is more cyclical than remodeling activity. Triangle Pacific manufactures hardwood flooring under the brand names of Bruce, Hartco and Robbins while cabinets are manufactured under the brand names of Bruce and IXL. The insulation products segment includes flexible pipe insulation used in construction and in original equipment manufacturing. Sales are primarily in Europe, with Germany having the largest concentration due to its regulatory requirements. Strong competition exists in insulation since there are minimal barriers to entry into this market. During most of 1999, "all other" included business units making a variety of specialty products for the building, automotive, textile and other industries worldwide. Gasket materials are sold for new and replacement use in automotive, construction and farm equipment, appliance, small engine and compressor industries. On June 30, 1999, Armstrong sold 65% of the gaskets business. Since the divestiture, Armstrong has accounted for the gaskets business under the equity method within the "all other" segment. Textile mill supplies, including cots and aprons, are sold to equipment manufacturers and textile mills. On September 30, 1999, Armstrong sold the textiles business. From 1997 to 1998, Armstrong owned an equity interest in Dal-Tile International Inc. ("Dal-Tile"), whose ceramic tile products are sold through home centers, Dal-Tile sales service centers and independent distributors. In 1998, Armstrong sold its interest in Dal-Tile. During 1999, Armstrong recognized revenue of approximately $348 million from The Home Depot, Inc., from sales in the floor coverings, building products, wood products and insulation products segments. -40- The table below provides a reconciliation of segment information to total consolidated information. - -------------------------------------------------------------------------------- (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Net sales: Total segment sales $3,443.8 $2,746.2 $2,198.7 Intersegment sales 23.4 39.5 35.8 Elimination of intersegment sales (23.4) (39.5) (35.8) - -------------------------------------------------------------------------------- Total consolidated sales $3,443.8 $2,746.2 $2,198.7 ================================================================================ Operating income: Total segment operating income $ 473.8 $ 387.1 $ 351.6 Segment reorganization and restructuring (charges) reversals 1.4 (65.7) -- Corporate reorganization charges -- (8.9) -- Dal-Tile charge -- -- (29.7) Asbestos liability charge (335.4) (274.2) -- Unallocated corporate (expense) income (12.0) 1.6 0.1 - -------------------------------------------------------------------------------- Total consolidated operating income $ 127.8 $ 39.9 $ 322.0 ================================================================================ Assets: Total assets for reportable segments $3,492.5 $3,428.2 $1,653.0 Assets not assigned to business segments 672.0 845.0 722.5 - -------------------------------------------------------------------------------- Total consolidated assets $4,164.5 $4,273.2 $2,375.5 ================================================================================ Other significant items: Depreciation and amortization expense: Segment totals $ 158.5 $ 137.4 $ 124.6 Unallocated corporate depreciation and amortization expense 10.7 5.3 8.1 - -------------------------------------------------------------------------------- Total consolidated depreciation and amortization expense $ 169.2 $ 142.7 $ 132.7 - -------------------------------------------------------------------------------- Capital additions: Segment totals $ 178.7 $ 165.7 $ 147.5 Unallocated corporate capital additions 16.5 18.6 13.0 - -------------------------------------------------------------------------------- Total consolidated capital additions $ 195.2 $ 184.3 $ 160.5 ================================================================================ GEOGRAPHIC AREAS - -------------------------------------------------------------------------------- Net trade sales (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Americas: United States $2,246.8 $1,803.2 $1,412.2 Canada 119.0 98.6 89.3 Other Americas 29.1 20.2 16.6 - -------------------------------------------------------------------------------- Total Americas $2,394.9 $1,922.0 $1,518.1 ================================================================================ Europe: Germany $ 291.3 $ 182.5 $ 110.2 England 144.1 142.5 130.3 France 90.1 65.9 53.1 Netherlands 101.4 57.0 33.1 Other Europe 278.9 251.4 221.8 - -------------------------------------------------------------------------------- Total Europe $ 905.8 $ 699.3 $ 548.5 ================================================================================ Pacific area: China $ 33.1 $ 35.5 $ 26.1 Australia 30.1 28.5 30.5 Other Pacific area 79.9 60.9 75.5 - -------------------------------------------------------------------------------- Total Pacific area $ 143.1 $ 124.9 $ 132.1 ================================================================================ Total net trade sales $3,443.8 $2,746.2 $2,198.7 ================================================================================ Sales are attributed to countries based on location of customer. - -------------------------------------------------------------------------------- Long-lived assets at December 31 (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Americas: United States $ 980.3 $ 991.9 $ 746.3 Canada 16.1 17.1 20.5 Other Americas 0.1 0.1 0.1 - -------------------------------------------------------------------------------- Total Americas $ 996.5 $1,009.1 $ 766.9 ================================================================================ Europe: Germany $ 227.0 $ 270.3 $ 47.7 England 52.7 52.7 54.7 Netherlands 45.6 42.3 13.0 Belgium 27.3 34.5 -- France 13.8 15.9 15.1 Sweden 15.2 14.2 11.3 Other Europe 19.7 21.8 21.3 - -------------------------------------------------------------------------------- Total Europe $ 401.3 $ 451.7 $ 163.1 ================================================================================ Pacific area: China $ 33.7 $ 34.0 $ 34.0 Other Pacific area 7.6 7.2 8.2 - -------------------------------------------------------------------------------- Total Pacific area $ 41.3 $ 41.2 $ 42.2 - -------------------------------------------------------------------------------- Total long-lived assets $1,439.1 $1,502.0 $ 972.2 ================================================================================ -41- NOTE 3. ACQUISITIONS On July 22, 1998, Armstrong completed its acquisition of Triangle Pacific Corp. ("Triangle Pacific"), a Delaware corporation. Triangle Pacific is a leading U.S. manufacturer of hardwood flooring and other flooring and related products and a substantial manufacturer of kitchen and bathroom cabinets. The acquisition, recorded under the purchase method of accounting, resulted in a total purchase price of $911.5 million. The purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair market value at the date of acquisition. The balance of $831.1 million was recorded as goodwill and is being amortized over forty years on a straight-line basis. During 1999, purchase price adjustments increased goodwill by $5.3 million. Effective August 31, 1998, Armstrong acquired approximately 93% of the total share capital of DLW Aktiengesellschaft ("DLW"), a corporation organized under the laws of the Federal Republic of Germany. DLW is a leading flooring manufacturer in Germany. The acquisition, recorded under the purchase method of accounting, resulted in a total purchase price of $289.9 million. During 1999, Armstrong increased its ownership percentage in DLW to approximately 96%. A portion of the purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair market value at the date of acquisition while the balance of $117.2 million was recorded as goodwill and is being amortized over forty years on a straight-line basis. During 1999, purchase price adjustments increased goodwill by $5.2 million. In this purchase price allocation, $49.6 million was allocated to the estimable net realizable value of DLW's furniture business and a carpet manufacturing business in the Netherlands, which Armstrong identified as businesses held for sale. In May 1999, Armstrong sold the DLW furniture business for $38.1 million. The remaining business held for sale, a Dutch carpet manufacturing company, remained unsold at December 31, 1999. Armstrong still intends to dispose of this business, but has consolidated the results of operations from September 1, 1999. The net book value of this business as of December 31, 1999 is $2.2 million. The table below reflects the adjustment to the carrying value of the businesses held for sale relating to interest allocation, profits, cash flow and the impact of sale proceeds in 1999 and 1998. - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Carrying value at January 1, 1999 and August 31, 1998 $55.9 $49.6 Interest allocated 1.0 1.1 Adjustment to estimated sales proceeds (9.1) -- Effect of exchange rate change (4.9) 2.8 Losses excluded from consolidated earnings (1.5) (0.4) Cash flows funded by parent (1.1) 2.8 Proceeds from sale (38.1) -- - -------------------------------------------------------------------------------- Carrying value at December 31 $ 2.2 $55.9 ================================================================================ The operating results of these acquired businesses have been included in the Consolidated Statements of Earnings from the dates of acquisition. Triangle Pacific's fiscal year ends on the Saturday closest to December 31, which was January 1, 2000 and January 2, 1999. No events occurred between December 31 and these dates at Triangle Pacific materially affecting Armstrong's financial position or results of operations. The table below reflects unaudited pro forma combined results of Armstrong, Triangle Pacific and DLW as if the acquisitions had taken place at the beginning of fiscal 1998 and 1997: - -------------------------------------------------------------------------------- (millions) 1998 1997 - -------------------------------------------------------------------------------- Net sales $3,479.8 $3,350.0 Net earnings (14.2) 173.2 Net earnings per diluted share (0.36) 4.22 ================================================================================ In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisitions had been effective at the beginning of fiscal 1998 and 1997. NOTE 4. DIVESTITURES On May 28, 1999, Armstrong sold DLW's furniture business for total cash proceeds of $38.1 million. Armstrong acquired this business as part of the acquisition of DLW in the third quarter of 1998 and had classified the business as held for sale. There was no gain or loss on the transaction. On June 22, 1999, Armstrong sold its interest in the assets of Martin Surfacing, Inc. Armstrong acquired this interest as part of its acquisition of DLW during the third quarter of 1998. There was no material gain or loss on the transaction. On June 30, 1999, Armstrong sold 65% of its ownership in Armstrong Industrial Specialties, Inc. ("AISI"), its gasket products subsidiary, to a group of investors including Citicorp Venture Capital Ltd. and the management of AISI for a cash purchase price of approximately $36.1 million. The sale resulted in a gain of approximately $6.0 million, or $0.15 per share, which was recorded in other income. On September 30, 1999, Armstrong completed the sale of its Textile Products Operations to Day International Group, Inc. The sale resulted in a pretax loss of $5.0 million ($3.2 million after tax, or $0.08 per diluted share) which was recorded in other income. -42- NOTE 5. REORGANIZATION AND OTHER ACTIONS In 1998, Armstrong recognized charges of $65.6 million, or $42.6 million after tax, related to severance and enhanced retirement benefits for more than 650 positions, approximately 75% of which were salaried positions. In addition, Armstrong recorded an estimated loss of $9.0 million, or $5.9 million after tax, related to redundant flooring products machinery disposed of in 1999. Approximately $28.6 million of the charge comprised cash expenditures for severance. The remainder was a noncash charge for enhanced retirement benefits. The following table summarizes activity in the reorganization and restructuring accruals for 1999: - -------------------------------------------------------------------------------- Beginning Cash Charges Ending (millions) balance payments (reversals) Other balance - -------------------------------------------------------------------------------- 1999 $30.6 ($16.9) ($1.4) ($0.2) $12.1 1998 12.2 (10.4) 28.6 0.2 30.6 ================================================================================ The accrual reversal, which was made in the fourth quarter of 1999, was for future severance payments that were no longer necessary. The amount in "other" is primarily related to foreign currency translations. Substantially all of the remaining balance relates to terminated employees with extended payouts, most of which will be paid during 2000, and a noncancelable operating lease. NOTE 6. EQUITY INVESTMENTS Investments in affiliates were $34.2 million at December 31, 1999, a decrease of $7.6 million, reflecting the receipt of $25 million from Armstrong's WAVE joint venture with Worthington Industries, offset by the equity earnings of Armstrong's 50% interest in its WAVE joint venture and the remaining 35% interest in the gaskets business. Armstrong continues to purchase certain raw materials from the gaskets business under a long-term supply agreement. Equity earnings from affiliates for 1998 primarily comprised income from a 50% interest in the WAVE joint venture, Armstrong's share of a net loss at Dal-Tile and amortization of the excess of Armstrong's investment in Dal-Tile over the underlying equity in net assets. Equity losses from affiliates in 1997 included $8.4 million for Armstrong's share of operating losses incurred by Dal-Tile; a $29.7 million loss for Armstrong's share of a charge incurred by Dal-Tile, primarily for uncollectible receivables and overstocked inventories; and $4.3 million for the amortization of Armstrong's initial investment in Dal-Tile over the underlying equity in net assets. NOTE 7. RECEIVABLES - -------------------------------------------------------------------------------- Accounts and notes receivable (millions) 1999 1998 - -------------------------------------------------------------------------------- Customers' receivables $455.8 $462.9 Customers' notes 13.4 15.5 Miscellaneous receivables 14.7 11.8 - -------------------------------------------------------------------------------- 483.9 490.2 - -------------------------------------------------------------------------------- Less allowance for discounts and losses 47.9 49.8 - -------------------------------------------------------------------------------- Net $436.0 $440.4 ================================================================================ Generally, Armstrong sells its products to select, preapproved customers whose businesses are directly affected by changes in economic and market conditions. Armstrong considers these factors and the financial condition of each customer when establishing its allowance for losses from doubtful accounts. -43- NOTE 8. INVENTORIES Approximately 43% of Armstrong's total inventory in 1999 and 44% in 1998 were valued on a LIFO (last-in, first-out) basis. Inventory values were lower than would have been reported on a total FIFO (first-in, first-out) basis, by $48.3 million at the end of 1999 and $50.5 million at year-end 1998. - -------------------------------------------------------------------------------- Inventories (millions) 1999 1998 - -------------------------------------------------------------------------------- Finished goods $275.6 $292.9 Goods in process 44.9 52.0 Raw materials and supplies 160.5 176.6 - -------------------------------------------------------------------------------- Less LIFO and other reserves 51.3 56.4 - -------------------------------------------------------------------------------- Total $429.7 $465.1 ================================================================================ NOTE 9. PROPERTY, PLANT AND EQUIPMENT - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Land $ 111.8 $ 111.5 Buildings 616.7 549.8 Machinery and equipment 1,827.2 1,759.5 Construction in progress 96.4 203.1 - -------------------------------------------------------------------------------- 2,652.1 2,623.9 - -------------------------------------------------------------------------------- Less accumulated depreciation and amortization 1,213.0 1,121.9 - -------------------------------------------------------------------------------- Net $1,439.1 $1,502.0 ================================================================================ NOTE 10. GOODWILL AND OTHER INTANGIBLES - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Goodwill $985.6 $ 993.4 Less accumulated amortization 50.5 28.0 - -------------------------------------------------------------------------------- Total goodwill $935.1 $ 965.4 ================================================================================ Other intangibles $ 79.3 $ 78.7 Less accumulated amortization 22.7 15.5 - -------------------------------------------------------------------------------- Total other intangibles $ 56.6 $ 63.2 ================================================================================ Goodwill and other intangibles decreased by $36.9 million, reflecting scheduled amortization of $35.1 million, final allocations of purchase price related to Triangle Pacific and DLW and foreign currency translations. Unamortized computer software costs included in other intangibles were $49.4 million at December 31, 1999, and $47.6 million at December 31, 1998. -44- NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Payables, trade and other $308.4 $235.2 Asbestos-related claims, current portion (note 26) 175.0 80.0 Employment costs 71.3 82.5 Reorganization and severance payments 12.1 30.6 Other 103.9 116.5 - -------------------------------------------------------------------------------- Total $670.7 $544.8 ================================================================================ NOTE 12. DEBT - -------------------------------------------------------------------------------- Average Average year-end year-end interest interest ($ millions) 1999 rate 1998 rate - -------------------------------------------------------------------------------- Short-term debt: Commercial paper $ 45.9 6.20% $ 104.1 6.20% Foreign banks 25.0 5.82% 45.8 5.29% - -------------------------------------------------------------------------------- Total short-term debt $ 70.9 6.07% $ 149.9 5.92% - -------------------------------------------------------------------------------- Long-term debt: Bank loans due 2000-2006 $ 66.5 5.32% $ 91.9 4.96% Medium-term notes 8.95-9% due 2000-2001 25.6 8.96% 25.6 8.96% 6.35% senior notes due 2003 199.9 6.35% 199.8 6.35% 6.50% senior notes due 2005 149.7 6.50% 149.7 6.50% 9.75% debentures due 2008 125.0 9.75% 125.0 9.75% 7.45% senior notes due 2029 199.8 7.45% -- -- 7.45% senior quarterly interest bonds due 2038 180.0 7.45% 180.0 7.45% Industrial development bonds 29.8 5.27% 31.2 4.67% Commercial paper, noncurrent 450.0 6.20% 750.0 6.20% Capital lease obligations 11.4 7.25% 13.3 7.25% Other 11.3 8.75% 29.2 7.28% - -------------------------------------------------------------------------------- Total long-term debt $1,449.0 6.90% $1,595.7 6.64% - -------------------------------------------------------------------------------- Less current installments 36.1 7.72% 32.9 5.54% - -------------------------------------------------------------------------------- Net long-term debt $1,412.9 6.88% $1,562.8 6.66% ================================================================================ - -------------------------------------------------------------------------------- Scheduled amortization of long-term debt (millions) - -------------------------------------------------------------------------------- 2001 $10.7 2003 $652.1 2002 0.8 2004 1.3 - -------------------------------------------------------------------------------- On March 16, 1999, Armstrong filed a shelf registration statement for $1 billion of combined debt and equity securities. On May 19, 1999, Armstrong completed an offering under the shelf registration statement of $200 million aggregate principal amount of 7.45% senior notes due 2029. The net proceeds from this offering were used to repay other indebtedness of Armstrong. On October 21, 1999, Armstrong renewed a bank credit facility for $450 million that expires in 364 days and cancelled a $300 million line of credit which was due to expire in 2001. Armstrong also has a $450 million line of credit which expires in 2003. There were no borrowings under these facilities at December 31, 1999. The 7.45% senior quarterly interest bonds are callable in 2003 and have no sinking-fund requirements. Armstrong's 9.75% debentures, senior notes and medium-term notes are not redeemable until maturity and have no sinking-fund requirements. The industrial development bonds mature in 2004, 2009 and 2024. Other debt includes an $18.6 million zero-coupon note due in 2013 that had a carrying value of $3.2 million at December 31, 1999, and an effective interest rate of 13.4%. Armstrong has two unused credit agreements: a $450 million credit agreement expiring in October 2000 and a $450 million line of credit expiring in 2003. In addition, Armstrong's foreign subsidiaries have approximately $188.1 million of unused short-term lines of credit available from banks. The credit lines are subject to immaterial annual commitment fees. Armstrong intends to refinance a portion of its outstanding commercial paper balance on a long-term basis. Such intent is supported by the long-term line of credit. Accordingly, long-term debt includes $450 million and $750 million of commercial paper reclassified from short-term debt at December 31, 1999, and December 31, 1998, respectively. In order to maintain the ratio of fixed to floating rate debt which management believes is appropriate, Armstrong entered into $150 million of interest rate swaps during 1999. Armstrong receives fixed rates and pays floating rates on these swaps. Details of outstanding swaps as of December 31, 1999, are as follows: - -------------------------------------------------------------------------------- Maturity date Notional Market ($ millions) amount Pays Receives value - -------------------------------------------------------------------------------- Aug. 15, 2005 $100.0 3 mo. LIBOR 6.26% ($3.5) Aug. 15, 2003 50.0 3 mo. LIBOR 6.54% ($0.6) - -------------------------------------------------------------------------------- Total $150.0 3 mo. LIBOR 6.35% ($4.1) ================================================================================ -45- NOTE 13. FINANCIAL INSTRUMENTS Armstrong does not hold or issue financial instruments for trading purposes. The estimated fair values of Armstrong's financial instruments are as follows: - -------------------------------------------------------------------------------- 1999 Estimated 1998 Estimated (In millions at carrying fair carrying fair December 31) amount value amount value - -------------------------------------------------------------------------------- Liabilities: Long-term debt $1,412.9 $1,356.9 $1,562.8 $1,606.1 Off-balance sheet financial instruments: Foreign currency contract obligations -- $ 8.9 -- $ 6.4 Foreign currency options -- 0.2 -- -- Letters of credit/financial guarantees -- 252.2 -- 244.6 Lines of credit -- 1,088.1 -- 1,458.9 Interest rate swaps -- (4.1) -- -- Natural gas contracts -- -- -- (0.5) - -------------------------------------------------------------------------------- Fair values were determined as follows: The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses, short-term debt and current installments of long-term debt approximate fair value because of the short-term maturity of these instruments. The fair value estimates of long-term debt were based upon quotes from major financial institutions taking into consideration current rates offered to Armstrong for debt of the same remaining maturities. Foreign currency contract obligations and options, as well as interest rate swaps, are estimated by obtaining quotes from major financial institutions. Letters of credit, financial guarantees and lines of credit amounts are based on the estimated cost to settle the obligations. Natural gas contract amounts are based on estimated cost to settle the contracts. NOTE 14. INCOME TAXES The tax effects of principal temporary differences between the carrying amounts of assets and liabilities and their tax bases are summarized in the table below. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize deferred tax assets except for certain net operating losses and capital loss carryforwards. Of the $57.7 million in capital loss carryforwards at December 31, 1999, $49.5 million will expire in 2001 and $8.2 million will expire in 2003. Of the $39.8 million in foreign net operating losses, $3.0 million will expire in 2003 and the remaining $36.8 million will be carried forward indefinitely. Valuation allowances decreased $4.0 million in 1999 primarily related to utilization of capital loss carryforwards in connection with the sale of the gaskets business (see Note 4). - -------------------------------------------------------------------------------- Deferred income taxes (millions) 1999 1998 - -------------------------------------------------------------------------------- Postretirement and postemployment benefits $ (86.4) $ (87.7) Reorganization payments (3.3) (24.2) Asbestos-related liabilities (238.5) (150.3) Net operating losses (16.0) (25.1) Capital loss carryforwards (20.2) (21.3) Other (64.4) (81.0) - -------------------------------------------------------------------------------- Total deferred tax assets $(428.8) $(389.6) - -------------------------------------------------------------------------------- Valuation allowance 25.5 29.5 - -------------------------------------------------------------------------------- Net deferred tax assets $(403.3) $(360.1) - -------------------------------------------------------------------------------- Accumulated depreciation $ 203.6 $ 224.8 Pension costs 69.3 51.3 Insurance for asbestos-related liabilities 103.6 92.7 Other 48.2 55.7 - -------------------------------------------------------------------------------- Total deferred income tax liabilities $ 424.7 $ 424.5 - -------------------------------------------------------------------------------- Net deferred income tax liabilities $ 21.4 $ 64.4 - -------------------------------------------------------------------------------- Deferred tax asset -- current (40.6) (43.2) - -------------------------------------------------------------------------------- Deferred income tax liability -- long term $ 62.0 $ 107.6 ================================================================================ - -------------------------------------------------------------------------------- Details of taxes (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Earnings (loss) before income taxes: Domestic $55.4 $(57.1) $ 236.4 Foreign 93.3 63.5 92.9 Eliminations (119.5) (27.0) (33.1) - -------------------------------------------------------------------------------- Total $29.2 $(20.6) $ 296.2 ================================================================================ Income tax provision (benefit): - -------------------------------------------------------------------------------- Current: Federal $15.8 $ 11.2 $ 46.8 Foreign 22.8 21.7 35.7 State 3.0 1.3 1.5 - -------------------------------------------------------------------------------- Total current 41.6 34.2 84.0 - -------------------------------------------------------------------------------- Deferred: Federal (36.6) (48.2) 30.9 Foreign 9.4 2.3 (3.7) State 0.5 0.4 -- - -------------------------------------------------------------------------------- Total deferred (26.7) (45.5) 27.2 - -------------------------------------------------------------------------------- Total income taxes $14.9 $(11.3) $ 111.2 ================================================================================ At December 31, 1999, unremitted earnings of subsidiaries outside the United States were $88.2 million (at December 31, 1999, balance sheet exchange rates) for which no U.S. taxes have been provided. If such earnings were to be remitted without offsetting tax credits in the United States, withholding taxes would be $5.3 million. Armstrong's intention, however, is to reinvest unremitted earnings permanently or to repatriate them only when it is tax effective to do so. - -------------------------------------------------------------------------------- Reconciliation to U.S. statutory tax rate (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Tax expense (benefit) at statutory rate $10.2 $ (7.2) $103.7 State income taxes, net of federal benefit 2.0 1.7 1.0 (Benefit) on ESOP dividend (1.3) (1.2) (0.9) Tax on foreign and foreign-source income 2.8 0.6 1.1 Utilization of excess foreign tax credit -- -- (2.9) Equity in (earnings) loss of affiliates -- (6.2) 9.9 Insurance programs (0.6) (1.0) (0.8) Goodwill 7.1 3.3 -- Change in valuation allowance (4.0) -- -- Other items (1.3) (1.3) 0.1 - -------------------------------------------------------------------------------- Tax expense (benefit) at effective rate $14.9 $(11.3) $111.2 ================================================================================ - -------------------------------------------------------------------------------- Other taxes (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Payroll taxes $88.6 $65.0 $50.7 Property, franchise and capital stock taxes $24.3 $20.0 $16.6 - -------------------------------------------------------------------------------- -46- NOTE 15. OTHER LONG-TERM LIABILITIES - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Deferred compensation $ 42.8 $ 38.1 Other 63.6 77.7 - -------------------------------------------------------------------------------- Total other long-term liabilities $106.4 $115.8 ================================================================================ NOTE 16. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSSOP) In 1989, Armstrong established an Employee Stock Ownership Plan (ESOP) that borrowed $270 million from banks and insurance companies, repayable over 15 years and guaranteed by Armstrong. The ESOP used the proceeds to purchase 5,654,450 shares of a new series of convertible preferred stock issued by Armstrong. In 1996, the ESOP was merged with the Retirement Savings Plan for salaried employees (a defined-contribution pension plan) to form the Retirement Savings and Stock Ownership Plan (RSSOP). On July 31, 1996, the trustee of the ESOP converted the preferred stock held by the trust into approximately 5.1 million shares of common stock at a one-for-one ratio. The number of shares released for allocation to participant accounts is based on the proportion of principal and interest paid to the total amount of debt service remaining to be paid over the life of the borrowings. Through December 31, 1999, the RSSOP had allocated to participants a total of 2,294,000 shares and retired 1,126,000 shares. During 1999, Armstrong issued 199,000 treasury shares and the trustee purchased 33,000 shares on the open market as part of meeting the necessary funding requirements. As of December 31, 1999, there are approximately 2,467,000 shares in the RSSOP that have yet to be allocated to participants. All RSSOP shares are considered outstanding for earnings per share calculations. Dividends on allocated shares are credited to employee accounts while dividends on unallocated shares are used to satisfy debt service payments. The RSSOP currently covers parent company nonunion employees and some union employees. Armstrong's guarantee of the ESOP loan has been recorded as a long-term obligation and as a reduction of shareholders' equity on its Consolidated Balance Sheets. - -------------------------------------------------------------------------------- Details of ESOP debt service payments (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Common stock dividends paid $ 8.9 $ 9.0 $ 8.5 Employee contributions 7.7 9.8 9.7 Company contributions 8.9 11.4 14.7 Company loans to ESOP 12.9 10.1 5.5 - -------------------------------------------------------------------------------- Debt service payments made by ESOP trustee $38.4 $40.3 $38.4 ================================================================================ Armstrong recorded costs for the RSSOP of $13.1 million in 1999, $6.9 million in 1998 and $10.4 million in 1997. The trustee borrowed from Armstrong $12.9 million in 1999, $10.1 million in 1998 and $5.5 million in 1997. These loans were made to ensure that the financial arrangements provided to employees remain consistent with the original intent of the RSSOP. -47- NOTE 17. STOCK-BASED COMPENSATION PLANS Awards under the 1993 Long-Term Stock Incentive Plan ("1993 Plan") may be in the form of stock options, stock appreciation rights in conjunction with stock options, performance restricted shares and restricted stock awards. No additional shares of common stock may be issued under the 1993 Plan. During 1999, Armstrong adopted the 1999 Long-Term Incentive Plan ("1999 Plan") which replaced the 1993 Plan. The 1999 Plan is similar to the 1993 Plan in that it provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, performance restricted shares and restricted stock awards. The 1999 Plan also incorporates stock awards and cash incentive awards. No more than 3,250,000 shares of common stock may be issued under the 1999 Plan, and no more than 300,000 of the shares may be awarded in the form of performance restricted shares, restricted stock awards or stock awards. No awards under the 1999 Plan will be granted after April 25, 2009. Pre-1999 grants made under predecessor plans will be governed under the provisions of those plans. Options are granted to purchase shares at prices not less than the closing market price of the shares on the dates the options were granted. The options generally become exercisable in one to three years and expire 10 years from the date of grant. - -------------------------------------------------------------------------------- Changes in option shares outstanding (thousands except for share price) 1999 1998 1997 - -------------------------------------------------------------------------------- Option shares at beginning of year 2,783.7 2,161.3 2,161.4 Options granted 829.7 914.8 286.8 Option shares exercised (54.5) (253.3) (265.5) Stock appreciation rights exercised (0.2) (3.1) (4.7) Options cancelled (49.2) (36.0) (16.7) - -------------------------------------------------------------------------------- Option shares at end of year 3,509.5 2,783.7 2,161.3 Option shares exercisable at end of year 1,828.0 1,372.0 1,262.1 Shares available for grant 3,307.3 789.7 1,585.5 - -------------------------------------------------------------------------------- Weighted average price per share: Options outstanding $58.48 $60.41 $54.01 Options exercisable 57.12 52.38 46.88 Options granted 50.70 70.43 69.63 Option shares exercised 36.17 41.68 39.10 - -------------------------------------------------------------------------------- The table below summarizes information about stock options outstanding at December 31, 1999. - -------------------------------------------------------------------------------- Stock options outstanding as of 12/31/99 (thousands except for life and share price) - -------------------------------------------------------------------------------- Options outstanding Options exercisable ---------------------------------------- ------------------------- Range Number Weighted- Weighted- Number Weighted- of outstanding average average exercisable average exercise at remaining exercise at exercise prices 12/31/99 contractual life price 12/31/99 price - -------------------------------------------------------------------------------- $27-49 516.4 4.5 $40.20 474.4 $39.81 49-53 779.9 9.1 50.98 19.6 51.53 53-60 791.7 5.9 58.48 680.2 58.42 60-70 779.5 7.1 65.55 424.5 65.53 70-86 642.0 8.1 73.69 229.3 73.97 - -------------------------------------------------------------------------------- 3,509.5 1,828.0 ================================================================================ Performance restricted shares issuable under the 1993 and 1999 plans entitle certain key executive employees to earn shares of Armstrong's common stock, but only if the total company or individual business units meet certain predetermined performance measures during defined performance periods (generally three years). At the end of performance periods, common stock awarded may carry additional restriction periods, during which time the shares will be held in custody by Armstrong until the expiration or termination of restrictions. Compensation expense will be charged to earnings over the performance period. Within performance periods at the end of 1999 were 6,280 unvested performance restricted shares outstanding and 535 accumulated dividend equivalent shares. No performance restricted share awards were earned based on the performance period ending December 31, 1999. Within restriction periods at the end of 1999 were 147,513 shares of restricted common stock outstanding based on performance periods ending prior to 1999 with 16,840 accumulated dividend equivalent shares. Restricted stock awards can be used for the purposes of recruitment, special recognition and retention of key employees. Awards for 21,700 shares of restricted stock were granted (excluding performance-based awards discussed above) during 1999. At the end of 1999, there were 122,935 restricted shares of common stock outstanding with 10,687 accumulated dividend equivalent shares. In 1996, Armstrong adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures. Had compensation cost for these plans been determined consistent with SFAS No. 123, Armstrong's net earnings and earnings per share would have been reduced to the following pro forma amounts. - -------------------------------------------------------------------------------- (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Net earnings (loss): As reported $14.3 $ (9.3) $185.0 Pro forma 7.0 (16.1) 180.7 Basic earnings (loss) per share: As reported 0.36 (0.23) 4.55 Pro forma 0.18 (0.40) 4.45 Diluted earnings (loss) per share: As reported 0.36 (0.23) 4.50 Pro forma 0.17 (0.40) 4.39 - -------------------------------------------------------------------------------- The fair value of grants was estimated on the date of grant using the Black-Scholes option pricing model with the assumptions for 1999, 1998 and 1997 presented in the table below. The weighted-average fair value of stock options granted in 1999 was $9.75. - -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Risk-free interest rates 6.34% 5.14% 6.21% Dividend yield 5.75% 3.03% 2.46% Expected lives 5 years 5 years 5 years Volatility 28% 28% 19% - -------------------------------------------------------------------------------- Because the SFAS No. 123 method of accounting has not been applied to grants prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. NOTE 18. EMPLOYEE COMPENSATION Employee compensation is presented in the table below. Charges for severance costs and early retirement incentives to terminated employees have been excluded. The increase in employee compensation is primarily due to the acquisitions of Triangle Pacific and DLW. - -------------------------------------------------------------------------------- Employee compensation cost summary (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Wages and salaries $722.8 $590.4 $494.7 Payroll taxes 88.7 65.0 50.7 Pension credits (29.1) (38.1) (22.2) Insurance and other benefit costs 64.1 60.0 51.9 Stock-based compensation 4.2 5.0 9.6 - -------------------------------------------------------------------------------- Total $850.7 $682.3 $584.7 ================================================================================ -48- NOTE 19. PENSION AND OTHER BENEFIT PROGRAMS Armstrong and a number of its subsidiaries have pension plans and postretirement medical and insurance benefit plans covering eligible employees worldwide. Armstrong also has defined-contribution pension plans (including the Retirement Savings and Stock Ownership Plan, as described on page 47) for eligible employees. Costs for these plans were $13.1 million in 1999, $6.9 million in 1998 and $10.4 million in 1997. Benefits from pension plans, which cover substantially all employees, are based on an employee's compensation and years of service. Pension plans are funded by Armstrong. Postretirement benefits are funded by Armstrong on a pay-as-you-go basis, with the retiree paying a portion of the cost for health care benefits by means of deductibles and contributions. Armstrong announced in 1989 and 1990 a 15-year phaseout of its health care benefits for certain future retirees. These future retirees include parent company nonunion employees and some union employees. Shares of RSSOP common stock are scheduled to be allocated to these employees, based on employee age and years to expected retirement, to help employees offset their future postretirement medical costs. The following tables summarize the balance sheet impact, as well as the benefit obligations, assets, funded status and rate assumptions associated with the pension and postretirement benefit plans. The plan assets are primarily stocks, mutual funds and bonds. Included in these assets were 1,426,751 shares of Armstrong common stock at year-end 1999 and 1998. - -------------------------------------------------------------------------------- Retiree Health and Life U.S. defined-benefit Pension Benefits Insurance Benefits plans (millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation as of January 1 $1,163.5 $1,078.1 $ 262.5 $ 262.7 Service cost 16.7 17.5 3.2 3.3 Interest cost 76.6 72.6 17.0 17.2 Plan participants' contributions -- -- 2.6 2.3 Acquisition -- 15.1 -- -- Effect of settlements -- -- (4.1) -- Effect of special termination benefits 1.7 38.1 -- -- Actuarial loss (gain) (96.4) 15.5 (24.9) (1.0) Benefits paid (82.7) (73.4) (23.0) (22.0) - -------------------------------------------------------------------------------- Benefit obligation as of December 31 $1,079.4 $1,163.5 $ 233.3 $ 262.5 ================================================================================ Change in plan assets: Fair value of plan assets as of January 1 $1,874.9 $1,754.4 -- -- Actual return (loss) on plan assets (46.7) 180.3 -- -- Acquisition -- 11.4 -- -- Employer contribution 2.8 2.2 $ 20.5 $ 19.7 Plan participants' contributions -- -- 2.6 2.3 Benefits paid (82.7) (73.4) (23.1) (22.0) - -------------------------------------------------------------------------------- Fair value of plan assets as of December 31 $1,748.3 $1,874.9 $ 0.0 $ 0.0 ================================================================================ Funded status $ 668.9 $ 711.4 $(233.3) $(262.5) Unrecognized net actuarial loss (gain) (483.9) (597.4) 23.0 48.8 Unrecognized transition asset (14.5) (20.7) -- -- Unrecognized prior service cost (benefit) 72.2 82.2 (5.1) (6.0) - -------------------------------------------------------------------------------- Net amount recognized $ 242.7 $ 175.5 $(215.4) $(219.7) ================================================================================ The funded status of U.S. defined-benefit plans was determined using the assumptions presented in the table below. - -------------------------------------------------------------------------------- Retiree Health and Life Pension Benefits Insurance Benefits U.S. defined-benefit plans 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Weighted-average assumption as of December 31: Discount rate 7.75% 6.75% 7.75% 6.75% Expected return on plan assets 8.75% 8.75% n/a n/a Rate of compensation increase 4.25% 3.75% 4.25% 3.75% - -------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets consist of: - -------------------------------------------------------------------------------- Retiree Health and Life Pension Benefits Insurance Benefits (millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Prepaid benefit costs $264.2 $187.8 -- -- Accrued benefit liability (30.2) (40.2) $(215.4) $(219.7) Intangible asset 2.0 2.3 -- -- Other comprehensive income 6.7 25.6 -- -- - -------------------------------------------------------------------------------- Net amount recognized $242.7 $175.5 $(215.4) $(219.7) ================================================================================ - -------------------------------------------------------------------------------- U.S. pension plans with benefit obligations Pension Benefits in excess of assets (millions) 1999 1998 - -------------------------------------------------------------------------------- Retirement benefit equity plan Projected benefit obligation, December 31 $34.9 $48.4 Accrued benefit obligation, December 31 30.2 40.2 Fair value of plan assets, December 31 -- -- - -------------------------------------------------------------------------------- The components of pension credit are as follows: - -------------------------------------------------------------------------------- U.S. defined-benefit Pension Benefits plans (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost of benefits earned during the year $ 16.7 $ 17.5 $ 16.4 Interest cost on projected benefit obligation 76.6 72.6 72.6 Expected return on plan assets (147.0) (136.2) (122.8) Amortization of transition asset (6.2) (6.2) (6.2) Amortization of prior service cost 10.0 10.0 10.0 Recognized net actuarial gain (17.3) (18.4) (13.6) - -------------------------------------------------------------------------------- Net periodic pension credit $ (67.2) $ (60.7) $ (43.6) ================================================================================ Costs for other funded and unfunded pension plans were $5.9 million in 1999, $4.0 million in 1998 and $2.8 million in 1997. The components of postretirement benefit cost are as follows: - -------------------------------------------------------------------------------- U.S. defined-benefit Retiree Health and Life Insurance Benefits plans (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost of benefits earned during the year $ 3.2 $ 3.3 $ 3.3 Interest cost on accumulated postretirement benefit obligation 17.0 17.2 17.6 Amortization of prior service benefit (0.9) (0.9) (0.9) Recognized net actuarial loss 0.6 1.3 1.24 - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost $19.9 $20.9 $21.2 ================================================================================ For measurement purposes, a 7% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease 1% per year to an ultimate rate of 6% by the year 2000. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects: - -------------------------------------------------------------------------------- U.S. retiree health and life One percentage point insurance benefit plans (millions) Increase Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 2.2 $ (1.8) Effect on postretirement benefit obligation 21.0 (17.6) - -------------------------------------------------------------------------------- Armstrong has pension plans covering employees in a number of foreign countries that utilize assumptions that are consistent with, but not identical to, those of the U.S. plans. The following tables summarize the balance sheet impact as well as the benefit obligations, assets, funded status and rate assumptions associated with pension benefits. - -------------------------------------------------------------------------------- Non-U.S. defined-benefit Pension Benefits plans (millions) 1999 1998 - -------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation as of January 1 $ 325.1 $ 127.4 Service cost 8.4 6.2 Interest cost 18.1 12.3 Plan participants' contributions 1.6 1.4 Acquisition -- 164.6 Divestitures (2.6) -- Effect of settlements -- (0.5) Effect of special termination benefits 0.3 0.5 Foreign currency translation adjustment (35.6) 12.8 Actuarial loss 0.9 10.2 Benefits paid (15.6) (9.8) - -------------------------------------------------------------------------------- Benefit obligation as of December 31 $ 300.6 $ 325.1 ================================================================================ Change in plan assets: Fair value of plan assets as of January 1 $ 147.1 $ 95.5 Actual return on plan assets 24.7 16.7 Acquisition -- 35.1 Employer contribution 13.1 6.2 Plan participants' contribution 1.6 1.4 Foreign currency translation adjustment (7.5) 2.0 Benefits paid (15.6) (9.8) - -------------------------------------------------------------------------------- Fair value of plan assets as of December 31 $ 163.4 $ 147.1 ================================================================================ Funded status $ (137.2) $(178.0) Unrecognized net actuarial gain (34.5) (21.1) Unrecognized transition obligation 0.6 1.7 Unrecognized prior service cost 4.7 4.9 - -------------------------------------------------------------------------------- Net amount recognized $ (166.4) $(192.5) ================================================================================ Amounts recognized in the Consolidated Balance Sheets consist of: - -------------------------------------------------------------------------------- Pension Benefits (millions) 1999 1998 - -------------------------------------------------------------------------------- Prepaid benefit cost $ 3.0 $ 2.2 Accrued benefit liability (169.5) (195.1) Intangible asset -- 0.2 Other comprehensive income 0.1 0.2 - -------------------------------------------------------------------------------- Net amount recognized $(166.4) $(192.5) ================================================================================ - -------------------------------------------------------------------------------- Non-U.S. pension plans with benefit obligations Pension Benefits in excess of assets (millions) 1999 1998 - -------------------------------------------------------------------------------- Projected benefit obligation, December 31 $203.8 $192.3 Accrued benefit obligation, December 31 162.2 186.2 Fair value of plan assets, December 31 2.8 0.6 - -------------------------------------------------------------------------------- The components of pension cost are as follows: - -------------------------------------------------------------------------------- Non-U.S. defined-benefit Pension Benefits plans (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Service cost of benefits earned during the year $ 8.4 $ 6.2 $ 5.7 Interest cost on projected benefit obligation 18.1 12.3 8.8 Expected return on plan assets (8.0) (7.4) (6.8) Amortization of transition obligation 0.2 0.3 0.3 Amortization of prior service cost 0.4 0.4 0.4 Recognized net actuarial gain (0.1) (0.1) (0.2) - -------------------------------------------------------------------------------- Net periodic pension cost $19.0 $11.7 $ 8.2 ================================================================================ The funded status of non-U.S. defined-benefit plans was determined using the assumptions presented in the table below. - -------------------------------------------------------------------------------- Pension Benefits Non-U.S. defined-benefit plans 1999 1998 - -------------------------------------------------------------------------------- Weighted-average assumption as of December 31: Discount rate 6.50% 6.25% Expected return on plan assets 4.25% 6.25% Rate of compensation increase 3.75% 3.50% - -------------------------------------------------------------------------------- -49- NOTE 20. LEASES Armstrong rents certain real estate and equipment. Several leases include options for renewal or purchase and contain clauses for payment of real estate taxes and insurance. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rental expense was $21.4 million in 1999, $26.1 million in 1998 and $15.5 million in 1997. Triangle Pacific leases a plant and related equipment in Beverly, West Virginia. The lease agreement contains a purchase option of $1 until 2018. As a result, the present value of the remaining future minimum lease payments is recorded as a capitalized lease asset and related capitalized lease obligation. Assets under this capital lease as included in the Consolidated Balance Sheets are as follows: - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Land $ 3.8 $ 3.8 Building 4.5 4.5 Machinery and equipment 21.5 21.5 - -------------------------------------------------------------------------------- Total assets $29.8 $29.8 ================================================================================ Less accumulated amortization 6.2 4.8 - -------------------------------------------------------------------------------- Net assets $23.6 $25.0 ================================================================================ Future minimum payments at December 31, 1999, by year and in the aggregate, having noncancelable lease terms in excess of one year were as follows: - -------------------------------------------------------------------------------- Scheduled minimum lease payments Capital Operating (millions) leases leases - -------------------------------------------------------------------------------- 2000 $ 4.3 $10.3 2001 0.8 7.5 2002 0.8 5.5 2003 2.2 4.5 2004 0.6 3.9 Thereafter 2.6 20.0 - -------------------------------------------------------------------------------- Total $11.3 $51.7 - -------------------------------------------------------------------------------- NOTE 21. SHAREHOLDERS' EQUITY Treasury share changes for 1999, 1998 and 1997 are as follows: - -------------------------------------------------------------------------------- Years ended December 31 (thousands) 1999 1998 1997 - -------------------------------------------------------------------------------- Common shares Balance at beginning of year 11,856.7 11,759.5 10,714.6 Stock purchases(1) 33.8 389.5 1,299.2 Stock issuance activity, net (261.8) (292.3) (254.3) - -------------------------------------------------------------------------------- Balance at end of year 11,628.7 11,856.7 11,759.5 ================================================================================ Note 1: Includes small unsolicited buybacks of shares, shares received under share tax withholding transactions and open market purchases of stock through brokers. In July 1996, the Board of Directors authorized Armstrong to repurchase 3.0 million shares of its common stock through the open market or through privately negotiated transactions, bringing the total authorized common share repurchases to 5.5 million shares. Under the total plan, Armstrong repurchased approximately 4,017,000 shares through December 31, 1998, with a total cash outlay of $248.1 million, including 355,000 repurchased in 1998. In June 1998, Armstrong halted purchases of its common shares under the common share repurchase program in connection with its announcement to purchase Triangle Pacific and DLW. The balance of each component of accumulated other comprehensive loss as of December 31, 1999, and December 31, 1998, is presented in the table below. - -------------------------------------------------------------------------------- (millions) 1999 1998 - -------------------------------------------------------------------------------- Foreign currency translation adjustments and hedging activities $12.1 $ 8.7 Minimum pension liability adjustments 4.4 16.7 - -------------------------------------------------------------------------------- Total $16.5 $25.4 ================================================================================ The related tax effects allocated to each component of other comprehensive income are presented in the table below. - -------------------------------------------------------------------------------- Before-Tax Tax After-Tax (millions) Amount Benefit Amount - -------------------------------------------------------------------------------- Foreign currency translation adjustments and hedging activities $ (3.4) $0.0 $(3.4) Minimum pension liability adjustments 18.9 6.6 12.3 - -------------------------------------------------------------------------------- Total $ 15.5 $6.6 $ 8.9 ================================================================================ - -------------------------------------------------------------------------------- Other comprehensive income reclassification adjustments (millions) 1999 1998 - -------------------------------------------------------------------------------- Unrealized holding gains arising during period -- $ 12.8 Less: Reclassification adjustment for gains included in net income -- (12.8) - -------------------------------------------------------------------------------- Net unrealized gains on securities -- $ 0.0 ================================================================================ -50- NOTE 22. PREFERRED STOCK PURCHASE RIGHTS PLAN In 1996, the Board of Directors renewed Armstrong's 1986 shareholder rights plan and in connection therewith declared a distribution of one right for each share of Armstrong's common stock outstanding on and after January 19, 1996. In general, the rights become exercisable at $300 per right for a fractional share of a new series of Class A preferred stock 10 days after a person or group, other than certain affiliates of Armstrong, either acquires beneficial ownership of shares representing 20% or more of the voting power of Armstrong or announces a tender or exchange offer that could result in such person or group beneficially owning shares representing 28% or more of the voting power of Armstrong. If thereafter any person or group becomes the beneficial owner of 28% or more of the voting power of Armstrong or if Armstrong is the surviving company in a merger with a person or group that owns 20% or more of the voting power of Armstrong, then each owner of a right (other than such 20% shareholder) would be entitled to purchase shares of company common stock having a value equal to twice the exercise price of the right. Should Armstrong be acquired in a merger or other business combination, or sell 50% or more of its assets or earnings power, each right would entitle the holder to purchase, at the exercise price, common shares of the acquirer having a value of twice the exercise price of the right. The exercise price was determined on the basis of the Board's view of the long-term value of Armstrong's common stock. The rights have no voting power nor do they entitle a holder to receive dividends. At Armstrong's option, the rights are redeemable prior to becoming exercisable at five cents per right. The rights expire on March 21, 2006. NOTE 23. SUPPLEMENTAL FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Selected operating expenses (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Maintenance and repair costs $118.7 $114.0 $107.3 Research and development costs 58.5 46.0 47.8 Advertising costs 49.2 41.2 19.3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Other expense (income), net (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Interest and dividend income $ (2.0) $ (3.3) $ (4.9) Gain on sale of businesses, net (1.0) -- -- Demutualization proceeds (2.6) -- -- Dal-Tile gain -- (12.8) -- Domco litigation expense -- 12.3 -- Discontinued businesses -- 0.3 0.8 Other (1.0) 1.8 1.9 - -------------------------------------------------------------------------------- Total $ (6.6) $ (1.7) $ (2.2) ================================================================================ NOTE 24. SUPPLEMENTAL CASH FLOW INFORMATION - -------------------------------------------------------------------------------- (millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Interest paid $105.1 $ 48.6 $ 23.5 Income taxes paid 50.9 $ 35.3 $ 54.5 - -------------------------------------------------------------------------------- Acquisitions: Fair value of assets acquired $ 3.8 $1,031.9 $ 32.6 Cost in excess of net assets acquired -- 948.3 -- Less: Liabilities assumed -- 804.5 28.4 - -------------------------------------------------------------------------------- Cash paid, net of cash acquired $ 3.8 $1,175.7 $ 4.2 - -------------------------------------------------------------------------------- NOTE 25. EARNINGS (LOSS) PER SHARE The table below provides a reconciliation of the numerators and denominators of the basic and diluted per share calculations for net earnings (loss). - -------------------------------------------------------------------------------- Earnings Per-Share Millions except for per-share data (Loss) Shares Amount - -------------------------------------------------------------------------------- For the year ended 1999 - -------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Net earnings $ 14.3 39.9 $ 0.36 - -------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE Dilutive options 0.3 Net earnings $ 14.3 40.2 $ 0.36 ================================================================================ For the year ended 1998 - -------------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER SHARE Net earnings (loss) $ (9.3) 39.8 $(0.23) - -------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE Dilutive options 0.6 Net earnings (loss) $ (9.3) 40.4 $(0.23)1 ================================================================================ For the year ended 1997 - -------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Net earnings $185.0 40.6 $ 4.55 - -------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE Dilutive options 0.4 Net earnings $185.0 41.0 $ 4.50 ================================================================================ Note 1: Diluted earnings (loss) per share for 1998 was antidilutive. -51- NOTE 26. LITIGATION AND RELATED MATTERS ASBESTOS-RELATED LITIGATION Armstrong is a defendant in personal injury claims and property damage claims related to asbestos containing products. PERSONAL INJURY CLAIMS Nearly all claims seek general and punitive damages arising from alleged exposures, at various times, from World War II onward, to asbestos-containing products. Claims against Armstrong, which can involve allegations of negligence, strict liability, breach of warranty and conspiracy, primarily relate to Armstrong's involvement with asbestos-containing insulation products. Armstrong discontinued the sale of all such insulation products in 1969. In addition, other Armstrong products, such as gasket materials, have been named in some litigation. Claims may arise many years after first exposure to asbestos in light of the long latency period (up to 40 years) for asbestos-related injury. Product identification and determining exposure periods are difficult and uncertain. Armstrong believes that many current plaintiffs are unimpaired. Armstrong is involved in all stages of claims resolution and litigation, including individual trials, consolidated trials and appeals. Over the long history of asbestos litigation involving hundreds of companies, attention has been given by various parties to securing a comprehensive resolution of the litigation. In 1991, the Judicial Panel for Multidistrict Litigation ordered the transfer of federal cases to the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. Armstrong supported this transfer. Some cases are periodically released for trial, although the issue of punitive damages is retained by the transferee court. That court has been instrumental in having the parties resolve large numbers of cases in various jurisdictions and has been receptive to different approaches to the resolution of claims. Claims filed in state courts have not been directly affected by the transfer. Asbestos Claims Facility ("Facility") and Center for Claims Resolution ("Center") The Facility was established to evaluate, settle, pay and defend all personal injury claims against member companies. Resolution and defense costs were allocated by formula. The Facility subsequently dissolved, and the Center was created in October 1988 by 21 former Facility members, including Armstrong. At December 31, 1999 there were 19 members of the Center. In January 2000, membership was reduced to 16 members. Insurance carriers, while not members, are represented ex officio on the Center's governing board and have agreed annually to provide a portion of the Center's operational costs. The Center adopted many of the conceptual features of the Facility and has addressed the claims in a manner consistent with the prompt, fair resolution of meritorious claims. Resolution and defense costs are allocated by formula to each of the member companies; adjustments over time have resulted in some increased share for Armstrong. Amchem Settlement Class Action Georgine v. Amchem ("Amchem") was a settlement class action filed in the Eastern District of Pennsylvania on January 15, 1993, that included essentially all future personal injury claims against members of the Center for Claims Resolution ("Center"), including Armstrong. It was designed to establish a nonlitigation system for the resolution of those claims, and offered a method for prompt compensation to claimants who were occupationally exposed to asbestos if they met certain exposure and medical criteria. Compensation amounts were derived from historical settlement data and no punitive damages were to be paid. The settlement was designed to, among other things, minimize transactional costs, including attorneys' fees; expedite compensation to claimants with qualifying claims; and relieve the courts of the burden of handling future claims. The District Court, after exhaustive discovery and testimony, approved the settlement class action and issued a preliminary injunction that barred class members from pursuing claims against Center members in the tort system. The U.S. Court of Appeals for the Third Circuit reversed that decision, and the reversal was sustained by the U.S. Supreme Court on September 25, 1997, holding that the settlement class did not meet the requirements for class certification under Federal Rule of Civil Procedure 23. The preliminary injunction was vacated on July 21, 1997, resulting in the immediate reinstatement of enjoined cases and a loss of the bar against the filing of claims in the tort system. Post Amchem Claim Developments Armstrong is a defendant in approximately 175,600 pending personal injury claims as of December 31, 1999. During 1999, the Center received and verified approximately 51,000 claims naming Armstrong as a defendant (of which approximately 10,200 were received and verified in the fourth quarter). Armstrong continues to seek broad-based settlements of claims through the Center. The Center has recently reached agreements with several law firms that cover approximately 82,000 claims (or 41% of current claims) some of which are currently pending and some of which have yet to be filed. These agreements typically provide for multiyear payments for settlement of current claims and establish specific medical and other criteria for the settlement of future claims as well as annual limits on the number of claims that can be filed by these firms. These agreements also establish fixed settlement values for different asbestos-related medical conditions which are subject to periodic renegotiation over a period of 2 to 5 years. The plaintiff law firms are required to recommend settlements to their clients although future claimants are not legally obligated to accept the settlements. These agreements also provide for nominal payments to future claimants who are unimpaired but who are eligible for additional compensation if they develop a more serious asbestos-related illness. The Center can terminate an agreement with an individual law firm if a significant number of that firm's clients elect not to participate under the agreement. Negotiations with additional plaintiff law firms engaged in asbestos-related litigation that would resolve a substantial portion of the remaining pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain. Asbestos-Related Liability In continually evaluating its estimated asbestos liability, Armstrong reviews, among other things, its recent and historical settlement amounts, the incidence of past and recent claims, the mix of the injuries and occupations of the plaintiffs, the number of cases pending against it and the status and results of broad-based settlement discussions. Based on this review, Armstrong has estimated its share of liability to defend and resolve probable asbestos-related personal injury claims. This estimate is highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that can affect the range of the liability. Armstrong will continue to study the variables in light of additional information in order to identify trends that may become evident and to assess their impact on the range of liability that is probable and estimable. In the fourth quarter of 1999, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $425.4 million. The revision in the estimated liability is attributable to many factors. The actual number of claims received in 1999 was higher than anticipated. Although we expect the number of claims to decrease in future years, we now expect that the total number of claims received will be higher than previously anticipated. Further, the Center has recently settled with some law firms at amounts higher than our original estimates pursuant to our broad-based settlement plan. In consideration of these factors, management has concluded that an increase in the estimated probable liability is required. Armstrong's estimate of such liability that is probable and estimable through 2005 ranges from $681.5 million to $1,337.9 million as of December 31, 1999. The range of probable and estimable liability reflects uncertainties in the number of future claims that will be filed, the outcome of the broad-based settlement negotiations and Armstrong's overall effective share of the Center's liabilities. Armstrong has concluded that no amount within that range is more likely than any other, and therefore has reflected $681.5 million as a liability in the consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $175.0 million over the next 12 months and has reflected $175.0 million as a current liability. Armstrong's estimated range of liability is primarily based on known claims and an estimate of future claims that are likely to occur and can be reasonably estimated through 2005. This estimated range of liability assumes that the number of new claims filed annually will be less than the number filed in 1999. For claims that may be filed beyond 2005, management believes that the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. Accordingly, it is reasonably possible that the total exposure to personal injury claims may be greater than the estimated range of liability. Although some settlements have already been reached, Armstrong is currently uncertain as to the ultimate success and timing of the remaining broad-based settlement discussions. However, if those discussions are unsuccessful or if unfavorable claims experiences continue, significant changes in the assumptions used in the estimate of Armstrong's liability may result. Those changes, if any, could lead to increases in the recorded liability. Because of the uncertainties related to the number of claims, the ultimate settlement amounts, and similar matters, it is extremely difficult to obtain reasonable estimates of the amount of the ultimate liability. As additional experience is gained regarding claims and such settlement discussions or other new information becomes available regarding the potential liability, Armstrong will reassess its potential liability and revise the estimates as appropriate. Because, among other things, payment of the liability will extend over many years, management believes that the potential additional costs for claims, net of any potential insurance recoveries, will not have a material after-tax effect on the financial condition of Armstrong or its liquidity, although the net after-tax effect of any future liabilities recorded in excess of insurance assets could be material to earnings in a future period. -52- Codefendant Bankruptcies Certain codefendant companies have filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on the litigation cannot be predicted. Letters of Credit As of December 31, 1999, Armstrong entered into $36.2 million of letters of credit to meet minimum collateral requirements established by the Center. Property Damage Litigation Armstrong is also one of many defendants in five pending claims as of December 31, 1999, that were filed by public and private building owners. These cases present allegations of damage to the plaintiffs' buildings caused by asbestos-containing products and generally seek compensatory and punitive damages and equitable relief, including reimbursement of expenditures, for removal and replacement of such products. Armstrong vigorously denies the validity of the allegations against it in these claims. These claims are not handled by the Center. Insurance coverage has been resolved and is expected to cover almost all costs of these claims. Insurance Coverage During relevant time periods, Armstrong purchased primary and excess insurance policies providing coverage for personal injury claims and property damage claims. Certain policies also provide coverage to ACandS, Inc., a former subsidiary of Armstrong. Armstrong and ACandS agreed to share certain coverage on a first-come first-served basis and to reserve for ACandS a certain amount of excess coverage. Wellington Agreement In 1985, Armstrong and 52 other companies (asbestos defendants and insurers) signed the Wellington Agreement. This Agreement settled disputes concerning personal injury insurance coverage with signatory carriers. It provides broad coverage for both defense and indemnity and applies to both products hazard and nonproducts (general liability) coverages. Armstrong has resolved most asbestos-related personal injury products hazard coverage matters with its solvent carriers through the Wellington Agreement or other settlements. Insurance Recovery Proceedings A substantial portion of Armstrong's primary and excess remaining insurance asset is nonproducts (general liability) insurance for personal injury claims including, among others, those that involve alleged exposure during Armstrong's installation of asbestos materials. An alternative dispute resolution ("ADR") procedure under the Wellington Agreement is under way against certain carriers to determine the percentage of resolved and unresolved claims that are nonproducts claims, to establish the entitlement to that coverage and to determine whether and how much reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits. The carriers have raised various defenses, including waiver, laches, statutes of limitations and contractual defenses. One primary carrier alleges that it is no longer bound by the Wellington Agreement, and another alleges that Armstrong agreed to limit its claims for nonproducts coverage against that carrier when the Wellington Agreement was signed. The ADR process is in the trial phase of binding arbitration. One insurer has taken the position that it is entitled to litigate in court certain issues in the ADR proceeding. During 1999, Armstrong received preliminary decisions in the initial phases of the trial proceeding of the ADR which were generally favorable to Armstrong on a number of issues related to insurance coverage. Because of the continuing ADR process and the possibilities for further proceedings on certain matters, Armstrong has not yet completely determined the financial implications of the decisions. Armstrong has entered into settlements with a number of the carriers resolving coverage issues. Other proceedings against non-Wellington carriers may become necessary. -53- Insurance Asset As with its estimated asbestos-related liability, Armstrong continually evaluates the probable insurance asset to be recorded. An insurance asset in the amount of $296.0 million is recorded as of December 31, 1999. Approximately $58.7 million was received in 1999 pursuant to existing settlements. The asset was also increased by $90.0 million in the fourth quarter of 1999 primarily as a result of insurance coverage in place related to the increase in the probable and estimable liability and recent settlements with certain carriers. Of the total insurance asset amount, approximately $78.3 million represents partial settlement for previous claims which will be paid in a fixed and determinable flow and is reported at its net present value discounted at 6.70%. The total amount recorded reflects Armstrong's belief in the availability of insurance in this amount, based upon Armstrong's success in insurance recoveries, recent settlement agreements that provide that coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. This insurance is either available through settlement or probable of recovery through negotiation, litigation or resolution of the ADR process that is in the trial phase of binding arbitration. Depending on further progress of the ADR, and activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, Armstrong may revise its estimate and additional insurance assets may be recorded in a future period. Of the $296.0 million asset, $26.0 million has been recorded as a current asset reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. However, the actual amount of payments to be received in the next 12 months could increase depending upon the nature and result of settlement discussions. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact Armstrong paid $173.0 million for asbestos-related claims in 1999 compared to $101.5 million in 1998. Armstrong received $58.7 million in asbestos-related insurance recoveries in 1999 compared with $27.1 million in 1998. Armstrong currently expects to pay approximately $95.0 million to $115.0 million for asbestos-related claims and expenses in 2000, net of expected insurance recoveries and taxes. CONCLUSION In the fourth quarter of 1999, Armstrong recorded a net pretax charge of $335.4 million. This charge is the net of an increase in its estimated asbestos-related liability of $425.4 million and a $90.0 million increase in related insurance recoveries. While some successful broad-based settlements have been reached with plaintiff law firms, Armstrong is uncertain as to the timing and number of any additional settlements to be reached. Since many uncertainties exist surrounding asbestos litigation, Armstrong will continue to evaluate its asbestos-related estimated liability and corresponding estimated insurance recoveries asset as well as the underlying assumptions used to derive these amounts. The recorded liability and asset reflect the most recent available information as of this filing. However, it is reasonably possible that Armstrong's total exposure to personal injury claims may be greater than the recorded liability, and, accordingly future charges to income may be necessary. While Armstrong believes that potential future charges may be material to the periods in which they are taken, Armstrong does not believe the charges will have a material adverse effect on its financial position or liquidity. ENVIRONMENTAL MATTERS Most of Armstrong's manufacturing and certain of Armstrong's research facilities are affected by federal, state and local environmental laws. These laws relate to the discharge of materials or otherwise relate to the protection of the environment. Armstrong has made, and intends to continue to make, necessary expenditures for compliance with applicable laws. Armstrong incurred capital expenditures of approximately $5.5 million in 1999, $6.7 million in 1998 and $1.2 million in 1997 for environmental compliance and control facilities and anticipates annual expenditures for those purposes to continue within this range for the years 2000 and 2001. Armstrong does not anticipate that it will incur significant capital expenditures in order to meet the requirements of the Clean Air Act of 1990 and the final implementing regulations promulgated by various state agencies. Until all new regulatory requirements are known, uncertainty will remain regarding future estimates of capital expenditures. As with many industrial companies, Armstrong is currently involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act ("Superfund"), and similar state laws at approximately 22 sites. In most cases, Armstrong is one of many potentially responsible parties ("PRPs") who have voluntarily agreed to jointly fund the required investigation and remediation of each site. With regard to some sites, however, Armstrong disputes the liability, the proposed remedy or the proposed cost allocation among the PRPs. Armstrong may also have rights of contribution or reimbursement from other parties or coverage under applicable insurance policies. Armstrong is also remediating environmental contamination resulting from past industrial activity at certain of its current and former plant sites. Estimates of future liability are based on an evaluation of currently available facts regarding each individual site and consider factors including existing technology, presently enacted laws and regulations and prior company experience in remediation of contaminated sites. Although current law imposes joint and several liability on all parties at any Superfund site, Armstrong's contribution to the remediation of these sites is expected to be limited by the number of other companies also identified as potentially liable for site costs. As a result, Armstrong's estimated liability reflects only Armstrong's expected share. In determining the probability of contribution, Armstrong considers the solvency of the parties, whether responsibility is being disputed, the terms of any existing agreements and experience regarding similar matters. Liabilities of $14.7 million at December 31, 1999, and $18.3 million at December 31, 1998, were for potential environmental liabilities that Armstrong considers probable and for which a reasonable estimate of the probable liability could be made. Where existing data is sufficient to estimate the amount of the liability, that estimate has been used; where only a range of probable liability is available and no amount within that range is more likely than any other, the lower end of the range has been used. As assessments and remediation activities progress at each individual site, these liabilities are reviewed to reflect additional information as it becomes available. The estimated liabilities do not take into account any claims for recoveries from insurance or third parties. Such recoveries, where probable, have been recorded as an asset in the consolidated financial statements and are either available through settlement or probable of recovery through negotiation or litigation. Actual costs to be incurred at identified sites in the future may vary from the estimates, given the inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, Armstrong believes that any sum it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future period. -54- Independent auditors' report The Board of Directors and Shareholders, Armstrong World Industries, Inc.: We have audited the consolidated financial statements of Armstrong World Industries, Inc., and subsidiaries as listed in the accompanying index on page 33. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index on page 33. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Armstrong World Industries, Inc., and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Philadelphia, Pennsylvania February 2, 2000 -55- Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - --------------------- Not applicable. PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------- Directors of the Registrant - ---------------------------- The information appearing in the tabulation in the section captioned "Election of Directors" on pages 8-11 of the Company's 2000 Proxy Statement is incorporated by reference herein. Executive Officers of the Registrant - ------------------------------------- George A. Lorch -- Age 58; Chairman of the Board since April 25, 1994; and President (Chief Executive Officer) since September 7, 1993; Member of the Executive Committee of the Board of Directors since March, 1988; Executive Vice President, 1988 to 1993; Group Vice President for Carpet Operations, 1983 to 1988. Marc R. Olivie -- Age 46; President, Worldwide Building Products Operations since October 15, 1996; and the following positions with Sara Lee Corporation (branded consumer products): President, Sara Lee Champion Europe, Inc. (Italy), March 1994-October 1996; Vice President, Corporate Development, Sara Lee/DE (Netherlands), September 1993-March 1994. Robert J. Shannon, Jr. -- Age 51, President, Worldwide Floor Products Operations since February 1, 1997; President Floor Products Operations International February 1, 1996,-February 1, 1997; President American Olean Tile Company, Inc. March 1, 1992-December 29, 1995. Ulrich J. Weimer -- Age 55; President, Armstrong Insulation Products since February 1, 1996; Managing Director, Armstrong World Industries G.m.b.H. since December 11, 1995; General Manager, Worldwide Insulation Products Operations, February 1, 1993-June 1, 1995. Douglas L. Boles -- Age 42; Executive Vice President, Human Resources since March 14, 2000; Senior Vice President, Human Resources since March 1, 1996; and the following positions with PepsiCo (consumer products): Vice President of Human Resources, Pepsi Foods International Europe Group (U.K.), June 1995- February 1996; Vice President of Human Resources, Walkers Snack Foods (U.K.), March 1994-June 1995; Vice President of Human Resources, Snack Ventures Europe (Netherlands), September 1992-March 1994. Deborah K. Owen -- Age 48; Senior Vice President, Secretary and General Counsel since January 1, 1998; Attorney, Law Offices of Deborah K. Owen, Columbia, MD, September 1996-September 1997; Partner, Arent Fox Kintner Plotkin & Kahn, PLLC, Washington DC, August 1994-August 1996; Commissioner, Federal Trade Commission, Washington, DC, October 1989-August 1994. Frank A. Riddick, III -- Age 43; Executive Vice President and Chief Operating Officer since March 14, 2000; Senior Vice President, Finance and Chief Financial Officer since April 1995; Controller FMC Corporation, Chicago, IL (chemicals, machinery), May 1993-March 1995. William C. Rodruan -- Age 45; Vice President and Controller since July 26, 1999; Director, Corporate Transformation and Shared Services from February 1, 1997, through July 26, 1999; Vice President of Finance, Corporate Retail Accounts from July 1, 1994 through February 1, 1997. -56- E. Follin Smith -- Age 40; Senior Vice President and Chief Financial Officer since March 14, 2000; Vice President and Treasurer since August 1998; and the following positions with General Motors Corporation (automobile manufacturer): Chief Financial Officer, Delphi Chassis Systems, April 1997-July 1998; Assistant Treasurer, October, 1994-April 1997; Vice President, Finance, General Motors Acceptance Corporation, May 1994-September 1994; Treasurer, General Motors of Canada Limited, June 1992-April 1994. Dr. Bernd F. Pelz -- Age 56; President DLW Aktiengesellschaft since September 1998; Member of the Executive Board, DLW Aktiengesellschaft since April 1990, and its Chairman since October 1991. Floyd F. Sherman -- Age 60; President, Wood Products Operations since July 24, 1998; and the following positions with Triangle Pacific Corp.: Chairman of the Board and Chief Executive Officer since July 1992; President 1981-November 1994. Stephen E. Stockwell -- Age 54, Senior Vice President Floor Products, Americas, Residential Sales, since July 28, 1998; President, Corporate Retail Accounts Division, November 22, 1994 through July 28, 1998; Vice President, Corporate Retail Accounts, July 1, 1994 through November 22, 1994; General Manager, Residential Sales, Floor Division, January 26, 1994 through July 1, 1994; Field Sales Manager, Floor Division, 1988 through 1994. All information presented above is current as of March 14, 2000. The term of office for each Executive Officer in his present capacity is one year, and each such Executive Officer will serve until reelected or until a successor is elected at the annual meeting of directors which follows the annual shareholders' meeting. Each Executive Officer has been employed by us in excess of five continuous years with the exception of Messrs. Olivie, Boles, Riddick, Pelz, Sherman and Mses. Owen and Smith. Section 16(a) Beneficial Ownership Reporting Compliance - ------------------------------------------------------- The information appearing in the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" on page 15 of the Company's 2000 Proxy Statement is incorporated by reference herein. Item 11. Executive Compensation - --------------------------------- The information appearing in the sections captioned "Compensation of Directors" on page 12 and "Executive Officers' Compensation," (other than the information contained under the subcaption "Performance Graph") and "Retirement Income Plan Benefits," on pages 17-22 of the Company's 2000 Proxy Statement is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------- The information appearing in the sections captioned "Stock Ownership of Certain Beneficial Owners" on pages 22-23 and "Directors' and Executive Officers' Stock Ownership" on pages 14-15 of the Company's 2000 Proxy Statement is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------- The information appearing under the heading "Transactions with Organizations Affiliated with Directors" appearing on page 23 of the Company's 2000 Proxy Statement is incorporated by reference herein. -57- PART IV ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------- The financial statements and schedule filed as a part of this Annual Report on Form 10-K are listed in the "Index to Financial Statements and Schedules" on page 33. a. The following exhibits are filed as a part of this Annual Report on Form 10-K: Exhibits -------- No. 3(a) Registrant's By-laws, as amended, effective September 20, 1999, are incorporated by reference herein from registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, wherein they appear as Exhibit 3. No. 3(b) Registrant's restated Articles of Incorporation, as amended, are incorporated by reference herein from registrant's 1994 Annual Report on Form 10-K wherein they appear as Exhibit 3(b). No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996, between the registrant and Chemical Mellon Shareholder Services, L.L.C., as Rights Agent, relating to the registrant's Preferred Stock Purchase Rights is incorporated by reference herein from registrant's registration statement on Form 8-A/A dated March 15, 1996, wherein it appeared as Exhibit 4. American Stock Transfer and Trust Company is the successor Rights Agent under this Agreement. No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended November 5, 1999. * No. 4(c) Registrant's $450,000,000 Credit Agreement (5-year) dated as of October 29, 1998, among the registrant, The Chase Manhattan Bank, as administrative agent, and the banks listed therein, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(f). No. 4(d) Registrant's Indenture, dated as of August 6, 1996, between the Registrant and The Chase Manhattan Bank, formerly known as Chemical Bank, as successor to Mellon Bank, N.A., as Trustee, is incorporated herein by reference from registrant's registration statement on Form S-3/A dated August 14, 1996, wherein it appeared as Exhibit 4.1. No. 4(e) Copy of portions of the registrant's Board of Directors' Pricing Committee's resolutions establishing the terms and conditions of $200,000,000 of 6.35% Senior Notes Due 2003 and $150,000,000 of 6 1/2% Senior Notes Due 2005, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(h). No. 4(f) Copy of portions of the registrant's Board of Directors' Pricing Committee's resolutions establishing the terms and conditions of $180,000,000 of 7.45% Senior Quarterly Interest Bonds Due 2038, is -58- incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(i). Registrant agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries which are not filed herewith in accordance with applicable rules of the Commission because the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated June 19, 1985, (the "Wellington Agreement") among the registrant and other companies is incorporated by reference herein from registrant's 1997 Annual Report on Form 10-K wherein it appeared as Exhibit 10(i)(a). No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution, as amended, among the registrant and other companies. No. 10(i)(c) Indenture, dated as of March 15, 1988, between the registrant and Morgan Guaranty Trust Company of New York, as Trustee, as to which The First National Bank of Chicago is successor trustee, (relating to the registrant's $125 million 9-3/4% Debentures due 2008 and Series A Medium Term Notes) is incorporated herein by reference from registrant's 1995 Annual Report on Form 10-K wherein it appeared as Exhibit 4(c). No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between Registrant and First National Bank of Chicago, as Trustee, is incorporated herein by reference from the registrant's Registration Statement on Form S-3 (File No. 333- 74501) dated March 16, 1999, wherein it appeared as Exhibit 4.3. No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes due 2029 is incorporated by reference herein from the registrant's Current Report on Form 8-K which was filed with the Commission on May 29, 1999, wherein it appeared as Exhibit 4.2. No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998, among the registrant, Triangle Pacific Corp., and Sapling Acquisition, Inc., is incorporated by reference herein from registrant's Form 8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1. No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by and among AISI Acquisition Corp. and registrant and Armstrong Industrial Specialties, Inc. is incorporated by reference herein from registrant's Current Report on Form 8- K filed on July 14, 1999, wherein it appeared as Exhibit 1. No. 10(i)(h) Registrant's $450,000,000 Credit Agreement (364-day) dated as of October 29, 1998, among the registrant, The Chase Manhattan Bank as administrative agent, and listed banks, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(e). -59- No. 10(i)(i) Amended and Restated Credit Agreement dated as of October 21, 1999, among the registrant, The Chase Manhattan Bank as administrative agent, and listed banks, which amends Exhibit 10(i)(h) in certain respects. No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as amended, is incorporated by reference herein from registrant's 1995 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(a). * No. 10(iii)(b) Form of agreement between DLW and Dr. Bernd F. Pelz, as amended. * No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c). * No. 10(iii)(d) Registrant's Management Achievement Plan for Key Executives, as amended December 13, 1999 * No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known as the Excess Benefit Plan), as amended January 1, 2000. * No. 10(iii)(f) Copy of Registrant's Deferred Compensation Plan, as amended January 1, 2000. * No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees of Armstrong World Industries, Inc., as amended, is incorporated by reference herein from registrant's 1994 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(g). * No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors, as amended, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(h).* No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried Employees, as amended July 13, 1998, is incorporated by reference herein from registrant's 1998 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(i). * No. 10(iii)(j) Registrant's 1999 Long-Term Stock Incentive Plan* No. 10(iii)(k) Form of Agreement between the Company and certain of its Executive Officers, together with a schedule identifying those executives and the material differences among the agreements to which each executive is a party. * No. 10(iii)(l) Form of Indemnification Agreement between the registrant and each of the registrant's Directors, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(l). * No. 10(iii)(m) Registrant's Bonus Replacement Retirement Plan, dated as of January 1, 1998, as amended, is incorporated by reference herein from registrant's 1998 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(m). * -60- No. 10(iii)(n) Copy of Employment Agreement between the registrant and George A. Lorch dated as of December 13, 1999. * No. 11(a) Computation for basic earnings. No. 11(b) Computation for diluted earnings per share. No. 12 Ratio of Earnings to Fixed Charges No. 21 List of the registrant's domestic and foreign subsidiaries. No. 23 Consent of Independent Auditors. No. 24 Powers of Attorney and authorizing resolutions. No. 27 Financial Data Statement * Compensatory Plan -61- b. The following reports on Form 8-K were filed during the last quarter of 1999: None. -62- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ARMSTRONG WORLD INDUSTRIES, INC. -------------------------------- (Registrant) By /s/ George A. Lorch ---------------------------- Chairman Date March 15, 2000 ------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Directors and Principal Officers of the registrant: George A. Lorch Chairman and President (Principal Executive Officer) Frank A. Riddick, III Senior Vice President, Finance (Principal Financial Officer) William C. Rodruan Vice President and Controller (Principal Accounting Officer) H. Jesse Arnelle Director Van C. Campbell Director Donald C. Clark Director Judith R. Haberkorn Director John A. Krol Director David M. LeVan Director James E. Marley Director David W. Raisbeck Director Jerre L. Stead Director By /s/ George A. Lorch ---------------------------------- (George A. Lorch, as attorney-in-fact and on his own behalf) As of March 15, 2000 -63- SCHEDULE II ----------- Valuation and Qualifying Reserves of Accounts Receivable -------------------------------------------------------- For Years Ended December 31 --------------------------- (amounts in millions)
Provision for Losses 1999 1998 1997 - -------------------- -------- -------- ------- Balance at Beginning of Year $ 18.2 $ 12.8 $ 10.9 Additions Charged to Earnings 12.1 7.2 7.3 Deductions (5.0) (11.4) (5.4) Balances via acquisitions/(divestitures) (0.1) 9.6 -- ------- ------- ------ Balance at End of Year $ 25.2 $ 18.2 $ 12.8 ======= ======= ====== - ----------------------------------------------------------------------- Provision for Discounts - ----------------------- Balance at Beginning of Year $ 31.6 $ 24.7 $ 24.0 Additions Charged to Earnings 112.4 93.3 76.7 Deductions (120.8) (88.8) (76.0) Balance via acquisitions/(divestitures) (0.5) 2.4 -- ------- ------- ------ Balance at End of Year $ 22.7 $ 31.6 $ 24.7 ======= ======= ====== - ----------------------------------------------------------------------- Total Provision for Discounts and Losses - ---------------------------------------- Balance at Beginning of Year $ 49.8 $ 37.5 $ 34.9 Additions Charged to Earnings 124.5 100.5 84.0 Deductions (125.8) (100.2) (81.4) Balances via acquisitions/(divestitures) (0.6) 12.0 -- ------- ------- ------ Balance at End of Year $ 47.9 $ 49.8 $ 37.5 ======= ======= ======
-64- EXHIBIT INDEX No. 3(a) Registrant's By-laws, as amended, effective September 20, 1999, are incorporated by reference herein from registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, wherein they appear as Exhibit 3. No. 3(b) Registrant's restated Articles of Incorporation, as amended, are incorporated by reference herein from registrant's 1994 Annual Report on Form 10-K wherein they appear as Exhibit 3(b). No. 4(a) Registrant's Rights Agreement effective as of March 21, 1996, between the registrant and Chemical Mellon Shareholder Services, L.L.C., as Rights Agent, relating to the registrant's Preferred Stock Purchase Rights is incorporated by reference herein from registrant's registration statement on Form 8-A/A dated March 15, 1996, wherein it appeared as Exhibit 4. American Stock Transfer and Trust Company is the successor Rights Agent under this Agreement. No. 4(b) Registrant's Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended November 5, 1999. * No. 4(c) Registrant's $450,000,000 Credit Agreement (5-year) dated as of October 29, 1998, among the registrant, The Chase Manhattan Bank, as administrative agent, and the banks listed therein, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(f). No. 4(d) Registrant's Indenture, dated as of August 6, 1996, between the Registrant and The Chase Manhattan Bank, formerly known as Chemical Bank, as successor to Mellon Bank, N.A., as Trustee, is incorporated herein by reference from registrant's registration statement on Form S-3/A dated August 14, 1996, wherein it appeared as Exhibit 4.1. No. 4(e) Copy of portions of the registrant's Board of Directors' Pricing Committee's resolutions establishing the terms and conditions of $200,000,000 of 6.35% Senior Notes Due 2003 and $150,000,000 of 6 1/2% Senior Notes Due 2005, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(h). No. 4(f) Copy of portions of the registrant's Board of Directors' Pricing Committee's resolutions establishing the terms and conditions of $180,000,000 of 7.45% Senior Quarterly Interest Bonds Due 2038, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(i). Registrant agrees to furnish to the Commission upon request copies of instruments defining the rights of holders of long-term debt of the registrant and its subsidiaries which are not filed herewith in accordance with applicable rules of the Commission because the total amount of securities authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. No. 10(i)(a) Registrant's Agreement Concerning Asbestos-Related Claims dated June 19, 1985, (the "Wellington Agreement") among the registrant and other companies is incorporated by reference herein from registrant's 1997 Annual Report on Form 10-K wherein it appeared as Exhibit 10(i)(a). No. 10(i)(b) Producer Agreement concerning Center for Claims Resolution, as amended, among the registrant and other companies. No. 10(i)(c) Indenture, dated as of March 15, 1988, between the registrant and Morgan Guaranty Trust Company of New York, as Trustee, as to which The First National Bank of Chicago is successor trustee, (relating to the registrant's $125 million 9-3/4% Debentures due 2008 and Series A Medium Term Notes) is incorporated herein by reference from registrant's 1995 Annual Report on Form 10-K wherein it appeared as Exhibit 4(c). No. 10(i)(d) Senior Indenture dated as of December 23, 1998 between Registrant and First National Bank of Chicago, as Trustee, is incorporated herein by reference from the registrant's Registration Statement on Form S-3 (File No. 333- 74501) dated March 16, 1999, wherein it appeared as Exhibit 4.3. No. 10(i)(e) Global Note representing $200 million of 7.45% Senior Notes due 2029 is incorporated by reference herein from the registrant's Current Report on Form 8-K which was filed with the Commission on May 29, 1999, wherein it appeared as Exhibit 4.2. No. 10(i)(f) Agreement and Plan of Merger dated as of June 12, 1998, among the registrant, Triangle Pacific Corp., and Sapling Acquisition, Inc., is incorporated by reference herein from registrant's Form 8-K filed on June 15, 1998, wherein it appeared as Exhibit 10.1. No. 10(i)(g) Agreement and Plan of Merger, dated as of June 30, 1999 by and among AISI Acquisition Corp. and registrant and Armstrong Industrial Specialties, Inc. is incorporated by reference herein from registrant's Current Report on Form 8- K filed on July 14, 1999, wherein it appeared as Exhibit 1. No. 10(i)(h) Registrant's $450,000,000 Credit Agreement (364-day) dated as of October 29, 1998, among the registrant, The Chase Manhattan Bank as administrative agent, and listed banks, is incorporated herein by reference from registrant's 1998 Annual Report on Form 10-K, wherein it appeared as Exhibit 4(e). No. 10(i)(i) Amended and Restated Credit Agreement dated as of October 21, 1999, among the registrant, The Chase Manhattan Bank as administrative agent, and listed banks, which amends Exhibit 10(i)(h) in certain respects. No. 10(iii)(a) Registrant's Long-Term Stock Option Plan for Key Employees, as amended, is incorporated by reference herein from registrant's 1995 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(a). * No. 10(iii)(b) Form of agreement between DLW and Dr. Bernd F. Pelz, as amended. * No. 10(iii)(c) Registrant's Directors' Retirement Income Plan, as amended, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(c). * No. 10(iii)(d) Registrant's Management Achievement Plan for Key Executives, as amended December 13, 1999 * No. 10(iii)(e) Registrant's Retirement Benefit Equity Plan (formerly known as the Excess Benefit Plan), as amended January 1, 2000. * No. 10(iii)(f) Copy of Registrant's Deferred Compensation Plan, as amended January 1, 2000. * No. 10(iii)(g) Registrant's Employment Protection Plan for Salaried Employees of Armstrong World Industries, Inc., as amended, is incorporated by reference herein from registrant's 1994 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(g). * No. 10(iii)(h) Registrant's Restricted Stock Plan For Nonemployee Directors, as amended, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(h).* No. 10(iii)(i) Registrant's Severance Pay Plan for Salaried Employees, as amended July 13, 1998, is incorporated by reference herein from registrant's 1998 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(i). * No. 10(iii)(j) Registrant's 1999 Long-Term Stock Incentive Plan* No. 10(iii)(k) Form of Agreement between the Company and certain of its Executive Officers, together with a schedule identifying those executives and the material differences among the agreements to which each executive is a party. * No. 10(iii)(l) Form of Indemnification Agreement between the registrant and each of the registrant's Directors, is incorporated by reference herein from registrant's 1996 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(l). * No. 10(iii)(m) Registrant's Bonus Replacement Retirement Plan, dated as of January 1, 1998, as amended, is incorporated by reference herein from registrant's 1998 Annual Report on Form 10-K wherein it appeared as Exhibit 10(iii)(m). * No. 10(iii)(n) Copy of Employment Agreement between the registrant and George A. Lorch dated as of December 13, 1999. * No. 11(a) Computation for basic earnings. No. 11(b) Computation for diluted earnings per share. No. 12 Ratio of Earnings to Fixed Charges No. 21 List of the registrant's domestic and foreign subsidiaries. No. 23 Consent of Independent Auditors. No. 24 Powers of Attorney and authorizing resolutions. No. 27 Financial Data Statement * Compensatory Plan EX-4 2 EXHIBIT 4(B) EXHIBIT 4(b) RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. As Amended and Restated Effective October 1, 1996 THIS WORKING COPY OF THE PLAN INCORPORATES AMENDMENTS ADOPTED THROUGH NOVEMBER 5, 1999 TABLE OF CONTENTS
PAGE ---- PREAMBLE..................................................................... 1 Article 1. Definitions...................................................... 4 1.01 Acquisition Loan...................................................... 4 1.02 Actual Deferral Percentage............................................ 4 1.03 Affiliated Company.................................................... 5 1.04 Beneficiary........................................................... 5 1.05 Board of Directors.................................................... 6 1.06 Break in Service...................................................... 6 1.07 Change in Control..................................................... 6 1.08 Code.................................................................. 6 1.09 Committee............................................................. 6 1.10 Company............................................................... 6 1.11 Company Stock......................................................... 6 1.12 Company Suspense Account.............................................. 7 1.13 Compensation.......................................................... 7 1.14 Contribution Percentage............................................... 8 1.15 Effective Date........................................................ 9 1.16 Eligible Employee..................................................... 9 1.17 Eligible Member....................................................... 9 1.18 Employee.............................................................. 9 1.19 Equity Account........................................................ 10 1.20 Equity Allocations.................................................... 10 1.21 ERISA................................................................. 10 1.22 Excess Exchange Contributions......................................... 10 1.23 Excess Matching Allocations........................................... 11 1.24 Excess Sheltered Contributions........................................ 12 1.25 Excess Standard Contributions......................................... 13 1.26 Exchange Contribution Account......................................... 14 1.27 Exchange Contributions................................................ 14 1.28 Full-Time Employee.................................................... 15 1.29 Highly Compensated Employee........................................... 15 1.30 Hour of Service....................................................... 18 1.31 Investment Fund....................................................... 18 1.32 Leveraged Shares...................................................... 18 1.33 Match Account......................................................... 19 1.34 Matching Allocations.................................................. 19 1.35 Member................................................................ 19 1.36 Member Account or Account............................................. 19 1.37 Parental Leave........................................................ 19 1.38 Participating Company................................................. 19
i 1.39 Part-Time Employee.................................................... 19 1.40 Plan.................................................................. 20 1.41 Plan Fiduciary........................................................ 20 1.42 Plan Year............................................................. 20 1.43 Qualifying Year of Employment......................................... 20 1.44 Retirement............................................................ 20 1.45 Retirement Savings Account............................................ 20 1.46 Retirement Savings Matching Contributions............................. 21 1.47 Retirement Savings Trustee............................................ 21 1.48 Rollover Contributions................................................ 21 1.49 Service............................................................... 21 1.50 Sheltered Contributions............................................... 21 1.51 Standard Contributions................................................ 22 1.52 Standard Contributions Percentage..................................... 22 1.53 Stock Ownership Account............................................... 23 1.54 Stock Ownership Allocation Period..................................... 23 1.55 Stock Ownership Contributions......................................... 23 1.56 Stock Ownership Plan.................................................. 23 1.57 Stock Ownership Trustee............................................... 24 1.58 Tax Deductible Contributions.......................................... 24 1.59 Trust................................................................. 24 1.60 Trust Agreement....................................................... 24 1.61 Trust Fund............................................................ 24 1.62 Valuation Date........................................................ 24 1.63 Year of Service....................................................... 25 Article 2. Eligibility and Membership........................................ 26 2.01 Eligibility........................................................... 26 2.02 Excluded Employees.................................................... 26 2.03 Membership............................................................ 27 2.04 Events Affecting Membership........................................... 28 2.05 Membership Upon Reemployment.......................................... 29 Article 3. Service.......................................................... 31 3.01 Companies For Whom Credited........................................... 31 3.02 Hours of Service...................................................... 31 3.03 Additional Service Credit............................................. 35 Article 4. Contributions and Dividends...................................... 36 4.01 Member Pre-Tax Contributions.......................................... 36 4.02 Standard Contributions................................................ 38 4.03 Change or Suspension in Member Contributions.......................... 39 4.04 Stock Ownership Contributions......................................... 41 4.05 Manner of Contributions............................................... 43 4.06 Return of Contributions............................................... 43
ii 4.07 Dividends on Company Stock.......................................... 43 4.08 Correction of Errors in Contributions............................... 44 4.09 Rollover Contributions.............................................. 45 Article 5. Acquisition Loans.............................................. 47 5.01 Acquisition Loan.................................................... 47 5.02 Allocation of Leveraged Shares...................................... 48 Article 6. Allocations of and Limitations on Contributions................ 50 6.01 Members Eligible for Allocations.................................... 50 6.02 Method of Allocations............................................... 53 6.03 Limitation on Exchange Contributions Affecting Highly Compensated... Employees...................................................... 57 6.04 Limitation on Sheltered Contributions Affecting Highly Compensated Employees...................................................... 59 6.05 Maximum Exchange Contributions and Sheltered Contributions.......... 60 6.06 Limitation on Matching Allocations Affecting Highly Compensated Employees...................................................... 62 6.07 Limitation on Standard Contributions Affecting Highly Compensated Employees...................................................... 64 6.08 Limitations on Annual Additions..................................... 67 Article 7. Investment of Contributions.................................... 73 7.01 Investment Funds.................................................... 73 7.02 Investment of Contributions......................................... 75 7.03 Change of Election.................................................. 76 7.04 Transfers Among Funds............................................... 76 7.05 Investment Options.................................................. 79 7.06 Valuations.......................................................... 79 7.07 Annual Statements................................................... 80 7.08 Diversification of Stock Ownership Accounts......................... 80 Article 8. In-Service Withdrawals and Loans............................... 83 8.01 In-Service Withdrawals.............................................. 83 8.02 Determination of Financial Hardship................................. 84 8.03 Investment Fund to be Charged with Withdrawal....................... 87 8.04 Loans to Eligible Borrowers......................................... 87 Article 9. Vesting and Distributions...................................... 93 9.01 Vesting............................................................. 93 9.02 Distribution Upon Retirement or Other Termination of Employment..... 94 9.04 Latest Commencement of Payments..................................... 102 9.05 Forfeitures......................................................... 103 9.06 Direct Rollover Distributions....................................... 105 9.07 Inability to Locate Payee........................................... 107
iii Article 10. Management of Funds............................................ 108 10.01 Trust Funds......................................................... 108 10.02 Investment of Stock Ownership Contributions......................... 109 10.03 Member Accounts..................................................... 109 10.04 Transfer of Trust Assets............................................ 111 10.05 Voting Rights for Company Stock..................................... 111 10.06 Tender Offer Rights with Respect to Company Stock................... 112 Article 11. Administration of Plan.......................................... 116 11.01 Appointment of Committee............................................ 116 11.02 Organization and Operation of the Committee......................... 116 11.03 Duties and Responsibilities of the Committee........................ 117 11.04 Required Information................................................ 118 11.05 Indemnification..................................................... 119 11.06 Claims and Appeal Procedure......................................... 119 11.07 Expenses of the Plan................................................ 121 Article 12. General Provisions.............................................. 122 12.01 Exclusiveness of Benefits........................................... 122 12.02 Limitation of Rights................................................ 122 12.03 Non-Assignability................................................... 122 12.04 Construction of Agreement........................................... 123 12.05 Severability........................................................ 123 12.06 Titles and Headings................................................. 124 12.07 Counterparts as Original............................................ 124 12.08 Construction........................................................ 124 12.09 Source of Benefits.................................................. 124 12.10 Top-Heavy Provisions................................................ 124 Article 13. Amendment, Merger And Termination.............................. 131 13.01 Amendment........................................................... 131 13.02 Termination, Sale of Assets or Sale of Subsidiary................... 131 13.03 Merger of Plans..................................................... 132 13.04 Additional Participating Companies, Locations, or Divisions......... 133
iv RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. PREAMBLE The purpose of the Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. (the "Plan"), formerly known as the "Retirement Savings Plan for Salaried Employees of Armstrong World Industries, Inc.," is to build a better and more prosperous Armstrong World Industries, Inc. (the "Company"). The Plan is designed to provide a means for long-term savings while providing employees with additional incentive to give their best efforts to help the Company prosper and grow, by permitting eligible employees to acquire a proprietary interest in the Company and accumulate capital for their future economic security. The Plan is designed to help provide additional benefits to eligible employees at the time of retirement, disability or termination of service, or for their beneficiaries in the event of their death. The Plan consists of two portions. The first portion is a profit sharing plan with a cash or deferred arrangement intended to qualify under Code Sections 401(a) and 401(k), under which contributions shall be made regardless of Armstrong's profits. The second portion (the assets of which are invested in the "Stock Ownership Fund") is both a stock bonus plan and an employee stock ownership plan intended to qualify under Sections 401(a), 401(k) and 4975(e)(7) of the Code, and as such is designed to invest primarily in common stock of Armstrong. All Trust assets acquired under the Plan as a result of contributions, income and other additions to the Plan shall be administered, distributed, forfeited and otherwise governed by the provisions of the Plan. 1 The Plan was originally established effective August 1, 1983, and has been amended from time to time since its adoption to comply with changes in the law and certain design changes. The Plan was amended and restated in order to comply with the Tax Reform Act of 1986 and other subsequent legislation and official guidance. Effective as of the close of business on September 30, 1996, the assets and liabilities of the Armstrong World Industries, Inc. Employee Stock Ownership Plan and the portion of the assets and liabilities of the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. attributable to hourly employees employed at the Company's Mobile Plant and to all hourly employees of the Affiliated Companies who are not members of a collective bargaining unit were merged into the Plan. The Plan is hereby amended and restated to change its name to the "Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc.," to reflect the merger of the Armstrong World Industries, Inc. Employee Stock Ownership Plan and part of the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc., and to make certain changes in the design of the employee stock ownership portion of the Plan. The rights of any Member or former Member whose employment terminates prior to the effective date of any amendment or restatement of the Plan, and the rights of the Beneficiary of such Member or former Member, shall be governed by the provisions of the Plan as in effect at the time of the Member's termination of employment, except in the event such Member is rehired and except as otherwise specifically provided herein or as required by law. 2 Unless a different date is specified for some purpose in the Plan, the provisions of the Plan are generally effective as of October 1, 1996. However, any Plan provision necessary to comply with the requirements of the Tax Reform Act of 1986, other subsequent legislation, or official guidance, which requirement has an earlier effective date, shall be effective retroactively to the date required by the applicable law or guidance. 3 Article 1. Definitions ----------- 1.01 "Acquisition Loan" means a loan or other extension of credit described in Section 4975(d)(3) of the Code which is used to finance or refinance the purchase of Company Stock by the Trustee. 1.02 "Actual Deferral Percentage" means, with respect to a specified group of Employees, any of whom is a Member or eligible to become a Member for a Plan Year, the average of the ratios, calculated separately for each Employee in that group, of (1) the amount of Exchange Contributions made on the Employee's behalf pursuant to Section 4.01(a) for the Plan Year plus the amount of any qualified nonelective contributions made on the Employee's behalf pursuant to Section 6.03(c) for the Plan Year, to (2) the Employee's Compensation for that Plan Year. In the case of a Highly Compensated Employee who is subject to the family aggregation requirements of Section 414(q)(6) of the Code, the combined Actual Deferral Percentage for the family group (which is treated as one Highly Compensated Employee) is determined by combining the Exchange Contributions, Compensation, and amounts treated as Exchange Contributions that are paid to the Trust Fund on behalf of all eligible family members for such Plan Year. In all events, Actual Deferral Percentages will be determined in accordance with all of the applicable requirements (including to the extent applicable, the plan aggregation and disaggregation requirements) of Section 401(k) of the Code, and the regulations issued thereunder. The percentage is determined by multiplying the ratio calculated above by one hundred (100). Notwithstanding the foregoing provisions, a separate Actual Deferral Percentage with respect to Sheltered Contributions shall be determined in the manner 4 indicated above, but with "Sheltered Contributions" replacing "Exchange Contributions," "Section 4.01(b)" replacing "Section 4.01(a)," and "Section 6.04(c)" replacing "Section 6.03(c)." 1.03 "Affiliated Company" means any corporation which is a member with the Company of a controlled group of corporations (determined under Section 1563(a) of the Code without regard to Section 1563(a)(4) and (e)(3)(C)); any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with the Company; a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Company; and any other entity which is required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code. Solely for purposes of applying the Code Section 415 limitations under Section 6.08, when determining whether an entity is an "Affiliated Company," "more than 50 percent" shall be substituted for "at least 80 percent" where it appears in Section 1563(a)(1) of the Code. 1.04 "Beneficiary" means the person, persons or entity designated in writing by a Member (on forms prescribed and filed with the Committee) to receive benefits payable after the Member's death; provided, however, that the surviving spouse of a Member who is married on the date of his death automatically shall be the Beneficiary unless the spouse consents in writing to the Member's designation of another Beneficiary. Any such consent shall be duly witnessed by a Plan representative or notary public and shall acknowledge the effect to the spouse of the Member's designation. If no person or entity is designated as "Beneficiary" or if no designated person or entity survives the Member, the term "Beneficiary" shall mean the Member's surviving spouse, or if none, the Member's estate. 5 1.05 "Board of Directors" means the Board of Directors of the Company. 1.06 "Break in Service" means a calendar year during which an Employee fails to complete more than 500 Hours of Service. 1.07 "Change in Control" means the occurrence of any of the following events: (1) any "person" becomes the "beneficial owner" of twenty-eight percent (28%) or more of the then outstanding "voting stock" of the Company and within five years thereafter, "disinterested directors" cease to constitute a majority of the Company's entire Board of Directors; or (2) a "business combination" with an "interested shareholder" that has not been approved by a majority of disinterested directors occurs. The terms "person," "beneficial owner," "voting stock," "disinterested directors," "business combination," and "interested shareholder" shall have the meaning given to them in Article 7 of the Company's Articles of Incorporation as in effect on May 1, 1985. 1.08 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.09 "Committee" means the entity appointed to administer and supervise the Plan as provided in Article 11. 1.10 "Company" means Armstrong World Industries, Inc., a Pennsylvania corporation, or any successor by merger, purchase, or otherwise with respect to its employees. 1.11 "Company Stock" means the common stock of the Company which shall constitute employer securities within the meaning of Section 409(l) of the Code. Prior to August 1, 1996, Company Stock under the Stock Ownership Plan included shares of 6 convertible preferred stock of the Company; on August 1, 1996, all such shares under the Stock Ownership Plan were converted to shares of common stock of the Company. 1.12 "Company Suspense Account" means the account under which Leveraged Shares are held until released and allocated pursuant to Sections 5.02 and 6.02. 1.13 "Compensation" means the total earnings payable to an Employee while a Member by a Participating Company during a Plan Year. Compensation shall be determined prior to any elective deferrals made on behalf of the Member under this Plan or under any other "qualified cash or deferred arrangement" (as defined under Section 401(k) of the Code and applicable regulations), or under a cafeteria plan (as defined under Section 125 of the Code and applicable regulations) maintained by the Company or an Affiliated Company, and shall not include reimbursements for expenses or any payments made following termination of employment and resulting from such termination, nor shall it include any awards, allowances, cost of living payments, payments on account of long-term disability, payments made in lieu of vacation time, or payments following layoff. Notwithstanding the foregoing, for purposes of Section 6.08, Compensation means an Employee's wages as defined in Section 3401(a) of the Code (without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2))) and all other payments of compensation to the Employee by his Participating Company (in the course of the Participating Company's trade or business) for which the Participating Company is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code (a Form W-2), and for purposes of Sections 1.02, 1.14 and 1.52, Compensation shall be as 7 defined above for purposes of Section 6.08, plus any elective deferrals made on behalf of the Member under this Plan or under any other "qualified cash or deferred arrangement" (as defined under Section 401(k) of the Code and applicable regulations), or under a cafeteria plan (as defined under Section 125 of the Code and applicable regulations) maintained by the Company or an Affiliated Company. In the case of a Member who begins, resumes, or ceases to be eligible to make contributions during a Plan Year, the amount of Compensation taken into account in determining the Actual Deferral Percentage, Contribution Percentage, and the Standard Contributions Percentage is the amount of Compensation received by the Member during the entire Plan Year. Further, for purposes of Sections 1.02, 1.14 and 1.52, and for purposes of any Equity Allocations, the amount of Compensation taken into account during any Plan Year shall not exceed $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and the regulations and other guidance issued thereunder). In determining a Member's Compensation for this purpose, the family aggregation rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the Member's spouse and any lineal descendants of the Member who have not attained age nineteen (19) before the close of the Plan Year. If any Plan Year consists of fewer than twelve (12) months, the foregoing annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the Plan Year, and the denominator of which is twelve (12). The annual Compensation limit that is in effect for a calendar year shall apply to any Plan Year that begins in such calendar year. 1.14 "Contribution Percentage" means, with respect to a specified group of Employees, any of whom is a Member or eligible to become a Member, the average of the 8 ratios, calculated separately for each Employee in that group, of (1) the value of Company Stock at the time allocated on behalf of the Employee to his Match Account for a Plan Year plus the amount of any qualified nonelective contributions made on the Employee's behalf pursuant to Section 6.06(c) for the Plan Year, to (2) the Employee's Compensation for that Plan Year. In the case of a Highly Compensated Employee who is subject to the family aggregation requirements of Section 414(q)(6) of the Code, the combined Contribution Percentage for the family group (which is treated as one Highly Compensated Employee) is determined by combining the Match Allocations, Compensation, and amounts treated as Match Allocations that are paid to the Stock Ownership Trust Fund on behalf of all eligible family members for such Plan Year. In all events, Contribution Percentages will be determined in accordance with all of the applicable requirements (including to the extent applicable, the plan aggregation requirements) of Section 401(m) of the Code, and the regulations issued thereunder. The percentage is determined by multiplying the ratio calculated above by one hundred (100). 1.15 "Effective Date" means August 1, 1983. 1.16 "Eligible Employee" means an Employee who has satisfied the applicable eligibility requirements of Section 2.01. 1.17 "Eligible Member" means a Member who is eligible for an allocation to his Equity Account and/or his Match Account during the Stock Ownership Allocation Period in accordance with Section 6.01. 1.18 "Employee" means any person (including leased employees within the meaning of Section 414(n)(2) of the Code) employed by the Company or an Affiliated Company and paid on an hourly or a salaried basis. Notwithstanding the foregoing, the term 9 "Employee" shall not include leased employees covered by a plan described in Section 414(n)(5)(B) of the Code if leased employees constitute less than twenty percent (20%) of the Company's nonhighly compensated workforce within the meaning of Section 414(n)(5)(C)(ii) of the Code. 1.19 "Equity Account" means the account established for each Eligible Member under Section 6.01(b) to receive and hold Equity Allocations. 1.20 "Equity Allocations" means Company Stock allocated on behalf of an Eligible Member pursuant to Section 6.02(c). 1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.22 "Excess Exchange Contributions" means, with respect to each Highly Compensated Employee, the amount of Exchange Contributions made to the Plan on his behalf during the Plan Year, determined after application of Section 6.03(b) and prior to application of the leveling procedure described below, minus the product of the Member's Actual Deferral Percentage, determined after application of Section 6.03(b) and the leveling procedure described below, multiplied by the Member's Compensation, as determined for purposes of Section 1.02. In accordance with the regulations issued under Section 401(k) of the Code, Excess Exchange Contributions shall be determined by a leveling procedure under which the Actual Deferral Percentage of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.03(a) to be satisfied, or, if it results in a lower reduction, to the extent required to cause such Member's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee 10 with the next highest Actual Deferral Percentage. This leveling procedure shall be repeated until the limitation of Section 6.03(a) is first satisfied. In no case shall the amount of Excess Exchange Contributions with respect to any Highly Compensated Employee exceed the amount of Exchange Contributions made on behalf of such Member in any Plan Year. The determination and correction of Excess Exchange Contributions of a Highly Compensated Employee whose Actual Deferral Percentage is determined under the family aggregation requirements of Code Sections 401(k) and 414(q)(6) shall be accomplished by reducing the family unit's Actual Deferral Percentage under the leveling procedure described in this Section 1.22 and allocating the Exchange Contributions among the family group in proportion to the Exchange Contributions made on behalf of each family member that are combined to determine the family unit's Actual Deferral Percentage. 1.23 "Excess Matching Allocations" means, with respect to each Highly Compensated Employee, the value of Company Stock allocated to his Match Account during the Plan Year, determined prior to application of the leveling procedure described below, minus the product of the Member's Contribution Percentage, determined after application of the leveling procedure described below, multiplied by the Member's Compensation, as determined for purposes of Section 1.14. In accordance with the regulations issued under Section 401(m) of the Code, Excess Matching Allocations shall be determined by a leveling procedure under which the Contribution Percentage of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.06(a) to be satisfied, or, if it results in a lower reduction, to the extent required to cause such Highly Compensated Employee's 11 Contribution Percentage to equal that of the Highly Compensated Employee with the next highest Contribution Percentage. This leveling procedure shall be repeated until the limitation of Section 6.06(a) is first satisfied. In no case shall the amount of Excess Matching Allocations with respect to any Highly Compensated Employee exceed the amount of Matching Allocations made on behalf of such Member in such Plan Year. The determination and correction of Excess Matching Allocations of a Highly Compensated Employee whose Contribution Percentage is determined under the family aggregation requirements of Code Sections 401(m) and 414(q)(6) shall be accomplished by reducing the family unit's Contribution Percentage under the leveling procedure described in this Section 1.23 and allocating the Excess Matching Allocations among the family group in proportion to the Matching Allocations made on behalf of each family member that are combined to determine the family unit's Contribution Percentage. 1.24 "Excess Sheltered Contributions" means, with respect to each Highly Compensated Employee, the amount of Sheltered Contributions made to the Plan on his behalf during the Plan Year, determined after application of Section 6.04(b) and prior to application of the leveling procedure described below, minus the product of the Member's Actual Deferral Percentage, determined after application of Section 6.04(b) and the leveling procedure described below, multiplied by the Member's Compensation, as determined for purposes of Section 1.02. In accordance with the regulations issued under Section 401(k) of the Code, Excess Sheltered Contributions shall be determined by a leveling procedure under which the Actual Deferral Percentage of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.04(a) to be satisfied, or, if it results in a 12 lower reduction, to the extent required to cause such Member's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Actual Deferral Percentage. This leveling procedure shall be repeated until the limitation of Section 6.04(a) is first satisfied. In no case shall the amount of Excess Sheltered Contributions with respect to any Highly Compensated Employee exceed the amount of Sheltered Contributions made on behalf of such Member in any Plan Year. The determination and correction of Excess Sheltered Contributions of a Highly Compensated Employee whose Actual Deferral Percentage is determined under the family aggregation requirements of Code Sections 401(k) and 414(q)(6) shall be accomplished by reducing the family unit's Actual Deferral Percentage under the leveling procedure described in this Section 1.24 and allocating the Sheltered Contributions among the family group in proportion to the Sheltered Contributions made on behalf of each family member that are combined to determine the family unit's Actual Deferral Percentage. 1.25 "Excess Standard Contributions" means, with respect to each Highly Compensated Employee, the amount equal to his Standard Contributions (including the amount of any Sheltered Contributions recharacterized pursuant to Section 6.07(c)) during the Plan Year, determined prior to application of the leveling procedure described below, minus the product of the Member's Standard Contribution Percentage, determined after the application of the leveling procedure described below, multiplied by the Member's Compensation, as determined for purposes of Section 1.52. In accordance with the regulations issued under Section 401(m) of the Code, Excess Standard Contributions shall be determined by a leveling procedure under which the Standard Contribution Percentage 13 of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.07(a) to be satisfied, or, if it results in a lower reduction, to the extent required to cause such Member's Standard Contribution Percentage to equal that of the Highly Compensated Employee with the next highest Standard Contribution Percentage. This leveling procedure shall be repeated until the limitation of Section 6.07(a) is first satisfied. In no case shall the amount of Excess Standard Contributions with respect to any Highly Compensated Employee exceed his Standard Contributions in any Plan Year. The determination and correction of Excess Standard Contributions of a Highly Compensated Employee whose Standard Contribution Percentage is determined under the family aggregation requirements of Code Sections 401(m) and 414(q)(6) is accomplished by reducing the family unit's Standard Contribution Percentage under the leveling procedure described in this Section 1.25 and allocating the Excess Standard Contributions among the family group in proportion to the Standard Contributions made on behalf of each family member that are combined to determine the family unit's Standard Contribution Percentage. 1.26 "Exchange Contribution Account" means the subaccount established for each Member under his Stock Ownership Account to receive and hold Exchange Contributions and Stock Ownership Contributions made pursuant to Section 4.04(b)(i). 1.27 "Exchange Contributions" means that portion of a Member's Compensation which is deferred and contributed to his Stock Ownership Account, in accordance with Section 401(k) of the Code and as described in Section 4.01(a). 14 1.28 "Full-Time Employee" means any Employee who is employed on a continuing basis and is expected to work the normal number of work hours for the location as determined by the Participating Company. 1.29 "Highly Compensated Employee" means any Employee who meets the definition of "Highly Compensated Employee" as determined under Section 414(q) of the Code and regulations issued thereunder, as set forth herein. The term "Highly Compensated Employee" includes "Highly Compensated Active Employees" and "Highly Compensated Former Employees" and shall be determined as follows: (a) A "Highly Compensated Active Employee" means an Employee who performs services for the Company or an Affiliated Company during the current Plan Year (the "determination year") and who, during the preceding Plan Year (the "look-back year"), was an Employee who: (i) received Compensation in excess of $75,000 (adjusted at the same time and in the same manner as under Section 415(d) of the Code), (ii) received Compensation in excess of $50,000 (adjusted at the same time and in the same manner as under Section 415(d) of the Code) and was a member of the "top-paid group", or (iii) was an officer earning more than fifty percent (50%) of the dollar limitation under Section 415(b)(1)(A) of the Code. (b) A "Highly Compensated Active Employee" also includes an Employee described in the preceding sentence if: 15 (i) the term "determination year" is substituted for the term "look-back year" and the Employee was one of the one hundred (100) Employees who earned the most Compensation during the determination year, or (ii) the Employee was at any time during the determination year or the look-back year a five percent (5%) owner of the Company or an Affiliated Company as defined in Section 416(i)(1) of the Code. (c) The "top-paid group" for any determination year or look-back year shall include all Employees who are in the top twenty percent (20%) of all Employees on the basis of Compensation. For purposes of determining the number of Employees in the top-paid group, the following Employees shall be excluded: (i) Employees who have not completed six (6) months of service by the end of the year; (ii) Employees who normally work less than seventeen and one- half (17 1/2) hours per week for the year; (iii) Employees who normally work during not more than six (6) months during any year; and (iv) Employees who have not attained age twenty-one (21) by the end of such year. (d) For purposes of determining the number of Employees who will be considered "officers," no more than fifty (50) Employees (or, if less, the greater of three Employees or ten percent (10%) of the Employees), excluding those Employees who are excluded for purposes of determining the top-paid group under the preceding Subsection, shall be treated as officers. If for any year no officer has earned more than fifty percent 16 (50%) of the dollar limitation under Section 415(b)(1)(A) of the Code, the highest paid officer of the Company or an Affiliated Company shall be treated as having earned such amount. (e) A "Highly Compensated Former Employee" means an Employee who separated from service prior to the determination year, who performed no services for the Company or an Affiliated Company during the determination year, and who was a Highly Compensated Active Employee for either such Employee's separation year or any determination year ending on or after the Employee's 55th birthday. (f) If during a determination year a Highly Compensated Employee is a five percent (5%) owner or one of the ten (10) most Highly Compensated Employees on the basis of Compensation paid during such determination year, then such Employee shall be subject to the family aggregation requirements of Section 414(q)(6) of the Code, and the Compensation and contributions paid to or on behalf of all family members who are Employees shall be aggregated with and attributable to the Highly Compensated Employee. For this purpose, family members shall include the Highly Compensated Employee's spouse and lineal ascendants or descendants and the spouse of such lineal ascendants or descendants. (g) For purposes of determining Highly Compensated Employees, Employees who are nonresident aliens receiving no United States source income within the meaning of Sections 861(a)(3) and 911(d)(2) of the Code shall be disregarded. (h) For purposes of determining Highly Compensated Employees, "Compensation" for a determination year or a look-back year shall be determined in the same manner as "Compensation" for purposes of Section 6.08, increased by pre-tax 17 amounts described in Sections 125 and 402(e)(3) of the Code under plans maintained by the Company or an Affiliated Company. (i) Notwithstanding the foregoing, the determination of Highly Compensated Employees may be made under the calendar year calculation election under the regulations issued pursuant to Code Section 414(q). In accordance with such election, if it is made by the Committee or its designee, each look- back year calculation shall be based on the calendar year ending within the applicable determination year. Such election shall apply to all other plans maintained by an Affiliated Company. The Committee or its designee may elect to apply the calendar year election for any Plan Year. Further, the Committee or its designee may elect to apply such other rules for determining Highly Compensated Employees, including substantiation guidelines, as issued pursuant to Code Section 414(q). 1.30 "Hour of Service" means each hour credited under Section 3.02. 1.31 "Investment Fund" means any of the separate funds in which contributions to the Plan are invested in accordance with Article 7. 1.32 "Leveraged Shares" means shares of Company Stock acquired by the Trustee with the proceeds of an Acquisition Loan pursuant to Section 5.01. Except as required by Section 409(h) of the Code and by Treasury Regulation Sections 54.4975-7(b)(9) and (10), or as otherwise required by applicable law, no Leveraged Shares may be subject to a put, call or other option, or buy-sell or similar arrangement while held by, or when distributed from, the Plan, whether or not the Plan is an employee stock ownership plan, within the meaning of Code Section 4975(e)(7), at that time. 18 1.33 "Match Account" means the subaccount established for each Eligible Member under his Stock Ownership Account pursuant to Section 6.01(c) to receive and hold Matching Allocations and to hold bonus allocations made under the Stock Ownership Plan prior to October 1, 1996. 1.34 "Matching Allocations" means Company Stock allocated on behalf of an Eligible Member pursuant to Section 6.02(d). 1.35 "Member" means any Eligible Employee included in the membership of the Plan, as provided in Article 2. 1.36 "Member Account" or "Account" means, as of any Valuation Date, the total value of each Member's Retirement Savings Account and Stock Ownership Account. 1.37 "Parental Leave" means a period in which the Employee is absent from work immediately following his active employment because of the Employee's pregnancy, the birth of the Employee's child or the placement of a child with the Employee in connection with the adoption of that child by the Employee, or for purposes of caring for that child for a period beginning immediately following that birth or placement. Parental leave shall include such periods of leave described in the Family and Medical Leave Act of 1993 solely to the extent required thereunder. 1.38 "Participating Company" means the Company and any other Affiliated Company which adopts the Plan as provided in Section 13.04. 1.39 "Part-Time Employee" means any Employee who is employed on a continuing basis and is expected to work less than the normal number of work hours for the location as determined by the Participating Company, or any Employee who is not employed on a continuing basis as determined by the Participating Company. 19 1.40 "Plan" means the Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. (formerly named the Retirement Savings Plan for Salaried Employees of Armstrong World Industries, Inc.), as set forth in this document or as amended from time to time. 1.41 "Plan Fiduciary" means the boards of directors of the Participating Companies, the Committee, the Trustees, and all other persons who exercise discretionary authority or have responsibility of a fiduciary nature as described in Title I of ERISA. 1.42 "Plan Year" means a period of twelve consecutive months commencing on each October 1 and ending on September 30. 1.43 "Qualifying Year of Employment" means the twelve consecutive month period beginning on a Part-Time Employee's first date of employment (or date of re- employment, if applicable) or any calendar year commencing after such date, during which the Part-Time Employee completes at least 1,000 Hours of Service. 1.44 "Retirement" means early, disability, normal or deferred retirement under the Retirement Income Plan for Employees of Armstrong World Industries, Inc. or any other retirement plan maintained by an Affiliated Company provided such retirement results in the Member's separation from the employment of the Company or Affiliated Company with no continuing employment immediately thereafter with any Affiliated Company. "Retirement" for Members not covered by any such retirement plan shall mean separation from Service on or after attaining age 65. 1.45 "Retirement Savings Account" means the portion of a Member's Account that is attributable to Sheltered Contributions, Standard Contributions, Rollover 20 Contributions, Tax Deductible Contributions, and Retirement Savings Matching Contributions, determined as of any Valuation Date. 1.46 "Retirement Savings Matching Contributions" means those contributions to the Plan that were made as of no later than December 31, 1989 by Participating Companies to match Tax Deferred Contributions to the Plan. 1.47 "Retirement Savings Trustee" means the party or parties, individual or corporate, named in a Trust Agreement who holds the assets of the Plan determined as of September 30, 1996; amounts attributable to Sheltered Contributions, Standard Contributions, and Rollover Contributions made subsequent to September 30, 1996; amounts attributable to Exchange Contributions invested in a Money Market Fund until the allocation of Leveraged Shares for the Stock Ownership Allocation Period in which such Exchange Contributions are made; and amounts attributable to the shares of Company Stock that are diversified in accordance with Section 7.08, as provided in Article 10. 1.48 "Rollover Contributions" means contributions made by an Eligible Employee who is eligible to make Sheltered Contributions and Standard Contributions, in accordance with Section 4.09. 1.49 "Service" means service credited pursuant to Article 3 of the Plan. 1.50 "Sheltered Contributions" means that portion of a Member's Compensation which is deferred and contributed to the profit sharing portion of the Plan, in accordance with Section 401(k) of the Code and as described in Section 4.01(b) and which were referred to as "Tax Deferred Contributions" prior to October 1, 1996. 21 1.51 "Standard Contributions" means contributions made by a Member to the profit sharing portion of the Plan, in accordance with Section 4.02 and which were, prior to October 1, 1996, referred to as "Additional (After Tax) Contributions" and included "Catch-Up Contributions," if any, that were made under the Plan prior to January 1, 1990. 1.52 "Standard Contributions Percentage" means, with respect to a specified group of Employees, any of whom is a Member or eligible to become a Member, the average of the ratios, calculated separately for each Employee in that group, of (1) the sum of (a) Standard Contributions made pursuant to Section 4.02 for such Plan Year; (b) any Sheltered Contributions that are recharacterized as Standard Contributions pursuant to Section 6.07(c) for such Plan Year; (c) any Sheltered Contributions that are utilized in satisfying the requirements of Section 6.07(a) for such Plan Year; and (d) any qualified nonelective contributions made on the Employee's behalf pursuant to Section 6.07(d) for the Plan Year, to (2) the Employee's Compensation for that Plan Year. In the case of a Highly Compensated Employee who is subject to the family aggregation requirements of Section 414(q)(6) of the Code, the combined Standard Contributions Percentage for the family group (which is treated as one Highly Compensated Employee) is determined by combining the Standard Contributions, the recharacterized Sheltered Contributions, the Sheltered Contributions that are utilized in satisfying the requirements of Section 6.07(a), qualified nonelective contributions, and Compensation, on behalf of all eligible family members for such Plan Year. In all events, Standard Contributions Percentages will be determined in accordance with all of the applicable requirements (including to the extent applicable, the plan aggregation requirements) of Section 401(m) of the Code, and the 22 regulations issued thereunder. The percentage is determined by multiplying the ratio calculated above by one hundred (100). 1.53 "Stock Ownership Account" means all Leveraged Shares and other assets held by the Stock Ownership Trustee under the Plan and allocated for the benefit of a Member attributable to Exchange Contributions, Matching Allocations and Equity Allocations, and all amounts attributable to Exchange Contributions invested in a Money Market Fund until the allocation of Leveraged Shares for the Stock Ownership Allocation Period in which such Exchange Contributions are made and all amounts attributable to the shares of Company Stock that are diversified in accordance with Section 7.08 held by the Retirement Savings Trustee, determined as of any Valuation Date. 1.54 "Stock Ownership Allocation Period" means the period for which an allocation of Leveraged Shares released from the Company Suspense Account under Section 6.02 is made to Members' Stock Ownership Accounts; the Stock Ownership Allocation Period initially shall be the period beginning July 1, 1996 and ending December 12, 1996, and thereafter, shall be the approximate six-month period ending on the second prior day on which the New York Stock Exchange is open for trading that immediately precedes the scheduled repayment of principal and interest on the Acquisition Loan. 1.55 "Stock Ownership Contributions" means contributions by a Participating Company under Section 4.04. 1.56 "Stock Ownership Plan" means the Armstrong World Industries, Inc. Employee Stock Ownership Plan, which was merged into this Plan on September 30, 1996. 23 1.57 "Stock Ownership Trustee" means the party or parties, individual or corporate, named in a Trust Agreement by whom the funds of the employee stock ownership portion of the Plan (other than amounts attributable to Exchange Contributions made in a Stock Ownership Allocation Period invested in a Money Market Fund until the allocation of Leveraged Shares for such Stock Ownership Allocation Period and amounts attributable to the shares of Company Stock that are diversified in accordance with Section 7.08) are held, as provided in Article 10. 1.58 "Tax Deductible Contributions" means a Member's contributions to the Plan made prior to January 1, 1987, that were tax deductible, in accordance with Section 219 of the Code and as described in Section 3.06 of the Plan in effect immediately preceding the effective date of this amendment and restatement. 1.59 "Trust" means the legal entity resulting from the Trust Agreements between the Company and the Stock Ownership and Retirement Savings Trustees. 1.60 "Trust Agreement" means the individual agreements entered into between the Company or the Committee and the Stock Ownership Trustee and the Company or the Committee and the Retirement Savings Trustee, which fix the rights and liabilities of each such party with respect to holding and administering the applicable Trust Fund for the purposes of the Plan. 1.61 "Trust Fund" means, depending on the context in which used, the portion of the Trust consisting of all Members' Retirement Savings Accounts and/or the portion of the Trust consisting of all Members' Stock Ownership Accounts. 1.62 "Valuation Date" means each day that the New York Stock Exchange is open for trading. 24 1.63 "Year of Service" means any calendar year in which the Employee has completed 1,000 or more Hours of Service. For purposes of determining a Member's vested interest in his Equity Account and Match Account under Section 9.01(b), any calendar year in which the Member was employed by Worthington Armstrong Venture ("WAVE") shall be recognized, provided the Member commences employment with the Company or an Affiliated Company directly following his termination of employment with WAVE. 25 Article 2. Eligibility and Membership -------------------------- 2.01 Eligibility ----------- On or after October 1, 1996 and prior to January 1, 1999, each Full- Time Employee (other than a Full-Time Employee excluded under Section 2.02) shall become an Eligible Employee on the first date on which he is credited with an Hour of Service, and each Part-Time Employee (other than a Part-Time Employee excluded under Section 2.02) shall become an Eligible Employee on the first day of the month next following the date upon which he completes a Qualifying Year of Employment. Effective January 1, 1999, any Employee (other than an Employee excluded under Section 2.02) shall become an Eligible Employee as of the earlier of January 1, 1999 or the date on which the Employee is first credited with an Hour of Service. Notwithstanding Section 2.02(a), each hourly Employee employed at the Company's Mobile Plant also shall be eligible to become a Member in the manner indicated in the preceding two sentences. 2.02 Excluded Employees ------------------ The following Employees shall be excluded from becoming Eligible Employees under the Plan: (a) Any Employee who is (or becomes) a member of a collective bargaining unit that is a party to a collective bargaining agreement with a Participating Company unless there is in effect an agreement making the Plan available to Employees in such unit. (b) Any Employee who is a leased employee of a Participating Company and who is employed by a leasing organization (as defined in Code Section 414(n)(2)) which is not an Affiliated Company. 26 (c) Any foreign national whose services are performed primarily for and at a branch facility of the Participating Company outside the United States. (d) Any citizen of a territorial possession of the United States whose employment relationship or contract of employment originates at, and whose services are performed primarily for and at, a branch facility of the Participating Company outside the United States. (e) Any person not employed by a Participating Company unless designated as eligible by the Committee. (f) Any person employed by a Participating Company at locations established or acquired after June 1, 1989, unless included pursuant to Section 13.04. (g) Any person employed on an hourly basis by Armstrong Industrial Specialties, Inc. or The W.W. Henry Company. 2.03 Membership ---------- An Eligible Employee under Section 2.01 or Section 2.05(a) shall become a Member under the Plan by designating a percentage of his Compensation to be contributed to the Plan under Section 4.01(a), 4.01(b) and/or 4.02(a). An Eligible Employee shall be provided one opportunity at any time during the calendar year in which he becomes an Eligible Employee to designate the percentage of his Compensation to be contributed to the Plan under Section 4.01(a); if no such designation is made during such calendar year, the Eligible Employee shall be provided an opportunity to designate the percentage of his Compensation to be contributed to the Plan for following calendar years under Section 4.01(a) only during the annual election period designated by the Committee. An Eligible Employee may designate the percentage of his Compensation to be contributed to the Plan 27 under Sections 4.01(b) and 4.02(a) at any time after becoming an Eligible Employee. Any designation under the preceding sentences shall become effective as soon as practicable thereafter, provided the designation is made in the manner authorized by the Committee and is accompanied by: (a) an authorization for the Participating Company to make regular payroll deductions to cover the amount of such contributions elected pursuant to Section 4.01 and/or 4.02; (b) an investment election with respect to Sheltered Contributions under Section 4.01(b), Standard Contributions under Section 4.02(a), and the remaining portion of his Retirement Savings Account, if any; and (c) a designation of Beneficiary. Notwithstanding the foregoing, an Eligible Employee's failure to designate contribution percentages under Sections 4.01 and 4.02 shall not affect his status as a Member and his entitlement to an allocation under Section 6.02(c), in accordance with Section 6.01(b). 2.04 Events Affecting Membership --------------------------- (a) If a Member is no longer employed by a Participating Company, is transferred to employment with an Affiliated Company that is not a Participating Company, or is transferred to a position with the Company or an Affiliated Company that makes him ineligible to be a Member under Section 2.02, his active participation under the Plan shall be suspended and, during the period of his unemployment or his employment in such ineligible position, he shall not be eligible to have allocated to his Retirement Savings Account or Stock Ownership Account any contributions made under Section 4.01, 4.02 or 4.04, except as may be required to satisfy the allocation requirements of Section 6.02(a). 28 (b) A Member who is employed by the Company and who is transferred directly to an Affiliated Company (whether or not a Participating Company) other than the Company shall not be eligible to have any Company Stock allocated to his Equity Account during the period of his employment with such Affiliated Company. 2.05 Membership Upon Reemployment ---------------------------- (a) Each individual described in Section 2.04(a) who is reemployed by a Participating Company or who ceases to be an excluded Employee under Section 2.02, shall again be an Eligible Employee on his date of reemployment or the date he ceases to be an excluded Employee, in accordance with such rules and regulations which are adopted by the Committee. Any such Eligible Employee shall again become a Member in accordance with Section 2.03. (b) Each individual described in Section 2.04(b) who is transferred to the Company other than as an excluded Employee under Section 2.02, shall again become eligible to have Company Stock allocated to his Equity Account as of his date of transfer . (c) A Part-Time Employee who terminates employment with the Company or an Affiliated Company prior to becoming an Eligible Employee and who is rehired by the Company or an Affiliated Company prior to January 1, 1999 and after a one-year Break in Service, shall be treated as a newly-hired Employee upon his reemployment. A Part-Time Employee who terminates employment with the Company or an Affiliated Company prior to becoming an Eligible Employee and who is rehired prior to January 1, 1999 and before the end of a one-year Break in Service, shall be eligible to become a Member in accordance with Sections 2.01, 2.02 and 2.03, based on his original date of hire. Effective January 1, 1999, any Part-Time Employee whose Continuous Employment has terminated and who is reemployed prior to January 1, 1999 shall be eligible to become a Member as of January 1, 1999. 29 Article 3. Service ------- 3.01 Companies For Whom Credited --------------------------- Service shall mean periods of an Employee's employment with the Company, an Affiliated Company (on and after the date of affiliation unless determined otherwise by the Committee), and any predecessor corporation of a Participating Company, or a corporation merged, consolidated or liquidated into the Participating Company or a predecessor of the Participating Company, or a corporation, substantially all of the assets of which have been acquired by the Participating Company, if the Participating Company maintains a plan of such a predecessor corporation. If the Participating Company does not maintain a plan maintained by such a predecessor, periods of employment with such a predecessor shall be credited as Service only to the extent required under regulations prescribed by the Secretary of the Treasury pursuant to Section 414(a)(2) of the Code. 3.02 Hours of Service ---------------- For purposes of determining an Employee's eligibility to participate under Section 2.01 of the Plan and a Member's vested interest in his Match Account and Equity Account under Section 9.01, with respect to any applicable computation period: (a) An Employee shall be credited with Hours of Service during periods for which he is directly or indirectly paid by, or entitled to payment from the Company or an Affiliated Company for the performance of duties; (b) An Employee shall be credited with Hours of Service during periods when no duties are performed: (i) Due to vacation, holiday, layoff, or leave of absence; and during which he is paid or entitled to payment from the Company or an Affiliated Company; 30 (ii) Because of temporary total disability due to sickness, injury, or incapacity; for which he receives or is entitled to receive either disability benefits or Worker's Compensation, directly or indirectly from the Company or an Affiliated Company; (iii) Due to total disability for which he receives or is entitled to receive benefits under a long-term disability income plan maintained by the Company or an Affiliated Company or under the provisions of Article VI, Section (8) of the Retirement Income Plan for Employees of Armstrong World Industries, Inc.; or (iv) Due to jury duty or military duty in the Armed Forces of the United States; and during which he is paid or entitled to payment from the Company or an Affiliated Company. (c) An Employee shall be credited with Hours of Service during periods for which back pay, irrespective of mitigation of damages, has been awarded or agreed to by the Company or an Affiliated Company. (d) The Committee shall determine whether an Employee is entitled to credit for an Hour of Service on the basis of records of hours worked and payments made or due. An exempt salaried Employee shall be credited with 45 Hours of Service for each week for which it is determined that he is entitled to credit for at least one such Hour of Service. (e) Hours of Service credited under Section 3.02(b) or (c) hereof for a period during which the Employee is not performing duties but for which he is paid or entitled to payment, directly or indirectly, by the Company or an Affiliated Company shall be subject to the following rules: 31 (i) If payments made for a period of absence are computed with specific reference to units of time, the number of Hours of Service credited shall be the number of regularly scheduled working hours included in the units of time on the basis of which the payment is calculated, consistently determined with respect to all Employees within the same job classification. (ii) If payments made for a period of absence are computed without regard to units of time, the number of Hours credited shall be equal to the amount of the payment made with respect to such period of absence divided by the Employee's most recent hourly rate of pay or its equivalent. (iii) Hours of Service credited hereunder for an absence shall be credited to the calendar year during which the period of absence occurs; provided, however, that if the period of absence falls within more than one calendar year, the Committee, following uniform rules and governmental regulations, may prorate such Hours between such calendar years. Hours of Service credited by reason of an award or agreement for back pay shall be credited to the calendar year to which the award or agreement pertains. (iv) The Hours of Service credited hereunder for any period of absence shall not exceed the number of working hours regularly scheduled for the performance of duties during such period of absence, as determined in accordance with procedures consistently applied by the Committee with respect to all Employees within any one job classification. Nothing contained herein shall result in double credit for the same period. 32 (v) No more than 501 Hours of Service shall be credited for a period described under Section 3.02(b) or (c) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period). (vi) No credit shall be given under this Section 3.02 during periods for which payments are made or due under a plan maintained solely to comply with applicable worker's compensation laws or unemployment compensation laws, for which payments are made solely to reimburse an Employee for medical or medically-related expenses incurred by the Employee, or for which payments are made for the period following retirement. (vii) The number of Hours of Service credited under the Plan for military service or for any other period described in Section 3.02(b)(iv) hereof during which the Employee is not paid or entitled to payment, directly or indirectly, from the Company or an Affiliated Company shall be determined on the basis of the number of regularly scheduled hours the Employee was working prior to the absence. (f) For the purposes of determining whether an Employee has incurred a Break in Service, an Employee who is absent from work due to Parental Leave and who is not entitled to credit for such absence under any of the other provisions of this Section 3.02 shall be credited with a number of Hours of Service for such absence equal to the number of Hours of Service that would have been credited to the Employee had he been performing duties during the absence or, if the Committee is unable to determine the number of such Hours, eight (8) Hours of Service per day of such absence; provided, however, that in no event shall more than 501 Hours of Service be credited for any single 33 continuous period of absence described in this Section 3.02(f). If in the year in which the absence begins, the Employee has not yet been credited with 501 Hours of Service, then the Hours of Service credited by reason of this Section shall be credited in such year; in any other case, the Hours of Service credited by reason of this Section shall be credited in the year following the year in which the absence begins. 3.03 Additional Service Credit ------------------------- The Committee, in its sole discretion, may provide additional credit for eligibility or vesting purposes for periods not required to be credited under this Article 3, provided that the Committee shall act in a nondiscriminatory manner. 34 Article 4. Contributions and Dividends --------------------------- 4.01 Member Pre-Tax Contributions ---------------------------- (a) Exchange Contributions ---------------------- Each Member may authorize the Participating Company by which he is employed, in the manner described in Section 2.03, to reduce his Compensation by not less than 1% and not more than 6% (or such lower maximum percentage as the Committee may from time to time determine), in multiples of 1% as elected by the Member, and have that amount contributed to the Plan by the Participating Company as Exchange Contributions, subject to the limits of Sections 6.03 and 6.05. The specified portion of the Member's Compensation which would otherwise be paid to the Member shall be paid by the Participating Company to the Stock Ownership Trustee as soon as practicable after the end of each payroll period, and shall be credited to the Member's Exchange Contribution Account. An Eligible Employee who does not elect to reduce his Compensation under this Section 4.01(a) as of the first day of the payroll period that begins coincident with or immediately following the date on which he becomes an Eligible Employee under Section 2.01, may make an election, in the manner described in Section 2.03, to reduce his Compensation effective for the payroll period coincident with or immediately following any subsequent January 1. (b) Sheltered Contributions ----------------------- Subject to the last sentence of this Subsection (b), each Member may authorize the Participating Company by which he is employed, in the manner described in Section 2.03, to reduce his Compensation by not less than 1% and not more than 15% (or such lower maximum percentage as the Committee may from time to time determine), in 35 multiples of 1% as elected by the Member, and have that amount contributed to the Plan by the Participating Company as Sheltered Contributions, subject to the limits of Sections 6.04 and 6.05. The specified portion of the Member's Compensation which would otherwise be paid to the Member shall be paid by the Participating Company to the Retirement Savings Trustee as soon as practicable after the end of each payroll period, and will be credited to the Member's Sheltered Account. Notwithstanding the foregoing, any Member employed by The W.W. Henry Company shall not be permitted to make Sheltered Contributions. (c) In the event that Exchange Contributions or Sheltered Contributions made under this Section are returned to the Employer in accordance with Section 4.06, the elections to reduce Compensation which were made by Members on whose behalf those contributions were made shall be void retroactively to the beginning of the period for which those contributions were made. (d) Notwithstanding anything to the contrary in this Section 4.01, the Committee may at any time reduce the maximum percentage by which some or all Members may reduce their Compensation pursuant to Subsection (a) or (b) above. The duration of such reduction shall be determined by the Committee at such time. (e) Notwithstanding any other provision of the Plan to the contrary, in no event may the Exchange Contributions and Sheltered Contributions under Subsections (a) and (b) above by any Member exceed in a Plan Year an amount equal to 15% (or such lower maximum percentage as set by the Committee pursuant to Sections 6.03 and 6.04) multiplied by the Member's Compensation not in excess of $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and the regulations and other guidance 36 issued thereunder). This limitation shall be applied on a Plan Year basis, shall not be prorated for any part of such Plan Year, and shall be applied only with respect to amounts earned after becoming a Member. 4.02 Standard Contributions ---------------------- (a) Subject to the last sentence of this Subsection (a), each Member may authorize contributions by payroll deduction on an after-tax basis of a stated whole percentage of Compensation from 1% to 10%, with such amount being rounded to the next higher multiple of one dollar per pay period and with such amount being subject to the limits of Section 6.07. The specified portion of the Member's Compensation shall be paid by the Participating Company to the Retirement Savings Trustee as soon as practicable after the end of each payroll period, and will be credited to the Member's Standard Account. Notwithstanding the foregoing, any Member employed by The W.W. Henry Company shall not be permitted to make Standard Contributions. (b) Notwithstanding anything to the contrary in this Section 4.02, the Committee may at any time reduce the maximum percentage by which some or all Members may reduce their Compensation pursuant to Subsection (a) above. The duration of such reduction shall be determined by the Committee at such time. (c) Notwithstanding any other provision of the Plan to the contrary, in no event may the Standard Contributions under Subsection (a) above by any Member in a Plan Year exceed an amount equal to 10% (or such lower maximum percentage as set by the Committee pursuant to Section 6.07) multiplied by the Member's Compensation not in excess of $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and the regulations and other guidance issued thereunder). This limitation shall be applied on a 37 Plan Year basis, shall not be prorated for any part of such Plan Year, and shall be applied only with respect to amounts earned after becoming a Member. 4.03 Change or Suspension in Member Contributions -------------------------------------------- (a) Exchange Contributions ---------------------- Once a Member initially elects to reduce his Compensation under Section 4.01(a), the Member may elect to change or suspend his rate of Exchange Contributions only during the annual election period designated by the Committee. Any such change or suspension shall be effective beginning with the first payroll period that begins on or immediately following the next January 1. Once made, a Member may not change his annual election with respect to the remainder of the calendar year. If the Member does not elect to change or suspend his Exchange Contributions during the annual election period, the Member's elected reduction in Compensation shall continue until the earlier of the end of the next calendar year, or the Member's separation from Service. Any attempt to change or suspend a Member's Exchange Contributions which does not comply with the provisions of Section 4.01(a) shall be invalid and the last election with respect to Exchange Contributions shall be deemed to have remained fully in effect. In the event a Member becomes an inactive Member, his Exchange Contributions shall be deemed suspended on the first day of such Member's payroll period next following the date he becomes an inactive Member and such suspension shall end on the first day of such Member's payroll period subsequent to the date he again becomes an active Member. A Member who is granted a hardship withdrawal under Section 8.02 shall have his Exchange Contributions automatically suspended for the 12-month period beginning with the first day of the Member's payroll period next following the date the hardship 38 withdrawal is granted, and the percentage of Compensation designated by the Member to measure such Exchange Contributions in effect immediately preceding such suspension shall automatically be reinstated as soon as practicable following the end of such 12-month period. (b) Sheltered Contributions and Standard Contributions -------------------------------------------------- The percentages of Compensation designated by a Member to measure the Sheltered Contributions and Standard Contributions made to his Retirement Savings Account will continue in effect, notwithstanding any change in his Compensation, until he elects to change or suspend such percentage. A Member may change or suspend such percentage at any time by applying to make such change or suspension in the manner prescribed by the Committee (including telephonic application). Any such change or suspension will become effective as of the first day of the payroll period that begins as soon as practicable after the Member applies to make such change or suspension. In the event a Member becomes an inactive Member, his Sheltered Contributions and Standard Contributions shall be deemed suspended on the first day of such Member's payroll period next following the date he becomes an inactive Member and such suspension shall end on the first day of such Member's payroll period subsequent to the date he again becomes an active Member. A Member who is granted a hardship withdrawal shall have his Sheltered Contributions and Standard Contributions automatically suspended for the 12-month period beginning with the first day of the Member's payroll period next following the date the hardship withdrawal is granted, and the percentages of Compensation designated by the Member to measure such Sheltered Contributions and Standard Contributions in effect immediately preceding such suspension shall automatically be reinstated as soon as 39 practicable following the end of such 12-month period. 4.04 Stock Ownership Contributions ----------------------------- (a) For each Stock Ownership Allocation Period during which there are Leveraged Shares in the Company Suspense Account, the Participating Companies shall make Stock Ownership Contributions which, when aggregated with Exchange Contributions made pursuant to Section 4.01(a), earnings on such Exchange Contributions, and any cash dividends received by the Stock Ownership Trustee on Company Stock (and earnings thereon), will at least equal the amount necessary to enable the Stock Ownership Trustee to pay any currently maturing obligation under an Acquisition Loan, without regard to the accumulated earnings and profits of each Participating Company. To the extent the total of such Stock Ownership and Exchange Contributions exceeds the amount required to pay any such currently maturing obligation, such excess amount may then be used to repay any outstanding Acquisition Loan. (b) (i) In addition to contributions under Section 4.04(a), each Participating Company shall contribute for each Plan Year, additional Stock Ownership Contributions equal to the difference, if any, between: (1) the total amount equal to the Exchange Contributions credited to the Members employed by such Participating Company during the Plan Year, plus earnings, and (2) the fair market value of the Leveraged Shares allocated to each such Member's Exchange Contribution Account during the Plan Year excluding Leveraged Shares released and allocated pursuant to Sections 5.02(b) and 6.02(a). 40 (ii) The Company also shall contribute for each Plan Year additional Stock Ownership Contributions (in cash or Company Stock) in the amount necessary to enable the Trustee to acquire such number of shares of Company Stock equal to the difference, if any, between (1) the number of shares of Company Stock initially intended to be credited to the Equity Accounts of Eligible Members of the Company during the Plan Year in accordance with Section 6.02(c), and (2) the number of Leveraged Shares actually allocated to each Member's Equity Account during the Plan Year in the absence of this Section 4.04(b)(ii). (iii) The Company also shall contribute for each Plan Year additional Stock Ownership Contributions (in cash or Company Stock) in the amount necessary to enable the Trustee to acquire such number of shares of Company Stock equal to the difference, if any, between (1) the number of shares of Company Stock initially intended to be credited as base allocations and supplemental allocations to the Match Accounts of Eligible Members during the Plan Year in accordance with Section 6.02(d), and (2) the number of Leveraged Shares actually allocated as base allocations and supplemental allocations to each Member's Match Account during the Plan Year in the absence of this Section 4.04(b)(iii). (c) Notwithstanding anything to the contrary in this Section 4.04, except as is necessary to satisfy the allocation requirements of Sections 6.02(a) and 6.02(b), each Participating Company's contribution to the Plan shall not exceed the amount deductible from the Participating Company's income tax return for the Plan Year under Section 404 of the Code when combined with amounts contributed by the Participating Company to its 41 other benefit plans qualified under Section 401 of the Code and each contribution shall be conditioned upon such deductibility. 4.05 Manner of Contributions ----------------------- Each Participating Company shall make its contributions for a Plan Year in cash or Company Stock on any date or dates which the Company may select, subject to the consent of the Trustee; provided that the total contributions for any Plan Year shall be paid within the time prescribed by law for filing the Company's Federal income tax return for such taxable year, including extensions thereof. Except to the extent applied to the payment of principal and/or interest on an Acquisition Loan, the Stock Ownership Trustee shall invest cash contributions in Company Stock or allocate such contributions to Members' Stock Ownership Accounts in accordance with instructions from the Committee as soon as practicable after it receives the contribution. 4.06 Return of Contributions ----------------------- Notwithstanding anything herein to the contrary, a contribution which (i) was made under a mistake of fact, or (ii) was conditioned upon deduction of the contributions under Section 404 of the Code and such deduction is disallowed, shall be returned to the Participating Company within one year after the payment of the mistaken contribution or the disallowance of the deduction (to the extent disallowed), whichever is applicable. 4.07 Dividends on Company Stock -------------------------- All cash dividends on Company Stock held in the Stock Ownership Fund and earnings thereon shall be utilized to repay an Acquisition Loan and shall be allocated pursuant to Section 6.02, with such dividends first being utilized to repay the principal amount of such Acquisition Loan. 42 4.08 Correction of Errors in Contributions ------------------------------------- If, with respect to any Plan Year, any Member's Stock Ownership Account is not credited with the Member's allocable share of Exchange Contributions or Stock Ownership Contributions (including Matching Allocations or Equity Allocations), any Member's Retirement Savings Account is not credited with the Member's designated amount of Sheltered Contributions or Standard Contributions, or earnings on any such contributions to which such Member is entitled under the Plan are not credited to the appropriate account, and such failure is due to administrative error in determining or allocating the proper amount of such contributions or earnings, or any other error or mistake of fact in determining an individual's eligibility for a contribution, the Committee may correct such error by reallocation of amounts among Members' Stock Ownership Accounts and/or Retirement Savings Accounts, as the case may be, and/or the Participating Company may make additional contributions to the Stock Ownership Account or Retirement Savings Account, as the case may be, of any affected Member to place the affected Member's Stock Ownership Account or Retirement Savings Account, as the case may be, in the position that would have existed if the error had not been made; provided that any such reallocations or additional contributions are made on a uniform and nondiscriminatory basis. In addition to the foregoing, if an error is made with respect to the investment of the Trust's assets which results in an error in the amount credited to a Member's Account, the Committee may correct such error by reallocation of amounts among Members' Accounts and/or the Participating Company may make additional contributions to the Account of any affected Member to place the affected Member's Account in the position that would have existed if the error had not been made; provided 43 that any such reallocations or additional contributions are made on a uniform and nondiscriminatory basis. 4.09 Rollover Contributions ---------------------- (a) An Eligible Employee who is eligible to make Sheltered Contributions and Standard Contributions may, with the permission of the Committee (which shall be uniformly applied), make a Rollover Contribution. Such Eligible Employee's Rollover Contribution shall be paid to the Retirement Savings Trustee as soon as practicable and shall be credited to his "Rollover Contribution Account" under his Retirement Savings Account. (b) The term "Rollover Contribution" means the contribution of an "eligible rollover distribution" to the Trustee by the Eligible Employee on or before the 60th day immediately following the day such Eligible Employee receives the "eligible rollover distribution" or a contribution of an "eligible rollover distribution" to the Trustee by the Eligible Employee or the trustee of another "eligible retirement plan" (as defined in Section 402(c)(8) of the Code) in the form of a direct transfer under Section 401(a)(31) of the Code. (c) The term "eligible rollover distribution" means: (i) part or all of a distribution to the Eligible Employee from an individual retirement account or individual retirement annuity (as defined in Section 408 of the Code) maintained for the benefit of such Employee making the Rollover Contribution, the funds of which are solely attributable to an eligible rollover distribution from an employee plan and trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code (a "conduit IRA"); or 44 (ii) part or all of the amount (other than nondeductible employee contributions) received by such Eligible Employee or distributed directly to this Plan on such Employee's behalf from an employee plan and trust described in Code Section 401(a) which is exempt from tax under Code Section 501(a). In all events, such amount shall constitute an "eligible rollover distribution" only if such amount qualifies as such under Code Section 402(c) and the regulations and other guidance thereunder and is a distribution of all or any portion of the balance to the credit of the Employee from the distributing plan or conduit IRA other than any distribution: (i) that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or for a specified period of ten years or more; (ii) to the extent such distribution is required under Code Section 401(a)(9); (iii) to the extent such distribution is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); or (iv) that is made to a non-spouse beneficiary. (d) Once accepted by the Trust, an amount rolled over pursuant to this Section 4.09 shall be credited to the Member's "Rollover Contributions Account" under his Retirement Savings Account, and thereafter, such Rollover Contributions shall be administered and invested in accordance with Article 7 and subject to the withdrawal and distribution provisions set forth in Articles 8 and 9. The limitations of Sections 6.03 through 6.08 shall not apply to Rollover Contributions. All Rollover Contributions shall be made in cash and shall be fully vested. 45 Article 5. Acquisition Loans ----------------- 5.01 Acquisition Loan ---------------- The Company may direct the Trustee to incur Acquisition Loans from time to time to finance the acquisition of Leveraged Shares or to repay a prior Acquisition Loan. Any Acquisition Loan shall be primarily for the benefit of Members and their beneficiaries. The proceeds of any Acquisition Loan shall be used within a reasonable period of time only to finance the acquisition of Leveraged Shares or to repay a prior Acquisition Loan. Any Acquisition Loan shall be for a specific term, shall bear a reasonable rate of interest, and shall not be payable on demand except in the event of default. In the event of default upon an Acquisition Loan, the value of Trust assets transferred in satisfaction of any Acquisition Loan shall not exceed the amount of the default. Any Acquisition Loan may be secured by collateral pledge of the Leveraged Shares so acquired. No other Trust assets may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against Trust assets other than any Leveraged Shares remaining subject to pledge. Any pledge of Leveraged Shares must provide for the release of shares so pledged on a pro rata basis as principal and interest on the Acquisition Loan are repaid by the Trustee and such Leveraged Shares are allocated to Members' Stock Ownership Accounts as provided under Section 6.02. Except upon termination of the Plan as provided under Section 13.02, repayments of principal and interest on any Acquisition Loan shall be made by the Trustee (as directed by the Committee) only from Stock Ownership Contributions or Exchange Contributions paid in cash to enable the Trustee to repay such Loan, from earnings attributable to such contributions, from any cash dividends received by the Trustee on Company Stock and earnings thereon, and from another 46 Acquisition Loan that refinances such Acquisition Loan. Any Acquisition Loan that refinances an earlier Acquisition Loan shall bear an interest rate based on the market conditions at the time such loan is made, and may be prepaid at any time, without penalty. Any prepayment of an Acquisition Loan within the 30-day period immediately following the end of the Stock Ownership Allocation Period shall be deemed to be a repayment of principal and interest on the Acquisition Loan for such Stock Ownership Allocation Period. In acquiring Leveraged Shares, the Trustee shall pay no more than "adequate consideration" (as defined in Section 3(18) of ERISA). 5.02 Allocation of Leveraged Shares ------------------------------ (a) Any Leveraged Shares shall initially be credited to the Company Suspense Account and shall be allocated to the Members' Stock Ownership Accounts for each Stock Ownership Allocation Period only as payments of principal and interest on the Acquisition Loan used to purchase such Leveraged Shares are made by the Trustee. The number of Leveraged Shares to be released from the Company Suspense Account following any amortization of an Acquisition Loan shall equal the number of Leveraged Shares in the Company Suspense Account immediately before release multiplied by a fraction. The numerator of the fraction shall be the amount of Stock Ownership Contributions, Exchange Contributions and any dividends on Company Stock which are applied to the payment of principal and interest on the Acquisition Loan during the Stock Ownership Allocation Period. The denominator of the fraction shall be the sum of the numerator plus the principal and interest to be paid for all future periods over the duration of the Acquisition Loan repayment period, including the principal and interest to be paid on an Acquisition Loan that refinances such Acquisition Loan. For this purpose, the 47 number of future Allocation Periods under the Acquisition Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the Acquisition Loan is variable, the interest to be paid in future Allocation Periods shall be computed by using the interest rate applicable as of the end of the Plan Year. Any Leveraged Shares released within thirty (30) days following the end of the Stock Ownership Allocation Period shall be deemed to be "Released Leveraged Shares" for purposes of Section 6.02. (b) In connection with the release of Leveraged Shares from the Company Suspense Account as a result of a loan amortization payment made in whole or in part with cash dividends on Company Stock held in Members' Stock Ownership Accounts ("Allocated Dividends"), a portion of the total number of shares so released, calculated with respect to each class of Company Stock, shall be released for allocation to the Members' Accounts as of a date during the Plan Year which is no later than the last day of the Plan Year in which the Allocated Dividends are paid, based on the amount of such Allocated Dividends used to make the loan amortization payment. The number of released shares with respect to Allocated Dividends shall be the total number of shares released on account of the loan amortization payment multiplied by a fraction. The numerator of the fraction shall be the amount of the Allocated Dividends used to make the loan amortization payment. The denominator of the fraction shall be the fair market value of the total number of shares released as a result of the loan amortization payment. The number of released shares with respect to Allocated Dividends shall be allocated among the Members in the same proportion that each Member's Allocated Dividends used to 48 make the loan amortization payment bears to the total amount of such Allocated Dividends, in accordance with Section 6.02(a). Article 6. Allocations of and Limitations on Contributions ----------------------------------------------- 6.01 Members Eligible for Allocations -------------------------------- The Stock Ownership Account maintained for each Member will be credited as of the last day of each Stock Ownership Allocation Period with his allocable share of Company Stock released from the Company Suspense Account during the Stock Ownership Allocation Period as determined under Section 6.02. (a) Each Member shall be eligible for an allocation under Sections 6.02(a) and 6.02(b). (b) For purposes of allocations under Section 6.02(c), an Eligible Member shall be any Member (other than a Member who is a foreign national or a citizen of a territorial possession of the United States who has been temporarily assigned to perform services within the United States) who is: (1) employed by the Company on a permanent full-time basis; (2) employed by the Company at its Mobile Plant and paid on an hourly basis (regardless of the employment status); or (3) employed by Armstrong Industrial Specialties, Inc. on a permanent full- time basis and paid on a salaried basis after having been transferred from the Company on or after January 1, 1996, provided the Member was an Eligible Member under clause (1) of this Section 6.01(b) immediately prior to such Member's transfer of employment; and who: (i) is employed by a Participating Company on the last day of the Stock Ownership Allocation Period; 49 (ii) enters Retirement and commences receipt of his retirement income if covered under a retirement plan specified in Section 1.44, dies, becomes totally disabled within the meaning of Section 9.01(c), or commences a period of long-term military leave, directly from active employment at any time during, but after the first day of, the Stock Ownership Allocation Period; (iii) is on a Parental Leave as of the last day of the Stock Ownership Allocation Period that has been approved by the Participating Company for which he is employed; or (iv) terminates employment with a Participating Company during the Stock Ownership Allocation Period on account of a reduction in the workforce at the office or manufacturing location at which the Member is employed which the Committee determines is a result of (1) adverse economic conditions, (2) a reorganization of the workforce or operating procedures, (3) technological change, or (4) layoff. Notwithstanding the above, a Member who becomes totally disabled (within the meaning of Section 9.01(c)) while actively employed by a Participating Company or an Affiliated Company shall be eligible for an Equity Allocation under Section 6.02(c) for each Stock Ownership Allocation Period in which he receives disability payments under a long-term disability plan sponsored by the Participating Company for which he was employed or under the provisions of Article VI, Section (8) of the Retirement Income Plan for Employees of Armstrong World Industries, Inc., or until he is no longer a Member, if earlier. Further, notwithstanding the foregoing, any Member who is employed by the Company at the Sparrows Point, Maryland, Plant on December 31, 1996, and whose 50 employment is transferred on such day to Worthington Armstrong Venture ("WAVE"), shall be eligible for an Equity Allocation under Section 6.02(c) for the Stock Ownership Allocation Period ending June 12, 1997. Further, notwithstanding the foregoing, any Member who is described in clause (3) of this Subsection (b) and who is employed by Armstrong Industrial Specialties, Inc. on June 30, 1999 shall be eligible for an Equity Account allocation under Section 6.02(c) for the Stock Ownership Allocation Period ending December 13, 1999. Further, notwithstanding the foregoing, any Member who is employed by the Corporation's textile products operations on September 30, 1999 shall be eligible for an Equity Allocation under Section 6.02(c) for the Stock Ownership Allocation Period ending December 13, 1999. (c) For purposes of allocations under Section 6.02(d), an Eligible Member shall be any Member who satisfies any one of the four conditions described in Section 6.01(b)(i) - (iv). Notwithstanding the preceding sentence, any Member who is employed by the Company at the Sparrows Point, Maryland Plant on December 31, 1996, and whose employment is transferred to WAVE, shall be eligible for an allocation under Section 6.02(d) for the Stock Ownership Allocation Period ending June 12, 1997. Further, notwithstanding the first sentence of this Subsection (c), any Member who is employed by Armstrong Industrial Specialists, Inc. on June 30, 1999 shall be eligible for an allocation under Section 6.02(d) for the Stock Ownership Allocation Period ending December 13, 1999 based on the Exchange Contributions made by such member from June 12, 1999 through June 30, 1999. Further, notwithstanding the first sentence of this Subsection (c), any Member who is employed by the Corporation's textile products 51 operations on September 30, 1999 shall be eligible for an allocation under Section 6.02(d) for the Stock Ownership Allocation Period ending December 13, 1999 based on the Exchange Contributions made by such Member from June 12, 1999 through September 30, 1999. 6.02 Method of Allocations --------------------- (a) For each Plan Year in which Allocated Dividends are paid, Company Stock with a fair market value equal to the amount of each Member's Allocated Dividends shall be allocated to the Member's Exchange Contribution Account, Equity Account and/or Match Account, as the case may be, to the extent such Allocated Dividends are attributable to Company Stock held in such Accounts. Each Participating Company shall be authorized to make a special contribution to the Plan with respect to any Member (as determined by the Committee) to assure that this requirement is satisfied. (b) Leveraged Shares released from the Company Suspense Account as a result of loan amortization payments made with respect to a Stock Ownership Allocation Period ("Released Leveraged Shares") that have not and will not be allocated pursuant to Section 6.02(a) and Stock Ownership Contributions made pursuant to Section 4.04(b)(i) shall be allocated to the Exchange Contribution Accounts of Members in dollar amounts equal to the Exchange Contributions made on the Member's behalf pursuant to Section 4.01(a) prior to the end of such Stock Ownership Allocation Period, plus earnings thereon. For purposes of this Section 6.02(b), the value of all Company Stock allocated to Members' Exchange Contribution Accounts shall be based on the closing price of such Company Stock on the New York Stock Exchange on the last day of the Stock Ownership Allocation Period. 52 (c) Released Leveraged Shares that have not and will not be allocated pursuant to Section 6.02(a) and 6.02(b), and Company Stock acquired with the Stock Ownership Contributions made pursuant to Section 4.04(b)(ii), shall be allocated to the Equity Accounts so that each Eligible Member under Section 6.01(b) receives his Equity Allocation. Except as provided below with respect to each such Eligible Member who (i) is an hourly Employee employed at the Company's Mobile Plant, (ii) initially became a Member on June 19, 1989, the effective date of the Stock Ownership Plan, or (iii) was employed by a Participating Company on June 19, 1989, the effective date of the Stock Ownership Plan, but who initially became an Eligible Member after such date, the Equity Allocation shall be the number of shares designated in Schedule A hereof with respect to individuals who are the same age as the Member was on such effective date. The Equity Allocation with respect to an Eligible Member who first is employed by a Participating Company after June 19, 1989, the effective date of the Stock Ownership Plan, shall be the number of shares designated in Schedule A hereof with respect to individuals who are age 21 on such effective date. Notwithstanding the foregoing, with respect to each Eligible Member who was employed as an hourly Employee at the Company's Mobile Plant and who initially became a Member on October 1, 1990 or who was employed as an hourly Employee at the Company's Mobile Plant on October 1, 1990 but who initially became a Member after October 1, 1990, the Equity Allocation shall be the number of shares designated in Schedule B hereof with respect to individuals who are the same age as the Member was on October 1, 1990. The Equity Allocation with respect to any Eligible Member who first is employed as an hourly Employee at the Company's Mobile Plant after 53 October 1, 1990, shall be the number of shares designated in Schedule B hereof with respect to individuals who are age 21 on October 1, 1990. (d) Released Leveraged Shares that have not and will not be allocated pursuant to Section 6.02(a), 6.02(b), or 6.02(c), and Company Stock acquired with the Stock Ownership Contributions made pursuant to Section 4.04(b)(iii), shall be allocated to the Match Accounts so that each Eligible Member under Section 6.01(c) receives a base allocation in accordance with Paragraph (i) below, and a supplemental allocation in accordance with Paragraph (ii) below. (i) With respect to each Stock Ownership Allocation Period, each Eligible Member under Section 6.01(c) shall receive a base allocation equal to 50% of the Exchange Contributions made by such Member for the Stock Ownership Allocation Period. Such base allocations shall be made from amounts attributable to Matching Allocations, subject to Sections 6.06 and 6.08, and shall be credited to the Member's Match Account as of the last day of each Stock Ownership Allocation Period in which the Member's Exchange Contributions were made. (ii) With respect to each Stock Ownership Allocation Period, each Eligible Member under Section 6.01(c) also may have allocated to his Match Account a supplemental allocation made from amounts attributable to Matching Allocations, subject to Sections 6.06 and 6.08. Any supplemental allocation shall be credited to the Member's Match Account as of the last day of each Stock Ownership Allocation Period in which the Member's Exchange Contributions were made. For the Stock Ownership Allocation Periods ending December 12, 1996, June 12, 1997 and December 11, 1997, the supplemental allocation shall equal twenty- five percent (25%) of the Exchange 54 Contributions made by such Member for each such Stock Ownership Allocation Period. For each subsequent Stock Ownership Allocation Period, a twenty-five percent (25%) supplemental allocation will be made if the fair market value of the Company Stock on the last business day of such Stock Ownership Allocation Period is at least equal to the "share price target" as determined by the Committee for such Stock Ownership Allocation Period. The Committee shall determine the share price target annually in advance of each open enrollment period in which Eligible Members under Section 6.01(c) can elect to change or suspend their Exchange Contributions under Section 4.03(a). Notwithstanding the foregoing, if Released Leveraged Shares remain at the end of a Stock Ownership Allocation Period after allocations pursuant to Sections 6.02(a), 6.02(b), 6.02(c), 6.02(d)(i), and the preceding sentences of this Section 6.02(d)(ii) have been made with respect to such Stock Ownership Allocation Period, all or a portion of such Released Leveraged Shares shall be used to make additional supplemental allocations for such Stock Ownership Allocation Period to the Match Account of each Eligible Member as determined under Section 6.01(c) to the extent not used to restore the forfeited portion of a Member's Stock Ownership Account under Subsection (e) below. The Company shall determine whether any Released Leveraged Shares shall be used for purposes of the preceding sentence. (e) If Released Leveraged Shares remain after each Eligible Member has had allocated to his Stock Ownership Account an allocation pursuant to Sections 6.02(a), 6.02(b), 6.02(c), and 6.02(d), all or a portion of such Released Leveraged Shares may be used to restore the forfeited portion of the Stock Ownership Account of a Member who is reemployed by a Participating Company, pursuant to Section 9.05(b). The Company shall 55 determine whether any Released Leveraged Shares shall be used for purposes of this Section 6.02(e). 6.03 Limitation on Exchange Contributions Affecting Highly Compensated ----------------------------------------------------------------- Employees --------- (a) Notwithstanding anything herein to the contrary, in no event shall the Exchange Contributions made on behalf of Highly Compensated Employees with respect to any Plan Year result in an Actual Deferral Percentage for such group of Highly Compensated Employees that exceeds the greater of: (i) an amount equal to 125% of the Actual Deferral Percentage for all Members other than Highly Compensated Employees; or (ii) an amount equal to the sum of the Actual Deferral Percentage for all Members other than Highly Compensated Employees and two percent (2%), provided that such amount does not exceed 200% of the Actual Deferral Percentage for all Members other than Highly Compensated Employees. (b) The Committee shall be authorized to implement rules limiting the Exchange Contributions that may be made on behalf of Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.03(a) is satisfied. (c) Notwithstanding any reductions pursuant to Section 6.03(b), if the limitation under Section 6.03(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee and in accordance with the regulations issued under Section 401(k) of the Code, make additional contributions to the Exchange Contribution Accounts of Members who are not Highly Compensated Employees, which 56 additional contributions shall be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, up to an amount necessary to assure that the limitation under Section 6.03(a) is not exceeded in the Plan Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Exchange Contributions under the Plan. (d) To the extent the limitation under Section 6.03(a) continues to be exceeded following the contribution of such qualified nonelective contributions, if any, such Excess Exchange Contributions made on behalf of Highly Compensated Employees with respect to a Plan Year and income allocable thereto shall be distributed to such Highly Compensated Employees as soon as practicable after the close of such Plan Year, but no later than twelve months after the close of such Plan Year. The amount of income allocable to Excess Exchange Contributions shall be determined in accordance with the regulations issued under Section 401(k) of the Code. The amount of any Excess Exchange Contributions distributed to any Member under this Section 6.03(d) shall be reduced by the amount of any excess deferrals attributable to Exchange Contributions previously distributed to such Member pursuant to Section 6.05, if any, for such Plan Year. (e) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods in Sections 6.03(b), (c) or (d) to assure that the limitation of Section 6.03(a) is satisfied. 57 6.04 Limitation on Sheltered Contributions Affecting Highly Compensated ------------------------------------------------------------------ Employees --------- (a) Notwithstanding anything herein to the contrary, in no event shall the Sheltered Contributions made on behalf of Highly Compensated Employees with respect to any Plan Year result in an Actual Deferral Percentage for such group of Highly Compensated Employees that exceeds the greater of: (i) an amount equal to 125% of the Actual Deferral Percentage for all Members other than Highly Compensated Employees; or (ii) an amount equal to the sum of the Actual Deferral Percentage for all Members other than Highly Compensated Employees and two percent (2%), provided that such amount does not exceed 200% of the Actual Deferral Percentage for all Members other than Highly Compensated Employees. (b) The Committee shall be authorized to implement rules limiting the Sheltered Contributions that may be made on behalf of Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.04(a) is satisfied. (c) Notwithstanding any reductions pursuant to Section 6.04(b), if the limitation under Section 6.04(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee and in accordance with the regulations issued under Section 401(k) of the Code, make additional contributions to the Sheltered Accounts of Members who are not Highly Compensated Employees, which additional contributions shall be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, up to an amount 58 necessary to assure that the limitation under Section 6.04(a) is not exceeded in the Plan Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Sheltered Contributions under the Plan. (d) To the extent the limitation under Section 6.04(a) continues to be exceeded following the contribution of such qualified nonelective contributions, if any, such Excess Sheltered Contributions made on behalf of Highly Compensated Employees with respect to a Plan Year and income allocable thereto shall be distributed to such Highly Compensated Employees as soon as practicable after the close of such Plan Year, but no later than twelve months after the close of such Plan Year. The amount of income allocable to Excess Sheltered Contributions shall be determined in accordance with the regulations issued under Section 401(k) of the Code. The amount of any Excess Sheltered Contributions distributed to any Member under this Section 6.04(d) shall be reduced by the amount of any excess deferrals attributable to Sheltered Contributions previously distributed to such Member pursuant to Section 6.05, if any, for such Plan Year. (e) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods in Sections 6.04(b), (c) or (d) to assure that the limitation of Section 6.04(a) is satisfied. 6.05 Maximum Exchange Contributions and Sheltered Contributions ---------------------------------------------------------- Notwithstanding any other provision of the Plan including the limitations of Section 6.03(a) and 6.04(a), in no event may the total of Exchange Contributions and Sheltered Contributions to this Plan on behalf of any Member, in addition to all such deferrals on behalf of such Member under all other cash or deferred arrangements (as 59 defined in Section 401(k) of the Code) maintained by the Company or any Affiliated Company in which the Member participates, exceed $7,000 (indexed as provided in Section 402(g)(5) of the Code) in any calendar year of the Member. If a Member participates in another cash or deferred arrangement in any calendar year which is not maintained by the Company or an Affiliated Company, and his total elective deferral contributions under this Plan and such other plan exceed $7,000 (as indexed) in a calendar year, he may request to receive a distribution of the amount of the excess deferral (a deferral in excess of $7,000, as indexed) that is attributable to Exchange Contributions or Sheltered Contributions in this Plan together with earnings thereon, notwithstanding any limitations on distributions contained in this Plan. Such distribution shall be made by the April 15 following the calendar year of the Exchange Contributions or Sheltered Contributions were made, provided that the Member notifies the Committee of the amount of the excess deferral that is attributable to Exchange Contributions or Sheltered Contributions to this Plan and requests such a distribution. The Member's notice must be received by the Committee no later than the March 1 following the calendar year of the excess deferral. In the absence of such notice, the amount of such excess deferral attributable to Exchange Contributions or Sheltered Contributions to this Plan shall be subject to all limitations on withdrawals and distributions in this Plan. The amount of excess deferrals that may be distributed under this Section 6.05 with respect to any Member for any Plan Year shall be reduced by the amount of any Excess Exchange Contributions previously distributed pursuant to Section 6.03(a) or any Excess Sheltered Contributions previously distributed pursuant to Section 6.04(a), if any, for such Plan Year. 60 6.06 Limitation on Matching Allocations Affecting Highly Compensated Employees ------------------------------------------------------------------------- (a) Notwithstanding anything herein to the contrary, in no event shall the Matching Allocations made on behalf of Highly Compensated Employees with respect to any Plan Year result in a Contribution Percentage for such group of Highly Compensated Employees that exceeds the greater of: (i) an amount equal to 125% of the Contribution Percentage for all Members other than Highly Compensated Employees; or (ii) an amount equal to the sum of the Contribution Percentage for all Members other than Highly Compensated Employees and two percent (2%), provided that such amount does not exceed 200% of the Contribution Percentage for all Members other than Highly Compensated Employees. (b) The Committee shall be authorized to implement rules limiting the Matching Allocations that may be allocated on behalf of Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.06(a) is satisfied. (c) Notwithstanding any reductions pursuant to Section 6.06(b), if the limitation under Section 6.06(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee and in accordance with the regulations issued under Section 401(m) of the Code, make additional contributions to the Match Accounts of Members who are not Highly Compensated Employees, which additional contributions shall either be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, or additional Match Allocations, up to an amount necessary to assure that the limitation under Section 6.06(a) is not exceeded in the 61 Plan Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Exchange Contributions under the Plan. In addition, in accordance with regulations issued under Section 401(m) of the Code, the Committee may elect to treat amounts attributable to Exchange Contributions as such additional Match Allocations solely for the purposes of satisfying the limitation of Section 6.06(a). (d) To the extent the limitation under Section 6.06(a) continues to be exceeded following the contribution of such additional Matching Allocations, if any, such Excess Matching Allocations made on behalf of Highly Compensated Employees with respect to a Plan Year and income allocable thereto shall then be distributed to such Highly Compensated Employees to the extent vested pursuant to Section 9.01, or if not vested, forfeited. Any such forfeitures shall be used to pay administrative expenses under the Plan in accordance with Section 9.05(a). All Excess Matching Allocations and any income allocable thereto shall be forfeited or distributed, as described above, as soon as practicable after the close of the Plan Year in which they occur, but no later than twelve months after the close of such Plan Year. The amount of income allocable to Excess Matching Allocations shall be determined in accordance with the regulations issued under Code Section 401(m). (e) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods described in Section 6.06(b), (c) and (d) to assure that the limitation of Section 6.06(a) is satisfied. (f) Notwithstanding anything to the contrary in Section 6.03 or this Section 6.06, Exchange Contributions and Matching Allocations may not be made to this Plan in 62 violation of the rules prohibiting multiple use of the alternative limitation described in Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) of the Code and the provisions of Treasury Regulation section 1.401(m)-2(b) and any further guidance issued thereunder. If such multiple use occurs, the Contribution Percentages for all Highly Compensated Employees (determined after applying the foregoing provisions of Sections 6.03 and 6.06) shall be reduced in accordance with Treasury Regulation section 1.401(m)-2(c) and any further guidance issued thereunder in order to prevent such multiple use of the alternative limitation. (g) Notwithstanding anything in the Plan to the contrary, if the rate of Matching Allocations (determined after application of the corrective mechanisms described in the foregoing provisions of this Section 6.06) discriminates in favor of Highly Compensated Employees, the Matching Allocations attributable to any Excess Exchange Contributions, Excess Matching Allocations, or excess deferrals (as described in Section 6.05) of each affected Highly Compensated Employee shall be forfeited so that the rate of Matching Allocations is nondiscriminatory. Any such forfeitures shall be made no later than the end of the Plan Year following the Plan Year for which the Matching Allocations were made. Forfeitures, if any, shall be applied as set forth in Section 9.05(a). 6.07 Limitation on Standard Contributions Affecting Highly Compensated ----------------------------------------------------------------- Employees --------- (a) Notwithstanding anything herein to the contrary, in no event shall the Standard Contributions made on behalf of eligible Highly Compensated Employees with respect to any Plan Year result in a Standard Contribution Percentage for such group of Highly Compensated Employees that exceeds the greater of: 63 (i) an amount equal to 125% of the Standard Contribution Percentage for all Members other than Highly Compensated Employees; or (ii) an amount equal to the sum of the Standard Contribution Percentages for all Members other than Highly Compensated Employees and two percent (2%), provided that such amount does not exceed 200% of the Standard Contribution Percentage for all Members other than Highly Compensated Employees. (b) The Committee shall be authorized to implement rules authorizing or requiring reductions in the Standard Contributions that may be made by Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.07(a) is satisfied. (c) Notwithstanding any reductions pursuant to Section 6.07(b), if the limitation under Section 6.07(a) is exceeded in any Plan Year, the Committee may, in accordance with the regulations issued under Sections 401(k) and 401(m) of the Code, elect to treat amounts attributable to Sheltered Contributions as additional Standard Contributions solely for the purposes of satisfying the limitation of Section 6.07(a). (d) Notwithstanding any reductions pursuant to Section 6.07(b), if the limitation under Section 6.07(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee and in accordance with the regulations issued under Section 401(m) of the Code, make additional contributions to the Standard Accounts of Members who are not Highly Compensated Employees, which additional contributions shall be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, up to an amount necessary to assure that the limitation under Section 6.07(a) is not exceeded in the Plan 64 Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Sheltered Contributions under the Plan. In addition, in accordance with regulations issued under Section 401(m) of the Code, the Committee may elect to treat amounts attributable to Sheltered Contributions as such additional Standard Contributions solely for the purposes of satisfying the limitation of Section 6.07(a). (e) To the extent the limitation under Section 6.07(a) continues to be exceeded following the application of Section 6.07(b), the Excess Standard Contributions made with respect to Highly Compensated Employees with respect to a Plan Year and income allocable thereto shall then be distributed to such Highly Compensated Employees in an amount equal to each such Member's Standard Contributions (including recharacterized Sheltered Contributions), as soon as practicable after the close of the Plan Year in which they occur, but no later than twelve months after the close of such Plan Year. The amount of income allocable to Excess Standard Contributions shall be determined in accordance with the regulations issued under Code Section 401(m). (f) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods described in Section 6.07(b), (c) and (d) to assure that the limitation of Section 6.07(a) is satisfied. (g) Notwithstanding anything to the contrary in Section 6.04 or this Section 6.07, Sheltered Contributions and Standard Contributions may not be made to this Plan in violation of the rules prohibiting multiple use of the alternative limitation described in Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) of the Code and the provisions of Treasury Regulation section 1.401(m)-2(b) and any further guidance issued thereunder. If 65 such multiple use occurs, the Contribution Percentages for all Highly Compensated Employees (determined after applying the foregoing provisions of Sections 6.04 and 6.07) shall be reduced in accordance with Treasury Regulation section 1.401(m)-2(c) and any further guidance issued thereunder in order to prevent such multiple use of the alternative limitation. 6.08 Limitations on Annual Additions ------------------------------- (a) Basic Limitation ---------------- Subject to the adjustments hereinafter set forth, the maximum aggregate Annual Addition allocated to a Member's Account in any calendar year (which shall be the Limitation Year) shall not exceed the lesser of: (i) 25% of the Member's Compensation in such Limitation Year, or (ii) $30,000 or such greater amount in effect as established by regulations issued pursuant to Section 415(d) of the Code. (b) Limitation for Members in a Combination of Plans ------------------------------------------------ Notwithstanding the foregoing, effective for Limitation Years beginning before January 1, 2000, in the case of a Member who participates in this Plan and a qualified defined benefit plan maintained by the Company or an Affiliated Company, the sum of the defined contribution plan fraction (as defined in Section 415(e)(3) of the Code) and the defined benefit plan fraction (as defined in Section 415(e)(2) of the Code) in any Limitation Year shall not exceed 1.0. 66 (c) Preclusion of Excess Annual Additions; Reduction of Benefits ------------------------------------------------------------ The Committee shall maintain records showing the contributions allocated to a Member's Account in any Limitation Year, and prior to the allocation of any contributions, the Committee shall determine whether the amount to be allocated would cause the limitations prescribed hereunder to be exceeded with respect to any Member. (i) In the event that the Committee determines that the allocation of a contribution would cause the restrictions imposed by Section 6.08(a) to be exceeded with respect to this Plan when combined with any other defined contribution plan pursuant to Section 6.08(e), allocations shall be reduced in the following order, but only to the extent necessary to satisfy such restrictions: (1) First, the Annual Additions under any other qualified defined contribution plan maintained by the Company or an Affiliated Company; (2) Second, the Annual Additions under this Plan. (ii) If it becomes necessary to make an adjustment in Annual Additions to a Member's Account under this Plan, either because of the limitations as applied to this Plan alone or as applied to this Plan in combination with another qualified defined contribution plan, the excess Annual Addition under this Plan with respect to the affected Member shall be reallocated proportionately in the same manner as Contributions are allocated to the Accounts of other Members until the Annual Addition to the Account of each Member reaches the limits of Section 415 of the Code. (iii) Notwithstanding Paragraph (i) above, if the combination limitation prescribed under Section 6.08(b) hereof would be exceeded in any Limitation Year that begins prior to January 1, 2000, benefits under the defined benefit plan shall be 67 frozen, or reduced if necessary, prior to making any reductions in this Plan or any other qualified defined contribution plan; provided, however, if in a subsequent year the limitations are increased due to cost of living adjustments or any other factor, the freeze or reduction of the Member's benefits shall lapse to the extent that additional benefits may be payable under the increased limitations. (iv) The Committee shall advise an affected Member of any limitation on his Annual Addition required by this Section 6.08. (d) Disposal of Excess Annual Additions ----------------------------------- In the event that, notwithstanding the foregoing, the limitations with respect to Annual Additions prescribed hereunder are exceeded with respect to any Member, and such excess arises as a consequence of the allocation of forfeitures, a reasonable error in estimating the Member's Compensation, a reasonable error in determining the amount of Sheltered Contributions or Exchange Contributions that may be made with respect to the Member under the limits of Code Section 415, or under other limited facts and circumstances that the Commissioner finds justify the availability of the rules set forth in this Section 6.08(d), such excess amounts shall not be deemed Annual Additions in that Limitation Year to the extent corrected hereunder. First, Standard Contributions (together with earnings thereon) shall be returned to each affected Member to the extent that such distribution would reduce the excess amounts in the Member's Account. These amounts shall be disregarded in applying the limitations of Sections 6.07. To the extent excess amounts remain after any such distribution, Sheltered Contributions (together with earnings thereon) shall be returned to each affected Member to the extent that such distribution would reduce the excess amounts in the Member's Account. These amounts shall be disregarded in applying the limitations of Sections 6.04 and 6.05. To the extent excess amounts remain after any such distributions, Exchange Contributions (together with earnings thereon) shall be returned to each affected Member to the extent that such distribution would reduce the excess amounts in the Member's Account. These 68 amounts shall be disregarded in applying the limitations of Sections 6.03 and 6.05. To the extent excess amounts remain after all such distributions, such excess amounts shall be used to reduce future contributions on behalf of the Member for the next succeeding Limitation Year and succeeding Limitation Years as necessary. If the Member is not covered by the Plan as of the end of such succeeding year, but an excess amount still exists, such excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future contributions on behalf of the other Members entitled to an allocation, in that Limitation Year, and succeeding Limitation Years, if necessary. (e) Aggregation of Plans -------------------- For purposes of this Section 6.08, all qualified defined contribution plans maintained by the Company or any Affiliated Company shall be treated as a single plan, and all qualified defined benefit plans maintained by the Company or any Affiliated Company shall be treated as a single plan. (f) Definition of "Annual Additions" -------------------------------- For purposes of this Section, the term "Annual Additions" shall mean the sum for any Limitation Year of the following amounts allocated to an account on behalf of a Member: 69 (i) Stock Ownership Contributions, and any other Company or Affiliated Company contributions allocated to the Member's account under any defined contribution plan maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; (ii) Exchange Contributions, Sheltered Contributions, Standard Contributions, and any other contributions by the Member or on behalf of the Member to any defined contribution plan maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; (iii) Any forfeitures allocated to the Member's account under any other defined contribution plan maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; and (iv) Amounts described in Sections 415(l)(1) and 419A(d)(2) of the Code. Notwithstanding the above, any contributions under this Plan which are applied by the Trustee (not later than the due date, including extension, for filing the Company's federal income tax return for the taxable year which ends with or within such Limitation Year) to pay interest on an Acquisition Loan, and any forfeitures allocated to a Member's Stock Ownership Account shall not be "Annual Additions." In any case where an Acquisition Loan has been made to finance the acquisition of Leveraged Shares for the Trust or to repay a prior Acquisition Loan, the amount of contributions under this Plan which are considered Annual Additions for the Limitation Year shall be calculated with respect to the contributions which are used to repay principal on the Acquisition Loan during such Limitation Year and not with respect to the Leveraged Shares which are allocated to a Member's Account during such Limitation Year. 70 Article 7. Investment of Contributions --------------------------- 7.01 Investment Funds ---------------- The Committee shall designate the Investment Funds of the Trust which shall include, but not be limited to, the following Investment Funds: (a) Equity Investment Fund ---------------------- One or more diversified equity funds, as may be available from time to time, invested in equity securities or securities convertible into equity securities or in a commingled equity trust for the collective investment of funds of employee benefit plans qualified under Section 401(a) of the Code (or corresponding provisions of any subsequent Federal revenue law at the time in effect), excluding, however, any stocks or other securities of the Retirement Savings Trustee. This exclusion shall not apply to any investment in a commingled trust or insurance company account not proscribed by applicable law. Pending the selection and purchase of suitable investments for this Fund, any part of this Fund may be invested in short-term and medium-term fixed income securities, such as commercial paper, notes of finance companies, and obligations of the U.S. Government and any agency or instrumentality thereof. (b) Fixed Income Investment Fund ---------------------------- One or more fixed income funds, as may be available from time to time, invested in, but not limited to, guaranteed income contracts, bonds, notes, debentures, asset-backed securities and fixed income derivatives, excluding securities of the Retirement Savings Trustee. This exclusion shall not apply to any investment in a commingled trust or insurance company account not prescribed by applicable law. Pending the selection and purchase of suitable investments for this Fund, any part of this 71 Fund may be invested in short-term and medium-term fixed income securities, such as commercial paper, notes of finance companies, bankers acceptances, certificates of deposit, and obligations of the U.S. Government and any agency or instrumentality thereof. (c) Money Market Fund ----------------- One or more money market funds, as may be available from time to time, invested in short-term obligations of the United States Government, bank certificates of deposit, commercial paper, bankers' acceptances, shares of money market mutual funds and other similar types of short-term investments which may include investment in any commingled trust fund qualified under Section 401(a) of the Code (or corresponding provisions of any subsequent Federal revenue law at the time in effect) and which is invested primarily in similar types of securities. (d) Balanced Fund ------------- One or more balanced funds, as may be available from time to time, that invest in a mixture of bonds, equities, and short-term instruments, as determined by the Fund manager. (e) Company Stock Fund ------------------ A fund designed solely to invest in Company Stock or to hold Company Stock contributed to the Plan by the Company. Up to 100% of the assets of a Member's Retirement Savings Account may be invested in the Company Stock Fund. (f) Stock Ownership Fund -------------------- A fund consisting of Company Stock and cash for fractional shares and earnings attributable thereto. All amounts credited to a Member's Stock Ownership 72 Account shall be invested in the Stock Ownership Fund (except that a Member's Exchange Contributions made in each Stock Ownership Allocation Period shall be invested in a Money Market Fund until the allocation of Leveraged Shares under Section 6.02(b) for such Stock Ownership Allocation Period) and may not be transferred from such fund to any of the other Investment Funds, except as provided in Section 7.08. If there shall be available for investment at any time more than one Equity Investment Fund, Fixed Income Investment Fund, Money Market Fund or Balanced Fund, there shall be separate accounting for each available Fund. To the extent allowed by applicable law and all other provisions of this Plan, all or any portion of a Fund identified above in (a) through (d) may be invested in securities of a foreign corporation or a foreign government and in other property located outside the United States. Each such Fund may keep such amounts of cash and cash equivalents as its managers shall deem necessary or advisable as a part of such Fund, all within the limitations specified in the applicable Trust Agreement. Dividends, interest and other distributions received on the assets held in each Fund shall be reinvested in the respective Fund. 7.02 Investment of Contributions --------------------------- Each Member, as a part of the application for membership in the Plan, shall designate the Investment Fund or Funds (other than the Stock Ownership Fund) in which his Sheltered Contributions, Standard Contributions, and Rollover Contributions, if any, shall be invested. The designated investments shall be in 1% increments, provided that the total designated equals 100% of the contributions to his Retirement Savings Account. In the event a Member fails to designate the investment of his Retirement Savings Account, the Member's Sheltered Contribution, Standard Contributions, and Rollover Contributions 73 shall be invested in one or more Fixed Income Investment Funds until the Member properly designates other Funds. Amounts held in a Member's Stock Ownership Account may not be invested in any Fund other than the Stock Ownership Fund, provided, however, a Member's Exchange Contributions made in each Stock Ownership Allocation Period shall be invested in a Money Market Fund until the allocation of Leveraged Shares under Section 6.02(b) for such Stock Ownership Allocation Period and all or a portion of a Member's Stock Ownership Account may be invested in any of the Investment Funds described in Section 7.01(a), (b), or (d), pursuant to Section 7.08. 7.03 Change of Election ------------------ A Member, by notice to the Retirement Savings Trustee in a format approved by the Committee, may change the election of the Investment Funds in which future contributions to his Retirement Savings Account shall be invested. A Member may change the election of the Investment Funds in which such contributions are to be invested by designating the percentage of contributions that shall be invested in each of the Investment Funds, in 1% increments, provided the total equals 100%. Such change shall be effective as soon as practicable after such notice is received by the Retirement Savings Trustee. 7.04 Transfers Among Funds --------------------- (a) An active or inactive Member may elect to transfer all or any portion of the value of his Retirement Savings Account in one of the Investment Funds to any other Investment Fund (except the Stock Ownership Fund) at the following times (and under such uniform rules as the Committee may adopt from time to time): 74 (i) Any election to transfer between and among the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund and the Balanced Fund (and any related funds maintained in the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund and the Balanced Fund) may be made at any time, to be effective as soon as practicable thereafter; and (ii) Any election to transfer to or from the Company Stock Fund may be made at any time, to be effective as follows: elections initiated by the fifteenth day of the month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteenth day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. (b) An active or inactive Member who has diversified all or part of his Stock Ownership Account pursuant to Section 7.08 may elect to transfer the diversified portion of his Stock Ownership Account in one of the Investment Funds to any other Investment Fund (except the Stock Ownership Fund and the Money Market Fund) at the following times (and under such uniform rules as the Committee may adopt from time to time): (i) Any election to transfer between and among the Equity Investment Fund, the Fixed Income Investment Fund, and the Balanced Fund (and any related funds maintained in the Equity Investment Fund, the Fixed Income Investment 75 Fund, and the Balanced Fund) may be made at any time, to be effective as soon as practicable thereafter; and (ii) Any election to transfer to or from the Company Stock Fund may be made at any time, to be effective as follows: elections initiated by the fifteenth day of the month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteen day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. (c) Notwithstanding the foregoing: (i) no transfers are permitted to be made from the Company Stock Fund with respect to that portion of a Member's Account attributable to his Retirement Savings Matching Contributions prior to the Member's attainment of age 59 1/2; (ii) no direct transfers are permitted from the Fixed Income Investment Fund to the Money Market Fund or the funds maintained in the Balanced Fund that are designated by the Company as having goals and objectives comparable to the Fixed Income Investment Fund (collectively the "Balanced Income Fund"); (iii) amounts transferred from the Fixed Income Investment Fund to any other Fund may not thereafter be transferred to the Money Market Fund or any Balanced Income Fund for three(3) months following such transfer; and 76 (iv) amounts transferred from the Stock Ownership Fund to the Equity Investment Fund, the Fixed Income Investment Fund, or any Balanced Income Fund, in accordance with the diversification rules under Section 7.08, may not thereafter be transferred to the Money Market Fund. (d) Except as otherwise provided, transfers pursuant to this Section 7.04 may be made by telephoning notice to the Retirement Savings Trustee, and shall be effective as soon as practicable following the Retirement Savings Trustee's receipt of the notice. 7.05 Investment Options ------------------ Each active and inactive Member is solely responsible for the selection of his investment options with respect to the amounts in his Retirement Savings Account. The Retirement Savings Trustee, the Committee, the Participating Companies or any of the officers or supervisors of the Participating Companies are not empowered to advise a Member as to the manner in which his Retirement Savings Account shall be invested. The fact that a security is available to Members for investment under the Plan shall not be construed as a recommendation for the purchase of that security, nor shall the designation of any option impose any liability on any Participating Company, its directors, officers or employees, the Retirement Savings Trustee, the Committee or any Member of the Plan. 7.06 Valuations ---------- (a) The market value of each Investment Fund (other than the Stock Ownership Fund) shall be determined by the Retirement Savings Trustee as of each Valuation Date. The valuation shall reflect all income, as well as the payment of brokerage fees and transfer taxes applicable to purchases and sales for each Fund and all 77 similar transactions, and any Plan administrative expenses to the extent they are not paid by a Participating Company, occurring since the last Valuation Date with respect to each Fund. The value of a Member's interest in each Investment Fund shall be represented by mutual fund shares, shares of Company stock, or in dollars, whichever is applicable. Contributions made by a Member for any payroll period shall be invested based on the value of the Fund as of the last Valuation Date in that payroll period, regardless of when such contributions are actually paid to and become part of an Investment Fund. The Trust Fund attributable to Members' Retirement Savings Accounts, and each Member's allocable share of such Trust Fund, shall be valued at fair market value periodically as determined necessary by the Retirement Savings Trustee or as requested by the Committee. (b) The market value of the Trust Fund attributable to Members' Stock Ownership Accounts, and each Member's allocable share of such Trust Fund, shall be determined by the Stock Ownership Trustee as of each Valuation Date. 7.07 Annual Statements ----------------- At least once each Plan Year, each active and inactive Member shall be furnished with a statement setting forth the value of his Retirement Savings Account and Stock Ownership Account. 7.08 Diversification of Stock Ownership Accounts ------------------------------------------- (a) Eligibility for Diversification ------------------------------- Each Member who has completed five (5) Years of Service and attained an age specified in the schedule below shall be permitted to direct the investment of up to a corresponding percentage of the number of shares of Company Stock in his Stock 78 Ownership Account, as specified in the schedule below and as determined in Subsection 7.08(b), in any of the Investment Funds described in Section 7.01(a), (b), or (d). Maximum Percentage of Stock Ownership Account Age Eligible for Diversification --- ---------------------------- 50-54 25% 55-59 50% 60 and older 100% In addition to the foregoing, a Member who is fully vested in his Stock Ownership Account upon his termination of employment and who has not received a distribution of his Stock Ownership Account in accordance with Section 9.02, shall be permitted to direct the investment of up to 100% of the shares of Company Stock in his Stock Ownership Account in accordance with any of the Investment Funds described in Section 7.01(a), (b), or (d). (b) Maximum Number of Shares Permitted to be Diversified ---------------------------------------------------- The maximum number of shares of Company Stock that may be directed by a Member under this Section 7.08 shall equal the total number of shares of Company Stock that have ever been allocated to the Member's Stock Ownership Account multiplied by the applicable percentage (based on the schedule in Subsection (a) above), and then reduced by the number of shares of Company Stock previously directed by the Member under this Section 7.08, rounded to the nearest whole integer. (c) Separate Diversification Elections ---------------------------------- A Member who is eligible to diversify his Stock Ownership Account under Subsection (a) above shall be permitted to designate separately the percentage of his 79 Exchange Contribution Account, Equity Account, and Match Account to be diversified, in accordance with the maximum percentages specified above. (d) Direction to Diversify ---------------------- A Member's direction to diversify pursuant to this Section 7.08 may be at any time, to be effective as follows: elections initiated by the fifteenth day of a month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteenth day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. If the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of the month shall be deemed to be the last business day preceding the fifteenth or last day of the month, respectively. Any direction to diversify may be made by telephoning direction to the Retirement Savings Trustee. Any direction to diversify may be revoked or modified before the fifteenth or last day of the month next following the request in the manner authorized by the Committee (including telephonically). All directions shall be in accordance with any notice, rulings, or regulations or other guidance issued by the Internal Revenue Service with respect to Section 401(a)(28)(B) of the Code. (e) Diversified Shares ------------------ Notwithstanding a Member's direction to diversify under this Section 7.08, any amounts invested in the Investment Funds described in Section 7.01(a), (b), or (d) as a result of such direction shall continue to be part of the Member's Stock Ownership Account. 80 Article 8. In-Service Withdrawals and Loans -------------------------------- 8.01 In-Service Withdrawals ---------------------- A Member who is actively employed by the Company or any Affiliated Company may elect in the manner prescribed by the Committee (including telephonically) to withdraw in cash a portion or all of his Standard Contributions Account, Tax Deductible Contributions Account, Rollover Account, or Sheltered Account, less the amount of any outstanding loan, according to the order in which the following Subsections are presented, as the amounts described in each successive Subsection are exhausted: (a) An amount equal to all or part of the Member's before-1987 Standard Contributions (i.e., after-tax contributions made by the Member), but ---- no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (b) An amount equal to all or part of the Member's after-1986 Standard Contributions and a pro rata portion of the earnings on all Standard Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (c) An amount equal to all or part of the Member's Tax Deductible Contributions Account. (d) An amount equal to all or part of the Member's Rollover Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Rollover Contributions. 81 (e) An amount equal to all or part of the Member's Sheltered Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Sheltered Contributions, provided: (i) the Member has attained age 59 1/2; (ii) the Member demonstrates financial hardship in accordance with the rules provided under Section 8.02, and only to the extent required to meet the need created by the financial hardship; or (iii) the Member becomes disabled in accordance with Code Section 401(k)(2)(B)(i)(A). In no event shall a Member who is actively employed be permitted to withdraw any portion of his Retirement Savings Matching Contributions (and earnings thereon) or Stock Ownership Account. 8.02 Determination of Financial Hardship ----------------------------------- (a) In order to demonstrate financial hardship, the Member shall provide written notice to the Committee setting forth the amount requested and the facts establishing the existence of such hardship. Upon receipt of such a request, the Committee shall determine whether an immediate and heavy financial hardship exists; if the Committee determines that such a hardship exists, it shall further determine what portion of the amount requested by the Member is required to meet the immediate and heavy financial need created by the hardship, taking into account such additional amounts necessary to pay any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. 82 (b) The amount to be withdrawn must not be reasonably available from other resources of the Member, as determined by the Committee under rules uniformly applicable to all Members similarly situated. Notwithstanding the foregoing, a Member shall be deemed to have no other resources reasonably available only if: (i) the Member has obtained all withdrawals and distributions currently available to the Member under the Plan and all other qualified defined contribution plans maintained by the Company or an Affiliated Company; (ii) the Member has obtained all loans reasonably available to the Member under the Plan and all other qualified defined contribution plans maintained by the Company or an Affiliated Company, to the extent any required repayment of such loan would not itself cause an immediate and heavy financial need; (iii) the Member agrees to cease all Exchange Contributions, Sheltered Contributions and Standard Contributions under the Plan as well as all similar contributions to all other qualified defined contribution plans maintained by the Company or an Affiliated Company for a period of 12 months from the date of the hardship withdrawal; and (iv) the amount of pre-tax elective contributions under all qualified defined contribution plans maintained by the Company or an Affiliated Company for the year following the year of the withdrawal are limited in accordance with regulations issued under Section 401(k) of the Code. (c) The determination of whether an immediate and heavy financial need exists shall be based on all relevant facts and circumstances, which need shall not be disqualified because it was reasonably foreseeable or voluntarily incurred by the Member, and shall be determined in accordance with regulations (and any other rulings, notices, or documents of general applicability) issued pursuant to Section 401(k) of the Code and, to the extent permitted by such authorities, shall be limited to any financial need arising from: 83 (i) medical expenses (as defined in Section 213(d) of the Code) incurred by the Member or a Member's spouse or any dependent of the Member (as defined in Code Section 152), or expenses necessary for these persons to obtain medical care (as defined in Section 213(d) of the Code); (ii) expenses relating to the payment of tuition and related educational fees for the next 12 months of post-secondary education for the Member, his spouse, children or dependents (as defined in Code Section 152); (iii) costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Member; (iv) payments necessary to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or (v) expenses arising from circumstances of sufficient severity that a Member is confronted by present or impending financial ruin or his family is clearly endangered by present or impending want or deprivation. To demonstrate such a need, the Member must prepare a statement indicating the reason for the need and the extent to which the Member has other resources reasonably available to relieve that need. (d) The amount of Sheltered Contributions that is available for withdrawal under Section 8.01(c)(ii) shall not exceed the lesser of: (i) the value of pre-tax contributions as of December 31, 1988 (taking into account earnings and losses attributable to such amounts), plus the total amount of the Member's pre-tax contributions (without account earnings) that are made after December 31, 1988, or (ii) the value of all pre-tax contributions made to the Plan (taking into account earnings and losses 84 attributable to such amounts), reduced by any amounts previously withdrawn from the Member's Sheltered Account. (e) Notwithstanding the foregoing, no withdrawal may be made by a Member during the period in which the Committee is making a determination of whether a domestic relations order affecting the Member's Account is a qualified domestic relations order, within the meaning of Section 414(p) of the Code. Further, if the Committee is in receipt of a qualified domestic relations order with respect to any Member's Account, it may prohibit such Member from making a withdrawal until the alternate payee's rights under such order are determined. 8.03 Investment Fund to be Deducted for Withdrawal --------------------------------------------- The amount withdrawn under Section 8.01 shall be deducted from the Investment Fund or Funds in which the amounts withdrawn are invested in accordance with such uniform rules as the Committee shall adopt from time to time. 8.04 Loans to Eligible Borrowers --------------------------- Loans from the Plan may be made to any Member who is actively employed by a Participating Company, or any Member or Beneficiary who is a "party in interest" within the meaning of Section 3(14) of ERISA. Each such individual is referred to herein as an "Eligible Borrower." (a) An application for a loan by an Eligible Borrower shall be made to the Committee or its designee in the manner prescribed by the Committee (including telephonic applications), whose action in approving or disapproving such application shall be final. The decisions by the Committee or its designee on loan applications shall be made on a reasonably equivalent, uniform and nondiscriminatory basis and within a 85 reasonable period after each loan application is received. In determining whether to make a loan pursuant to this Section 8.03, the Committee or its designee shall consider only those factors which would be considered in a normal commercial setting by an entity in the business of making loans which are similar to loans made hereunder. Notwithstanding the foregoing, the Committee or its designee may apply different terms and conditions for loans to Eligible Borrowers who are not actively employed by an Employer, or for whom payroll deduction is not available, based on economic and other differences affecting the individuals' ability to repay any loan. In no event shall loans be made from a Member's Stock Ownership Account, or from amounts attributable to a Member's Tax Deductible Contributions or a Member's Retirement Savings Matching Contributions. (b) The amount of the loan must be at least $1,000 and shall not exceed the lesser of: (i) $50,000, reduced by the highest outstanding balance of loans from the Plan and any other defined contribution plan maintained by the Company or an Affiliated Company during the one-year period ending on the day before the date on which the loan was made, and (ii) one-half of the value of his Member Account (other than his Tax Deductible Contributions) as of the Valuation Date coincident with or immediately following the date the Eligible Borrower applies to the Committee or its designee for a loan. (c) The interest rate to be charged on loans made during the Plan Year shall be a reasonable rate as determined by the Committee from time to time. For loans granted or renewed after October 18, 1989, and for changes in the interest rate under an existing 86 loan after that date, the interest rate shall not be less than the commercial rate of interest charged by persons in the business of lending money on loans which are made under similar circumstances, as determined by the Committee from time to time. (d) A loan may be subject to a loan initiation fee, as determined by the Committee from time to time, which fee shall be obtained from an Eligible Borrower's Retirement Savings Account at the time of such loan. The amount of the loan, reduced by such loan initiation fee, is to be transferred from the Eligible Borrower's Retirement Savings Account invested in the Investment Funds enumerated in Section 7.01, other than amounts attributable to Tax Deductible Contributions or amounts invested in the Company Stock Fund that are attributable to his Retirement Savings Matching Contributions, to a special "Loan Reserve" for such Eligible Borrower, invested solely in the loan made to the Eligible Borrower. Such amounts will be transferred from the Investment Funds in a uniform manner as determined by the Committee from time to time. Payments of principal on the loan will reduce the amount held in the Eligible Borrower's Loan Reserve. Such payments, together with the attendant interest payment, will be credited to the Eligible Borrower's Retirement Savings Account invested in the Investment Funds in accordance with the Eligible Borrower's election in effect under Sections 7.02 or 7.03 at the time of such payment. If an Eligible Borrower has no election in effect, payments will be credited to the Money Market Fund. (e) In addition to such rules and regulations as the Committee may adopt, all loans shall comply with the following terms and conditions: (i) To the extent required by the Committee, each loan shall be evidenced by a promissory note payable to the Plan. 87 (ii) Loans will be adequately secured, as determined by the Committee as of the date the loan is originated. (iii) Loans will be available to all Eligible Borrowers on a reasonably equivalent basis and will not be made available to Highly Compensated Employees in an amount greater than the amount made available to Members who are not Highly Compensated Employees. (iv) The period of repayment for any loan shall be arrived at by mutual agreement between the Committee and the Eligible Borrower, but such period shall not be less than twelve (12) months and greater than five years. In the event a loan is refinanced, the total cumulative period of repayment for the initial loan and the refinanced loan also shall not exceed five years. (v) Payments of principal and interest will be made by level payments by payroll deductions or in a manner agreed to by the Eligible Borrower and the Committee. In the case of an Eligible Borrower who is not employed by the Company or an Affiliated Company, or in the case of any other Eligible Borrower where at any time during the repayment period, it is not possible to repay the loan by payroll deduction, the Member and the Committee shall agree to another form of repayment. In any event, however, such payments will be in an amount sufficient to amortize the loan over the repayment period and shall be made at least quarterly. (vi) A loan may be prepaid in full as of any date without penalty. (vii) Only one loan may be outstanding at any given time. (viii) Outstanding loans may be subject to an annual loan administration fee, as determined by the Committee from time to time. Loan 88 administration fees shall be obtained from an Eligible Borrower's Retirement Savings Account on a quarterly basis, in such manner as determined by the Committee. (ix) If a loan is outstanding when a Member terminates his employment with a Participating Company other than on account of (1) Involuntary Termination (as defined in the Retirement Income Plan for Employees of Armstrong World Industries, Inc., (2) the sale of substantially all of the assets of a trade or business, unit or location where the Member is employed, or (3) the sale by a Participating Company of its interest in a subsidiary where the Member is employed, the Member shall be considered in default with respect to the loan unless the Member continues to be a party in interest to the Plan (as defined in Section 3(14) of ERISA). Any other Eligible Borrower shall be considered in default on the loan if a required payment of principal or interest thereon is not paid within 60 days after it is due. If a loan is not repaid in accordance with the terms contained in the promissory note and a default occurs, the Plan may execute upon its security interest in the Eligible Borrower's Retirement Savings Account under the Plan to satisfy the debt. Alternatively, if the Eligible Borrower has not repaid the loan as of the date benefits are to commence, the Committee may reduce the Eligible Borrower's distribution by the amount of the outstanding principal and interest on the loan. However, the Plan shall not levy against any portion of the Loan Reserve attributable to amounts held in the Member's Sheltered Account until such time as a distribution of the Sheltered Account could otherwise be made under the Plan. An Eligible Borrower must repay any loan prior to distribution of the Eligible Borrower's Retirement Savings Account. 89 (f) Notwithstanding anything herein to the contrary, no loan shall be made to an Eligible Borrower during a period in which the Committee is making a determination of whether a domestic relations order affecting the Eligible Borrower's Account is a qualified domestic relations order, within the meaning of Section 414(p) of the Code. Further, if the Committee is in receipt of a qualified domestic relations order with respect to any Eligible Borrower's Retirement Savings Account, it may prohibit such Eligible Borrower from obtaining a loan until the alternate payee's rights under such order are satisfied. (g) Loan amounts shall be withdrawn from a Member's Retirement Savings Account in the following order: (i) Sheltered Contributions; (ii) Rollover Contributions; and (iii) Standard Contributions. Within each category (i) through (iii), the Investment Fund or Funds in which the Member is invested will be reduced to reflect the amount of the loan and any applicable set-up or maintenance charges in accordance with such uniform rules as the Committee shall adopt from time to time. Payroll deductions made to repay the loan will be invested in the various Investment Funds in accordance with the Member's investment election in effect at the time of such repayment. 90 Article 9. Vesting and Distributions ------------------------- 9.01 Vesting ------- (a) A Member shall always have a vested and nonforfeitable interest in his Retirement Savings Account and his Exchange Contribution Account. (b) A Member shall have a vested and nonforfeitable interest in his Equity Account and Match Account upon his completion of five (5) Years of Service. (c) Notwithstanding anything in the Plan to the contrary, a Member shall have a vested and nonforfeitable interest in his Equity Account and Match Account upon (i) attaining age 65 provided he is actively employed by the Company or an Affiliated Company on that date; (ii) Retirement; (iii) death; (iv) total disability, provided that the Member is eligible to receive disability benefits under a long-term disability plan sponsored by the Affiliated Company for which he was employed, under the provisions of Article VI, Section (8) of the Retirement Income Plan for Employees of Armstrong World Industries, Inc., or under the Social Security Act; (v) a Change in Control; (vi) separation from Service from a Participating Company due to a reduction in the workforce at the office or manufacturing location at which the Member is employed which the Committee determines is a result of (1) adverse economic conditions, (2) a reorganization of the workforce or operating procedures, (3) technological change, or (4) layoff; (vii) the sale of substantially all of the assets of a trade or business, unit or location where the Member is employed, or the sale by a Participating Company of its interest in a subsidiary where the Member is employed; or (viii) the Member's termination of employment with the Company or an Affiliated Company on account of the Member's transfer to employment with Worthington Armstrong Venture (WAVE), a Delaware general partnership. 91 9.02 Distribution Upon Retirement or Other Termination of Employment --------------------------------------------------------------- If a Member terminates employment for any reason other than death, he may elect, in the manner prescribed by the Committee (including telephonically), at any time following his termination to receive an "eligible rollover distribution" (as defined in Code Section 402(c) and the regulations and other guidance issued thereunder) of the nonforfeitable portion of his Account. The amount of such eligible rollover distribution shall be determined as follows: for any request made by the fifteenth day of the month, the amount of such eligible rollover distribution shall be determined as soon as practicable after the fifteenth day of the month; for any request made after the fifteenth day of the month and by the last day of the month, the amount of such eligible rollover distribution shall be determined as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. Such eligible rollover distribution shall be subject to Section 9.04(b) and the following: (a) Except as provided in Subsection (b), (c) or (d) below, the portion of the Member's Account attributable to his Retirement Savings Account that is not invested in the Company Stock Fund shall be distributed in cash, and the portion of the Member's Account attributable to his Retirement Savings Account that is invested in the Company Stock Fund and the nonforfeitable portion of the Member's Account attributable to his Stock Ownership Account shall be distributed in a single sum in either cash or Company Stock (with cash for fractional shares), as elected by the Member. If the Member fails to 92 elect to receive the distribution in Company Stock, such distributions shall be made in cash. (b) If the Member does not elect to receive an eligible rollover distribution of the nonforfeitable portion of his Account by a Valuation Date (specified by the Committee) by the February following the Member's termination of employment, and his Account (including the amount of any outstanding loan plus accrued interest, if any) equals $5,000 or less as of such Valuation Date, as soon as practicable thereafter the Committee or its designee will notify the Member of his right to elect to make an eligible rollover distribution and his right to receive all or a portion of such distribution in Company Stock in accordance with Subsection (a). (i) If the Member notifies the Committee or its designee of his elections within forty-five (45) calendar days following the above-described Valuation Date, the Committee or its designee shall make a distribution or direct rollover in cash or Company Stock (as elected by the Member) of the nonforfeitable portion of the Member's Account as soon as practicable following receipt by the Committee or its designee of the Member's election, in an amount determined as of the Valuation Date on which the Committee or its designee receives such election. (ii) If the Member fails to notify the Committee or its designee of his elections within such forty-five (45) day period, the Committee or its designee shall determine the value of the nonforfeitable portion of the Member's Account as of the Valuation Date that coincides with or immediately follows the end of such 45-day period, and if the Member's Account (including the amount of any outstanding loan plus accrued interest, if any) equals $5,000 or less as of such Valuation Date, the Committee or its 93 designee shall make a single lump sum cash distribution (less any mandatory withholding for federal income tax purposes) of the nonforfeitable portion of the Member's Account determined as of such Valuation Date. Notwithstanding the foregoing provisions of this Subsection (b), the Committee or its designee shall identify each former Member who as of a Valuation Date (specified by the Committee) in November, 1999 has not commenced receiving payments under the Plan and has an Account balance (including the amount of any outstanding loan plus accrued interest) of $5,000 or less. As soon as practicable after such Valuation Date, the Committee or its designee will notify each such Member of his right to make an eligible rollover distribution and to receive all or a portion of such distribution in Company Stock in accordance with Subsection (a) and will make either a distribution or a direct rollover in accordance with the procedures described above in paragraphs (i) and (ii), except that any reference to 45 calendar days shall be replaced with 30 calendar days. (c) A married Member whose Account (including the amount of any outstanding loan plus accrued interest, if any) exceeds $5,000 as of any Valuation Date following his termination of employment may elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase an annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life, with 50% of the amount payable to the Member continued after his death for the remainder of the life of the spouse to whom the Member is married on the date payments are due to commence. If such a married Member obtains the consent of his spouse (which consent shall be in writing and notarized or witnessed by a member of the 94 Committee or its designee), he may instead elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase a life annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life. (d) An unmarried Member whose Account (including the amount of any outstanding loan plus accrued interest, if any) exceeds $5,000 as of any Valuation Date following his termination of employment may elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase a life annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life. (e) A Member may revoke the election of an annuity form of benefit under Subsection (c) or (d) at any time prior to commencing the receipt of benefits. The Committee, or its designee, shall furnish to each Member who elects an annuity described in Subsection (c) or (d) above, a written explanation of the annuity, the circumstances in which it will be provided in that form, the availability of such an election, and the relative financial effect on a Member's benefits of such an election. A Member may, at any time, after receipt of the aforementioned explanation, request a further written explanation of the terms and conditions of the annuity and the financial effect upon the particular Member's benefits of making an election not to receive his benefits in such form. Within 30 days of the date of the Member's request or as soon thereafter as practicable, the Committee shall furnish to the Member a written explanation of the effect of such an 95 election, given in terms of dollars per payment, calculated on the basis of the current value of the Member's Retirement Savings Account determined as of the Valuation Date on which the Committee receives the Member's written election to receive an annuity form of payment. (f) The Committee or its designee shall notify each Member, at such time and in such manner as required by Sections 402(f) and 411(a)(11) of the Code and the regulations and other guidance issued thereunder, of his right to make a "direct rollover distribution" in accordance with Section 9.06 below, and his right to receive an immediate distribution of the nonforfeitable portion of his Account. Distribution of the nonforfeitable portion of a Member's Account under the Plan may occur prior to 30 days after the Committee or its designee provides such notice, provided: (i) the Member is informed that he has a right to a period of at least 30 days after receiving the notice to consider the decision of whether to make a direct rollover distribution and whether to receive an immediate distribution; and (ii) the Member, after receiving the notice, requests to receive an immediate distribution, in the manner prescribed by the Committee (including telephonically). (g) In the event an allocation of Company Stock resulting from Stock Ownership Contributions or dividends is made to a Member's Stock Ownership Account following the date on which an initial distribution is made or begins under this Section 9.02, distribution of the nonforfeitable portion of such allocation shall be made to the Member in a single lump sum payment (in cash or Company Stock, as elected by the Member with respect to the initial distribution) as soon as practicable following the 96 allocation of such Company Stock and/or dividends in an amount determined as of the Valuation Date coinciding with or immediately following such allocation. Further, to the extent a Member is entitled to a distribution under this Section 9.02 and there are dividends on Company Stock which have not been allocated to the Member's Stock Ownership Account and have not been utilized to pay any amounts due under an Acquisition Loan, such dividends shall be paid to the Member in cash. (h) Notwithstanding any other provision in the Plan to the contrary, in the event a Member who terminates employment because of his Retirement has not requested a lump sum distribution of his entire Account under this Section 9.02 or the purchase of an annuity under Subsection (c) or (d), the Member may elect (in the manner prescribed by the Committee, including telephonically) to withdraw in cash a portion of his Account and investment income thereon, less the amount of any outstanding loan, according to the order in which the following Paragraphs are presented, as the amounts described in each successive Paragraphs are exhausted: (i) An amount equal to all or part of the Member's before-1987 Standard Contributions (i.e., after-tax contributions made by the Member), but ---- no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (ii) An amount equal to all or part of the Member's after-1986 Standard Contributions and a pro rata portion of the earnings on all Standard Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. 97 (iii) An amount equal to all or part of the Member's Tax Deductible Contributions Account. (iv) An amount equal to all or part of the Member's Rollover Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Rollover Contributions. (v) An amount equal to all or part of the Member's Sheltered Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Sheltered Contributions. (vi) An amount equal to all or part of the Retirement Savings Matching Contributions made on the Member's behalf, but no more than the current value thereof in the event such value is less than the net amount of such Retirement Savings Matching Contributions. (vii) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Equity Allocations. (viii) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Exchange Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Exchange Contributions. (ix) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Matching Allocations. Solely for the calendar quarter beginning October 1, 1996, a Member who terminates employment for any reason and who has not requested a lump sum distribution of his entire Account under this Section 9.02 or the purchase of an annuity under 98 Subsection (c) or (d) shall have the right to withdraw in cash all or any portion of his Account described in Paragraphs (i) through (v). (i) Notwithstanding any other provision in the Plan to the contrary, in no event shall any distribution or withdrawal of a Member's Stock Ownership Account be permitted between October 1, 1996 and December 31, 1996. 9.03 Distribution on Account of Death -------------------------------- (a) If a Member dies before the distribution of his entire Account under Section 9.02, the entire amount outstanding in his Account, determined as of the Valuation Date coinciding with or immediately following the Member's death or notification of the Member's death, if later, shall be paid to his Beneficiary in a single lump sum distribution as soon as practicable thereafter. The portion of the Member's Retirement Savings Account not invested in the Company Stock Fund shall be distributed to his Beneficiary in cash, and the portion of the Member's Retirement Savings Account invested in the Company Stock Fund and the Member's Stock Ownership Account shall be distributed in a single sum in either cash or Company Stock (with cash for fractional shares), as elected by the Beneficiary. (b) In the event an allocation of Company Stock resulting from Stock Ownership Contributions or dividends is made to the Member's Stock Ownership Account following the date on which a single lump sum distribution is made to the Member's Beneficiary under Section 9.03(a), distribution of such allocations shall be paid to the Member's Beneficiary in a single lump sum distribution (in cash or Company Stock, as elected by the Beneficiary with respect to the initial distribution) as soon as practicable following such allocation in an amount determined as of the Valuation Date coinciding 99 with or immediately following the latest of the Member's death, the notification of the Member's death, or the allocation of such Company Stock or dividends. Further, to the extent a Member's Beneficiary is entitled to a distribution under this Section 9.03 and there are dividends on Company Stock which have not been allocated to the Member's Stock Ownership Account and have not been utilized to pay any amounts due under an Acquisition Loan, such dividends shall be paid to the Beneficiary in cash. (c) Notwithstanding any other provision in the Plan to the contrary, in no event shall any distribution of a deceased Member's Stock Ownership Account be permitted under this Section 9.03 between October 1, 1996 and December 31, 1996. 9.04 Latest Commencement of Payments ------------------------------- (a) Notwithstanding the provisions of Section 9.02 or 9.03, unless the Member otherwise elects, the vested portion of a Member's Account shall be distributed not later than the 60th day following the end of the Plan Year in which the latest of the following occurs: (i) the Member's 65th birthday, (ii) the tenth anniversary of the date on which he became a Member, or (iii) the date he terminates service with the Company or an Affiliated Company. (b) Notwithstanding anything in the Plan to the contrary, distribution of any Member's Account shall commence not later than the April 1 following the close of the calendar year in which the Member attains age 70 1/2, regardless of whether his employment with the Company or an Affiliated Company is terminated as of that date. If the Member 100 is actively employed by the Company or an Affiliated Company as of that date, the Member shall elect whether to receive the minimum amount required under Code section 401(a)(9) and the regulations issued thereunder (based on the life expectancy of such Member), or his entire Account. If the Member is no longer actively employed, he shall be entitled to elect to receive his distribution in either manner indicated in the preceding sentence or in accordance with the other provisions of this Article 9. If the Member elects to receive the minimum amount required under Code section 401(a)(9), unless otherwise elected by the Member by the time distributions are required to begin under this Subsection (b), the Member's life expectancy shall be recalculated annually. Also, any such election shall be irrevocable and shall apply to all subsequent years. Amounts required to be paid for each year shall be based on the value of the Member's Account on the last day of the immediately preceding calendar year, adjusted to reflect any additional benefits accrued during such immediately preceding calendar year, and may be subject to an administration fee, which fee shall be obtained from the Member's Account on a monthly or annual basis. In the event an actively employed Member elects to receive his entire Account, a distribution of the total value of his Account shall be made no later than the last day of each subsequent Plan Year. 9.05 Forfeitures ----------- (a) Termination of Employment ------------------------- If a Member terminates employment prior to the date on which he is fully vested in his Account, the non-vested portion of his Account shall be forfeited as of the close of the Plan Year in which the earlier of the following occurs: (i) the terminated Member incurs five (5) consecutive Breaks in Service, or (ii) the terminated Member 101 receives a distribution of the vested portion of his Account. If the non-vested portion of a Member's Stock Ownership Account is forfeited, Company Stock allocated pursuant to an Acquisition Loan shall be forfeited only after other assets. The cash equivalent of any forfeited Company Stock shall be based on the fair market value of the Company Stock as of the last Valuation Date in such Plan Year of forfeiture. If interests in more than one class of Company Stock have been allocated to the Member's Stock Ownership Account, such Member must be treated as having forfeited the same portion of each such class. Any forfeited amount under this Section 9.05(a) shall be used first to reduce any future Participating Company contributions, and then to pay administrative expenses under the Plan in accordance with Section 11.07 no later than as of the end of the Plan Year in which the forfeiture occurs. (b) Restoration of Account Balance ------------------------------ If the non-vested portion of a Member's Account has been forfeited in accordance with Section 9.05(a), that amount shall be subsequently restored to his Stock Ownership Account and used to purchase shares of Company Stock, provided (i) he is reemployed by a Participating Company before he has a period of five (5) consecutive Breaks in Service, and (ii) he repays to the Plan within five (5) years of his reemployment a cash lump sum payment equal to the full amount distributed to him from the Plan on account of his termination of employment. The fair market value of Company Stock as of the date of restoration shall be used to determine the number of shares to be restored to the Member's Stock Ownership Account. Any amounts to be restored to a Member's Stock Ownership Account shall be taken first from any forfeitures which have not been used to reduce future Participating Company contributions or to pay administrative 102 expenses, then from Released Leveraged Shares if the Committee determines to use Released Leveraged Shares for this purpose, and if any amounts remain to be restored, the Member's Participating Company shall make a special contribution in an amount necessary to restore such amounts. If Released Leveraged Shares are used to restore a Member's Stock Ownership Account, the fair market value of such Released Leveraged Shares as of the date of restoration shall be used to determine the number of shares to be credited to the Member's Stock Ownership Account. 9.06 Direct Rollover Distributions ----------------------------- (a) At the request of a Member, a surviving spouse of a Member, or a spouse or former spouse of a Member that is an alternate payee under a qualified domestic relations order as defined in Section 414(p) of the Code (referred to as the "distributee"), the Retirement Savings Trustee shall effectuate a direct rollover distribution of the amount requested by the distributee, in accordance with Section 401(a)(31) of the Code, to an eligible retirement plan (as defined in Section 402(c)(8)(B) of the Code). Such amount may constitute all or any whole percent of any distribution from the Plan otherwise to be made to the distributee, provided that such distribution constitutes an "eligible rollover distribution" as defined in Section 402(c) of the Code and the regulations and other guidance issued thereunder. All direct rollover distributions shall be made in accordance with the following Subsections (b) through (h). (b) A direct rollover shall only be made to one eligible retirement plan; a distributee may not elect to have a direct rollover distribution apportioned between or among more than one eligible retirement plan. 103 (c) Direct rollover distributions shall be made, in accordance with such forms and procedures as may be established by the Committee or its designee and to the extent any such distribution is to be made in shares of Company stock otherwise distributable under the Plan to the distributee, such shares shall be registered in a manner necessary to effectuate a direct rollover under Section 401(a)(31) of the Code. (d) No direct rollover distribution shall be made unless the distributee furnishes the Committee or its designee with such information as the Committee or its designee shall require and deems to be sufficient. (e) A distributee may elect to divide an eligible rollover distribution into two components, with one portion paid as a direct rollover distribution and the remainder paid to the distributee. (f) No direct rollover distribution may be made unless the distributee has received a written explanation of the consequences of such a distribution and such other information required by the Code at such time and in such manner as required by Sections 402(f) and 411(a)(11) of the Code and the regulations and other guidance issued thereunder, and in accordance with rules established by the Committee. (g) No direct rollover distribution shall be permitted unless the amount of the distribution exceeds $200. (h) Direct rollover distributions shall be treated as all other distributions under the Plan and shall not be treated as a direct trustee-to- trustee transfer of assets and liabilities. 104 9.07 Inability to Locate Payee ------------------------- If a Member or Beneficiary cannot be located by reasonable efforts of the Committee within a reasonable period of time after the latest date such benefits are otherwise payable under the Plan, the amount in such Member's Account shall be forfeited and used, not later than as of the last day of the Plan Year in which the forfeiture occurs to reduce future Participating Company contributions, to defray administrative expenses of the Plan, and to restore Members' Stock Ownership Accounts in accordance with Section 9.05(b). Such forfeited amount shall be restored (without earnings) if, at any time, the Member or Beneficiary who was entitled to receive such benefit when it first became payable, after furnishing proof of their identity and right to make such claim to the Committee, files a written request for such benefit with the Committee. 105 Article 10. Management of Funds ------------------- 10.01 Trust Funds ----------- All contributions and all other cash, securities or other property received by the Retirement Savings Trustee from time to time and held by it shall constitute the Retirement Savings Trust Fund; all contributions and all other cash, securities or other property received by the Stock Ownership Trustee from time to time and held by it shall constitute the Stock Ownership Trust Fund. Each Trust Fund shall be held and invested upon such terms and in such manner as set forth in the Plan and its respective Trust Agreement. The Retirement Savings Trustee shall have exclusive authority and control to manage and control the assets of the Plan attributable to: (i) the profit sharing portion of the Plan, (ii) the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02, and (iii) the diversification by certain Members of a portion of their Stock Ownership Accounts pursuant to Section 7.08, subject to the terms of the Plan and the Retirement Savings Trust Agreement; the Stock Ownership Trustee shall have exclusive authority and control to manage and control the assets of the Plan attributable to the employee stock ownership portion of the Plan, excluding the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02 and the diversification by certain Members of a portion of their Stock Ownership Accounts pursuant to Section 7.08, subject to the terms of the Plan and the Stock Ownership Trust Agreement. All payments of benefits as provided in this Plan shall be made solely out of, and to the extent of, the assets held in Trust, and no Participating Company shall be liable, directly or indirectly, for the payment of any benefits provided in this Plan, nor shall any Participating Company be liable for any deficiency existing at any time in the Trust. 106 10.02 Investment of Stock Ownership Contributions ------------------------------------------- The investment policy of the employee stock ownership portion of the Plan is to invest primarily in Company Stock and to that end, up to 100% of the assets in the Stock Ownership Trust Fund may be so invested, subject to the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02 and the rights of certain Members to transfer to other Investment Funds pursuant to Section 7.08. Such Company Stock shall be purchased by the Stock Ownership Trustee through an established securities market or from the Company, or any other person or entity, at a price not less than fair market value. Company Stock may be sold by the Stock Ownership Trustee through an established securities market or to the Company or to any other person or entity, at a price not less than fair market value. To the extent funds are available, the Stock Ownership Trustee may invest assets temporarily in savings accounts, certificates of deposit, U.S. Government obligations, obligations of agencies of the U.S. Government or in other types of short-term investments including commercial paper, or other investments deemed desirable for the Stock Ownership Trust Fund, or the funds may be held in cash or cash equivalents. 10.03 Member Accounts --------------- (a) Retirement Savings Account -------------------------- The Committee shall authorize the establishment of the following subaccounts within each Member's Retirement Savings Account, to provide for the administration of the profit sharing portion of the Trust, in accordance with the provisions of this Plan: 107 (i) Sheltered Account, to hold the Member's Sheltered Contributions, and earnings thereon. (ii) Standard Account, to hold the Member's Standard Contributions, and earnings thereon. (iii) Retirement Savings Matching Account, to hold any Retirement Savings Matching Contributions made on the Member's behalf under the Plan, and earnings thereon. (iv) Rollover Contributions Account, to hold any Rollover Contributions made by the Member, and earnings thereon. (v) Tax Deductible Contributions Account, to hold the Member's Tax Deductible Contributions made under the Plan, and earnings thereon. (b) Stock Ownership Account ----------------------- The Committee shall authorize the establishment of the following subaccounts within each Member's Stock Ownership Account, to provide for the administration of the employee stock ownership portion of the Trust in accordance with the provisions of this Plan: (i) Exchange Contribution Account. (ii) Match Account, which shall include the Bonus Account in existence under the Stock Ownership Plan prior to October 1, 1996. (iii) Equity Account. Each such subaccount shall include any cash dividends received by the Trustee on shares of Company Stock held in the Members' Stock Ownership Accounts or in the Stock Ownership Suspense Account (and earnings attributable thereto), and any 108 proceeds of the sale of Leveraged Shares. Funds in this Account may be invested only in the Stock Ownership Fund, subject to the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02 and the rights of certain Members to transfer to other Investment Funds pursuant to Section 7.08. 10.04 Transfer of Trust Assets ------------------------ (a) The Committee may make a transfer of liabilities and corresponding assets from the Trust to trusts of other plans qualified under Code Section 401(a). The Committee may accept a transfer of liabilities and corresponding assets from the trusts of other plans qualified under Code Section 401(a). Any assets received under the provisions of this Section shall thereafter constitute part of the corpus of the Trust. All such transfers and allocations shall be made in accordance with the provisions of ERISA. (b) Effective as of September 30, 1996, all of the assets and liabilities under the Stock Ownership Plan were transferred to this Plan and the portion of the assets and liabilities under the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. attributable to Employees of the Company employed at its Mobile Plant and Employees who are not subject to any collective bargaining agreement was transferred to this Plan. 10.05 Voting Rights for Company Stock ------------------------------- Each Member (or Beneficiary of a deceased Member) is, for purposes of this Section 10.05, hereby designated as a "named fiduciary" (within the meaning of ERISA) with respect to the shares of Company Stock allocated to his Retirement Savings Account, the shares of Company Stock allocated to his Stock Ownership Account and to a pro rata portion of the unallocated shares of Company Stock held in the Stock Ownership 109 Suspense Account and shall have the right to direct the Retirement Savings Trustee and/or the Stock Ownership Trustee, as the case may be, with respect to the vote of the shares of Company Stock allocated to his Retirement Savings Account and/or his Stock Ownership Account, on each matter brought before any meeting of the stockholders of the Company. Before each such meeting of stockholders, the Company shall cause to be furnished to each Member (or Beneficiary) a copy of the proxy solicitation material, together with a form requesting confidential directions to the Retirement Savings Trustee and/or the Stock Ownership Trustee on how such shares of Company Stock allocated to such Member's (or Beneficiary's) Account shall be voted on each such matter. Upon timely receipt of such directions the appropriate Trustee shall, on each such matter, vote as directed the number of shares (including fractional shares) of Company Stock allocated to such Member's (or Beneficiary's) Retirement Savings Account or Stock Ownership Account, and the appropriate Trustee shall have no discretion in such matter. The instructions received by the Retirement Savings Trustee and/or the Stock Ownership Trustee from Members (or Beneficiaries) shall be held by them in confidence and shall not be divulged or released to any person, including the Committee, officers or employees of the Company or an Affiliated Company. Each Trustee shall vote all Company Stock held by it, including Company Stock for which it has not received direction, as well as unallocated shares in the employee stock ownership portion of the Plan, in the same proportion as directed shares are voted determined by the votes of Members (or Beneficiaries) on all shares allocated to Members' (or Beneficiaries') Accounts, and the appropriate Trustee shall have no discretion in such matter. 10.06 Tender Offer Rights with Respect to Company Stock ------------------------------------------------- 110 The provisions of this Section 10.06 shall apply in the event a tender or exchange offer, including, but not limited to, a tender offer or exchange offer within the meaning of the Securities Exchange Act of 1934, as from time to time amended and in effect (hereinafter, a "tender offer"), for Company Stock is commenced by a person or persons. In the event a tender offer for Company Stock is commenced, the Committee, promptly after receiving notice of the commencement of any such tender offer, shall transfer certain of the Committee's record- keeping functions under the Plan to an independent record-keeper (which if one of the Trustees consents in writing, may be such Trustee). The functions so transferred shall be those necessary to preserve the confidentiality of any directions given by the Members (or Beneficiaries) in connection with the tender offer. The Retirement Savings Trustee and the Stock Ownership Trustee shall have no discretion or authority to sell, exchange or transfer any of such shares pursuant to such tender offer except to the extent, and only to the extent, as provided in this Plan and the applicable Trust Agreement. Each Member (or Beneficiary) is, for purposes of this Section 10.06, hereby designated as a "named fiduciary" (within the meaning of ERISA) with respect to the shares of Company Stock allocated to his Retirement Savings Account, the shares of Company Stock allocated to his Stock Ownership Account, and to a pro rata portion of the unallocated shares of Company Stock held in the Stock Ownership Suspense Account and shall have the right, to the extent of the number of whole shares of Company Stock allocated to his Retirement Savings Account and/or his Stock Ownership Account, to direct the Trustee in writing as to the manner in which to respond to a tender offer with respect to shares of Company Stock. The Company shall use its best efforts to timely distribute or cause to be 111 distributed to each Member (or Beneficiary) such information as will be distributed to stockholders of the Company in connection with any such tender offer. Upon timely receipt of such instructions, the Retirement Savings Trustee and/or the Stock Ownership Trustee shall respond as instructed with respect to such shares of Company Stock. The instructions received by the appropriate Trustee from Members (or Beneficiaries) shall be held by such Trustee in confidence and shall not be divulged or released to any person, including the Committee, officers or employees of the Company or any Affiliated Company. If the Retirement Savings Trustee and/or Stock Ownership Trustee shall not receive timely instructions from a Member (or Beneficiary) as to the manner in which to respond to such a tender offer, such Trustee shall not tender or exchange any shares of Company Stock with respect to which such Member (or Beneficiary) has the right of direction, and such Trustee shall have no discretion in such matter. Unallocated shares of Company Stock and fractional shares of Company Stock allocated to Members' (or Beneficiaries') Accounts shall be tendered or exchanged by such Trustee in the same proportion it tenders or exchanges the shares with respect to which Members (or Beneficiaries) have the right of direction, and the Retirement Savings Trustee and/or Stock Ownership Trustee shall have no discretion in such matter. In determining such proportion, the Trustee shall under all circumstances include in its calculation the direction of Members (or Beneficiaries) on all shares of Company Stock allocated to Members' (or Beneficiaries') Accounts. The independent record-keeper shall solicit confidentially from each Member (or Beneficiary) the directions described in this Section 10.06 as to whether shares are to be tendered. The independent record-keeper, if different from one of the Trustees, shall instruct the Trustees as to the amount of shares to be tendered, in accordance with the above provisions. 112 Article 11. Administration of Plan ---------------------- 11.01 Appointment of Committee ------------------------ (a) The Committee shall be comprised of the members of the Retirement Committee of the Retirement Income Plan for Employees of Armstrong World Industries, Inc. The Chairman and Secretary of the Retirement Income Plan's Committee shall be the Chairman and Secretary of the Committee. (b) If no members of the Committee are in office, the Company shall be deemed the Committee. 11.02 Organization and Operation of the Committee ------------------------------------------- (a) The Committee shall endeavor to act, in carrying out its duties and responsibilities in the interest of the Members and Beneficiaries, with the care, skill, prudence and diligence under the prevailing circumstances that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and aims. (b) The Committee shall act by a majority of its members or by unanimous approval of its members if there are two or less members in office at the time, and any action may be taken either by a vote taken in a meeting or by action taken in writing without the formality of convening a meeting. In the event of a deadlock, the Committee shall determine the method for resolving such deadlock. If there are two or more Committee members, no member shall act upon any question pertaining solely to himself, and the other member or members shall alone make any determination required by the Plan in respect thereof. 113 (c) The Committee may authorize any one or more of its members, or members of a separate administrative subcommittee it may form, to execute any routine administrative document on behalf of the Committee. (d) The Committee may, in addition to the execution of routine administrative documents, delegate specific duties and powers to one or more of its members or to a separate administrative subcommittee it may form. Such delegation shall remain in effect until rescinded in writing by the Committee. The members or persons so designated shall be solely liable, jointly and severally, for their acts or omissions with respect to such delegated responsibilities. (e) The Committee shall endeavor not to engage directly or indirectly in any prohibited transaction, as set forth in ERISA. 11.03 Duties and Responsibilities of the Committee -------------------------------------------- The Committee, except for such investment and other responsibilities vested in one of the Trustees, a designated investment manager or the investment committee of the Board of Directors, shall have full authority and responsibility for administering the Plan in accordance with its provisions and under applicable law. The duties and responsibilities of the Committee shall include, but shall not be limited to, the following: (a) To appoint such accountants, consultants, administrators, counsel, or such other persons it deems necessary for the administration of the Plan. Members of the Committee shall not be precluded from serving the Committee in one or more of such individual capacities. (b) To determine, in its full and exclusive discretion, all benefits and to resolve all questions arising from the administration, interpretation, and application of Plan 114 provisions, either by general rules or by particular decisions, including determinations as to whether a claimant is eligible for benefits, the amount, form and timing of benefits, and any other matter (including any question of fact) raised by a claimant or identified by the Committee. (c) To advise each Trustee with respect to all benefits which become payable under the Plan and to direct each Trustee as to the manner in which such benefits are to be paid. (d) To adopt such forms and regulations it deems advisable for the administration of the Plan and the conduct of its affairs. (e) To take such steps as it considers necessary and appropriate to remedy any inequity resulting from incorrect information received or communicated or as a consequence of administrative error (f) To assure that its members, each Trustee and every other person who handles funds or other property of the Plan are bonded as required by law. (g) To settle or compromise any claims or debts arising from the operation of the Plan and to defend any claims in any legal or administrative proceeding. All duties and responsibilities of the Committee shall be carried out in its sole discretion, and its decisions shall be final and binding upon all affected persons, except for the right any such persons shall have to appeal such decisions pursuant to Section 11.06 or through any court proceeding. 11.04 Required Information -------------------- Each Participating Company and each Member and Beneficiary entitled to benefits shall furnish the Committee any information or proof requested by the Committee 115 and required for the proper administration of the Plan. Failure on the part of any Member or Beneficiary to comply with such request shall be sufficient grounds for the delay in payment of benefits under the Plan until the requested information or proof is received. 11.05 Indemnification --------------- The Company will indemnify and save harmless the members of the Committee and any person to whom fiduciary responsibilities are delegated under this Plan against any cost or expense (including attorney's fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act, except in the case of willful misconduct. 11.06 Claims and Appeal Procedure --------------------------- (a) Any request or claim for Plan benefits must be made in writing and shall be deemed to be filed by a Member or Beneficiary when a written request is made by the claimant or the claimant's authorized representative which is reasonably calculated to bring the claim to the attention of the Committee. (b) The Committee shall provide notice in writing to any Member or Beneficiary where a claim for benefits under the Plan has been denied in whole or in part. Such notice shall be made within 90 days of the receipt by the Committee of the Member's or Beneficiary's claim or, if special circumstances require, and the Member or Beneficiary is so notified in writing, within 180 days of the receipt by the Committee of the Member's or Beneficiary's claim. The notice shall be written in a manner calculated to be understood by the claimant and shall: (i) set forth the specific reasons for the denial of benefits; 116 (ii) contain specific references to Plan provisions relative to the denial; (iii) describe any material and information, if any, necessary for the claim for benefits to be allowed, which had been requested, but not received by the Committee; and (iv) advise the Member or Beneficiary that any appeal of the Committee's adverse determination must be made in writing to the Committee, within 60 days after receipt of the initial denial notification, setting forth the facts upon which the appeal is based. (c) If notice of the denial of a claim is not furnished within the time periods set forth above, the claim shall be deemed denied and the claimant shall be permitted to proceed to the review procedures set forth below. If the Member or Beneficiary fails to appeal the Committee's denial of benefits in writing and within 60 days after receipt by the claimant of written notification of denial of the claim (or within 60 days after a deemed denial of the claim), the Committee's determination shall become final and conclusive. (d) If the Member or Beneficiary appeals the Committee's denial of benefits in a timely fashion, the Committee shall re-examine all issues relevant to the original denial of benefits. Any such claimant, or his duly authorized representative may review any pertinent documents, as determined by the Committee, and submit in writing any issues or comments to be addressed on appeal. (e) The Committee shall advise the Member or Beneficiary and such individual's representative of its decision which shall be written in a manner calculated to be understood by the claimant, and include specific references to the pertinent Plan 117 provisions on which the decision is based. Such response shall be made within 60 days of receipt of the written appeal, unless special circumstances require an extension of such 60 day period for not more than an additional 60 days. Where such extension is necessary, the claimant shall be given written notice of the delay. If the decision on review is not furnished within the time set forth above, the claim shall be deemed denied on review. 11.07 Expenses of the Plan -------------------- All reasonable expenses of the Committee and of the Plan (other than expenses of the Company which relate to settlor functions), including the expenses of the Trustees, and other reasonable expenses related to the financial administration of the Plan, shall be approved by the Committee and shall be paid out of the Trust Fund to the extent they are not paid by the Company. 118 Article 12. General Provisions ------------------ 12.01 Exclusiveness of Benefits ------------------------- The Plan has been created for the exclusive benefit of the Members and their Beneficiaries. No part of the Trust shall ever revert to a Participating Company nor shall any part of such Trust ever be used other than for the exclusive benefit of the Members and their Beneficiaries, except as provided in accordance with Section 12.03(b). No Member or Beneficiary shall have any interest in or right to any part of the Trust, or any equitable right under the Trust Agreements except to the extent expressly provided in the Plan or Trust Agreements. 12.02 Limitation of Rights -------------------- The establishment of this Plan shall not be considered as giving to any Member or other employee of a Participating Company the right to be retained in the employ of a Participating Company, and all Members and other employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 12.03 Non-Assignability ----------------- (a) No benefit or interest under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such action shall be void for purposes of the Plan. No benefit or interest shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such benefit or interest, nor shall it be subject to attachment or other legal process for or against any person, except to such extent as may be required by law or permitted by Treasury Regulation. If any payee or representative of a payee under the Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, 119 encumber, or charge any such benefit or interest, the Committee may hold or apply the benefit or interest or any part thereof to or for such person, his spouse, his children, or other dependents, or any of them in such manner and in such proportions as the Committee shall determine in its sole discretion. (b) Notwithstanding any other provisions of the Plan to the contrary, the Committee and the Trustees shall comply with a "qualified domestic relations order" as such term in defined in Section 414(p) of the Code and the benefits otherwise payable to the Member, and to any other person than the payee entitled to benefits under the order, shall be adjusted accordingly. Benefits payable under a qualified domestic relations order may be paid prior to the "earliest retirement age" as such term is defined in Code Section 414(p). The Committee shall establish reasonable procedures for determining the qualified status of any domestic relations order and for administering distributions under any such order. 12.04 Construction of Agreement ------------------------- The Plan shall be construed according to the laws of the Commonwealth of Pennsylvania and all provisions hereof shall be administered according to, and its validity shall be determined under, the laws of such Commonwealth, except where preempted by Federal law. 12.05 Severability ------------ (a) Should any provision of the Plan be deemed or held to be illegal or invalid for any reason, such invalidity shall not adversely affect any other Plan provision and in such case, the appropriate parties shall immediately adopt a new provision or regulation to take the place of the one deemed or held to be illegal or invalid. 120 (b) If the invalidity inhibits the proper operation of this Plan a new provision shall be adopted to take the place of the one deemed or held to be illegal or invalid. 12.06 Titles and Headings ------------------- The titles and headings of the Sections and any Subsections in this instrument are for convenience of reference only. In the event of any conflict between the text of this instrument and the titles or headings, the text rather than such titles or headings shall control. 12.07 Counterparts as Original ------------------------ The Plan may be prepared in counterparts, each of which so prepared shall be construed as an original. 12.08 Construction ------------ The singular, where appearing in the Plan shall include the plural and the plural shall include the singular; and the masculine pronoun, where appearing in the Plan shall include the feminine and the feminine shall include the masculine. 12.09 Source of Benefits ------------------ All benefits under the Plan shall be provided solely from the Trust Funds, and neither the Participating Companies nor their officers, directors or stockholders shall have any liability or responsibility therefor. Neither the Participating Companies nor the Trustees guarantee the funds of the Plan against any loss or depreciation or guarantee the payment of any benefit under the Plan. No person shall have any rights under the Plan with respect to the funds of the Plan, or against either Trustee, any Participating Company or any member of the Committee, except as specifically provided herein. 12.10 Top-Heavy Provisions -------------------- 121 (a) General Rule ------------ The Plan shall meet the requirements of this Section 12.10 in the event that the Plan is or becomes a Top-Heavy Plan. (b) Top-Heavy Plan -------------- Subject to the aggregation rules set forth in Subsection (c), the Plan shall be considered a Top-Heavy Plan pursuant to Section 416(g) of the Code in any Plan Year if, as of the Determination Date, the value of the cumulative Accounts of all Key Employees exceeds sixty percent (60%) of the value of the cumulative Accounts of all of the Employees as of such Date, excluding former Key Employees, and excluding any Employee who has not performed services for the Company or any Affiliated Company during the five (5) consecutive Plan Year period ending on the Determination Date, but taking into account in computing the ratio any distributions made during the five (5) consecutive Plan Year period ending on the Determination Date. For purposes of the above ratio, the Account of a Key Employee shall be counted only once each Plan Year, notwithstanding the fact that an individual may be considered a Key Employee for more than one reason in any Plan Year. (c) Aggregation Rules ----------------- For purposes of determining whether the Plan is a Top-Heavy Plan and for purposes of meeting the requirements of this Section 12.10, the Plan shall be aggregated and coordinated with other qualified plans, including terminated plans, in a Required Aggregation Group and may be aggregated or coordinated with other qualified plans in a Permissive Aggregation Group. If such Required Aggregation Group is 122 Top-Heavy, this Plan shall be considered a Top-Heavy Plan. If such Permissive Aggregation Group is not Top-Heavy, this Plan shall not be a Top-Heavy Plan. (d) Definitions ----------- For the purpose of determining whether the Plan is Top-Heavy, the following definitions shall be applicable: (i) The term "Determination Date" shall mean, in the case of the first Plan Year, the last day of such Plan Year and in the case of any subsequent Plan Year, the last day of the preceding Plan Year. The value of an individual Member's Account shall be determined as of the Determination Date. (ii) An individual shall be considered a "Key Employee" if he is an Employee or former Employee who at any time during the current Plan Year or any of the four (4) preceding Plan Years: (1) was an officer of the Company who has annual compensation from the Company in the applicable Plan Year in excess of 50% of the dollar limitation under Section 415(b)(1)(A) of the Code; provided, however, that the number of individuals treated as Key Employees by reason of being officers hereunder shall not exceed the lesser of fifty (50) or ten percent (10%) of all Employees, and provided further, that if the number of Employees treated as officers is limited to fifty (50) hereunder, the individuals treated as Key Employees shall be those who, while officers, received the greatest annual Compensation in the applicable Plan Year and any of the four preceding Plan Years; or (2) was one of the ten (10) Employees owning or considered as owning the largest interests in the Company who has annual Compensation from the 123 Company in the applicable Plan Year in excess of the dollar limitation under Section 415(c)(1)(A) of the Code as increased under Section 415(d) of the Code; or (3) was a more than five percent (5%) owner of the Company; or (4) was a more than one percent (1%) owner of a Participating Company whose annual Compensation from the Company in the applicable Plan Year exceeded $150,000. For purposes of determining who is a Key Employee, ownership shall mean ownership of the outstanding stock of the Company or of the total combined voting power of all stock of the Company, taking into account the constructive ownership rules of Section 318 of the Code, as modified by Section 416(i)(1) of the Code. For purposes of Subparagraph (1) but not for purposes of Subparagraphs (2), (3) and (4) (except for purposes of determining Compensation under (4)), the term "Company" shall include any entity aggregated with the Company pursuant to Section 414(b), (c) or (m) of the Code. For purposes of Subparagraph (2), an Employee (or former Employee) who has some ownership interest is considered to be one of the top ten (10) owners unless at least ten (10) other Employees (or former Employees) own a greater interest than such Employee (or former Employee), provided that if an Employee has the same ownership interest as another Employee, the Employee having greater annual Compensation from the Company is considered to have the larger ownership interest. (iii) The term "Non-Key Employee" shall mean any Employee who is a Member and who is not a Key Employee. 124 (iv) Whenever the term "Key Employee," "former Key Employee," or "Non-Key Employee" is used herein, it includes the beneficiary or beneficiaries of such individual. If an individual is a Key Employee by reason of the foregoing sentence as well as a Key Employee in his own right, both the value of his inherited benefit and the value of his own Account will be considered his Account for purposes of determining whether the Plan is a Top-Heavy Plan. (v) For purposes of this Section 12.10, except as otherwise specifically provided, the term "Compensation" shall be determined in the same manner as "Compensation" for purposes of Section 6.08, increased by pre-tax amounts described in Sections 125 and 402(e)(3) of the Code under plans maintained by the Company or an Affiliated Company. (vi) The term "Required Aggregation Group" shall mean all other qualified defined benefit and defined contribution plans maintained by the Company in which a Key Employee participates, and each other plan of the Company which enables any plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) and 410 of the Code. (vii) The term "Permissive Aggregation Group" shall mean all other qualified defined benefit and defined contribution plans maintained by the Company that meet the requirements of Sections 401(a)(4) and 410 of the Code when considered with a Required Aggregation Group. 125 (e) Requirements Applicable If Plan Is Top-Heavy -------------------------------------------- In the event the Plan is determined to be Top-Heavy for any Plan Year, the following requirements shall be applicable: (i) Minimum Allocations shall be as follows: (1) In the case of a Non-Key Employee who is covered under this Plan but does not participate in any qualified defined benefit plan maintained by the Company, the minimum allocation of contributions plus forfeitures allocated to the account of each Non-Key Employee who has not separated from service at the end of a Plan Year in which the Plan is Top-Heavy shall equal the lesser of three percent (3%) of Compensation for such Plan Year or the largest percentage of Compensation (including Sheltered Contributions and Exchange Contributions) provided on behalf of any Key Employee for such Plan Year. Sheltered Contributions and Exchange Contributions may not be used to satisfy this minimum allocation requirement. The minimum allocation provided hereunder may not be suspended or forfeited under Section 411(a)(3)(B) or (D) of the Code. (2) A Non-Key Employee who is covered under this Plan and under a qualified defined benefit plan maintained by the Company shall not be entitled to the minimum allocation under this Plan but shall receive the minimum benefit provided under the terms of the qualified defined benefit plan. If a Non-Key Employee is covered under one or more qualified defined contribution plans in addition to this Plan, the minimum allocation requirements may be satisfied through contributions and forfeitures allocated to his accounts under such other plans. 126 (ii) Effective for Plan Years beginning before January 1, 2000, for purposes of computing the defined benefit plan fraction and defined contribution plan fraction as set forth in Section 415(e)(2)(B) and (e)(3)(B) of the Code, the dollar limitations on benefits and Annual Additions applicable to a limitation year shall be multiplied by 1.0 rather than by 1.25. (iii) The Member's nonforfeitable right to a percentage of his Account shall be determined in accordance with the following table: Nonforfeitable Years of Service Percentage ---------------- ---------- 2 20 3 40 4 60 5 80 6 or more 100 Notwithstanding the foregoing, in no event will a Member's nonforfeitable right to a percentage of his Account be less than his nonforfeitable right determined prior to the Plan's becoming a Top-Heavy Plan. 127 Article 13. Amendment, Merger And Termination --------------------------------- 13.01 Amendment --------- The Company, by written resolution of the Board of Directors, reserves the right at any time and from time to time to modify or amend, in whole or in part, any or all of the provisions of the Plan, provided that: (a) no modification or amendment shall be made that makes it possible for any portion of the assets of the Trust to revert to or become the property of any Participating Company, and (b) no modification or amendment shall have any retroactive effect so as to cause any reduction in the Member's Account as of the date of such amendment or shall deprive any Member or Beneficiary of any benefit accrued hereunder. Notwithstanding the foregoing, the Board of Directors has delegated the authority to amend the Plan to the Committee; provided, however, that the Board of Directors reserves the right to rescind or modify such delegation at any time and for any reason and retains the right to amend the Plan itself at any time. Further notwithstanding the foregoing, any modification or amendment of the Plan may be made, retroactively if necessary, which the Board of Directors or its delegate deems necessary or proper to bring the Plan into conformity with any law or governmental regulation relating to plans or trusts of this character, including the qualification of any trust or other fund created under the Plan as exempt from income taxes under the Code. 13.02 Termination, Sale of Assets or Sale of Subsidiary ------------------------------------------------- While the Plan and Trust are intended to be permanent, they may be terminated at any time at the discretion of the Board of Directors or its delegate by written resolution, 128 solely as to all or any one Participating Company. Written notification of such action shall be given to each Participating Company and the Trustees setting forth the date of termination and such date of termination shall be deemed a Valuation Date. Thereafter, no further contributions shall be made to any Trust Fund by a Participating Company involved in the termination. Upon the complete or partial termination of the Plan, or upon the complete discontinuance of all contributions by all Participating Companies, the rights of all affected Members in their Accounts shall be fully vested. Any unallocated Leveraged Shares shall be sold to the Company or on the open market. The proceeds of such sale shall be used to satisfy any outstanding Acquisition Loan and the balance of any funds remaining shall be allocated to each Member's Account based on the proportion that the balance of each such Member's Account bears to the total of the balances of all Accounts. Upon termination, a Member's Account shall not be distributed until such time as otherwise provided under Article 9 hereof. Upon the sale of substantially all of the assets of a Participating Company in a trade or business or the sale by a Participating Company of its interest in a subsidiary, a Member who is employed by such Participating Company shall be considered to have separated from service for purposes of determining a Member's entitlement to a distribution pursuant to the provisions of Section 9.02, to the extent permitted under Sections 401(k)(10) and 409(d) of the Code. Upon such event, the Members may no longer actively participate in the Plan. 13.03 Merger of Plans --------------- Upon the merger or consolidation of this Plan with any other plan or the transfer of assets or liabilities from the Trust to another trust, all Members shall be entitled to a 129 benefit at least equal to the benefit they would have been entitled to receive had the Plan been terminated in accordance with Section 13.02 immediately prior to such merger, consolidation or transfer of assets or liabilities. 13.04 Additional Participating Companies, Locations, or Divisions ----------------------------------------------------------- Any domestic subsidiary which is now or becomes an Affiliated Company shall become a Participating Company upon appropriate action by the board of directors of such subsidiary necessary to adopt the Plan with respect to its employees. In order for a domestic subsidiary to become a Participating Company the Board, the Executive Committee of the Board, or the Committee must consent to such action. The Board, the Executive Committee of the Board, or the Committee also may approve the inclusion of employees of any newly established or acquired location or division as Employees eligible for membership under the Plan. The Committee shall determine to what extent, if any, credit for eligibility and vesting purposes shall be granted for previous service with the subsidiary, location or division, but subject to the continued qualification of the Trust for the Plan as tax-exempt under the Code. 130 EX-10.(I)(B) 3 PRODUCER AGREEMENT EXHIBIT 10 (i)(b) As Amended, Effective February 1, 1994 PRODUCER AGREEMENT CONCERNING CENTER FOR CLAIMS RESOLUTION September 28, 1988 PRODUCER AGREEMENT CONCERNING CENTER FOR CLAIMS RESOLUTION ---------------------------------------------------------- This Agreement, dated September 28, 1988, to provide for the administration, defense, payment and disposition of asbestos-related claims (hereinbelow referred to as the "Agreement") is made between and among the Participating Producers, as defined hereinbelow. WITNESSETH: WHEREAS, a substantial number of asbestos-related claims are pending, and continue to be filed or asserted, against Participating Producers, requiring appropriate defense and disposition; WHEREAS, Participating Producers deem it beneficial to have an organization that will administer and handle asbestos-related claims on behalf of more than one Producer, that will provide claims-related analysis and reporting and that will administer the insurance-coverage provisions of the Agreement Concerning Asbestos-Related Claims dated June 19, 1985 (hereinafter referred to as the "Wellington Agreement"); and WHEREAS, although upon the dissolution of the Asbestos Claims Facility certain aspects of the relationship between the Producer and Insurer signatories to the Wellington Agreement will continue to be governed thereunder, the -2- relationship among Producer signatories will not be so governed, and there no longer will be a waiver of certain cross and counter claims among Producers; and WHEREAS, Participating Producers believe it is important to establish an organization that will, on behalf of all Participating Producers, resolve meritorious asbestos-related claims in a fair and expeditious manner and, where necessary, defend asbestos-related claims efficiently and economically; and WHEREAS, Participating Producers desire to establish an organization that will, at least for all Participating Producers, provide claims-related analysis and reporting and administer the insurance-coverage provisions of the Wellington Agreement; and WHEREAS, Participating Producers desire to enter into a constructive relationship with one another and to resolve any cross or counter claims that they may have against each other; NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the Participating Producers hereby agree as follows: I. DEFINITIONS ----------- As used in the Agreement and Attachment A hereto, the following terms shall have the following meanings: 1. Allocated Expenses -- means all fees and expenses incurred for services ------------------ performed outside the Center that can be directly attributed to the defense and disposition of a particular asbestos-related claim. -3- 2. Asbestos-Related Claims -- means any claims or lawsuits against any ----------------------- Participating Producers or the Center, or against any Supporting Insurer based solely on the conduct of any Participating Producers, by whomever brought and in whatever procedural posture such claims or lawsuits may arise, seeking monetary relief (whether or not such relief is the only relief sought) for bodily injury, sickness, disease or death, alleged to have been caused in whole or in part by any asbestos or asbestos-containing product; provided, that asbestos-related -------- claims shall not include claims for damage to or destruction of property or statutory claims for compensation by an employee against an employer. 3. Center -- means the Center for Claims Resolution, established under the ------ Agreement. 4. Insurer Agreement -- means the Insurer Agreement Concerning Center for ----------------- Claims Resolution dated September 23, 1988. 5. Insurers -- means persons that are or were engaged in the business of -------- providing liability insurance to Producers. 6. Liability Payments -- means the sums paid in settlement of, or in ------------------ satisfaction of a judgment on, any asbestos-related claims, exclusive of allocated and unallocated expenses for such claims. 7. Participating Producers -- means Producers that have become signatories ----------------------- to the Agreement. 8. Persons -- means natural persons and organizations of any kind. ------- -4- 9. Producers -- means persons that are or were engaged in the mining, --------- manufacturing, production, processing, fabrication, distribution, installation, sale or use of asbestos or asbestos-containing products or that may have a liability with respect to asbestos-related claims. 10. Supporting Insurers -- means Insurers that have become signatories to ------------------- the Insurer Agreement. 11. Unallocated Expenses -- means the overhead, operating and -------------------- administrative expenses (other than allocated expenses) of the Center incurred in administering, defending and disposing of asbestos-related claims, providing claims-related analysis and reporting and administering the insurance-coverage provisions of the Wellington Agreement; provided, that -------- unallocated expenses shall not include any expenses, debts or other obligations of the Asbestos Claims Facility, whatever previously or hereinafter incurred by it. II. ESTABLISHMENT OF CENTER ----------------------- 1. Participating Producers shall establish a non-profit organization to be known as the Center for Claims Resolution. The Center shall administer and arrange for the evaluation, settlement, payment or defense of all asbestos- related claims in accordance with the provisions of the Agreement and Attachment A hereto, applicable law and professional standards; shall provide claims- related analysis and reporting; -5- and shall administer the insurance-coverage provisions of the Wellington Agreement. 2. The Center shall not be a continuation of or a successor to the Asbestos Claims Facility. The Center shall be established, funded and operated independently of the Asbestos Claims Facility, and shall not assume or otherwise be responsible for any of the Asbestos Claims Facility's debts, liabilities or obligations. 3. The Center shall be governed by a Board of Directors whose members shall number at least five (5) and whose manner of election, powers and duties shall be as set forth in the Center's by-laws. The Board of Directors shall appoint as non-voting ex officio directors one representative selected by -- ------- Supporting Insurers, who shall serve during the period that Supporting Insurers are paying unallocated expenses of the Center, and one representative selected by an affirmative majority of Participating Producers. The Board of Directors shall have no power to modify any provisions of the Agreement or Attachment A hereto. 4. The Center shall not sell, lease, exchange, mortgage, pledge, or otherwise dispose of all or substantially all of its property or assets and shall not dissolve or wind up its affairs except upon the affirmative vote of two-thirds of its Participating Producer members with two-thirds interest. -6- III. MEMBERSHIP IN CENTER -------------------- 1. Each Participating Producer shall become a member of the Center upon becoming a signatory to the Agreement, and shall have all of the rights and duties of a member, as set forth in the Agreement, Attachment A hereto and the Center's by-laws. 2. The membership of any Participating Producer in the Center may be terminated only in the following manner: a) the Participating Producer may terminate its membership effective at any time after October 3, 1989, by: i) providing written notice to the Center at least 60 days prior to the effective date of termination; and ii) obtaining a determination from the Board of Directors of the Center, which may not be unreasonably withheld, that such Participating Producer has paid or made adequate provision for the payment of any amounts due from it under the Agreement or Attachment A hereto; or b) the membership of any Participating Producer shall terminate upon the filing by such Participating Producer for bankruptcy protection or other protection against creditors under any state or federal law; or c) the Board of Directors of the Center may terminate or suspend the membership of any Participating Producer that: i) is involuntarily placed in bankruptcy under any state or federal law or that has been determined by a court to be insolvent; or ii) the Board of Directors determines, by an -7- affirmative vote of three-fifths of the directors then in office, has materially breached the Agreement or Attachment A hereto, including but not limited to a failure to pay to the Center in a timely manner any amounts due to or incurred by the Center on such Participating Producer's behalf; provided, that -------- termination of membership by the Board of Directors for breach of the Agreement or Attachment A hereto shall not be effective until 30 days after written notice of the Board's determination is provided to the Participating Producer, to afford such Producer an opportunity to cure the breach in question and avoid membership termination. 3. Upon termination of membership and thereafter, a Participating Producer shall have none of the rights or obligations of a member of the Center, as set forth in the Agreement, Attachment A hereto and the Center's by-laws. However, notwithstanding termination of membership, a Participating Producer shall continue to have and to honor all of the obligations incurred by it hereunder or on its behalf as a member prior to the effective date of its membership termination, including any retroactive adjustments of its percentage shares of liability payments and allocated expenses made pursuant to Attachment A hereto. IV. SUBMISSION AND WITHDRAWAL OF CLAIMS ----------------------------------- 1. By becoming a signatory to the Agreement and a member of the Center, each Participating Producer hereby desig- -8- nates the Center as its sole agent to administer and arrange on its behalf for the evaluation, settlement, payment or defense of all asbestos-related claims against such Participating Producer. As sole agent, the Center shall have exclusive authority and discretion to administer, evaluate, settle, pay or defend all asbestos-related claims, including the right to delegate to any person, upon consent of the Participating Producer in question, such authority and discretion with respect to designated asbestos-related claims against such Participating Producer. 2. The Center shall serve as the sole agent of each Participating Producer with respect to all asbestos-related claims so long as such Participating Producer is a member of the Center. Termination of membership of a Participating Producer pursuant to Paragraph 2 of Section III hereinabove shall serve immediately as a withdrawal by such Participating Producer of the designation of the Center as its sole agent made pursuant to Paragraph 1 of this Section, and shall terminate immediately the Center's right, authority and obligation to act on behalf of such Participating Producer with respect to any and all asbestos-related claims, whenever made or filed, but this shall not prevent reasonable access by such Participating Producer to its claims files. -9- V. COOPERATION WITH CENTER ----------------------- Each Participating Producer shall comply with the terms and conditions of the Agreement and Attachment A hereto and shall cooperate with and assist the Center in the furtherance of such terms and conditions and of its purposes. Each Participating Producer shall respond fully and in a timely manner to reasonable requests by the Center for information and shall assist in the securing and giving of evidence concerning asbestos-related claims. The Center shall use its best efforts to maintain the confidentiality of confidential or proprietary information submitted by Participating Producers and Supporting Insurers. VI. ALLOCATION OF LIABILITIES AND EXPENSES -------------------------------------- Liability payments and allocated expenses shall be apportioned to each Participating Producer from the date such Producer becomes a signatory to the Agreement and a member of the Center. Such apportionment shall establish the responsibility of each Participating Producer for a percentage share of liability payments and a percentage share of allocated expenses attributable to each claim handled by the Center as sole agent for such Participating Producer under Section IV hereinabove. Each Subscribing Producer's percentage shares of liability payments and allocated expenses shall be established as provided in Attachment A hereto, and shall be subject to modification only in the manner and to the -10- extent set forth therein. To the extent that a Participating Producer's percentage shares of liability payments and allocated expenses attributable to a particular asbestos-related claim are not paid in a timely manner by one or more of its Insurers, whether pursuant to the Wellington Agreement or any other agreement, such Participating Producer shall pay in a timely manner the percentages of liability payments and allocated expenses in question. VII. PAYMENT OF UNALLOCATED EXPENSES ------------------------------- Each Participating Producer shall pay, respectively, the percentage share attributed to it pursuant to Attachment A hereto of any unallocated expenses incurred by the Center during its first fiscal year of operation not otherwise paid by Supporting Insurers pursuant to the Insurer Agreement. The manner and timing of such payments shall be as determined by the Center. The amounts and timing of unallocated-expense payments, if any, by Participating Producers concerning the Center's second and subsequent years of operation shall be as mutually agreed upon by the signatories hereto. VIII. CENTER CLAIMS HANDLING ---------------------- 1. The Center shall administer, evaluate, settle, pay or defend all asbestos-related claims in a fair, cost-effective and expeditious manner. The Center shall handle each asbestos-related claim on behalf of all -11- Participating Producer members, and shall not settle an asbestos-related claim on behalf of fewer than all Participating Producer members. The Center shall settle each asbestos-related claim so as to extinguish claims for all damages, including punitive damages, and, in the settlement of asbestos-related claims, the Center shall not pay punitive damages to claimants. 2. The Center shall hire an adequate number of competent and experienced claims and legal staff and shall retain the services of competent and experienced legal counsel to defend asbestos-related claims. The Center shall retain such counsel, including punitive counsel, as are necessary and appropriate to defend the interests of Participating Producer members. The Center may utilize counsel-sharing arrangements on behalf of its members with Producers not signatories hereto. 3. Actions against third parties may be undertaken by the Center on behalf of its members, but the Agreement shall neither require nor preclude such actions. 4. The Center shall require valid evidence to support each claim against Participating Producer members, and shall require credible medical evidence in each case prior to making payment to a claimant. Center personnel shall be responsible for obtaining such evidence from each claimant and verifying it. 5. A claimant shall be paid solely for asbestos-related injury. However, the Center may provide certain claimants -12- whose claims have not matured with an opportunity to resubmit a claim to the Center should additional medical evidence become available. The Center may enter into agreements to suspend the running of statutes of limitations with respect to claims timely presented and shall adopt uniform, streamlined, expeditious procedures, including voluntary nonjudicial means of resolving disputed claims. 6. The Center shall not make payments pursuant to a pre-determined schedule of benefits, but detailed claims guidelines shall be used to evaluate and settle asbestos-related claims. The Center shall make payments and settle claims on behalf of Participating Producer members and shall be entitled to credit for settlements made and judgments paid by Participating Producer members prior to membership in the Center. 7. The Center shall operate according to annual liability, defense and operational programs to be established by the Board of Directors. The Center shall be subject to annual financial and quality control audits by persons selected by the Board of Directors. 8. The Center may enter into arrangements to administer, evaluate, settle, pay and defend asbestos-related claims and/or any other kind of claim on behalf of persons that are not signatories hereto in exchange for appropriate compensation and upon terms satisfactory to the Center, but the Center shall not be required to enter into such arrangements. For purposes of such arrangements, "asbestos- -13- related claims" shall include such claims as defined in Section I, paragraph 2, even if not brought against any Participating Producer, Supporting Insurer, or the Center. IX. CENTER ADMINISTRATIVE SERVICES ------------------------------ 1. In addition to the functions to be performed by the Center pursuant to Section VIII hereinabove, the Center shall perform for Participating Producers, and for Supporting Insurers that are paying unallocated expenses incurred by the Center, certain administrative services, including claims analysis and reporting and insurance allocation and billing. 2. In furtherance of its administrative function the Center shall, among other things, administer all Center receipts and disbursements; develop, maintain and keep current an accurate claims database; produce claims-related analyses, comparisons and reports; clearly communicate Center claims-handling analyses and results on a periodic basis; administer and implement the provisions of Attachment A hereto, including the provision of timely evaluation, analyses and monitoring of the manner in which liability payments and allocated expenses are apportioned thereunder; administer and implement the insurance- coverage provisions of the Wellington Agreement in full conformity with that agreement and also in an accurate, consistent and timely manner, including the provision of periodic billings and supporting information; administer other insurance-coverage arrangements of -14- Participating Producers; and administer for Participating Producers any counsel- sharing arrangements with Producers not signatories hereto. 3. The Center shall perform its administrative function in a timely, accurate and cost-effective manner, and may retain the services of experienced and competent third parties and consultants to do so. 4. The Center may enter into arrangements to provide certain administrative services to persons that are not signatories hereto in exchange for appropriate compensation and upon terms satisfactory to the Center, but the Center shall not be required to enter into such arrangements. X. THIRD-PARTY RIGHTS ------------------ The Agreement is intended to confer rights and benefits only upon Participating Producers, Supporting Insurers that are paying unallocated expenses incurred by the Center and the Center, and is not intended to confer any rights or benefits upon any other persons. No person other than the Center, a signatory hereto or a Supporting Insurer that is paying unallocated expenses incurred by the Center shall have any legally enforceable rights under the Agreement. All rights of action for any breach of this Agreement by any signatory hereto are hereby reserved to the Center, Participating Producers and to Supporting Insurers that are paying unallocated expenses incurred by the Center. -15- XI. EFFECTIVE DATE -------------- The effective date of this Agreement with respect to each signatory hereto shall be the date upon which such person executed the Agreement in the manner set forth in Section XV hereinbelow or September 30, 1988, whichever is later. XII. ADDITIONAL SIGNATORIES ---------------------- 1. A Producer may become a signatory to the Agreement subsequent to September 30, 1988, only upon application to the Board of Directors of the Center and approval by an affirmative vote of four-fifths (4/5) of the voting directors then in office. 2. In determining whether a Producer may become a signatory hereto, the Board of Directors shall determine whether the best interests of the Center and of the other signatories would be served thereby, in order to assure that the compromises herein and commitments of resources hereunder are duly respected, that such Producer derives no unfair advantage with respect to the other signatories and that none of the other signatories suffers any unfair disadvantage by reason of said Producer's failure to become a signatory to the Agreement prior to September 30, 1988. 3. Pursuant to the foregoing, the Board of Directors shall determine the terms upon which a Producer may become a signatory to the Agreement subsequent to September 30, 1988, including the percentage shares of liability payments, -16- allocated expenses and unallocated expenses that are to be attributed to such Producer. In so doing, the Board of Directors shall consider all relevant factors, including: (i) what the shares would have been had the Producer became a signatory to the Agreement prior to September 30, 1988; (ii) the degree of risk of additional liability or expense that the Producer would bring to the Center; (iii) the impact of such Producer's participation on the percentage shares of other Participating Producers; and (iv) the appropriateness of a minimum share. XIII. MODIFICATION AND TERM --------------------- 1. The Agreement, including Attachment A hereto, is the entire agreement between and among Participating Producers for the administration, defense, payment and disposition of asbestos-related claims. All antecedent or contemporaneous extrinsic representations, warranties or collateral provisions concerning the negotiation and preparation of the Agreement or Attachment A hereto are intended to be discharged and nullified. In any dispute involving the Agreement or Attachment A hereto, no person shall introduce evidence of or seek to compel testimony concerning any oral or written communication made prior to September 30, 1988, with respect to the negotiation and preparation of the Agreement or Attachment A hereto. Nothing in this Paragraph applies to the Insurer Agreement, the Wellington Agreement, the Agreement Concerning -17- Asbestos Claims Facility dated June 15, 1988, or the Agreement Concerning the Insurance Defense Program between certain Supporting Insurers and GAF Corporation and Keene Corporation. 2. Nothing in the Agreement shall have the effect of relieving any Supporting Insurer or Participating Producer of any obligation under the Wellington Agreement that survives dissolution or termination of the Asbestos Claims Facility, including insurance-related obligations; provided, that as to -------- Supporting Insurers and all Participating Producers except GAF Corporation and Keene Corporation, whose rights are the subject of a separate agreement, the Insurance Defense Program provided for in Section XII and Appendix E to the Wellington Agreement ("IDP") and all rights thereunder with respect to allocated expenses incurred after October 3, 1988, shall terminate as of that date. 3. Any modifications to the Agreement or Attachment A hereto may be made only by mutual agreement of all Participating Producers and in writing. 4. The Agreement and Attachment A hereto shall have perpetual existence, notwithstanding the failure or invalidation of any particular provision. XIV. WAIVERS, ADR AND CHOICE OF LAW ------------------------------ 1. So long as it is a member of the Center each Participating Producer shall forego with respect to asbestos-related claims for contribution or indemnity (other than for -18- contribution or indemnity assumed under written agreement) against all other Participating Producers that are members of the Center. 2. Each Participating Producer waives, as to the Center and all other Participating Producers, any claims for conflict of interest that may arise from the representation of it or the Center in connection with the handling or defense of asbestos-related claims hereunder during the period of such Participating Producer's membership in the Center by i) any Center liaison counsel, ii) joint or special counsel or iii) employees of the Center or of any Participating Producer. 3. All disputes concerning the validity, interpretation and application of the Agreement or any provision thereof, and all disputes concerning issues within the scope of the Agreement shall be resolved through alternative dispute resolution (ADR) in the manner set forth in Appendix C to the Wellington Agreement; provided, that the Center for Public Resources, rather than the -------- Asbestos Claims Facility, shall be requested to administer any alternative dispute resolution and the parties thereto shall share, on an equal basis and pending final resolution, any of the fees or expenses of the Center for Public Resources. All such disputes shall be determined in accordance with applicable common law of the states of the United States. 4. In the event that any Participating Producer's percentage shares of liability payments or allocated expenses are not paid in a timely manner, the Center's Board of -19- Directors may direct the Center to institute an ADR on behalf of the Center's Participating Producers against such Participating Producer to enforce payment of such obligations. Any such ADR brought by the Center against a Participating Producer to enforce payment of such obligations shall be resolved in the manner set forth in Paragraph 3 of this Section XIV; provided that (a) the Center may -------- elect to waive the Negotiation stage of such ADR and proceed directly to the Proceeding stage and such Participating Producer shall have no right to object to such election; (b) such Participating Producer shall not be permitted to assert any objection or defense in such ADR except a defense or objection based on some computational error in the particular Center billing(s) for such obligations; in particular, the belief on the part of such Participating Producer that its Participating Producer Shares (as that term is defined in Attachment A hereto) are inequitable or have been inconsistently or inaccurately applied shall not be permitted as a defense or objection in such ADR, even if such belief provides a basis for a separate ADR proceeding with respect to its Participating Producer Shares; and (c) the Center shall be entitled, if it is determined to be the prevailing party in such ADR, to recover from such Participating Producer the costs of instituting and prosecuting such ADR, including the Center's reasonable attorneys' fees. -20- XV. SIGNATURE --------- The Agreement may be executed in any number of counterparts and by different signatories hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Each Participating Producer shall send one executed counterpart of the Agreement to a depository to be established and maintained by the Center. IN WITNESS WHEREOF, the person named below has caused this Agreement to be signed by its authorized representative on this ______ day of __________________, 19__. Name:_________________________________________ By: /s/ ------------------------------------------ Title:________________________________________ Signed, sealed and delivered this ______ day of ___________________, 19__, in the presence of ______________________________________________, Witness to the signature of the above-named person. -21- As Amended, Effective December 1, 1991 ATTACHMENT A ------------ Apportionment of Center Payments and Expenses --------------------------------------------- All Liability Payments, Allocated Expenses, and Unallocated Expenses shall be apportioned among Participating Producers based on the individual Participating Producer shares established as provided in this Section (the "Participating Producer Shares"). A. Initial Producer Shares ----------------------- The Participating Producer Shares for Participating Producers as of December 1, 1991, shall be as provided in this Section A until changed pursuant to the provisions of Section B. Participating Producer Shares for Producers becoming Participating Producers subsequent to December 1, 1991, shall be as determined pursuant to Section XII of the Agreement. 1. Liability Payment Shares ------------------------ Any Liability Payment shall be apportioned among the Participating Producers based on individual Participating Producer Shares established as provided herein (the "Liability Payment Shares"). a. Generally. For any Asbestos-Related Claim that is not the subject of a --------- Special Claim Category as described below, the -22- Liability Payment Share for each Participating Producer will be computed as follows: (i) All Asbestos-Related Claims closed by each Participating Producer prior to its becoming a member of the Asbestos Claims Facility will be placed in one of twelve occupational categories (the "Twelve Occupational Categories") using the Guidelines for Occupational Categories attached hereto as Exhibit 1. The total number of such claims in each Occupational Category for each Participating Producer will then be divided into the total amount of liability payments (including punitive damages, if any) made by that Participating Producer with respect to those claims to derive the "Average Cost Per Closed Claim" for each Participating Producer for each such Occupational Category. (ii) These Twelve Occupational Categories will then be grouped into four occupational groupings (the "Four Occupational Groupings") as shown below. Twelve Four ------ ---- Occupational Categories Occupational Groupings ----------------------- ---------------------- Shipyard Shipyard Insulator Insulator Construction Plasterer/Spray Construction Sheetmetal Bystander/Secondary Exposure Friction Maintenance/Repair/Cleaner Manufacturing All Other Other Plantworker Railroad -23- Each Participating Producer's Average Cost Per Closed Claim for the Twelve Occupational Categories will then be converted into an Average Cost Per Closed Claim for each of the Four Occupational Groupings as follows: (I) Where the Occupational Category is also an Occupational Grouping (as is the case for the "Shipyard" and "Insulator" Occupational Categories), each Participating Producer's Average Cost Per Closed Claim for that Occupational Category will constitute its Average Cost Per Closed Claim for that Occupational Grouping. (II) Where the Occupational Grouping is made up of several Occupational Categories (as is the case for the "Construction" and "All Other" Occupational Groupings), each Participating Producer's Average Cost Per Closed Claim for that Occupational Grouping will be derived by taking the weighted average of the Participating Producer's Average Cost Per Closed Claim for each constituent Occupational Category, weighted by the total number of Asbestos- Related Claims filed or brought during the period June 20, 1986, through September 30, 1990 (the cut-off date for the last recalculation of Liability Payment Shares for Period IV Claims under the predecessor to this Attachment A) in which that Participating Producer has been named as a defendant or a third- party defendant or has otherwise been designated in a claim as responsible for the injury; provided, that this weighting factor will be subject to periodic -------- adjustment upon the recommendation of the Special Counsel (established pursuant to -24- paragraph B.3 below) and with the approval of the Participating Producers pursuant to paragraph B.2 below. (III) For any Participating Producer who would otherwise have an Average Cost Per Closed Claim for any Occupational Grouping of less than four- hundred dollars ($400), the Average Cost Per Closed Claim for that Occupational Grouping for that Participating Producer will be four-hundred dollars ($400). For certain Participating Producers, regardless of what their Average Cost Per Closed Claim for certain Occupational Groupings would otherwise be, the Average Cost Per Closed Claim for those Participating Producers for those Occupational Categories will be an amount greater than four hundred dollars ($400), as set forth in letters dated November 26, 1991 to such Participating Producers from the law firm of Shea & Gardner (the Special Counsel established pursuant to paragraph B.3 below). For any Participating Producer who would otherwise have an Average Cost Per Closed Claim for any Occupational Grouping of more than ten thousand dollars ($10,000), but whose Average Cost Per Closed Claim for that particular Occupational Grouping was derived from fewer than fifteen (15) total claims closed by that Participating Producer prior to its becoming a member of the Asbestos Claims Facility, its Average Cost Per Closed Claim for that Occupational Grouping will be ten-thousand dollars ($10,000). (iii) For each Asbestos-Related Claim in which any Participating Producer is named as a defendant or a third-party defendant or is otherwise designated in the claim as -25- responsible for the injury, that Participating Producer's Average Cost Per Closed Claim in the corresponding Occupational Grouping will be converted into an individual Liability Payment Share. For each such claim, the Liability Payment Share of each Participating Producer so named will be the ratio of its Average Cost Per Closed Claim for that Occupational Grouping to the sum of the Average Costs Per Closed Claim for that Occupational Grouping of all Participating Producers so named in that particular claim. b. Special Claim Categories. Notwithstanding the foregoing, separate ------------------------ Special Claim Categories, Interim Sharing Arrangements, and Permanent Sharing Arrangements as described below will be maintained pursuant to paragraph B.5.b for Asbestos-Related Claims that are already the subject of Special Claim Categories previously adopted (including, but not limited to, the existing Special Claim Categories for "Rubber" and "Steel" claims as defined pursuant to the Guidelines for Occupational Categories attached hereto as Exhibit 1); for Asbestos-Related Claims that may be the subject of Special Claim Categories adopted in the future; and for a new category of Asbestos-Related Claims to be known as "High Dollar" claims, defined as claims not otherwise subject to a Special Claim Category and for which the Liability Payment attributable to any such claim equals or exceeds one-hundred thousand dollars ($100,000). -26- (i) Under the previously approved First Permanent Sharing Arrangement for Rubber claims, any Liability Payments with respect to those claims will be shared per capita among those Participating Producers named as defendants or third-party defendants or otherwise designated in the claims as responsible for the injury in more than four percent (4%) of those claims. (ii) Under the previously approved New Interim Sharing Arrangement for Steel claims (and subject to the Special Claim Sub-Category and First Permanent Sharing Arrangement for Sparrow's Point Steel Claims), any Liability Payments made with respect to those claims will be shared among those Participating Producers named as defendants or third-party defendants or otherwise designated in the claims as responsible for the injury in more than four percent (4%) of those claims, with each such Participating Producer assigned to one of three tiers as shown on the chart below based on the percentage of those claims in which it is so named or designated, and with each Participating Producer on a given tier having the same Liability Payment Shares for those claims. The Liability Payment Share for the Participating Producers on a given tier will be determined by taking the number of Participating Producers on that tier, multiplying that number by the Weighting Factor for that tier, determining what percentage that product is of the aggregate of the products of the number of Participating Producers on each tier multiplied by the Weighting Factor for each tier, and sharing the resulting percentage equally among the Participating Producers on that tier. An example follows, assuming the number of Participating Producers on each tier shown below, which was the number based on data through September 30, 1987.
# Producers Range of Weighting Share Per Tier On Tier % Named Factor Producer ---- -------- ------- --------- ------- l 7 More than 50% 3 10.00% 2 3 Over 20% but 2 6.67% 50% or less 3 3 Over 4% but 1 3.33% 20% or less
(iii) Under the Interim Sharing Arrangement for High Dollar claims, each Liability Payment made with respect to -27- each such claim will be shared among those Participating Producers named as defendants or third-party defendants or otherwise designated in the claim as responsible for the injury, in the manner that corresponds to the Liability Payment Shares that would otherwise apply to that claim under paragraph 1.a of this Section A. c. Application. The Liability Payment Shares computed pursuant to ----------- paragraphs 1.a and 1.b of this Section A shall be applied to apportion the Liability Payments made by the Center after November 30, 1991. Notwithstanding the foregoing, however, if a Participating Producer shall have closed any claim prior to becoming a member of the Asbestos Claims Facility, the Center shall not apportion to that Participating Producer (and that Participating Producer shall not be obliged to pay) any portion of any Liability Payments with respect to that claim. The amount of any such payments that would otherwise have been apportioned to that Participating Producer shall be apportioned among the remaining Participating Producers in proportion to the Liability Payment Shares of those Participating Producers applicable to that claim. d. Definitions. For purposes of the Agreement and this Attachment A, ----------- "closed claims" with respect to a Participating Producer are Asbestos-Related Claims in which that Participating Producer was named as a defendant or a third- party defendant or was otherwise designated in the claim as responsible for the injury, and of which that Participating Producer has disposed on -28- its own behalf, whether by judgment, settlement, dismissal, or otherwise, prior to joining the Asbestos Claims Facility. "Closed claims" with respect to the Center are Asbestos-Related Claims in which at least one Participating Producer was named as a defendant or a third-party defendant or was otherwise designated in the claim as responsible for the injury, and had not closed that claim as of becoming a signatory of the Agreement, but of which the Center has subsequently disposed (whether by judgment, settlement, dismissal, or otherwise). "Open claims" or "pending claims" are Asbestos-Related Claims that are not "closed" so far as the Producer or entity in question is concerned. 2. Allocated Expense Shares ------------------------ Any Allocated Expense shall be apportioned among the Participating Producers based on individual Participating Producer Shares established as provided herein (the "Allocated Expense Shares"). a. Derivation. The Allocated Expense Share for each Participating ---------- Producer will be a single share applicable to any Allocated Expense, computed by determining for that Participating Producer a Partial Allocated Expense Share for Period I Claims (defined herein as any Asbestos-Related claims filed or brought on or before September 30, 1983), Period II & III Claims (defined herein as any Asbestos-Related Claims filed or brought during the period October 1, 1983, through June 19, 1986), and Period IV -29- Claims (defined herein as any Asbestos-Related Claims filed or brought after June 19, 1986), respectively, and by taking the weighted average of those Partial Allocated Expense Shares weighted by the total number of open claims the Center had in each of those periods, as of September 30, 1991. The Partial Allocated Expense Shares for each Participating Producer will be computed as follows: (i) For Period I Claims, the Partial Allocated Expense Share for each Participating Producer will be the allocated expense share (determined pursuant to Appendix A-1 of the Agreement Concerning Asbestos-Related Claims dated May 29, 1985) that each Participating Producer had in the Asbestos Claims Facility as of September 1, 1987, adjusted upward pro rata to reflect the absence of the allocated expense shares of those producers who were members of the Asbestos Claims Facility but were not members of the Center as of September 30, 1991. (ii) For Period II & III Claims, the Partial Allocated Expense Share for each Participating Producer will be computed as provided in this paragraph A.2.a(ii). For Participating Producers that became members of the Asbestos Claims Facility pursuant to Section H of Appendix A-1 of the Agreement Concerning Asbestos-Related Claims dated May 29, 1985 (the "New Entrants") their Partial Allocated Expense Share will be their respective allocated expense shares as negotiated pursuant to that Section H, with appropriate adjustments to reflect the absence of the allocated expense shares for Period II & III Claims of those -30- Producers who were members of the Asbestos Claims Facility but were not members of the Center as of September 30, 1991. For all other Participating Producers, the Partial Allocated Expense Share for each Participating Producer will be computed by taking the number of Period II & III Claims in which that Participating Producer is named as a defendant or a third-party defendant or is otherwise designated in a claim as responsible for the injury, and dividing it by the aggregate of the number of such claims for all Participating Producers (including a factor for the New Entrants). (iii) For Period IV Claims, the Partial Allocated Expense Share for each Participating Producer will be computed in the same manner as for Period II & III Claims except using Asbestos-Related Claims filed or brought during the period June 20, 1986, through September 30, 1991, rather than Period II & III Claims. b. Application. Subject to the previously approved adjustment of the ----------- existing Expense Shares with respect to certain Operating Allocated Expenses, the Allocated Expense Shares computed pursuant to paragraph 2.a of this Section A shall be applied to apportion the Allocated Expenses incurred by the Center during the calendar quarter immediately following the calendar quarter ending September 30, 1991 (excluding claims subject to a Permanent Sharing Arrangement). 3. Unallocated Expense Shares -------------------------- -31- Any Unallocated Expense for which the Center does not receive reimbursement from any Supporting Insurer of any Participating Producer shall be apportioned among the Participating Producers based on individual Participating Producer Shares established as provided herein (the "Unallocated Expense Shares"). Each Participating Producer will be assigned to one of four tiers based on where its Partial Allocated Expense Share for Period IV Claims falls with respect to the ranges listed in the chart below. Notwithstanding the foregoing, Participating Producers otherwise on the top tier will be placed on the second tier if more than fifty percent (50%) of the insurance coverage currently being billed by the Center to Supporting Insurers of that Participating Producer (and other Insurers of that Participating Producer that are nonetheless paying on the same basis as the Supporting Insurers) is primary insurance. The aggregate Period IV Partial Allocated Expense Shares for all Participating Producers on a given tier will then be divided equally among all Participating Producers on that tier to give the Unallocated Expense Share for each Participating Producer on that tier. The Unallocated Expense Shares as thus established shall be applied to apportion the Unallocated Expenses incurred while those shares are in effect. An example follows, assuming the number of Participating Producers on each tier shown below, which was the number based on data through September 30, 1987. -32-
# Producers Range of Share Per Tier On Tier Period IV Share Producer ---- ----------- --------------- --------- 1 6 More than 5% 11.97% 2 8 Over 1% but 5% 2.97% or less 3 8 Over 0.4% but 1% 0.53% or less 4 3 Less than or equal 0.06% to 0.4% or $10,000 per year whichever is greater
4. Documentation on Initial Shares ------------------------------- The data submitted to the Center by Participating Producers generally have been reviewed for accuracy, consistency, reasonableness, and completeness. Each Participating Producer, however, is responsible for the accuracy and integrity of the data it has submitted. No reduction in any Participating Producer's Liability Payment Share, Allocated Expense Share, or Unallocated Expense Share shall be made in response to any error or incompleteness in that data that may come to light more than thirty (30) days after the effective date of the Agreement. Any error or incompleteness that would result in an increase in any such share shall promptly be given effect by the Center, after consultation with the Special Counsel (appointed pursuant to paragraph B.3 below), through an appropriate adjustment to the appropriate Participating Producer Share, with the same presumption of retroactive effect as contained in paragraph -33- B.5.c(i) below. There shall be deposited with both the Center and the Special Counsel a complete list of Liability Payment Shares, Allocated Expense Shares, and Unallocated Expense Shares for all Participating Producers computed in accordance with this Section A using data through June 30, 1988. Accompanying this list shall be a computer tape containing on a claim-by-claim and aggregated basis all data required for and actually used in the computation of those shares. -34- B. Future Adjustment of Participating Producer Shares -------------------------------------------------- 1. Shares Subject to Adjustment ---------------------------- The Unallocated Expense Shares, the Allocated Expense Shares, and the Liability Payment Shares may be adjusted in the future but only in accordance with the following provisions. 2. Participating Producer Approval ------------------------------- Any adjustments pursuant to paragraph B.5 below must be approved by an affirmative vote of the Participating Producers after consideration of the recommendation of the Special Counsel (established pursuant to paragraph B.3 below) and applying the standards set out in this Section B. Any such adjustments shall not become effective before sixty (60) days after such affirmative vote. The affirmative vote must include Participating Producers representing: a. At least fifty percent (50%) of the combined dollar contributions by all Participating Producers to the Center for all purposes during the preceding calendar year (including contributions made by Participating Producers directly or on their behalf by their respective Supporting Insurers); and b. At least forty percent (40%) of the total number of Participating Producers. 3. Special Counsel --------------- The Board of Directors of the Center shall retain the services of a Special Counsel to assist the Center and its Participating Producers in connection with any future adjustment -35- in the Unallocated Expense Shares, the Allocated Expense Shares, and the Liability Payment Shares, and in connection with such other matters as the Board shall deem appropriate. The Special Counsel shall serve at the pleasure of the Board and shall be compensated by the Center as determined by the Board. a. Adjustment Proposals. All proposals for adjusting the shares of any -------------------- Participating Producer pursuant to paragraph B.5 below shall be submitted to the Special Counsel for its review prior to any consideration of the proposal by the Participating Producers. The Special Counsel shall provide a recommendation with respect to any such proposal prior to its consideration by the Participating Producers. In addition, the Special Counsel may develop its own proposals with respect to adjusting the shares of any Participating Producer pursuant to paragraph B.5. Such proposals shall be promptly considered by the Participating Producers pursuant to paragraph B.2 above and shall not require prior consideration or approval by the Board. b. Data Collection. To assist in this work, the Center shall maintain --------------- information with respect to claims reported to Participating Producers, Liaison Counsel, or the Center in which a Participating Producer is named as a defendant or a third-party defendant or is otherwise designated in a claim as responsible for the injury. This information shall include, without limitation, the following items: (i) The Filing Date of the claim. -36- (ii) The Occupational Category of the claim based on the occupation or status of the person whose exposure to asbestos gave rise to the claim (hereinafter "Primary Claimant"), as determined by the Center using the Guidelines for Occupational Categories attached hereto as Exhibit 1. (iii) The Disease Category of the claim based on the asbestos-related disease from which the Primary Claimant is suffering as determined by the Center. (iv) The Dates of Exposure of the Primary Claimant to asbestos (to the extent available and deemed appropriate). (v) The Circumstances of such Exposure, to the extent available and deemed appropriate (such as, for workplace exposure, the duties and responsibilities of the Primary Claimant, the job site, the identity of the Primary Claimant's employer, and the degree of exposure to asbestos or asbestos- containing products). (vi) Each Producer that is named as a defendant or a third-party defendant or is otherwise designated in a claim as responsible for the injury. (vii) Plaintiff's counsel. (viii) The Disposition Date (i.e. the date the claim was disposed of by the Center, whether by dismissal, settlement, judgment, or otherwise). (ix) The Type of Disposition (i.e. dismissal, settlement, judgment, or other). (x) Producers Held Liable. -37- (xi) The Amount Paid or Owed by the Center as Liability Payments. (xii) Such other information as may be designated by the Center or Special Counsel. c. Reports. The Center shall provide monthly reports to the Special ------- Counsel (at a time and in a form to be agreed upon) displaying on an aggregated basis the information specified in paragraph B.3.b with respect to: (i) new claims reported to Participating Producers, Liaison Counsel, or the Center during the preceding month; (ii) claims disposed of by the Center during the preceding month; (iii) all claims reported to Participating Producers, Liaison Counsel, or the Center as of the end of the preceding month; and (iv) all claims pending in the Center as of the end of the preceding month. d. Outside Assistance. The Special Counsel shall be given access by the ------------------ Center to the information from which the reports described in paragraph B.3.c are derived (including all information described in paragraph B.3.b. above) and to such other information as the Special Counsel shall deem necessary in order for it to perform its responsibilities under this Attachment A (all such information hereinafter referred to as the "Share Information"). The Center will perform studies and -38- analyses of the Share Information as directed by the Special Counsel. The Special Counsel may, with the concurrence of the Board of Directors of the Center, retain an outside auditor to conduct an independent audit of the Share Information, or retain an outside consultant to perform studies and analyses of the Share Information. 4. Identification of Adjustments ----------------------------- The Center and the Special Counsel shall monitor the reports and information obtained pursuant to paragraph B.3 above to identify any factors or trends that tend to suggest that the Participating Producer Shares may not fairly reflect the relative responsibility of Participating Producers for Liability Payments, Allocated Expenses, or Unallocated Expenses with respect to all or an identifiable category of claims. These factors or trends may include, without limitation, the following: a. A dramatic increase in the number of claims involving one of the existing Twelve Occupational Categories (such as, for example, a dramatic increase in the number of cases within the "Friction" category) or a new occupational category. b. A dramatic increase in the number of claims involving a particular occupation or status presently subsumed within one of the existing Occupational Categories (such as, for example, a dramatic increase in the number of chemical plant cases within the "Insulator" category). -39- c. A dramatic increase in the number of cases of a particular type within a particular state (especially if few cases of this type have previously been filed in that state or if there are little available data on the disposition of this type of case in that state). d. A dramatic increase in the number of cases at a specific location or place (such as, for workplace exposure, a particular job site). e. A dramatic increase in the number of cases involving a particular Disease Category (such as, for example, a dramatic increase in the "Pleural Disease" category). f. A dramatic increase in the number of cases involving a particular disease subsumed by the Center within an existing Disease Category (such as, for example, a dramatic increase in the number of cases involving a particular form of cancer currently classified by the Center within the "Other Cancer" category). g. Disposition or other data indicating for a particular category of claims (whether based on occupation or status, location, disease, or some other basis) that a particular Participating Producer is not liable for those claims or that the relative responsibility among Participating Producers is significantly different from what is indicated by the Participating Producer Shares. h. Such other factors and trends as may be identified by the Center or the Special Counsel. -40- 5. Adjustments Subject to Participating Producer Approval ------------------------------------------------------ a. General. Adjustments may be made to reflect these factors and trends ------- in the Participating Producer Shares of any Participating Producer. These adjustments may include, but are not limited to, the segregation of significant and identifiable categories of Asbestos-Related Claims into "Special Claim Categories" (as described in paragraphs B.5.b and c below), the adjustment of any Participating Producer's Average Cost Per Closed Claim for any of the Four Occupational Groupings, and the subdivision of Asbestos-Related Claims by time and the application of different Participating Producer Shares for claims in each subdivision. These adjustments may also include revision of the Guidelines for Occupational Categories at Exhibit 1. All adjustments pursuant to this paragraph B.5 must be approved by the Participating Producers pursuant to paragraph B.2 above. b. Interim Sharing Arrangements for Special Claim Categories. Where a --------------------------------------------------------- Special Claim Category is deemed appropriate, an "Interim Sharing Arrangement" shall be proposed for apportioning among Participating Producers any Liability Payments made by the Center with respect to claims falling within this Special Claim Category. (i) In developing the Interim Sharing Arrangement, the following factors may be considered: (i) the relative frequency with which Participating Producers are named as defendants or third-party defendants or are otherwise -41- designated in claims as responsible for the injury; (ii) any disposition data with respect to those claims; (iii) information concerning the particular products, locations, occupations, or employers involved; and (iv) such other information as the Center or the Special Counsel shall deem relevant. (ii) The establishment of a Special Claim Category and of an Interim Sharing Arrangement for that category must be approved by the Participating Producers pursuant to paragraph B.2. above. Once approved, the Interim Sharing Arrangement shall be used to apportion all Liability Payments thereafter made with respect to claims falling within that Special Claim Category (subject, however, to the provisions of paragraph B.5.c below). (iii) The Allocated Expenses paid in connection with cases falling within the Special Claim Category and subject to an Interim Sharing Arrangement shall be treated no differently than the Allocated Expenses paid in connection with any other claim. c. Permanent Sharing Arrangement for Special Claim Categories. The Center ---------------------------------------------------------- shall monitor, in conjunction with Liaison Counsel and the Special Counsel, (i) relevant pretrial discovery taken in connection with claims falling within a Special Claim Category subject to an Interim Sharing Arrangement, (ii) relevant pretrial motions made in connection with such claims, (iii) disposition data with respect to such claims, and (iv) such other data as the Center or the Special Counsel shall deem relevant. -42- (i) Once it is concluded that the foregoing data are sufficient to permit it, a "Permanent Sharing Arrangement" will be proposed for apportioning among Participating Producers any Liability Payments or Allocated Expenses with respect to those claims. Such a Permanent Sharing Arrangement must be approved by the Participating Producers pursuant to paragraph B.2 above. Once so approved, all Liability Payments made and all Allocated Expenses incurred thereafter with respect to claims falling within that Special Claim Category shall be apportioned among Participating Producers pursuant thereto, subject to any subsequent change in the Permanent Sharing Arrangement approved by the Participating Producers pursuant to paragraph B.2 above. In addition, it is presumed that the Permanent Sharing Arrangement shall be given retroactive effect to apportion all Liability Payments made and all Allocated Expenses incurred with respect to claims falling within that Special Claim Category from the date that Special Claim Category was first established, subject to the right of the Participating Producers to make the application of such Permanent Sharing Arrangement prospective only to Liability Payments made and/or Allocated Expenses incurred after the approval of the Permanent Sharing Arrangement if the benefit in terms of Participating Producer equity from retroactivity is deemed to be de minimis when compared to the administrative costs of doing so and other -- ------- factors. (ii) In the event that a Permanent Sharing Arrangement proposed for a Special Claim Category is rejected by -43- the Participating Producers, all Liability Payments made by the Center with respect to claims subject to that category shall continue to be apportioned among Participating Producers pursuant to the Interim Sharing Arrangement for that category (and all allocated expenses incurred in connection with such claims shall continue to be apportioned as provided in paragraph B.5.b.(iii) above) unless and until either a Permanent Sharing Arrangement is subsequently approved by the Participating Producers for that category or the Participating Producers vote to disestablish the Special Claim Category. Any such disestablishment shall require approval of the Participating Producers pursuant to paragraph B.2. 6. Adjustments Not Subject to Participating Producer Approval ---------------------------------------------------------- Within twenty (20) days after the end of a calendar quarter (hereinafter referred to as the "Completed Quarter"), the Partial Allocated Expense Shares for Period IV Claims shall automatically be recalculated pursuant to paragraph A.2 above by incorporating all Period IV Claims not previously reflected in those shares that have been reported to Participating Producers, Liaison Counsel, or the Center during that calendar quarter (excluding claims subject to a Permanent Sharing Arrangement). Thereafter the weighted average of the Partial Allocated Expense Shares shall be recomputed (pursuant to paragraph A.2), using the total number of open claims the Center had in the corresponding periods as of the end of the Completed Quarter, to compute new Allocated -44- Expense Shares for all Participating Producers. The Allocated Expense Shares thus recalculated shall be used by the Center to apportion all Allocated Expenses incurred by the Center during the calendar quarter immediately following the Completed Quarter (excluding claims subject to a Permanent Sharing Arrangement). In addition, the Unallocated Expense Shares shall also automatically be recalculated pursuant to paragraph A.3 above using the recalculated Partial Allocated Expense Shares for Period IV claims. The Unallocated Expense Shares thus recalculated shall be used by the Center to apportion all Unallocated Expenses incurred during the calendar quarter immediately following the Completed Quarter. C. Punitive Damages ---------------- Punitive damage judgments shall not be apportioned among the Participating Producers according to the Liability Payment Shares provided herein, but shall be borne by the Participating Producer against which the judgment was rendered and its Insurers. D. Separate Counsel ---------------- Any Participating Producer retaining counsel to represent it separately from the Center (whether in connection with a punitive damage claim, a matter as to which it has an interest that is not shared by the other Participating Producers, or for some other reason) shall be entitled to have the cost of such separate counsel in any calendar year reimbursed by the Center as Allocated Expense (thereafter to be apportioned among all -45- Participating Producers including the Participating Producer retaining such counsel based on the applicable Allocated Expense Shares) up to a limit to be established by the Board of Directors for each calendar year. All other such Allocated Expenses shall be billed directly to the responsible Insurer or Insurers for the Participating Producer or, in the absence of such Insurers, to the Participating Producer itself. E. Alternative Dispute Resolution ------------------------------ Any Participating Producer that believes that application of any future adjustment in any Liability Payment Share, any Allocated Expense Share, or any Unallocated Expense Share pursuant to Section B above is inequitable as applied to its particular situation, or that the calculation of any particular share pursuant to such future adjustment has been performed inaccurately or incorrectly, may cause the matter to be presented to the Participating Producers pursuant to paragraph B.2 above and, failing receipt of satisfactory action, may take the matter to alternative dispute resolution within the Center. Such Participating Producer shall bear the burden of proof. F. New Entrants and Withdrawals ---------------------------- -46- Any Producer that is not a signatory to the Agreement as of December 1, 1991, may become a signatory as provided in Section XII of the Agreement. The Special Counsel shall provide such support and recommendations as the Board may request with respect to any request from any Producer to become a signatory to the Agreement, including the Liability Payment Shares, Allocated Expense Shares, and the Unallocated Expense Shares to be borne by that Producer. In the event the Producer becomes a signatory, the corresponding shares of the other Participating Producers shall be reduced appropriately to make room for the shares of the new Participating Producer. In the event that a Participating Producer shall withdraw from membership in the Center pursuant to Section IV of the Agreement or have its membership terminated pursuant to Paragraph 3 of Section III, the corresponding shares of the other Participating Producers shall be increased appropriately to pick up the shares of the withdrawing or terminating Participating Producer. EX-10.(I)(I) 4 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 10 (i)(i) AMENDED AND RESTATED CREDIT AGREEMENT (364-Day) dated as of October 21, 1999 (this "Amendment and Restatement"), among ARMSTRONG WORLD INDUSTRIES, INC. (the "Borrower"), each lender listed on the signature pages hereof (each individually a "Lender" and collectively the "Lenders") and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders (in its capacity as administrative agent, the "Administrative Agent"). WHEREAS, on October 29, 1998, the Borrower, The Chase Manhattan Bank, as Administrative Agent, and certain of the Lenders entered into a 364-Day Credit Agreement (the "Credit Agreement") pursuant to which the Lenders made available to the Borrower Loans in an aggregate principal amount of $450,000,000; WHEREAS, the parties hereto desire to amend and restate the Credit Agreement as set forth herein; and WHEREAS, the Borrower and the Lenders have agreed to amend and restate, on the terms and subject to the conditions set forth herein, the Credit Agreement, to provide for the foregoing. NOW THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Administrative Agent and the Lenders hereby agree as follows: SECTION 1. All capitalized terms which are defined in the Credit Agreement and not otherwise defined herein or in the recitals hereof shall have the same meanings herein as in the Credit Agreement. SECTION 2. All references to Section numbers in this Amended and Restated Credit Agreement shall, except as the context requires, be references to the corresponding Sections of the Credit Agreement. SECTION 3. The Credit Agreement is hereby amended as follows: (a) the heading is deleted and the following is substituted in lieu thereof: "AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT dated as of October 21, 1999, among ARMSTRONG WORLD INDUSTRIES, INC. (the "Borrower"), the lenders listed in Schedule 2.01 (the "Lenders") and THE CHASE MANHATTAN BANK, as administrative agent for the Lenders (the "Administrative Agent"). (b) Section 1.01 of the Credit Agreement is amended as follows: (i) The definition of "Borrower's 1997 Form 10-K" is hereby replaced in its entirety by the following: "Borrower's 1998 Form 10-K" means the Borrower's annual report on Form 10-K for 1998, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934." (ii) The definition of "Borrower's Latest Form 10-Q" is hereby replaced in its entirety by the following: "Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended June 30, 1999, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934." (iii) The definition of "Co-Documentation Agents" is hereby deleted in its entirety. (iv) The definition of "Designated Currency" is hereby replaced in its entirety by the following: "Designated Currency' means Pounds Sterling, Canadian Dollars, Australian Dollars, Japanese Yen and the Euro and any other Alternate Currency that shall be designated by the Borrower in a notice delivered to the Administrative Agent and approved by the Administrative Agent and all the Banks as a Designated Currency." (v) The definition of "Documentation Agent" is hereby deleted in its entirety. (vi) The definition of "Existing Credit Agreement" is hereby replaced in its entirety by the following: "Existing Credit Agreement' means the Credit Agreement dated as of October 29, 1998, among the Borrower, the Banks party thereto and The Chase Manhattan Bank, as Administrative Agent." (vii) The definition of "Syndication Agent" is hereby deleted in its entirety: (viii) The definition of "Termination Date" is hereby replaced in its entirety by the following: "Termination Date' means October 19, 2000, or, if such day is not a Eurocurrency Business Day, the next preceding Eurocurrency Business Day, as such date may be extended pursuant to Section 2.07." (c) Section 2.06 of the Credit Agreement is hereby amended by deleting paragraph (b) thereof. (d) Section 4.04(a) of the Credit Agreement is hereby amended by (i) deleting the date December 31, 1997 therein and inserting the date December 31, 1998 in lieu thereof and (ii) deleting "Borrower's 1997 Form 10-K" and inserting "Borrower's 1998 Form 10-K" in lieu thereof. (e) Section 4.04(b) of the Credit Agreement is hereby amended by deleting the date June 30, 1998 therein and inserting the date June 30, 1999 in lieu thereof. (f) Section 4.04(c) of the Credit Agreement is hereby amended by deleting the date June 30, 1998, therein and inserting the date June 30, 1999 in lieu thereof. (g) Section 4.05 of the Credit Agreement is hereby amended by deleting "Borrower's 1997 Form 10-K" and inserting "Borrower's 1998 Form 10-K" in lieu thereof. (h) The Credit Agreement is hereby amended by inserting a new Section 4.11 as follows: "Section 4.11. Year 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (a) the mission critical computer systems of the Borrower and its Subsidiaries and (b) mission critical equipment containing embedded microchips (including systems and equipment supplied by others or with which the Borrower's systems interface) and the testing of all such systems and equipment, as so reprogrammed, has been completed. The cost to the Borrower and its Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of Year 2000 to the Borrower and its Subsidiaries (including reprogramming errors and the failure of others' systems or Equipment) will not result in a Default or a material adverse effect." (i) The definition of "Commencement of the Third Stage of EMU" in Section 9.12 of the Credit Agreement is hereby deleted in its entirety. (j) Section 9.12(b) of the Credit Agreement is hereby deleted in its entirety. (k) Section 9.12(c) of the Credit Agreement is hereby replaced in its entirety by the following: "(b) Redenomination of Certain Foreign Currencies. Each obligation of any party to this Credit Agreement to make a payment denominated in the national currency unit of any member state of the European Union that adopts the Euro as its lawful currency after the date hereof shall be redenominated into the Euro at the time of such adoption (in accordance with the EMU Legislation). (l) Section 9.12(d) of the Credit Agreement is deleted in its entirety. (m) The Pricing Schedule to the Credit Agreement is hereby amended by (i) deleting the 6.50 in Category 2 of the Facility Fee Rate and inserting 7.00 in lieu thereof and (ii) deleting the 33.50 in Category 2 of the Eurocurrency Margin and inserting 33.00 in lieu thereof. (n) The Commitment Schedule to the Credit Agreement is hereby replaced in its entirety by the Commitment Schedule attached as Exhibit A hereto. (o) "Effective Date" shall mean the date on which this Amendment and Restatement shall become effective in accordance with Section 6 below. SECTION 4. Restatement. The Credit Agreement is hereby restated in the form in which it currently exists but with the changes provided for in Section 3 above. SECTION 5. Representations and Warranties. The Borrower represents and warrants as of the Effective Date to the Administrative Agent on behalf of the Lenders that: (a) Before and after giving effect to this Amendment and Restatement, the representations and warranties set forth in the Credit Agreement, as amended hereby, are true and correct in all material respects with the same effect as if made on the Effective Date hereof. (b) Immediately before and after giving effect to this Amendment and Restatement, no Event of Default or Default has occurred and is continuing. SECTION 6. Conditions to Effectiveness. This Amendment and Restatement shall become effective as of the date hereof when the following conditions shall have been satisfied (or waived in accordance with Section 9.05 of the Credit Agreement): (a) receipt by the Administrative Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Administrative Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Administrative Agent of an opinion of Walter T. Gangl, Esq., Deputy General Counsel and Corporate Assistant Secretary of the Borrower, substantially in the form of Exhibit A to the Credit Agreement and covering such additional matters relating to the transactions contemplated hereby as the Administrative Agent may reasonably request; (c) receipt by the Administrative Agent of all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Amendment and Restatement, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent; (d) receipt by the Administrative Agent of all fees and expense; and (e) termination of the Borrower's existing credit facility dated as of February 7, 1995 among the Borrower, the lenders party thereto and Morgan Guaranty Trust Company, as administrative agent. SECTION 7. Amendment and Restatement. Except as specifically amended herein, the provisions of the Credit Agreement shall remain identical in all other respects. As used therein, the terms "Credit Agreement", "herein", "hereunder", respects. As used therein, the terms "Credit Agreement", "herein", "hereunder", "hereinafter", "hereto", "hereof" and words of similar import shall, unless the context otherwise requires, refer to the Credit Agreement as amended and restated hereby. SECTION 8. Counterparts. This Amendment and Restatement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Delivery of any executed counterpart of a signature page of this Amendment and Restatement by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. SECTION 9. Applicable Law. THIS AMENDMENT AND RESTATMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 10. Headings. The headings of this Amendment and Restatement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Restatement to be duly executed by their duly authorized officers, all as of the date and year first above written. ARMSTRONG WORLD INDUSTRIES, INC., By /s/ Jeffrey R. Wittenberg --------------------------------- Name: Jeffrey R. Wittenberg Title: Assistant Treasurer THE CHASE MANHATTAN BANK, individually and Administrative Agent, By /s/ Robert T. Sacks --------------------------------- Name: Robert T. Sacks Title: Managing Director BANK OF AMERICA, NA, formerly known as BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, By /s/ John W. Pocalyko --------------------------------- Name: John W. Pocalyko Title: Managing Director WACHOVIA BANK, N.A., By /s/ James Barwis ------------------------------ Name: James Barwis Title: Vice President DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN ISLANDS BRANCH, By /s/ Hans-Josef Thiele ------------------------------ Name: Hans-Josef Thiele Title: Director By /s/ Joel Makowsky ------------------------------ Name: Joel Makowsky Title: Vice President BARCLAYS BANK PLC, By /s/ Terance Bullock ------------------------------ Name: Terance Bullock Title: Vice PresidentBW CAPITAL MARKETS, INC. By /s/ Thomas A. Lowe ------------------------------ Name: Thomas A. Lowe Title: Vice President By /s/ Kenneth J. Ward ------------------------------ Name: Kenneth J. Ward Title: Chief Financial Officer BANQUE NATIONALE DE PARIS, By /s/ Richard L. Sted ------------------------------- Name: Richard L. Sted Title: Senior Vice President By /s/ Thomas George ------------------------------- Name: Thomas George Title: Vice President Corporate Banking Division UNICREDITO ITALIANO S.P.A., By /s/ Christopher Eldin ------------------------------- Name: Christopher Eldin Title: Vice President By /s/ Saiyed A. Abbos ------------------------------- Name: Saiyed A. Abbos Title: Vice President CITIBANK N.A., By /s/ Stuart G. Miller ------------------------------- Name: Stuart G. Miller Title: Managing Director FIRST UNION NATIONAL BANK, By /s/ Joseph M. Del Tito ------------------------------- Name: Joseph M. Del Tito Title: Executive Vice President BANK ONE, NA (MAIN OFFICE CHICAGO), By /s/ Stephen E. McDonald ------------------------------- Name: Stephen E. McDonald Title: Senior Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Dennis Wilczek ------------------------------------ Name: Dennis Wilczek Title: Associate PNC BANK, NATIONAL ASSOCIATION, By /s/ Brennan T. Danile ------------------------------------ Name: Brennan T. Danile Title: Assistant Vice President SOCIETE GENERAL FINANCE (IRELAND) LIMITED, By /s/ Richard Wanless ------------------------------------ Name: Richard Wanless Title: Managing Director By /s/ Aidan Storey ------------------------------------ Name: Aidan Storey Title: Account Manager SUNTRUST BANK ATLANTA By /s/ W. David Wisdom ------------------------------------ Name: W. David Wisdom Title: Vice President WESTDEUTSCHE LANDESBANK By /s/ Alan S. Bookspan ------------------------------------ Name: Alan S. Bookspan Title: Director By /s/ Walter T. Duffy, III ------------------------------------ Name: Walter T. Duffy, III Title: Vice President HSBC BANK USA, By /s/ Anna Yuen ------------------------------------ Name: Anna Yuen Title: Assistant Vice President THE BANK OF NEW YORK, By /s/ Walter C. Parelli ----------------------------------- Name: Walter C. Parelli Title: Vice President SKANDINAVISKA ENSKILDA BANKEN, NEW YORK BRANCH, By /s/ Magnus C. Lejstrom ------------------------------------ Name: Magnus C. Lejstrom Title: Vice President By /s/ Phillip Montemurro ------------------------------------ Name: Phillip Montemurro Title: Vice President FORTIS (USA) FINANCE LLC, By /s/ David Snyder ------------------------------------ Name: David Snyder Title: Senior Vice President By /s/ Eddie Matthews ------------------------------------ Name: Eddie Matthews Title: Senior Vice President COMMITMENT SCHEDULE BANK COMMITMENT ---- ---------- The Chase Manhattan Bank $ 50,000,000 Bank of America N.A. $ 35,000,000 Deutsche Bank AG New York Branch and/or Cayman Islands Branch $ 35,000,000 Morgan Guaranty Trust Company Of New York $ 35,000,000 Wachovia Bank, N.A. $ 35,000,000 Bank One, NA (Main Office Chicago) $ 20,000,000 Barclays Banks PLC $ 20,000,000 Citibank N.A. $ 20,000,000 First Union National Bank $ 20,000,000 Marine Midland Bank $ 20,000,000 Societe Generale Finance (Ireland) Limited $ 20,000,000 Westdeutsche Landesbank $ 20,000,000 The Bank of New York $ 15,000,000 Banque Nationale De Paris $ 15,000,000 BW Capital Markets, Inc. $ 15,000,000 Fortis (USA) Finance LLC $ 15,000,000 PNC Bank, National Association $ 15,000,000 Skandinaviska Enskilda Banken $ 15,000,000 Suntrust Bank, Atlanta $ 15,000,000 Unicredito Italiano S.p.A. $ 15,000,000 ------------ $450,000,000 PRICING SCHEDULE "FACILITY FEE RATE" and "EUROCURRENCY MARGIN" mean, for any date, the applicable rate set forth below in the row opposite such term based upon the ratings by S&P and Moody's, respectively, applicable on such date to the Index Debt:
- ----------------------------------------------------------------------------------------------------------------------------- Category 1 Category 2 Category 3 Category 4 Category 5 Category 6 A/A2 or A-/A3 BBB+Baal BBB/Baa2 BBB/Baa2 BBB/Baa3 Higher And A2/P2 And not Or Lower A2/Ps - ----------------------------------------------------------------------------------------------------------------------------- Eurocurrency 30.00 33.00 37.00 45.00 45.00 62.50 Margin (bp) - ----------------------------------------------------------------------------------------------------------------------------- Facility Fee 5.00 7.00 8.00 10.00 10.00 12.50 Rate (bp) - -----------------------------------------------------------------------------------------------------------------------------
For purposes of the foregoing, (i) if S&P or Moody's shall not have in effect a rating for the Index Debt, then such rating agency shall be deemed to have established a rating in Category 5; (ii) if the ratings established or deemed to have been established by S&P and Moody's for the Index Debt shall fall within different categories, the applicable rate shall be based on (A) if the ratings are in adjacent categories, the higher of the two ratings and (B) if the ratings are in non-adjacent categories, the rating immediately below the higher of the two ratings; and (iii) if the ratings established or deemed to have been established by S&P and Moody's for the Index Debt shall be changed (other than as a result of a change in the rating system of such rating agency), such change shall be effective as of the date on which it is first announced by the applicable rate shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. "MOODY'S" means Moody's Investors Service, Inc. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "INDEX DEBT" means the senior unsecured long-term debt securities of the Borrower without third-party enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. EX-10.(III)(B) 5 SERVICE AGREEMENT EXHIBIT 10(iii)(b) [Translation] [Letterhead] DLW Aktiengesellschaft August 2, 1999 Dr. Pelz Stuttgarter Str. 75 74321 Bietigheim-Bissingen Telefax-No.: 07142/71 270 Dear Dr. Pelz, Service Agreement Paragraph 6, section 1 of the service agreement which has already been signed by me reads as follows: "If you leave the Company due to (a) permanent disability; (b) at the end of your 65th year, or (c) termination through no fault of your own, You will receive a pension according to the following formula...." This provision is to be interpreted such that its contents are the following: "According to paragraph 6, section 2 through section 5 you will receive the agreed upon pension under the following provisions a) if you leave because of permanent disability b) if your current contract which expires on March 31, 2002, is terminated by the Company on or prior to March 31, 2002, and/or if your contract as member of the board of 2 [Translation] the company is terminated prior to March 31, 2002, and thus the service agreement is automatically terminated (number 1 of the service agreement) c) if the Company does not extend the service agreement beyond March 31, 2002, once or several times up to the end of your 65/th/ year or if such agreement is ended prior to its expiration date due to reasons mentioned under b) d) at the end of your 65/th/ year. There is no entitlement for pension payments prior to the end of your /65th/ year resulting from b) and c), if the prior termination of the service agreement or its non-extension is deemed to be your fault." The above explanations are based on a circular decision of the presidial committee. This clarification related to the interpretation of paragraph 6, section 1 of the service agreement is valid only in combination with the service agreement. May I therefore ask you to sign and return to me the second copy of your service agreement and the second copy of this contract. Also I am asking you to initial every page. Kind regards, Dr. Bernd F. Pelz /s/ /s/ ________________ ___________________ Dr. Dirk Dirksen August 8, 1999 [Translation] Private/Confidential - -------------------- Dr. Bernd F. Pelz - -Chairman of the Board of DLW AG - Stuttgarter Strabe 75 Frankfurt am Main, May 14, 1999 Service Agreement Dear Dr. Pelz: The following details the provisions of the transition service agreement that you discussed with Bob Shannon on December 21, 1998. This is a transition service agreement between you and DLW AG (the "Company"), a subsidiary of Armstrong World Industries, Inc., U.S.A., concerning your service as chairman of the board of the Company. This agreement includes the following provisions: 1. This agreement will be effective from January 1, 1999 until March 31, 2002. This agreement expires in any event - even before this date - with the end of your service as member of the board of the Company. -2- [Translation] 2. Your annual base salary will be DM 500,000, subject to annual review on April 1 of each year beginning April 1, 2000. 3. With effect as of January 1, 1999, you will participate in the Management Achievement Plan of Armstrong as amended from time to time in the sole discretion of Armstrong. Our target bonus award will be 50% of your annual actual base salary earnings. The Management Achievement Plan document contains the rules and parameters of the programs under which a bonus payment will be made for 1999. Your bonus opportunity will be based 30% on Armstrong Corporate EVA results and 70% on Floor Products Europe/DLW Floors. For calendar year 1999, a minimum bonus payment of DM250,000 will be guaranteed. Bonus payments in prior years do not give rise to an obligation for bonus payments in subsequent years. 4. Vacation: Five weeks -------- 5. Illness: Six months of salary continuation, not to extend beyond the end of ------- this agreement. Death: Your widow or children shall receive full base salary for a period ----- of three months, starting the month after death occurred, as well as a prorated bonus in accordance with Section 3 for the three months. 6. Retirement: If you leave the Company due to (a) permanent disability; (b) ---------- age 65; or (c) termination through no fault of your own, you will receive a pension according to the following formula: -3- [Translation] 45 % of your annual base salary at the time of retirement, this amount increases at 1% per year for each full year of service, up to 60%. If you are permanently disabled within the next five years, the amount will automatically become 60% of your annual base salary. The pension will increase in the same manner as any increase in the salary of a senior federal civil servant to account for inflation. In the case of termination through no fault of your own pursuant to letter (C), your salary from other professional activities shall be set off against the pension to the extent the salary exceeds the annual base salary set forth in paragraph 2. 7. Bonus during retirement: In the cases set out in paragraph 6 you will ----------------------- receive a bonus in the following manner in addition to your pension. All payments will be made based upon the actual bonus you received in your final year of active full time employment: a) For each year in which you retire, you will receive a full bonus based upon the prior year's results; b) For the year following retirement, you will receive a full bonus for the number of months you worked full time in the previous year, plus 75% of the bonus for months you did not work; c) For the third year of retirement, you will receive one half of the full bonus; d) For the fourth year of retirement, you will receive one quarter of the full bonus. 8. Widow's Pension: Upon your death, your wife will receive 60% of your --------------- pension for life. This shall cease upon remarriage or death. -4- [Translation] 9. Voluntary resignation: Should you leave the Company voluntarily before you --------------------- reach age 65 due to reasons not listed in paragraph 6 above, then compensations and benefits provided under this agreement shall cease. You shall become entitled to your maintenance settlement if and so far as the legal requirements for nonforfeitability are met. 10. The undertaking not to compete between you and the Company dated October 13, 1989 shall remain unaffected. Apart from that, this agreement supersedes all oral statements and prior writings between you and the Company. Any modifications or additions to this agreement have to be in writing. If the above is acceptable, please sign both copies of this letter of agreement and return one copy to me for our file. Sincerely, /s/ _______________________________________________ Dr. Burkhardt Meister - -President of the Supervisory Board of DLW AG - Accepted: Dated: June 10, 1999 --------------- Signature: /s/_________________________ Dr. Bernd F. Pelz EX-10.(III)(D) 6 MANAGEMENT ACHIEVEMENT PLAN EXHIBIT 10(iii)(d) MANAGEMENT ACHIEVEMENT PLAN PLAN TEXT AND ADMINISTRATIVE GUIDELINES ADOPTED BY BOARD OF DIRECTORS NOVEMBER 28, 1983 AS AMENDED DECEMBER 13, 1999 ARMSTRONG WORLD INDUSTRIES, INC. -------------------------------- MANAGEMENT ACHIEVEMENT PLAN FOR KEY EXECUTIVES ---------------------------------------------- (PLAN TEXT) ----------- 1. Purpose ------- The Armstrong World Industries, Inc. (the "Company") Management Achievement Plan (the "Plan") is designed to promote the financial success of the Company by recognizing the significant contributions individual employees can make to the achievement of Company goals. Its objectives are to motivate key Company and subsidiary employees to produce outstanding results by providing the opportunity to earn financial rewards in relation to the attainment of corporate and business unit goals. The Plan is based on the concept that the Company establishes for each participant at the beginning of the year a target incentive award based on the achievement of specific corporate and business unit goals. When the year is over, the results actually achieved will be evaluated against these goals to determine the amount, if any, of additional compensation earned by individuals participating in the Plan. 2. Administration -------------- The Plan shall be administered by the Management Development and Compensation Committee (the "Committee") of the Board of Directors with the advice and counsel of the Chief Executive Officer of the Company. Designated subsidiary companies may adopt this Plan. Subject to compliance with the requirements of Section 162(m) of the Internal Revenue Code for deductibility of awards, the Board may amend or terminate the Plan from time to time so long as the amendment or termination does not adversely affect any rights or obligations with respect to awards for the then current year or any prior year which has not yet been paid. 3. Eligibility ----------- The intent of the Plan is to extend participation only to those key employees whose duties and responsibilities give them the opportunity to make a continuing material and -2- substantial impact on the achievement of organization goals. The Chief Executive Officer will annually determine the non-officer participants and recommend officer participants to the Committee. 4. Incentive Awards ---------------- A) At the beginning of each year, the Chief Executive Officer shall present to the Committee criteria for evaluating performance against corporate and business unit goals for the purposes of determining the incentive awards which shall be paid for the year. B) At the same time, the Chief Executive Officer shall recommend to the Committee a target award expressed as a percentage of salary for each participant. C) As soon as practical following the close of each year, the Chief Executive Officer shall evaluate the levels of corporate and business unit achievement and recommend to the Committee the incentive amount earned by the participants. D) Absent specific Board authorization to the contrary, no awards under the corporate achievement segment of the Plan shall be authorized as to any year in which the consolidated Company results fail to achieve a minimum return on stockholders' equity of 8.5%. E) The incentive award determined in accordance with the provisions of Paragraphs A through D of this Section 4 shall be reduced for such year as follows for Plan participants who are eligible to participate in the Bonus Replacement Retirement Plan of Armstrong World Industries, Inc.: (1) If a Plan participant's grade level is 18 or 19 as of January 1 of the calendar year for which the incentive award is determined, the incentive award otherwise payable shall be reduced by the lesser of (i) 50% of the amount determined -3- under Paragraphs A through D, (ii) $7,500 or (iii) the authorized contribution to the Bonus Replacement Retirement Plan. (2) If a Plan participant's grade level is 20 or 21 as of January 1 of the calendar year for which the incentive award is determined, the incentive award otherwise payable shall be reduced by the lesser of (i) 50% of the amount determined under Paragraphs A through D, (ii) $15,000 or (iii) the authorized contribution to the Bonus Replacement Retirement Plan. (3) If a Plan participant's grade level is 22 or higher as of January 1 of the calendar year for which the incentive award is determined, the incentive award otherwise payable shall be reduced by the lesser of (i) 50% of the amount determined under Paragraphs A through D, (ii) $20,000 or (iii) the authorized contribution to the Bonus Replacement Retirement Plan. 5. Time of Payment --------------- Awards under this Plan shall be paid as soon as practicable after the yearly financial results have been determined. 6. Miscellaneous Provisions ------------------------ A) Condition of Award - Plan participants who retire, become disabled, die ------------------ or are involuntarily terminated for reasons other than cause on or after the last workday of March may be eligible for awards on a prorated basis. Employees who voluntarily terminate employment at any time from the beginning of the year until the award for that year is paid are not eligible for an award unless otherwise approved by the Committee. -4- B) No Assignment or Transfer - Awards are payable only to the participant, ------------------------- except in the case of death or legal incapacity at the time of payment, award may be paid to his heirs, estate or legal guardian. No awards under the Plan or any rights or interests therein shall be assignable or transferable by a participant. C) No Rights to Awards - No employee or other person shall have any claim ------------------- or right to be granted an award under the Plan. Neither the Plan nor any action taken hereunder shall be construed as giving any employee any right to be retained in the employ of the Company or any of its subsidiaries. D) Withholding Taxes - The Company shall have the right to deduct from all ----------------- awards hereunder paid all taxes required by law to be withheld with respect to such awards. E) Funding of Plan - The Company shall not be required to establish any --------------- special or separate fund or to make any other segregation of assets to assure the payment of any award under the Plan. 7. Effective Date of the Plan -------------------------- The effective date of the Plan shall be November 28, 1983. EX-10.(III)(E) 7 RETIREMENT BENEFIT EQUITY PLAN EXHIBIT 10(iii)(e) RETIREMENT BENEFIT EQUITY PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. This Retirement Benefit Equity Plan was originally established, pursuant to the authority of the Board of Directors of Armstrong World Industries, Inc., effective January 1, 1976 to pay supplemental retirement benefits to certain employees of the Company who have qualified or may qualify for benefits under the Retirement Income Plan for Employees of Armstrong World Industries, Inc. The Retirement Benefit Equity Plan is hereby amended and restated as of January 1, 2000. All benefits payable under this Plan shall be paid out of the general assets of the Company, or from a trust, if any, established by the Company for the purpose of paying benefits under the Plan, the assets of which shall remain subject to the claims of judgment creditors of the Company in accordance with the provisions of any such trust. Article 1. Definitions 1.01 "Actuarial Equivalent Present Value" shall refer to the present value of a Member's supplemental benefits. With respect to any Member who is eligible to retire or has retired under the Retirement Income Plan, such present value shall be determined using the immediate Present Value Factors applied to a single life annuity payable immediately. With respect to any Member who is not eligible to retire or has not retired under the Retirement Income Plan, such present value shall be determined using the deferred Present Value Factors applied to an age 65 single life annuity. The determination of Actuarial Equivalent Present Value shall reflect future assumed increases in the limitations under Section 415 of the Internal Revenue Code, with such future assumed increases being based on the interest rate that is used by the Committee to determine the amount of any employment taxes that may be owed under Section 3121(v) of the Internal Revenue Code. 1.02 "Board of Directors" shall mean the Board of Directors of the Company. 1.03 "Committee" shall mean the Retirement Committee as provided for in Article 4. 1.04 "Company" shall mean Armstrong World Industries, Inc. or any successor by merger, purchase or otherwise, with respect to its employees. The term Company shall also mean any other company participating in the Retirement Income Plan with respect to its employees if such Company adopts this Plan. 1.05 "Compensation" shall mean a Member's "compensation" as determined under the Retirement Income Plan without regard to limitations under Section 401(a)(17) of the Internal Revenue Code, plus amounts deferred by the Member under the Armstrong Deferred Compensation Plan, if any, and amounts contributed by the Company to the Bonus Replacement Retirement Plan of Armstrong World Industries, Inc. (the "Bonus Replacement Retirement Plan") on behalf of the Member in the year in which such contribution is made. 1.06 "Effective Date" shall mean January 1, 1976. 1.07 "Member" shall mean any person included in the membership of the Plan as provided in Article 2. 1.08 "Plan" shall mean the Retirement Benefit Equity Plan of Armstrong World Industries, Inc. as described herein or as hereafter amended. 1.09 "Present Value Factors" shall refer to the discount rate utilized in the Company's annual published financial statements in determining the Company's net credit for its U.S. defined benefit plans for the calendar year preceding the year in which the supplemental benefits are determined and the 1983 Group Annuity Mortality Table, based upon a fixed blend of 50% of the male rates and 50% of the female rates. 1.10 "Retirement Income Plan" shall mean the Retirement Income Plan for Employees of Armstrong World Industries, Inc. Article 2. Membership 2.01 Every person who was a member of the Plan as in effect on December 31, 1999 shall remain a Member of the Plan on or after January 1, 2000. 2.02 Every other employee of the Company shall become a Member of the Plan on the first day of the calendar year in which the Committee determines that: (a) the employee's benefit calculated under the Retirement Income Plan exceeds the allowed benefit under Section 415 of the Internal Revenue Code, (b) the employee's compensation exceeds the maximum allowed under Section 401(a)(17) of the Internal Revenue Code, (c) the employee has compensation deferred under the terms of the Armstrong Deferred Compensation Plan, (d) the employee is a key executive designated by the Board of Directors, or its delegate, to receive credit for employment prior to his Company employment for purposes of calculating his Retirement Income Plan benefit, as provided under Section 3.01(a)(iii) of this Plan, or (e) the employee has a contribution made on his behalf to the Bonus Replacement Retirement Plan. 2.03 Membership under the Plan shall terminate if a Member's employment with the Company terminates unless at that time the Member is entitled to retirement income payments pursuant to the Retirement Income Plan or benefits described in Section 3.04. Article 3. Amount and Payment of Supplemental Benefits 3.01 The supplemental benefits under this Plan shall be payable by the Company only with respect to a Member who has retired, died or otherwise terminated his employment with the Company after becoming vested under the Retirement Income Plan. Any such supplemental benefits shall be payable from the general assets of the Company or from a trust, if any, established by the Company for the purpose of paying benefits under the Plan, the assets of which shall remain subject to the claims of judgment creditors of the Company in accordance with the provisions of any such trust. 2 The amount of any supplemental benefits payable to or on account of a Member pursuant to this Plan, expressed as a single life annuity payable as of the Member's "normal retirement date" (as that term is defined in the Retirement Income Plan) or in the event the Member defers his retirement beyond his normal retirement date, his "deferred retirement date" (as that term is defined in the Retirement Income Plan), shall be equal to (a) minus (b) minus (c) minus (d), where: (a) is the benefit calculated under the provisions of the Retirement Income Plan, but: (i) disregarding any reduction in the amount of benefits under the Retirement Income Plan attributable to any provision therein incorporating limitations imposed by Section 415 of the Internal Revenue Code or Section 401(a)(17) of the Internal Revenue Code; (ii) disregarding any reduction due to compensation deferred under the Armstrong Deferred Compensation Plan; (iii) including, for purposes of calculating Total Service under the Retirement Income Plan, years of employment for a Member described in Section 2.02(d) which precede his Company employment to the extent so designated by the Board of Directors, or its delegate, at the time such individual is designated as eligible for membership in the Plan; and (iv) including, for purposes of determining compensation, any amounts contributed on the Member's behalf to the Bonus Replacement Retirement Plan; (b) is the actual amount of benefits payable to or on account of the Member as calculated under the Retirement Income Plan; (c) is the value of the benefit (excluding the portion of such benefit attributable to employee contributions) which is payable, which has been paid or which will become payable to a Member described in Section 2.02(d) from a qualified defined benefit plan to the extent such plan takes into account the period of employment described in Section 3.01(a)(iii). In the event the Member has received, is receiving, or is scheduled to receive benefits from another such plan in any form other than a single life annuity or at a time other than when benefits commence under this Plan, the benefit to be taken into account under this subsection (c) shall be determined by the Company based on actuarial assumptions and factors reasonably utilized under the Retirement Income Plan as of the date of determination, or to the extent such factors or assumptions do not contemplate a particular situation which arises under this Plan, based upon the Present Value Factors; and (d) is the actuarial equivalent value of any supplemental benefits previously paid to the Member under this Plan, provided that the actuarial equivalent value of any supplemental benefits paid as a single sum shall be determined using the Present Value Factors. 3 Notwithstanding the preceding provisions of this Section 3.01, in the event a retired or terminated Member's benefit calculated under the Retirement Income Plan is increased for any reason after the Member's supplemental benefit payments have commenced in an annuity form, the amount of any supplemental benefits payable to or on account of such Member under this Plan shall be reduced correspondingly on a prospective basis, and in the event such increase is made retroactively resulting in the overpayments of any or all of the Member's supplemental benefits, future benefit payments under this Plan shall be reduced to reflect such prior overpayments in any manner determined by the Committee, in its discretion, and applied on a consistent basis to all similarly situated Members, until an amount equal to the total overpayments in the Member's supplemental benefit payments are recovered. 3.02 Subject to the following rules, an employee of the Company who becomes a Member under this Plan in accordance with Section 2.02 shall elect in writing the form and timing of payment of the supplemental benefits payable on behalf of such Member under this Plan within the thirty (30) day period following the Committee's determination that such employee has become a Member. Further, subject to the following rules, each employee of the Company who is a Member of the Plan on December 31, 1999 shall elect in writing no later than June 30, 2000 the form and timing of payment of the supplemental benefits payable on behalf of such Member. (a) The Member may elect to have his supplemental benefits paid in the form of any annuity that is offered under the Retirement Income Plan or in a single sum. (b) In no event shall the Member elect to have his supplemental benefits commence or be paid earlier than the later of: (i) the Member's attainment of age 55, or (ii) the date the Member first becomes eligible to receive his benefits under the Retirement Income Plan and in no event shall the Member elect to have his supplemental benefits commence or be paid later than the Member's attainment of age 65 or, if later, his actual retirement from the Company. Notwithstanding the preceding sentence, if the Member elects a single sum payment, he may elect to receive such single sum payment at any time following his termination of employment. (c) In the event the Member fails to affirmatively elect the form and timing of payment of his supplemental benefits hereunder, the Member shall be deemed to have elected to have his supplemental benefits paid in the form of a single life annuity, commencing as of the first day of the month next following his attainment of age 65 or if later, his actual retirement from the Company. (d) If the Member elects to have his supplemental benefits paid in a single sum, the Member shall receive 100% of the Actuarial Equivalent Present Value of his supplemental benefits determined under Section 3.01. Notwithstanding the preceding sentence, if the Member elects a single sum payment date that is within twelve (12) months of the date of his distribution election, he shall receive 94% of the Actuarial Equivalent Present Value of his supplemental benefits determined under Section 3.01, and the 4 remaining six percent (6%) of the Actuarial Equivalent Present Value shall be permanently forfeited. (e) Notwithstanding any other provision of the Plan to the contrary, in the event the Member elects to receive a period certain annuity or joint and survivor annuity and either the beneficiary designated by the Member dies prior to the date the Member commences receiving his supplemental benefits or the Member designates his spouse as his beneficiary and the Member is not legally married to such spouse immediately preceding the date the Member commences receiving his supplemental benefits, the Member's election to receive such period certain annuity or joint and survivor annuity shall automatically be converted to an election to receive a single life annuity. 3.03 Notwithstanding the provisions of Section 3.02, a Member who has not commenced receiving payment of his supplemental benefits may request in writing to the Committee to amend the commencement date (in the case of an annuity) or payment date (in the case of a single sum) and/or the form of payment of his supplemental benefits elected by the Member under Section 3.02, in accordance with the following rules: (a) A Member who has not commenced receiving payment of his supplemental benefits may request to amend the timing and/or form of payment of the supplemental benefits provided: (i) the commencement date or the payment date in the absence of such distribution election amendment is not within twelve (12) months of the date of the amendment; (ii) his amended commencement date or payment date (if applicable) is at least twelve (12) months after the date of the distribution election amendment; and (iii) his amended commencement date or payment date (if applicable) is otherwise in conformance with the provisions of Section 3.02(b). (b) Notwithstanding subsection (a) above and any other provision of the Plan to the contrary, a Member who has not commenced receiving payment of his supplemental benefits may request at any time to change (i) his annuity form of payment to a single sum payment or (ii) the payment date of the single sum, with the single sum payment in either case being made within the twelve (12) month period beginning on the date of the distribution election amendment and being equal to 94% of the Actuarial Equivalent Present Value of the Member's supplemental benefits, and with the remaining six percent (6%) of the Actuarial Equivalent Present Value being permanently forfeited. (c) Notwithstanding any other provision of the Plan to the contrary, a Member who is receiving annuity payments of his supplemental benefits may request to receive a single sum payment of the Actuarial Equivalent Present Value of the remaining supplemental benefits payable to such Member (and if applicable, to such Member's beneficiary in the case of a period certain annuity or a joint and survivor annuity) only under the following circumstances: (i) Each Member who is receiving payments of his supplemental benefits immediately prior to March 1, 2000 shall be given a three (3) month period, beginning with the date the Committee notifies the Member, during which the 5 Member may elect to receive such single sum payment. (ii) In the event of a change in control (as defined in Section 5.05(c)), each Member who is receiving payments of his supplemental benefits immediately prior to the change in control shall be given a three (3) month period, beginning with the date of the change in control, during which the Member may elect to receive such single sum payment. The Member's election under (i) or (ii) must be in writing and must specify the payment date of the single sum; provided, however, if the Member elects a payment date that is within twelve (12) months of the date of his single sum election, he shall receive 94% of the Actuarial Equivalent Present Value of the remaining supplemental benefits payable to such Member (and if applicable, to such Member's beneficiary), and the remaining six percent (6%) of the Actuarial Equivalent Present Value shall be permanently forfeited. 3.04 Notwithstanding the provisions of Section 3.01 and Section 3.02, supplemental benefits shall be payable under this Plan to or on account of a Member described in Section 2.02(d) who: (i) is involuntarily terminated after completing one year of service but prior to becoming vested in the Retirement Income Plan, and (ii) receives severance pay benefits under the Severance Pay Plan for Salaried Employees of Armstrong World Industries, Inc. or any individual severance agreement, or who is eligible for severance pay benefits under the Employment Protection Plan for Salaried Employees of Armstrong World Industries, Inc. The Member's supplemental benefits will be calculated using the guaranteed pension schedule for Salaried Employees of Armstrong World Industries, Inc. under the Retirement Income Plan multiplied by the total years of service credited for employment prior to his Company employment, as determined in Section 2.02(d) and his years of Company employment and shall be payable in the form of a single life annuity commencing as of the later of the Member's attainment of age 62 or the Member's termination date. 3.05 If a Member is restored to employment with the Company after having retired, any monthly payments under the Plan shall be discontinued and, upon subsequent retirement or termination of employment with the Company, the Member's benefits under the Plan shall be recomputed in accordance with Section 3.01 and shall again become payable to such Member in accordance with the provisions of the Plan, including his election under Section 3.02. 3.06 In the event the dollar amount of the maximum benefit under the Retirement Income Plan pursuant to Section 415 of the Internal Revenue Code increases because of adjustments in the cost of living, the supplemental benefits of any Member payable under the Plan, whether or not in pay status, shall be recalculated to take into account the higher maximum benefit payable from the Retirement Income Plan. If payments have already commenced under the Retirement Income Plan and this Plan, benefit amounts under both plans shall be adjusted to reflect the higher maximum benefit, by increasing the amount paid under the Retirement Income Plan and decreasing the amount paid under this Plan, as soon as administratively possible after such a change. 6 Notwithstanding the above, if the Retirement Income Plan is terminated, no adjustments shall be made to benefits payable under this Plan with respect to changes in the maximum benefit after the date of such termination. Article 4. Administration 4.01 The administration of the Plan and the responsibility for carrying out its provisions are vested in a Retirement Committee which shall be composed of the members of the Retirement Committee provided for under Article X of the Retirement Income Plan. The provisions of Article X of the Retirement Income Plan concerning powers of the Committee shall apply under this Plan. The Retirement Committee shall have the full and exclusive discretion and authority to interpret the Plan and to determine all benefits and to resolve all questions arising from the administration, interpretation, and application of Plan provisions, either by general rules or by particular decisions, including determinations as to whether a claimant is eligible for benefits, the amount, form and timing of benefits, and any other matter (including any question of fact) raised by a claimant or identified by the Retirement Committee. All decisions of the Committee shall be conclusive and binding upon all affected persons. The expenses of the Committee shall be paid directly by the Company. Article 5. General Provisions 5.01 The establishment of the Plan shall not be construed as conferring any legal rights upon any person for a continuation of employment, nor shall it interfere with the rights of the Company to discharge any employee and to treat him without regard to the effect which such treatment might have upon him as a Member of the Plan. No legal or beneficial interest in any of the Company's assets is intended to be conferred by the terms of the Plan. 5.02 In the event that the Committee shall find that a Member or other person entitled to benefits hereunder is unable to care for his affairs because of illness or accident, the Committee may direct that any benefit payment due him, unless claim shall have been made therefor by a duly appointed legal representative, be paid to his spouse, a child, a parent or other blood relative, or to a person with whom he resides, and any such payment so made shall be a complete discharge of the liabilities of the Company and the Plan therefor. 5.03 The Company shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. 5.04 Subject to any applicable law, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, any attempt so to do shall be void, nor shall any such benefit be in any manner liable for or subject to garnishment, attachment, execution or levy, or liable for or subject to the debts, contracts, liabilities, engagements or torts of the Member. In the event that the Committee shall find that any Member or other person entitled to benefits hereunder has become bankrupt or has made any such attempt with respect to any such benefit, such benefit shall cease and terminate, and in that event the Board shall hold or apply the same to or for the benefit of such Member or other person entitled to benefits. 7 5.05 (a) In the event that a Member (i) is discharged for willful, deliberate, or gross misconduct as determined by the Board of Directors or a duly constituted committee thereof; or (ii) if following the Member's termination of employment with the Company and, within a period of three years thereafter, the Member engages in any business or enters into any employment which the Board of Directors or a duly constituted committee thereof determines to be either directly or indirectly competitive with the business of the Company or substantially injurious to the Company's financial interest (the occurrence of an event described in (i) or (ii) shall be referred to as "Injurious Conduct"), all benefits which would otherwise be payable to him under the Plan shall be forfeited. Further, the Board of Directors or a duly constituted committee thereof, in its discretion, may require the Member who has engaged in Injurious Conduct to return any amounts previously received by the Member, provided the right to require repayment under this subsection (a) must be exercised within ninety (90) days after the Board (or committee, as the case may be) first learns of the Injurious Conduct, but in no event later than twenty-four (24) months after the Member's termination of employment with the Company. A Member may request the Board of Directors or a duly constituted committee thereof, in writing, to determine whether any proposed business or employment activity would constitute Injurious Conduct. Such a request shall fully describe the proposed activity and the Board's (or the committee's, as the case may be) determination shall be limited to the specific activity so described. (b) Notwithstanding the foregoing, benefits shall not cease or be forfeited or be required to be repaid merely because the Member (1) owns publicly traded shares of stock of a corporation which competes with the Company, or (2)(a) acts as a consultant for, (b) has an investment in, or (c) is a Board member of a business where after the Member notifies the Company in writing in advance of his potential involvement under (2)(a), (b) or (c), the Company's Board of Directors or a duly constituted committee thereof determines that the Member will not be in violation of the Company's Conflicts of Interest policy, or (3) becomes associated with a business which competes with the Company within two years following a "change in control" and is eligible for benefits under the Employment Protection Plan for Salaried Employees or any individual severance agreement. (c) A "change in control" shall occur if and when (i) any person acquires "beneficial ownership" of more than 28% of the then outstanding "voting stock" of the Company and within five years thereafter, "disinterested directors" no longer constitute at least a majority of the entire Board of Directors or (ii) there shall occur a "business combination" with an "interested shareholder." For the purpose of this Section, the terms "person," "beneficial ownership," "voting stock," "disinterested director," "business combination," and "interested shareholder" shall have the meaning given to them in Article 7 of the Company's Articles of Incorporation as in effect on May 1, 1985. Notwithstanding the preceding sentence, for any Member who is covered by an individual severance agreement, a "change in 8 control" shall have the meaning assigned to such term by the individual severance agreement. 5.06 The Plan shall be constructed, regulated and administered under the laws of the Commonwealth of Pennsylvania. 5.07 The masculine pronoun shall mean the feminine wherever appropriate. 5.08 The Board of Directors may, through written resolutions adopted by the Board of Directors, amend or discontinue the Retirement Benefit Equity Plan at any time; provided, however, that if the Plan is amended to discontinue or reduce the amount of supplemental benefit payments (except as may be required pursuant to any plan arising from insolvency or bankruptcy proceedings) (a) any Member who is being paid his supplemental benefits immediately prior to the effective date of the amendment shall continue to be paid his supplemental benefits in the amount and manner (as provided under Article 3 hereof) as they were being paid at the time of such amendment, and (b) any Member who is not being paid his supplemental benefits immediately prior to the effective date of the amendment shall be entitled to receive (i) the supplemental benefits accrued by such Member as of the effective date of the amendment, with such supplemental benefits being paid in the form and at the time elected by the Member under Section 3.02, and (ii) any legal fees and related expenses incurred by the Member in receiving such supplemental benefits (as permitted under Section 5.09(e)) and interest under Section 5.09(f) (to the extent applicable). Notwithstanding the preceding sentence, any written employment agreement between the Executive Committee and any Member described in clause (b) of the preceding sentence shall govern to the extent such agreement either amends or discontinues the Member's supplemental benefits under the Plan, and Section 5.05 shall govern to the extent any Member engages in Injurious Conduct as defined under that section. In addition, the Board of Directors may by written resolution delegate to the Executive Committee of the Board of Directors this authority to amend the Plan. The Executive Committee shall amend the Plan by means of written resolution in accordance with the authorization of the Board of Directors, provided, however, that any such amendment by the Executive Committee also may be made through the terms of a written employment agreement entered into between a Member and the Executive Committee. 5.09 (a) Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee which shall respond in writing as soon as practicable. (b) If the claim or request is denied, the written notice of denial shall state: (i) The reasons for denial, with specific reference to the Plan provisions on which the denial is based. (ii) A description of any additional material or information required and an explanation of why it is necessary. (iii) An explanation of the Plan's claim review procedure. 9 (c) Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing. (d) The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned. (e) In the event a Member's claim for supplemental benefits under this Plan is denied and the Member successfully appeals the denial of such claim under the foregoing procedures, the Company shall pay or reimburse the legal fees and expenses directly incurred by the Member in connection with his appeal subject to a maximum payment or reimbursement of one-third of the Actuarial Equivalent Present Value of the supplemental benefits to which the Member is entitled. For purposes of the preceding sentence, actuarial equivalence shall be determined using the Present Value Factors. Any such legal fees and expenses shall be paid by the Company to, or on behalf of, the Member no later than thirty (30) days following the Member's written request for the payment of such legal fees and expenses, provided the Member supplies the Committee with evidence of the fees and expenses incurred by the Member that the Committee, in its sole discretion, determines is sufficient. (f) Further, in the event a Member's claim for supplemental benefits under this Plan is denied and the Member successfully appeals the denial of such claim under the foregoing procedures, the Company shall pay to the Member interest on the portion of the Member's supplemental benefits that were not otherwise paid when due because of the initial denial of the claim. For purposes of the preceding sentence, interest shall accrue at an annual rate equal to the prime rate as quoted in the Wall Street Journal as of the date the supplemental benefits would otherwise have been paid if the claim had not initially been denied, plus five percent (5%), and shall be adjusted as necessary to reflect any partial payment or payments of the amounts owed to the Member. As Amended Through December 13, 1999 10 EX-10.(III)(F) 8 DEFERRED COMPENSATION PLAN EXHIBIT 10(iii)(f) ARMSTRONG DEFERRED COMPENSATION PLAN The Armstrong Deferred Compensation Plan (the "Plan") was initially established by the Board of Directors of Armstrong World Industries, Inc. effective September 30, 1985. The Plan allows certain directors and management employees of the Company to defer receipt of a portion of their Compensation and, as a result, to receive certain supplemental retirement or survivor benefits. In addition, effective January 1, 1996, certain directors are required to defer receipt of a portion of their Compensation until termination of Board service. The Plan is hereby amended and restated as of January 1, 2000. 1. DEFINITIONS 1.01 "Company" shall mean Armstrong World Industries, Inc. or any successor by merger, purchase or otherwise. In addition, the term Company shall include any subsidiary corporation controlled by Armstrong World Industries, Inc. that shall have adopted this Plan with the permission of the Board of Directors of Armstrong World Industries, Inc. 1.02 "Committee" shall mean the Deferred Compensation Committee whose membership shall include the Chief Executive Officer of the Company and at least two (2) other employees of the Company selected by the Chief Executive Officer. 1.03 "Compensation" for an employee Participant shall include a Participant's annual base salary and any actual bonus payable under the Company's annual bonus plan received by the employee for services with the Company and, in the case of a nonemployee director Participant, shall include payments by the Company to the director in the form of retainer fees, meeting fees, and special assignment fees, as well as share awards made by the Company to the director's Stock Subaccount. Upon the prior approval of the Committee and subject to any conditions imposed by the Committee, an employee Participant may elect to include in annual base salary an applicable amount of any "severance pay" to be provided to a Participant under the Employment Protection Plan for Salaried Employees, the Severance Pay Plan for Salaried Employees or any individual agreement. 1.04 "Participant" shall be each nonemployee director and employee who has been selected for participation by the Committee, who satisfies all conditions of eligibility, and who elects to participate by entering into a Participation Agreement. 1.05 "Participation Agreement" is the contract between the Company and the Participant covering participation in the Plan. 1.06 "Change in Control" shall occur if and when (i) any person acquires "beneficial ownership" of more than twenty-eight percent (28%) of the then outstanding "voting stock" of the Company and, within five (5) years thereafter, "disinterested directors" no longer constitute at least a majority of the entire Board of Directors, or (ii) there shall occur a "Business Combination" with an "Interested Shareholder." For those individuals with individual agreements, "Change in Control" shall occur as defined within such agreement. For the purpose of this section, the terms "person," "beneficial ownership," "voting stock," "disinterested director," "Business Combination," and "Interested Shareholder" shall have the meaning given to them in Article 7 of the Company's Articles of Incorporation as in effect on May 1, 1985. 1.07 "Supplemental Retirement Account Balance" at any date shall mean with respect to any Participant an amount equal to the amounts credited (including deferrals and earnings thereon) to the Participant's Cash Subaccount, the Participant's Stock Subaccount, and the Participant's Fund Subaccount, as determined pursuant to Sections 1.09, 1.10 and 1.11. 1.08 "Termination Account Balance" at any date shall mean with respect to any Participant the sum of (a) plus (b), where (a) equals one hundred percent (100%) of the amount credited to the Participant's Cash Subaccount attributable to deferrals made prior to January 1, 1993, and earnings thereon, as determined pursuant to Section 1.09; and (b) equals ninety-four percent (94%) of the sum of (i) the amount credited to the Participant's Cash Subaccount attributable to deferrals made on or after January 1, 1993, and earnings thereon, as determined pursuant to Section 1.09, (ii) the amount credited to the Participant's Stock Subaccount (including deferrals and earnings thereon), as determined pursuant to Section 1.10, plus (iii) the amount credited to the Participant's Fund Subaccount (including deferrals and hypothetical earnings thereon), as determined pursuant to Section 1.11. 1.09 "Cash Subaccount" shall mean with respect to any Participant: (a) The amount which the Participant actually defers under this Plan unless such Participant elects in writing that all or a portion of such deferral be credited to his Stock Subaccount or his Fund Subaccount in accordance with subsection 3.02(g) or 3.02(h) of this Plan, plus (b) Interest which is credited on each such deferral at a rate equal to the rate specified in the Participant's individual Participation Agreement for purposes of determining the Participant's Supplemental Retirement Account Balance, for the following period: (i) From the date on which the deferred Compensation normally would have been paid in the case of deferrals to the Cash Subaccount or, in all -2- other cases, from the date of transfer from the Stock Subaccount or the Fund Subaccount pursuant to subsection 3.02(h), (ii) Until the earlier of the date of payment or the date of transfer to the Stock Subaccount or the Fund Subaccount pursuant to subsection 3.02(h). 1.10 "Stock Subaccount" at any date shall mean with respect to any Participant the amount which the Participant elects to defer and have credited to his Stock Subaccount in accordance with subsection 3.02(g) of this Plan or, in the case of a nonemployee director Participant, the share awards made by the Company which the Participant defers in accordance with Subsection 3.02(i), plus any amounts the Participant elects to transfer to this Subaccount from the Cash Subaccount or the Fund Subaccount in accordance with the provisions of Section 3.02(h), reduced by any amounts the Participant elects to transfer from this Subaccount to the Cash Subaccount or the Fund Subaccount in accordance with the provisions of Section 3.02(h). A bookkeeping entry shall be made of the number of whole and fractional shares of Company common stock that were awarded or that could have been purchased with the amounts actually deferred under or transferred to the Stock Subaccount by the Participant, based on the fair market value of such stock on the date the deferral is made or the transfer is credited to the Participant's Stock Subaccount. The Stock Subaccount also shall be credited with a bookkeeping entry indicating the number of additional whole or fractional shares which would be payable as a stock dividend on the shares previously credited to the Stock Subaccount. Any amounts which would represent cash dividends on Company common stock credited to a Participant's Stock Subaccount shall be converted to an entry representing the number of additional shares of Company common stock which could be purchased at fair market value with such dividends as of the date such dividends are credited to the Subaccount. For purposes of this section, "fair market value" of a share of Company common stock shall mean the closing price of a single share of Company common stock as reported by the New York Stock Exchange on the applicable date or, if no sales were made on such date, on the next preceding date on which sales of the Company common stock were made. The "applicable date" for deferred amounts shall be the date on which the deferred Compensation would have been paid. The "applicable date" for transfers to or from the Stock Subaccount shall be the effective date of the Participant's conversion election under Section 3.02(h). In the event of any changes in the outstanding shares of Company common stock by reason of stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of deferral, the Committee shall adjust the balance in the Participant's Stock Subaccount appropriately to reflect such change. 1.11 "Fund Subaccount" at any date shall mean with respect to any Participant the amount which the Participant elects to defer and have credited to his Fund Subaccount in accordance with subsection 3.02(g) of this Plan, plus any amounts the Participant elects to -3- transfer to this Subaccount from the Cash Subaccount or the Stock Subaccount in accordance with the provisions of Section 3.02(h), reduced by any amounts the Participant elects to transfer from this Subaccount to the Cash Subaccount or the Stock Subaccount in accordance with the provisions of Section 3.02(h). The Participant shall designate his preference for the investment of the funds deferred by him under this Subaccount. Such designation shall be limited to the selection of one or more investment funds designated on the Participant's Deferral Election forms for the period in question. The Company and the Trustee, if a trust is funded, may elect to invest trust assets in such designated investment funds, but shall not be required to do so. In any event, the Participant's Fund Subaccount shall be credited with the hypothetical earnings, gains, losses, and changes in the fair market value of such Fund Subaccount for the time period that a Participant has amounts credited to the Fund Subaccount as if the Company had followed such investment designation (such amount being referred to herein as the "hypothetical earnings"). A bookkeeping entry shall be made of the amounts deferred or transferred to the Fund Subaccount, along with the hypothetical earnings on such amounts for each investment fund selected by the participant. Deferrals credited to the Fund Subaccount under the Plan may be deemed to be invested in one or more investment funds as approved by the Committee, including but not limited to the following: (a) Equity Investment Fund - One or more diversified equity funds ---------------------- invested in equity securities or securities convertible into equity securities. (b) Fixed Income Investment Fund - One or more fixed income funds ---------------------------- invested in, but not limited to, guaranteed income contracts, bonds, notes, debentures, asset-backed securities and fixed income derivatives. (c) Money Market Fund - One or more money market funds invested in ----------------- short-term obligations of the United States Government, bank certificates of deposit, commercial paper, bankers' acceptances, shares of money market mutual funds and other similar types of short-term investments. (d) Balanced Fund - One or more balanced funds, as may be available ------------- from time to time, that invest in a mixture of bonds, equities, and short- term instruments. Dividends, interest and other distributions which would otherwise be received in respect to each hypothetical investment under the Fund Subaccount shall be deemed to be reinvested in the respective investment fund. 1.12 "Reporting Person" shall mean a person who is subject to the provisions of Section 16(a) of the Securities Exchange Act of 1934, as amended. For purposes of this Plan, a person shall be deemed to be a Reporting Person for the period he is such a Reporting Person and six (6) months thereafter. -4- 2. ELIGIBILITY FOR PARTICIPATION Participation in the Plan is limited to nonemployee directors of the Company and those management employees who have been selected for participation by the Committee. 3. DEFERRAL OF COMPENSATION 3.01 Deferral Period: During such period or periods as may, from time to time, be selected by the Committee (the "Deferral Period"), each person eligible to participate in the Plan shall be given the opportunity to elect to defer a portion of his or her Compensation. The length of the current Deferral Period shall be four (4) years, commencing on January 1, 1997. 3.02 Deferral Rules: (a) There shall be no minimum amount a Participant is required to defer. (b) The maximum amount an employee Participant may defer for each year of the Deferral Period shall be twenty percent (20%) of the Participant's annual base salary at the time of the deferral election and one hundred percent (100%) of the Participant's actual bonus payable under the Company's annual bonus plan; or, with the approval of the Board of Directors, up to the sum of twenty percent (20%) of the Participant's annual base salary and one hundred percent (100%) of the Participant's target bonus award. The amount of any bonus deferral may not exceed the gross amount of the bonus reduced by any tax required to be withheld from such amounts under Sections 3111(a) and (b) of the Internal Revenue Code of 1986, as amended, or any state or local statute. Subject to the above deferral limitations, the Board of Directors may also approve deferrals from any payment of cash Compensation to the employee Participant. The maximum amount of Compensation a nonemployee director may defer for each year of the Deferral Period shall be determined by the director. (c) The amount deferred by an employee Participant shall be deferred by means of reductions in the employee's annual base salary or bonus, whichever is applicable under the Participant's deferral election. Amounts deferred by a nonemployee director shall be made from the director's retainer fees, meeting fees and special assignment fees, and share awards made by the Company to the director's Stock Subaccount under Section 3.02(i). (d) The decision by a Participant to defer a portion of Compensation (other than share awards to nonemployee directors under Section 3.02(i)) is an election for the full Deferral Period which must be made by the December 1 prior to the Deferral Period to which an election to defer Compensation relates; provided, however, that in the case of a Participant whose eligibility to participate in the Plan initially commences after January 1 of a year, a decision to defer a portion of Compensation earned after such a -5- deferral election and during the remaining part of a Deferral Period must be made no later than thirty (30) days after the Participant's commencement of participation. The decision by a Participant of the amount to be deferred under this Plan for each calendar year in the Deferral Period (other than share awards to nonemployee directors under Section 3.02(i)) is an annual election which must be made by December 1 of the calendar year prior to the year in which the amount is to be deferred. Deferrals of share awards to nonemployee directors under Section 3.02(i) shall be automatic at the time such award is made and shall not require a deferral election other than the initial election described in Section 3.02(i) for Participants who were directors prior to January 1, 1996. (e) Except as provided below, a Participant's election to defer Compensation shall be irrevocable for the Deferral Period and a Participant's election of the amount to be deferred shall be irrevocable for the calendar year in which the election is effective. Notwithstanding the prior sentence, the Committee may permit a Participant to waive the remainder of the deferral commitment upon a finding based upon uniform standards established by the Committee that the Participant has suffered a severe financial hardship. For these purposes, a severe financial hardship includes a sudden and unexpected illness or accident of the Participant or a dependent (as defined under Section 152(a) of the Internal Revenue Code of 1986, as amended), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, to the extent not reimbursed by insurance or otherwise, and to the extent the Participant does not have other funds reasonably available to alleviate the hardship. (f) Notwithstanding the above, any employee Participant, after approval by the Committee, may elect to complete the deferral of annual base salary as specified in the current Deferral Election from any "severance pay" which the Participant is eligible to receive following the Participant's date of termination under the Employment Protection Plan for Salaried Employees, the Severance Pay Plan for Salaried Employees or any individual agreement. (g) At the time a Participant makes an election for the amount to be deferred for a calendar year during the Deferral Period in accordance with this Section 3.02, such Participant may elect in writing that a specified percentage (stated in five percent (5%) increments) of the Compensation he is deferring pursuant to the Plan for such calendar year be credited to his Cash Subaccount, to his Stock Subaccount or to the individual investment funds elected by the Participant in his Fund Subaccount. Such percentage allocation may be changed with respect to future deferrals at any time. If the -6- Participant's election fails to specify the percentage to be allocated to each Subaccount or allocates less than one hundred percent (100%) of the amounts to be deferred, the amounts deferred by the Participant for which no allocation election has been made for the calendar year shall be credited to the Participant's Cash Subaccount. (h) At any time, a Participant may elect to convert all or a portion of amounts previously deferred under one Subaccount to any other Subaccount; provided, however, that amounts deferred or otherwise credited to the Stock Subaccount may not be converted to the Cash Subaccount or the Fund Subaccount if the Participant is a Reporting Person. The Participant's election shall be effective on the first day of the month following the receipt of such election by the Secretary of the Committee, provided that the Secretary is notified of such election by the twenty- fifth (25th) day of the month prior to the conversion date. Notice by telephone or facsimile shall be deemed to constitute notice to the Secretary of the conversion election, provided that a written form is submitted immediately subsequent to such notice. The number of shares to be credited to a Participant's Stock Subaccount, or the number of shares to be debited from a Participant's Stock Subaccount and the cash to be credited to the Participant's Cash Subaccount, or an investment fund in the Fund Subaccount, shall be based on the fair market value of Company common stock (as determined in Section 1.10 of the Plan) on the date that the conversion election is effective. The interest rate for amounts transferred to the Cash Subaccount shall be the rate in effect under the Participant's individual Participation Agreement in effect during the Deferral Period in which the conversion election is effective. Hypothetical earnings credited on amounts transferred to the Fund Subaccount shall be based on the actual investment performance of each applicable investment fund for the time period that a Participant has an account balance in such investment funds. (i) Effective January 1, 1996, nonemployee directors of the Company who were Participants of the Board prior to January 1, 1996, were able to elect to discontinue their participation in the Directors' Retirement Income Plan ("Directors' Plan") and waive their right to any benefit accrued under the Directors' Plan. If a nonemployee director made this election, such director became eligible to receive an annual award equivalent to the value of two hundred (200) shares of Company common stock which shall be credited to his Stock Subaccount. The annual share award shall be made each January 1 up until the time a director attains twelve (12) years of Board service, including years of Board service prior to January 1, 1996. The first such award was made on January 1, 1996. Further, such director received, effective January 1, 1996, a share award grant to replace the value of the accrued Directors' Plan benefit the director elected to forfeit. This share award grant was credited to the director's Stock Subaccount and was the greater of: (i) Two hundred (200) shares times the number of full years of Board service as of January 1, 1996, up to a maximum of twelve (12) years, or -7- (ii) The number of shares whose value (based on the fair market value of Armstrong common stock on January 1, 1996) equated to the present value of the benefits accrued under the Directors' Plan using a six and one-half percent (6-1/2%) discount rate and assuming benefit payments commence on the first day of the month following the director's sixty-fifth (65th) birthday (January 1, 1996, if the director was older than sixty-five (65)). Nonemployee directors who join the Board after January 1, 1996, shall be eligible to receive an annual award equivalent to two hundred (200) shares of Armstrong common stock which shall be credited to their Stock Subaccount unless the director elects to receive stock options in lieu of this award. The annual share award shall be made each January 1 until such time as a director attains twelve (12) years of Board service. 3.03 Manner of Electing Deferral and Payment of Benefits: A Participant shall elect to defer Compensation by giving written notice to the Company on forms provided for such purposes, which notice shall include: (a) The amount and manner of Compensation to be deferred in each calendar year of a specified Deferral Period. An employee Participant shall make a separate election for amounts of annual base salary to be deferred and amounts of bonus awards to be deferred. (b) A Designation of Beneficiary. (c) The date the installment payments of the Participant's deferred Compensation and interest thereon are to commence, subject to the limitations of Section 4.03. (d) The designation of the Subaccount (Cash, Stock or Fund and, if applicable, the investment fund or funds under the Fund Subaccount) to which deferrals are to be credited for each calendar year of the specified Deferral Period. The Designation of the Beneficiary shall continue to be effective until and unless a new election is filed in writing with the Committee. The designation of the date that the installment payments of the Participant's benefits are to commence shall be irrevocable, except as provided in Article 4. 4. PAYMENT AND AMOUNT OF BENEFITS 4.01 A Participant's supplemental retirement benefits under this Plan shall be paid in substantially equal monthly installments under the declining balances methodology for one hundred twenty (120) months in the case of a nonemployee director Participant and for one -8- hundred eighty (180) months in the case of an employee Participant; provided, however, that alternative payment schedules may be established by the Management Development and Compensation Committee of the Board of Directors. The Participant's installment payments of his supplemental retirement benefits shall commence in accordance with the election made by the Participant pursuant to Section 3.03, provided, however, that: (a) For a Participant who is a nonemployee director, payment may commence at any time following termination of service as a director, but in no event earlier than age sixty-five (65) for directors who begin Plan participation before January 1, 1996; provided that payment will commence in all events not later than the first day of the month following the Participant's seventieth (70th) birthday, regardless of whether service as a director has terminated at that time. (b) For a Participant who is an employee, payment may commence at any time subsequent to termination or retirement; provided, however, that payment will commence in all events not later than the first day of the month following the Participant's sixty-fifth (65th) birthday, regardless of whether the Participant has actually retired at that time. Notwithstanding the foregoing, the Company reserves the right to impose conditions, including with respect to payment commencement, in connection with early retirement opportunities or any other severance arrangements which otherwise enhance an employee Participant's retirement income. 4.02 The supplemental retirement benefits for a Deferral Period will be paid, but in a lesser amount, if: (a) By the end of the Deferral Period the Compensation payable to a Participant has proved insufficient to accommodate full deferral; (b) Prior to the end of the Deferral Period, a nonemployee director ceases to be a director after completing one (1) year of service on the Board of Directors for any reason other than death; (c) A Participant ceases to be a Participant within the Deferral Period because his or her employment with the Company ceases or such Participant retires under any Company Pension Plan within that period; (d) A Participant discontinues deferrals within the Deferral Period due to severe financial hardship. 4.03 Notwithstanding any other provision of the Plan (including but not limited to Sections 4.05 and 4.06), if an employee Participant resigns without the written approval of the -9- Committee or is discharged for willful, deliberate or gross misconduct as determined by the Committee or if a nonemployee director Participant terminates service on the Board of Directors prior to the completion of one (1) year of service, then in lieu of any other benefit under the Plan (including any single sum previously requested by the Participant under Section 4.05(b) or Section 4.06), the Participant shall be paid a single sum amount, as soon as practical following such resignation, discharge or termination (as the case may be) equal to the Participant's Termination Account Balance, and shall permanently forfeit the amount that represents the difference between the Participant's Supplemental Retirement Account Balance and Termination Account Balance. 4.04 Notwithstanding Section 4.03, if an employee Participant is terminated or terminates for good reason as set forth in the Employment Protection Plan for Salaried Employees or an individual agreement within three (3) years following a Change in Control or if an employee Participant retires pursuant to an early retirement opportunity or any other severance arrangement in which the Participant agrees to commence payment of the supplemental retirement benefits following the Participant's sixty-fifth (65th) birthday and a Change in Control precedes the commencement of such payments, the Participant may request the payment of his Supplemental Retirement Account Balance in a single sum. Notwithstanding the preceding sentence, if such Participant requests that the single sum be paid on a date that is less than twelve (12) months from the date of such request, the Participant shall receive a single sum payment equal to the Participant's Termination Account Balance, and shall permanently forfeit the amount that represents the difference between the Participant's Supplemental Retirement Account Balance and Termination Account Balance. 4.05 Notwithstanding any other provision of the Plan to the contrary, a Participant may elect, upon written request to the Committee, to accelerate the commencement date of the installment payments to be made to the Participant and/or to receive a specified portion (including one hundred percent (100%)) of his supplemental retirement benefits under the Plan in a single sum payment, in accordance with the rules set forth below: (a) A Participant may accelerate the commencement date upon which the installment payments of his supplemental retirement benefits are otherwise scheduled to commence, provided that the accelerated commencement date is otherwise permissible under Section 4.01 and is at least twelve (12) months from the date of such request. (b) A Participant may request at any time the single sum payment of a specified dollar amount or percentage (including one hundred percent (100%)) of his supplemental retirement benefits. The Participant's single sum payment shall equal the specified dollar amount or percentage of the Participant's Supplemental Retirement Account Balance as of the payment date. Notwithstanding the preceding sentence, if such Participant requests that the single sum be paid on a date that is less than twelve (12) months from the date of such request, the Participant shall receive a single sum payment equal to the specified dollar amount or percentage of the Participant's Termination Account Balance as of the payment date and shall permanently forfeit the proportionate -10- amount of his Supplemental Retirement Account Balance that would otherwise have been paid in a single sum if the Participant had requested that the single sum be paid on a date that is at least twelve (12) months from the date of the such request. If a Participant has commenced receiving installment payments of his supplemental retirement benefits, and the Participant is paid a single sum payment under this Section 4.05(b), each subsequent installment payment shall be reduced as necessary to reflect the single sum payment and the permanent forfeiture. A Participant shall be limited to two (2) single sum requests in any calendar year. (c) Notwithstanding any other provision in the Plan to the contrary, any Participant who is a Reporting Person shall not be entitled to receive a distribution of any amount owed to the Participant under the Stock Subaccount. (d) Notwithstanding any other provision in the Plan to the contrary, a Participant who has requested, but not received, a single sum payment of all or part of his supplemental retirement benefits under the Plan may elect, upon written request to the Committee, to change the payment date of such single sum or revoke the payment of such single sum provided the payment date in the absence of such request is not within twelve (12) months of the date of the request. If the Participant requests an amended payment date that is less than twelve (12) months from the date of the request, the Participant shall receive a single sum payment equal to the specified dollar amount or percentage of the Participant's Termination Account Balance as of the payment date. Any such single sum paid under this Section 4.05(d), the forfeiture of a portion of the Participant's Supplemental Retirement Account, and the Participant's remaining installment payments in the event the Participant has commenced receiving installment payments, shall be administered in accordance with the provisions of Section 4.05(b) above. 4.06 Further, notwithstanding any other provision of the Plan to the contrary, a Participant may request a single sum payment of an amount necessary to satisfy a severe financial hardship. The Committee shall determine, based upon uniform, established standards, whether the Participant has suffered a severe financial hardship. For these purposes, a severe financial hardship shall have the same meaning as under Section 3.02(e). Notwithstanding the foregoing, amounts deferred under the Stock Subaccount shall not be distributable due to such a severe financial hardship if the Participant is a Reporting Person. Upon such determination, the Participant will receive an amount necessary to satisfy such financial hardship but in no event more than the balance of the Participant's Supplemental Retirement Account Balance as of the date of payment. 4.07 For purposes of any single sum payment made under Section 4.05(b) or 4.06, the Participant's request for such single sum payment shall designate the deferral period or periods and the dollar amount or percentage of the Participant's interest in his Cash Subaccount, Fund Subaccount and/or Stock Subaccount (to the extent the Participant is not a Reporting Person at the time of the single sum payment) with respect to each such deferral period that shall be debited to derive the proceeds of the single sum payment. If the Participant designates more -11- than one deferral period, the actual proceeds of the single sum shall be derived from the deferral periods in the order designated by the Participant, with the deferrals and earnings in a deferral period being fully exhausted before accessing each other deferral period according to the order designated by the Participant. With respect to each such deferral period, the proceeds shall be derived first from the Participant's deferrals to the Subaccount or Subaccounts designated by the Participant on a last deferred, first distributed basis, and then from earnings thereon. 5. SURVIVOR BENEFIT 5.01 If a Participant dies prior to the full distribution of his supplemental retirement benefits and prior to the commencement of the installment payments of his supplemental benefits, the Participant's designated beneficiary or the Participant's estate (in the event no beneficiary is designated) shall be entitled to a survivor benefit equal to the greater of (a) the Participant's Supplemental Retirement Account Balance as of the Participant's date of death, or (b) an amount equal to three (3) times the deferrals (but not earnings) credited to the Participant's Cash Subaccount, Stock Subaccount and Fund Subaccount for each Deferral Period that have not been previously distributed to the Participant under Article 4. Such survivor benefit shall be paid to the Participant's designated Beneficiary or estate (as the case may be) in substantially equal monthly installments under the declining balances methodology for a period of one hundred twenty (120) months, beginning as soon as practical after the Participant's death. Notwithstanding the preceding sentence, the Committee may approve a single sum payment of the survivor benefit if such single sum is requested by the Beneficiary and necessitated by severe financial hardship (as defined in Section 3.02(e)). 5.02 If a Participant dies prior to the full distribution of his supplemental retirement benefits and after the commencement of the installment payments of his supplemental benefits, the remaining installments shall be paid, on their respective due dates, to the Participant's designated beneficiary or the Participant's estate (in the event no beneficiary is designated). Notwithstanding the preceding sentence, the Participant's designated beneficiary or the representative of the Participant's estate (as the case may be) may request a single sum distribution equal to the Participant's Supplemental Retirement Account Balance as of the payment date; provided, however, if the beneficiary or the representative of the estate (as the case may be) requests a payment date within twelve (12) months of the date of such request, the single sum payment shall equal the Participant's Termination Account Balance as of the payment date and the amount that represents the difference between the Participant's Supplemental Retirement Account Balance and Termination Account Balance shall be permanently forfeited. 6. AMOUNTS OF SUPPLEMENTAL RETIREMENT AND SURVIVOR BENEFITS The amount of the supplemental retirement and survivor benefits shall be prescribed in accordance with a general plan applicable to all Participants which has been established by the Committee and approved by the Management Development and Compensation Committee of the Board of Directors. -12- 7. FINANCING The Company may finance obligations under this Plan by the purchase of one (1) or more policies of life insurance upon the lives of Participants, with the Company as owner of and beneficiary under such policies. No Participant shall have any right or interest in any such policy or the proceeds thereof or in any other specific fund or asset of the Company as a result of the Plan. The rights of Participants to benefit payments hereunder shall be no greater than those of an unsecured creditor. Each Participant shall cooperate fully in the application for, and in the maintenance of, any such policy or policies of insurance upon the Participant's life. 8. AMENDMENT OR TERMINATION 8.01 The Board of Directors of the Company may, through written resolutions, terminate or amend this Plan at any time, including a retroactive amendment if necessary to bring this Plan into conformity with any law or governmental regulation relating to plans or trusts of this character; provided, however, that if the Plan is amended to discontinue or reduce the amount of supplemental retirement benefits payments (except as may be required pursuant to any plan arising from insolvency or bankruptcy proceedings) (a) any Participant who has commenced receiving installment payments of his supplemental retirement benefits prior to the effective date of the amendment shall continue to be paid his supplemental retirement benefits in the amount and manner (as provided under Articles 3 and 4 hereof) as they were being paid at the time of such amendment, and (b) any Participant who has not commenced receiving installments payment of his supplemental retirement benefits prior to the effective date of the amendment shall be entitled to receive (i) the supplemental retirement benefits accrued by such Participant as of the effective date of the amendment, with such supplemental retirement benefits being paid in the form and at the time elected by the Participant under Articles 3 and 4, and (ii) any legal fees and related expenses incurred by the Participant in receiving such supplemental retirement benefits (as permitted under Section 10.05) and interest under Section 10.06 (to the extent applicable). Notwithstanding the preceding sentence, any written employment agreement between the Executive Committee and any Participant described in clause (b) of the preceding sentence shall govern to the extent such agreement either amends or discontinues the Participant's supplemental retirement benefits under the Plan, and Section 4.03 shall govern to the extent any Participant is discharged for willful, deliberate or gross misconduct. 8.02 Notwithstanding the preceding provisions of Section 8.01, if the reason for termination or amendment is a change in the tax laws adversely affecting the financing of the supplemental retirement benefits or survivor benefits under the Plan, then the Board of Directors of the Company may terminate all (but not less than all) of the then existing Participation Agreements except any under which benefits are then being paid. (a) Each Participant with a terminated Agreement will be paid in lieu of any and all other benefits hereunder an amount equal to the Participant's Supplemental Retirement Account balance as of the date of termination. -13- (b) Such amount resulting from termination may be paid in a single sum within forty-five (45) days of the date of such termination or in such other manner and at such other time or times as the Committee may reasonably determine. 9. ADMINISTRATION 9.01 Responsibility for establishing the requirements for participation and for administration of the Plan shall be vested in the Committee, which shall have the full and exclusive discretionary authority to interpret the Plan or the Participation Agreements, to determine all benefits and to resolve all questions arising from the administration, interpretation, and application of their provisions, either by general rules or by particular decisions, including determinations as to whether a claimant is eligible for benefits, the amount, form and timing of benefits, and any other matter (including any question of fact) raised by a claimant or identified by the Committee. The Committee may delegate administrative tasks as necessary to persons who are not Committee members. All decisions of the Committee shall be conclusive and binding upon all affected persons. 9.02 The expenses of administering the Plan shall be borne by the Company. No member of the Committee shall receive any remuneration for service in such capacity. However, expenses of the Committee or its members paid or incurred in connection with administering the Plan shall be reimbursed by the Company. 9.03 The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of gross negligence or willful misconduct. 10. CLAIMS PROCEDURE 10.01 Claim. Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee which shall respond in writing as soon as practicable. 10.02 Denial of Claim. If the claim or request is denied, the written notice of denial shall state: (a) The reasons for denial, with specific reference to the Plan provisions on which the denial is based. (b) A description of any additional material or information required and an explanation of why it is necessary. (c) An explanation of the Plan's claim review procedure. -14- 10.03 Review of Claim. Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee. The claim or request shall be reviewed by the Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing. 10.04 Final Decision. The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reasons and the relevant Plan provisions. All decisions on review shall be final and bind all parties concerned. 10.05 Attorney's Fees and Expenses. In the event a Participant's claim for benefits under this Plan is denied and the Participant successfully appeals the denial of such claim under the foregoing procedures, the Company shall pay or reimburse the legal fees and expenses directly incurred by the Participant in connection with his appeal subject to a maximum payment or reimbursement of one-third of the supplemental retirement benefits to which the Participant is entitled. Any such legal fees and expenses shall be paid by the Company to, or on behalf of, the Participant no later than thirty (30) days following the Participant's written request for the payment of such legal fees and expenses, provided the Participant supplies the Committee with evidence of the fees and expenses incurred by the Participant that the Committee, in its sole discretion, determines is sufficient. 10.06 Interest on Delayed Payments. Further, in the event a Participant's claim for supplemental retirement benefits under this Plan is denied and the Participant successfully appeals the denial of such claim under the foregoing procedures, the Company shall pay to the Participant interest on the portion of the Participant's supplemental retirement benefits that were not otherwise paid when due because of the initial denial of the claim. For purposes of the preceding sentence, interest shall accrue at an annual rate equal to the prime rate as quoted in the Wall Street Journal as of the date the supplemental retirement benefits would otherwise have been paid if the claim had not initially been denied, plus five percent (5%), and shall be adjusted as necessary to reflect any partial payment or payments of the amounts owed to the Participant. 11. MISCELLANEOUS 11.01 No amount payable under the Plan or any Participation Agreement shall be subject to assignment, transfer, sale, pledge, encumbrance, alienation or charge by a Participant or the Beneficiary of a Participant except as may be required by law. 11.02 Neither the Plan nor any action taken hereunder shall be construed as giving any employee who is a Participant or who becomes a Participant any right to be retained in the employ of the Company. -15- 11.03 "Retirement" under the Company Pension Plan shall mean retirement under the Retirement Income Plan. However, in the event of any retirement arising by reason of a "Change in Control" and which, as set forth in the Retirement Income Plan, results in an enhancement of an employee Participant's retirement income then: (a) "Retirement" for purposes of this Plan shall mean the Participant's sixty-fifth (65th) birthday; or (b) A Participant may elect to treat retirement as "retirement" under the Plan subject to the penalties imposed in an early retirement opportunity under Section 4.04 of this Plan. 11.04 The Management Development and Compensation Committee of the Board of Directors may at any time direct the Company to establish a trust to secure part or all of the obligations of the Company with respect to payments and benefits to be paid to Participants under this Plan. Funding of the trust shall be at the direction of the Board of Directors and shall be irrevocable in nature. Notwithstanding the foregoing, the assets of such trust shall be subject to the claims of the general creditors of the Company in the event of bankruptcy or insolvency of the Company. 11.05 In the event that the Committee shall find that a Participant or other person entitled to benefits hereunder is unable to care for his or her affairs because of illness or accident, the Committee may direct that any benefit payment due him or her, unless claim shall have been made therefor by a duly appointed legal representative, be paid to the Participant's spouse, child, parent or other blood relative, or to a person with whom he or she resides, and any such payment so made shall be a complete discharge of the liabilities of the Company and the Plan therefor. -16- EX-10.(III)(J) 9 1999 LONG-TERM STOCK INCENTIVE PLAN EXHIBIT 10(iii)(j) 1999 LONG-TERM STOCK INCENTIVE PLAN Article I - GENERAL PROVISIONS 1.1 Purposes The purposes of the 1999 Long-Term Incentive Plan (the "Plan") are to advance the long-term success of Armstrong World Industries, Inc. (the "Company"), and to increase shareholder value by providing long-term incentive awards to officers, directors and key employees. The Plan is designed to: (i) encourage stock ownership by Participants to further align their interest in increasing the value of the Company; and (ii) to assist in the attraction and retention of key employees vital to the Company's success. 1.2 Definitions For the purpose of the Plan, the following terms shall have the meanings indicated: (a) "Board" means the Board of Directors of the Company. (b) "Cash Incentive Awards" means a right to receive a cash payment pursuant to any award made pursuant to Article VI hereof. (c) "Change in Control" means a situation where: (i) any person acquires beneficial ownership of 28 percent or more of the then outstanding voting stock of the Company and within five years thereafter disinterested directors no longer constitute at least a majority of the Board; or (ii) a business combination with an interested shareholder occurs which has not been approved by a majority of disinterested directors. The terms person, beneficial ownership, voting stock, disinterested director, business combination, and interested shareholder are defined in Article 7 of the Company's Articles of Incorporation. (d) "Code" means the Internal Revenue Code of 1986, as amended, including any successor law thereto. (e) "Committee" means the Management Development and Compensation Committee of the Board or the full Board, as the case may be. (f) "Common Stock" means the Common Stock of the Company, par value $1.00 per share. (g) "Company" means Armstrong World Industries, Inc., and solely for purposes of determining (i) eligibility for participation in the Plan; (ii) employment; and (iii) the establishment of performance goals, shall include any corporation, partnership, or other organization of which Armstrong owns or controls, directly or indirectly, not less than 50 percent of the total combined voting power of all classes of stock or other equity interests. For purposes of this Plan, the terms "Armstrong" and "Company" shall include any successor to Armstrong World Industries, Inc. (h) "Disability" means total and permanent disability within the meaning of Section 22(e)(3) of the Code. (i) "Dividend Equivalent" means an amount equal to the cash dividend paid on one share of Common Stock for each Performance Restricted Share granted during the Performance Period. All Dividend Equivalents will be reinvested in Performance Restricted Shares at a purchase price equal to the Fair Market Value on the dividend date. (j) "Employee or employment" means with respect to any nonemployee director (as defined herein) service on the Board. (k) "Fair Market Value" means the closing price of the Common Stock as reported on the New York Stock Exchange Composite Transactions reporting system on the applicable date or, if no sales were made on such date, on the next preceding date on which sales of the Common Stock were made. (l) "Incentive Stock Option" means a Stock Option which meets the definition under Section 422 of the Code. (m) "Nonstatutory Stock Option" means a Stock Option which does not meet the definition of an Incentive Stock Option. (n) "Participant" means any officer, director or key employee who has met the eligibility requirements set forth in Section 1.6 hereof and to whom a grant has been made and is outstanding under the Plan. (o) "Performance Measures" shall mean the Performance Measures described in Section 4.4 of the Plan. (p) "Performance Period" means, in relation to Performance Restricted Shares or Cash Incentive Awards, any period for which performance goals have been established. (q) "Performance Restricted Share" means a right granted to a Participant pursuant to Article IV. (r) "Restricted Stock Award" means an award of Common Stock granted to a Participant pursuant to Article V which is subject to a Restriction Period. (s) "Restriction Period" means (i) in relation to Performance Restricted Shares, the period of time, beginning at the end of the Performance Period, during which the Participant shall not be permitted to sell, assign, transfer, pledge, or otherwise dispose of such shares; and (ii) in relation to Restricted Stock Awards, the period of time during which such shares are subject to forfeiture pursuant to the Plan and such shares are subject to the restrictions on transferability described in (i) of this paragraph. (t) "Retirement" means termination from employment with the Company after the Participant has attained age 55 and has completed five years of service with the Company or termination of employment under circumstances which the Committee deems equivalent to retirement. (u) "Stock Appreciation Right" means a right granted to a Participant pursuant to Article III to surrender to the Company all or any portion of the related Stock Option and to receive in shares of Common Stock an amount equal to the excess of the Fair Market Value over the option price on the date of such exercise. (v) "Stock Award" means an award of Common Stock granted to a Participant pursuant to Article V which is not subject to a Restriction Period or a Vesting Period. (w) "Stock Option" means a right granted to a Participant pursuant to Article II, to purchase, before a specified date and at a specified price, a specified number of shares of Common Stock. (x) "Vesting Period" means the period of time, beginning at the end of the Performance Period, during which Performance Restricted Shares are subject to forfeiture pursuant to the Plan. 1.3 Administration The Plan shall be administered by the Committee; provided, however, that the Board shall administer the Plan as it relates to the terms, conditions and grant of awards to nonemployee directors. A majority of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee, shall be deemed the acts of the Committee. Subject to the provisions of the Plan and to directions by the Board, the Committee is authorized to interpret the Plan, to adopt administrative rules, regulations, and guidelines for the Plan, and to impose such terms, conditions, and restrictions on grants as it deems appropriate. The Committee, in its discretion, may allow certain optionees holding unexercised Incentive Stock Options to convert such options to Nonstatutory Stock Options. The Committee may, with respect to Participants who are not subject to Section 16 (b) of the Exchange Act or "covered employees" within the meaning of Section 162(m) of the Code ("Section 162(m)"), delegate such of its powers and authority under the Plan as it deems appropriate to designated officers or employees of the Company. All determinations by the Committee shall be final and binding. 1.4 Types of Grants Under the Plan Grants under the Plan may be in the form of any one or more of the following: (a) Nonstatutory Stock Options; (b) Incentive Stock Options; (c) Stock Appreciation Rights; (d) Performance Restricted Shares; (e) Restricted Stock Awards; (f) Stock Awards; (g) Cash Incentive Awards. 1.5 Shares Subject to the Plan and Individual Award Limitation (a) A maximum of 3,250,000 shares of Common Stock may be issued under the Plan provided, however, that no more than 300,000 shares may be granted in the form of Performance Restricted Shares, Restricted Stock Awards and Stock Awards. The total number of shares authorized is subject to adjustment as provided in Section 8.1 hereof. Shares of Common Stock issued under the Plan may be treasury shares or authorized but unissued shares. No fractional shares shall be issued under the Plan. (b) If any Stock Option granted under the Plan expires or terminates, the underlying shares of Common Stock may again be made available for the purposes of the Plan. Any shares of Common Stock that have been granted as Restricted Stock Awards, or that have been reserved for distribution in payment for Performance Restricted Shares but are later forfeited or for any other reason are not payable under the Plan, may again be made available for the purposes of the Plan. Furthermore, shares of Common Stock that are tendered in payment of the exercise price of any Stock Option or tendered or withheld in satisfaction of tax withholding obligations arising from any award shall be available for issuance under the Plan. (c) In addition to the shares of Common Stock authorized under Sections 1.5(a) and 1.5(b), shares of Common Stock that are (i) forfeited under the Company's 1993 Long- Term Stock Incentive Plan (the "Prior Plan") or for any other reason not paid under the Prior Plan; or (ii) tendered in payment of the exercise price of a stock option granted under the Prior Plan or tendered or withheld in satisfaction of tax withholding obligations arising from awards under the Prior Plan, shall be available for issuance under the Plan. (d) The aggregate maximum number of shares of Common Stock that may be granted to any Participant in the form of Stock Options, Stock Appreciation Rights, Performance Restricted Shares, Restricted Stock Awards and Stock Awards in any one calendar year is 400,000. 1.6 Eligibility and Participation Participation in the Plan shall be limited to officers, who may also be members of the Board, other key employees of the Company and directors who are not employees of the Company ("nonemployee directors"). ARTICLE II - STOCK OPTIONS 2.1 Grant of Stock Options The Committee may from time to time, subject to the provisions of the Plan, grant Stock Options to such Participants. The Committee shall determine the number of shares of Common Stock to be covered by each Stock Option and shall have the authority to grant Incentive Stock Options, Nonstatutory Stock Options or a combination thereof. Furthermore, the Committee may grant a Stock Appreciation Right in connection with a Stock Option, as provided in Article III. 2.2 Incentive Stock Option Exercise Limitations The aggregate Fair Market Value (determined at the time an Incentive Stock Option is granted) of the shares of Common Stock with respect to which an Incentive Stock Option is exercisable for the first time by a Participant during any calendar year (under all plans of the Company) shall not exceed $100,000 or such other limit as may be established from time to time under the Code. 2.3 Option Documentation Each Stock Option shall be evidenced by a written Stock Option agreement between the Company and the Participant to whom such option is granted, specifying the number of shares of Common Stock that may be acquired by its exercise and containing such terms and conditions consistent with the Plan as the Committee shall determine. 2.4 Exercise Price The price at which each share covered by a Stock Option may be acquired shall be determined by the Committee at the time the option is granted and shall not be less than the Fair Market Value of the underlying shares of Common Stock on the day the Stock Option is granted. The exercise price will be subject to adjustment in accordance with the provisions of Section 8.1 of the Plan. 2.5 Exercise of Stock Options (a) Exercisability. Stock Options shall become exercisable at such times and upon the satisfaction of such conditions and in such installments as the Committee may provide at the time of grant. (b) Option Period. For each Stock Option granted, the Committee shall specify the period during which the Stock Option may be exercised, provided that no Stock Option shall be exercisable after the expiration of ten years from the date the option was granted. (c) Exercise in the Event of Termination of Employment. (i) Death: Unless otherwise provided by the Committee at the time of grant, in the event of death of the Participant, the option must be exercised by the Participant's estate or beneficiaries prior to its expiration. Each option may be exercised as to all or any portion thereof regardless of whether or not fully exercisable under the terms of the grant. (ii) Disability: Unless otherwise provided by the Committee at the time of grant, in the event of the Disability of the Participant, the option must be exercised prior to its expiration. An unexercised Incentive Stock Option will cease to be treated as such and will become a Nonstatutory Stock Option twelve months following the date of termination due to Disability. Each option may be exercised as to all or any portion thereof regardless of whether or not fully exercisable under the terms of the grant. (iii) Retirement: Unless otherwise provided by the Committee at the time of grant, in the event of the Retirement of the Participant, the option must be exercised prior to its expiration. An unexercised Incentive Stock Option will cease to be treated as such and will become a Nonstatutory Stock Option three months following the date of Retirement. (iv) Other Terminations: Unless otherwise provided by the Committee at the time of grant, in the event a Participant ceases to be an employee of the Company for any reason other than death, Disability, or Retirement, options which are exercisable on the date of termination must be exercised within three months after termination. All options which are not exercisable on the date of termination shall be canceled. (v) Extension of Exercise Period: Notwithstanding all other provisions under Section 2.5(c) in the event a Participant's employment is terminated, the Committee may, in its sole discretion, extend the post termination period during which the option may be exercised, provided however that such period may not extend beyond the original option period. (d) Exercise in the Event of Change in Control. In the event of any Change in Control, all Stock Options shall immediately become exercisable without regard to the exercise period set forth in 2.5(a). 2.6 Method of Exercise The option may be exercised, in whole or in part, from time to time by written request received by the Treasurer of the Company. The option price of each share acquired pursuant to an option shall be paid in full at the time of each exercise of the option either (i) in cash; (ii) by delivering to the Company a notice of exercise with an irrevocable direction to a broker-dealer registered under the Securities Exchange Act of 1934 to sell a sufficient portion of the shares of Common Stock underlying such option having an aggregate Fair Market Value equal to the option price of the shares being acquired; or (iii) by delivering to the Company shares of Common Stock or any combination of shares and cash having an aggregate Fair Market Value equal to the option price of the shares being acquired. However, shares of Common Stock previously acquired by the Participant under the Plan or any other incentive plan of the Company shall not be utilized for purposes of payment upon the exercise of an option unless those shares have been owned by the Participant for a six-month period or such longer period as the Committee may determine. ARTICLE III - STOCK APPRECIATION RIGHTS 3.1 Grant of Stock Appreciation Rights The Committee may, in its discretion, grant Stock Appreciation Rights in connection with all or any part of an option granted under the Plan. Any Stock Appreciation Right granted in connection with an option shall be governed by the terms of the Stock Option agreement and the Plan. 3.2 Exercise of Stock Appreciation Rights Stock Appreciation Rights shall become exercisable under the Stock Option terms set forth in Section 2.5 but shall be exercisable only when the Fair Market Value of the shares subject thereto exceeds the option price of the related option. 3.3 Method of Exercise (a) Stock Appreciation Rights shall permit the Participant, upon exercise of such rights, to surrender the related option, or any portion thereof, and to receive, without payment to the Company (except for applicable withholding taxes), an amount equal to the excess of the Fair Market Value over the option price. Such amount shall be paid in shares of Common Stock valued at Fair Market Value on the date of exercise. (b) Upon the exercise of a Stock Appreciation Right and surrender of the related option, or any portion thereof, such option, to the extent surrendered, shall be terminated, and the shares covered by the option so surrendered shall no longer be available for purposes of the Plan. ARTICLE IV - PERFORMANCE RESTRICTED SHARES 4.1 Grant of Performance Restricted Shares The Committee may from time to time grant Performance Restricted Shares to Participants under which payment may be made in shares of Common Stock if the performance of the Company meets certain goals established by the Committee. Such Performance Restricted Shares shall be subject to the provisions of the Plan terms and conditions, and, if earned, a Vesting Period and a Restriction Period as the Committee shall determine. 4.2 Performance Restricted Share Agreement Each grant of Performance Restricted Shares shall be evidenced by a written agreement between the Company and Participant to whom such shares are granted. The agreement shall specify the number of Performance Restricted Shares granted, the terms and conditions of the grant, the duration of the Performance Period, the performance goals to be achieved, and the Vesting Period and the Restriction Period applicable to shares of Common Stock earned. 4.3 Common Stock Equivalent Each Performance Restricted Share shall be credited to an account to be maintained for each such Participant during the Performance Period and shall be deemed to be the equivalent of one share of Common Stock. At the conclusion of the Performance Period, Performance Restricted Shares earned, if any, shall be converted to shares of Common Stock subject to a Vesting Period and a Restriction Period. 4.4 Performance Measures Performance Restricted Share awards shall be conditioned upon the Company's attainment of a specified goal with respect to one or more of the following performance measures: (i) total shareholder return; (ii) EVA as defined below; (iii) return on shareholders' equity; (iv) return on capital; (v) earnings per share; (vi) sales; (vii) earnings; (viii) cash flow; and (ix) operating income. EVA equals the dollar amount arrived at by taking net operating profit after taxes and subtracting a charge for the use of the capital needed to generate that profit. The Committee shall determine a minimum performance level below which no Performance Restricted Shares shall be payable and a performance schedule under which the number of shares earned may be less than, equal to, or greater than the number of Performance Restricted Shares granted based upon the Company's performance. The Committee may adjust the performance goals and measurements to reflect significant unforeseen events; provided, however, that the Committee may not make any such adjustment with respect to any award of Performance Restricted Shares to an individual who is then a "covered employee" as such term is defined in Regulation 1.162-27(c)(2) promulgated under Section 162(m), if such adjustment would cause compensation pursuant to such Performance Restricted Share award to cease to be performance-based compensation under Section 162(m). 4.5 Performance Period The Committee shall establish a Performance Period applicable to each grant of Performance Restricted Shares. Each such Performance Period shall commence on January 1 of the calendar year in which grants are made. There shall be no limitation on the number of Performance Periods established by the Committee, and more than one Performance Period may encompass the same calendar year. The Committee may shorten any Performance Period if it determines that unusual or unforeseen events so warrant. 4.6 Dividend Equivalents During Performance Period Unless otherwise provided by the Committee, a Participant shall be entitled to receive Dividend Equivalents during the Performance Period which shall be deemed to have been reinvested in additional Performance Restricted Shares at the same time as such underlying Common Stock cash dividend is paid. Performance Restricted Shares granted through such reinvestment shall be credited to the Participant's account and shall be payable to the Participant in the same manner and at the same time as the Performance Restricted Shares with respect to which such Dividend Equivalents were issued. 4.7 Right to Payment of Performance Restricted Shares (a) At the conclusion of the Performance Period, the Committee shall determine the number of Performance Restricted Shares, if any, which have been earned on the basis of Company performance in relation to the established performance goals. In no event shall such number exceed 300% of the shares contingently granted. (b) Performance Restricted Shares earned shall be converted to shares of Common Stock and shall be represented by book entry or by a stock certificate registered in the name of the Participant. Certificates evidencing such shares shall be held in custody by the Company until the restrictions thereon are no longer in effect. After the lapse or waiver of the restrictions imposed, the Company shall deliver in the Participant's name one or more stock certificates, free of restrictions, evidencing the shares of Common Stock to which the restrictions have lapsed or been waived. 4.8 Vesting Period At the time a Performance Restricted Share grant is made, the Committee shall establish a period of time (the "Vesting Period") applicable to such shares earned, if any, which shall begin at the end of the Performance Period. During the Vesting Period, Performance Restricted Shares shall be subject to the risk of forfeiture. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service and such other factors as the Committee may determine. 4.9 Restriction Period At the time a Performance Restricted Share grant is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such shares earned, if any, which shall begin at the end of the Performance Period. During the Restriction Period, the Participant shall not be permitted to sell, assign, transfer, pledge or otherwise dispose of Performance Restricted Shares that have been earned. The Committee may provide for the lapse of such restrictions in installments, in whole or in part, based on service and such other factors as the Committee may determine. 4.10 Other Terms and Conditions Performance Restricted Shares earned and restricted shares received with respect to such shares shall be subject to the following terms and conditions: (a) Except as otherwise provided in the Plan or in the Performance Restricted Share agreement, the Participant shall have all the rights of a shareholder of the Company, including the right to vote the shares. (b) Cash dividends paid with respect to Performance Restricted Shares shall be reinvested to purchase additional shares of Common Stock that shall be subject to the same terms, conditions, and restrictions that apply to the Performance Restricted Shares with respect to which such dividends were issued. (c) Except as otherwise provided in the Plan or in the Performance Restricted Share agreement, upon termination of a Participant's employment, all unvested shares subject to restriction shall be forfeited by the Participant. 4.11 Termination of Employment Provisions During a Performance Period (a) In the event a Participant terminates employment during a Performance Period by reason of death, Disability, or Retirement, the Participant shall be entitled to the full number of shares earned, if any, as long as the Participant had completed a minimum of one year of employment during the Performance Period. If the termination of employment is by reason of death or Disability, all other restrictions shall lapse and shares of Common Stock shall be issued to the Participant or the Participant's designated beneficiary following the Performance Period. If the termination of employment is by reason of Retirement, any applicable Restriction Period shall continue in effect, but in no event beyond the end of the three-year period following the Participant's Retirement. Following the expiration of such Restriction Period, shares of Common Stock shall be issued to the Participant. In the event the Participant had not completed one year of employment during the Performance Period, the Participant shall forfeit all rights to earn such Performance Restricted Shares. (b) If a Participant terminates employment for any reason other than death, Disability, or Retirement, the Participant shall forfeit all rights to earn such Performance Restricted Shares. (c) Notwithstanding Sections 4.11(a) and 4.11(b), in the event a Participant's employment is terminated under special circumstances, the Committee may, in its sole discretion, continue a Participant's rights to earn any or all Performance Restricted Shares and waive, in whole or in part, any or all remaining restrictions. 4.12 Termination of Employment Provisions Following a Performance Period (a) In the event a Participant terminates employment following a Performance Period by reason of death, Disability, or Retirement, all Performance Restricted Shares earned shall immediately vest. If the termination of employment is by reason of death or Disability, all other restrictions shall lapse and shares of Common Stock shall be issued to the Participant or the Participant's designated beneficiary. If the termination of employment is by reason of Retirement, any applicable Restriction Period shall continue in effect, but in no event beyond the end of the three-year period following the Participant's Retirement. Following the expiration of such Restriction Period, shares of Common Stock shall be issued to the Participant. (b) If a Participant terminates employment for any reason other than death, Disability, or Retirement, the Participant shall forfeit all Performance Restricted Shares subject to the Vesting Period. Any applicable Restriction Period shall continue in effect, but in no event beyond the end of the three- year period following the Participant's date of termination of employment. Following the expiration of such Restriction Period, shares of Common Stock shall be issued to the Participant. (c) Notwithstanding Sections 4.12 (a) and 4.12 (b), in the event a Participant's employment is terminated under special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all remaining restrictions. 4.13 Change in Control Provisions In the event of any Change in Control, all Performance Restricted Shares earned shall immediately vest and restrictions shall lapse on all shares subject to restrictions as of the date of such Change in Control. Further, all Performance Restricted Shares granted, including those granted pursuant to Dividend Equivalents, shall be deemed to have been earned to the maximum extent permitted pursuant to Section 4.4 for any Performance Period not yet completed as of the effective date of such Change in Control. ARTICLE V - RESTRICTED STOCK AWARDS AND STOCK AWARDS 5.1 Award of Restricted Stock and Stock Awards The Committee may grant Restricted Stock Awards to officers and key employees of the Company subject to such terms and conditions as the Committee shall determine, provided that each Restricted Stock Award shall be subject to a Restriction Period. The Committee may also grant Stock Awards. Restricted Stock Awards and Stock Awards shall be used for the purposes of recruitment, recognition, and retention of key employees vital to the Company's success and may be issued independent of or in lieu of other compensation payable to a Participant. The Committee may, in its sole discretion, require a Participant to deliver consideration in form of services or cash as a condition to the grant of a Restricted Stock Award or Stock Award. 5.2 Restricted Stock Award and Stock Award Agreements Each Restricted Stock Award shall be evidenced by a written agreement between the Company and the Participant to whom such award is granted and a Stock Award will be evidenced by a written agreement in the event that the Committee determines that an agreement is appropriate. The agreement shall specify the number of shares awarded, the terms and conditions of the award and, in the case of a Restricted Stock Award, the Restriction Period and the consequences of forfeiture. 5.3 Awards and Certificates Shares of Common Stock awarded pursuant to a Restricted Stock Award or a Stock Award shall be registered in the name of the Participant. Certificates evidencing Restricted Stock Awards shall be held in custody by the Company until the restrictions thereon are no longer in effect. After the lapse or waiver of the restrictions imposed upon the Restricted Stock Award, the Company shall deliver in the Participant's name one or more stock certificates, free of restrictions, evidencing the shares of Common Stock subject to the Restricted Stock Award to which the restrictions have lapsed or been waived. 5.4 Restriction Period At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such award during which the shares of restricted stock are subject to the risk of forfeiture and the Participant shall not be permitted to sell, assign, transfer, pledge, or otherwise dispose of such shares. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service and such other factors as the Committee may determine. 5.5 Other Terms and Conditions of Restricted Stock Awards Shares of Common Stock subject to Restricted Stock Awards shall be subject to the following terms and conditions: (a) Except as otherwise provided in the Plan or in the Restricted Stock Award agreement, the Participant shall have all the rights of a shareholder of the Company, including the right to vote the shares. (b) Cash dividends paid with respect to Common Stock subject to a Restricted Stock Award shall be reinvested to purchase additional shares of Common Stock that shall be subject to the same terms, conditions, and restrictions that apply to the Restricted Stock Award with respect to which such dividends were issued. (c) Except as otherwise provided in the Plan or in the Restricted Stock Award agreement, upon termination of a Participant's employment, all shares subject to restriction shall be forfeited by the Participant. 5.6 Termination of Employment (a) In the event a Participant terminates employment during the Restriction Period by reason of death or Disability, restrictions shall lapse on all shares subject to restriction at the time of such termination. (b) In the event a Participant terminates employment during the Restriction Period by reason of Retirement, restrictions shall lapse on a proportion of any shares subject to restriction at the time of such Retirement. Any applicable Restriction Period shall continue in effect, but in no event beyond the end of the three-year period following the Participant's Retirement. The number of shares upon which the restrictions shall lapse shall be prorated for the number of months of employment during the Restriction Period prior to the Participant's termination of employment. (c) If a Participant terminates employment for any reason other than death, Disability, or Retirement, the Participant shall forfeit all shares subject to restriction. (d) Notwithstanding Sections 5.6 (a), 5.6 (b) and 5.6 (c), in the event a Participant's employment is terminated under special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all remaining restrictions. 5.7 Change in Control Provisions In the event of any Change in Control, all restrictions applicable to any outstanding Restricted Stock Award shall lapse as of the date of such Change in Control. ARTICLE VI - CASH INCENTIVE AWARDS 6.1 Granting of Awards The Committee, in its discretion, may grant Cash Incentive Awards to Participants. Each Cash Incentive Award shall be conditioned upon the Company's attainment of a specified goal with respect to one or more Performance Measures during the applicable Performance Period. The Committee shall determine a minimum performance level below which the Cash Incentive Award shall not be payable. The Committee may adjust the performance goals and measurements to reflect significant unforeseen events; provided, however, that the Committee may not make any such adjustment with respect to any Cash Incentive Award to an individual who is then a "covered employee" as such term is defined under Section 162(m), if such adjustment would cause compensation pursuant to such Cash Incentive Award to cease to be performance-based compensation under Section 162(m). 6.2 Other Award Terms The Committee may, in its sole discretion, establish certain additional performance-based conditions that must be satisfied by the Company, a business unit or the Participant as a condition precedent to the payment of all or a portion of any Cash Incentive Awards. Such conditions precedent may include, among other things, the receipt by a Participant of a specified annual performance rating and the achievement of specified performance goals by the Company, business unit or Participant. 6.3 Maximum Amount Available for Awards The maximum amount payable to any one Participant pursuant to a Cash Incentive Award with respect to any one year shall be $3,000,000. ARTICLE VII - TAX WITHHOLDING AND DEFERRAL OF PAYMENT 7.1 Tax Withholding (a) The Company may withhold from any payment of cash or Common Stock to a Participant or other person pursuant to the Plan an amount sufficient to satisfy any required withholding taxes, including the Participant's Social Security and Medicare taxes ("FICA") and federal, state and local income tax with respect to income arising from the payment of the award. The Company shall have the right to require the payment of any such taxes before delivering payment or issuing Common Stock pursuant to the award. (b) At the discretion of the Committee, share tax withholding may be included as a term of any grant of Stock Options, Stock Appreciation Rights, Performance Restricted Shares, Restricted Stock Award and Stock Award. (c) Share tax withholding shall entitle the Participant to elect to satisfy, in whole or in part, any tax withholding obligations in connection with the issuance of shares of Common Stock earned under the Plan by requesting that the Company either: (i) withhold shares of Common Stock otherwise issuable to the Participant; or (ii) accept delivery of shares of Common Stock previously owned by the Participant. In either case, the Fair Market Value of such shares of Common Stock will generally be determined on the date of exercise for Stock Options and Stock Appreciation Rights, the date following the Restriction Period for Performance Restricted Shares and Restricted Stock Awards and on the grant date for Stock Awards. (d) Notwithstanding any other provision hereof to the contrary, the Committee, in its sole discretion may at any time suspend, terminate, or disallow any or all entitlements to share tax withholding previously granted or extended to any Participant. 7.2 Deferral of Payment At the discretion of the Committee, a Participant may be offered the right to defer the receipt of all or any portion of the Common Stock distributable to such Participant with respect to Performance Restricted Shares, Restricted Stock Awards or Stock Awards. Such right shall be exercised by execution of a written agreement by the Participant: (i) with respect to Restricted Stock Awards, prior to the expiration of the applicable Restriction Period; (ii) with respect to Performance Restricted Shares, prior to the expiration of the applicable Vesting Period; and (iii) with respect to Stock Awards, prior to the deadline established by the Committee for such award. Upon any such deferral, the number of shares of Common Stock subject to the deferral shall be converted to stock units and a stock unit account shall be maintained by the Company on behalf of the Participant. Such stock units shall represent only a contractual right and shall not represent any interest in or title to Common Stock. Such units shall be entitled to earn dividend equivalents. All other terms and conditions of deferred payments shall be as contained in said written agreement. ARTICLE VIII - OTHER PROVISIONS 8.1 Adjustment in Number of Shares and Option Prices Grants of Stock Options, Stock Appreciation Rights, Performance Restricted Shares, Restricted Stock Awards and Stock Awards shall be subject to adjustment by the Committee as to the number and price of shares of Common Stock or other considerations subject to such grants in the event of changes in the outstanding shares by reason of stock dividends, stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the date of grant. In the event of any such change in the outstanding shares, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee. 8.2 No Right to Employment Nothing contained in the Plan, nor in any grant pursuant to the Plan, shall confer upon any Participant any right with respect to continuance of employment by the Company or its subsidiaries, nor interfere in any way with the right of the Company or its subsidiaries to terminate the employment or change the compensation of any employee at any time. 8.3 Nontransferability A Participant's rights under the Plan, including the right to any shares or amounts payable may not be assigned, pledged, or otherwise transferred except, in the event of a Participant's death, to the Participant's designated beneficiary or, in the absence of such a designation, by will or by the laws of descent and distribution; provided, however, that the Committee may, in its discretion, at the time of grant of a Nonstatutory Stock Option or by amendment of an option agreement for an Incentive Stock Option or a Nonstatutory Stock Option, provide that Stock Options granted to or held by a Participant may be transferred, in whole or in part, to one or more transferees and exercised by any such transferee, provided further that (i) any such transfer must be without consideration; (ii) each transferee must be a member of such Participant's "immediate family" or a trust, family limited partnership or other estate planning vehicle established for the exclusive benefit of one or more members of the Participant's immediate family; and (iii) such transfer is specifically approved by the Committee following the receipt of a written request for approval of the transfer; and provided further that any Incentive Stock Option which is amended to permit transfers during the lifetime of the Participant shall, upon the effectiveness of such amendment, be treated thereafter as a Nonstatutory Stock Option. In the event a Stock Option is transferred as contemplated in this Section, such transfer shall become effective when approved by the Committee and such Stock Option may not be subsequently transferred by the transferee other than by will or the laws of descent and distribution. Any transferred Stock Option shall continue to be governed by and subject to the terms and conditions of this Plan and the relevant option agreement, and the transferee shall be entitled to the same rights as the Participant as if no transfer had taken place. As used in this Section, "immediate family" shall mean, with respect to any Participant, any spouse, child, stepchild or grandchild, and shall include relationships arising from legal adoption. 8.4 Compliance with Government Regulations (a) The Company shall not be required to issue or deliver shares or make payment upon any right granted under the Plan prior to complying with the requirements of any governmental authority in connection with the authorization, issuance, or sale of such shares. (b) The Plan shall be construed and its provisions enforced and administered in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts entered into and performed entirely in such State. 8.5 Rights as a Shareholder The recipient of any grant under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to such recipient or such shares are represented by book entry in the name of such recipient. 8.6 Unfunded Plan Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or separate funds. With respect to any payment not yet made to a Participant, nothing contained herein shall give any Participant any rights that are greater than those of a general creditor of the Company. 8.7 Foreign Jurisdiction The Committee shall have the authority to adopt, amend, or terminate such arrangements, not inconsistent with the intent of the Plan, as it may deem necessary or desirable to make available tax or other benefits of the laws of foreign countries in order to promote achievement of the purposes of the Plan. 8.8 Other Compensation Plans Nothing contained in this Plan shall prevent the Company from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required. 8.9 Termination of Employment - Certain Forfeitures Notwithstanding any other provision of the Plan (other than provisions regarding Change in Control, including without limitation Sections 2.5(d), 4.13 and 5.7 which shall apply in all events) and except for Performance Restricted Shares, Restricted Stock Awards or Stock Awards which would otherwise be free of restrictions and the receipt of which has been deferred pursuant to Section 7.2, a Participant shall have no right to exercise any Stock Option or Stock Appreciation Right or receive payment of any Performance Restricted Share or Restricted Stock Award if: (i) the Participant is discharged for willful, deliberate, or gross misconduct as determined by the Committee in its sole discretion; or (ii) if following the Participant's termination of employment with the Company and, within a period of three years thereafter, the Participant engages in any business or enters into any employment which the Committee in its sole discretion determines to be either directly or indirectly competitive with the business of the Company or substantially injurious to the Company's financial interest (the occurrence of an event described above in (i) or (ii) of this Section 8.9 shall be referred to herein as "Injurious Conduct"). Furthermore, notwithstanding any other provision of the Plan to the contrary, in the event that a Participant receives or is entitled to cash or the delivery or vesting of Common Stock pursuant to an award during the 12 month period prior to the Participant's termination of employment with the Company or during the 24 months following the Participant's termination of employment, then the Committee, in its sole discretion, may require the Participant to return or forfeit the cash and/or Common Stock received with respect to such award (or its economic value as of (i) the date of the exercise of Stock Options or Stock Appreciation Rights; (ii) the date immediately following the end of the Restricted Period for Performance Restricted Shares or for Restricted Stock Awards; and (iii) the date of grant or payment with respect to Stock Awards or Cash Incentive Awards, as the case may be) in the event that the Participant engages in Injurious Conduct. A Participant may request the Committee in writing to determine whether any proposed business or employment activity would constitute Injurious Conduct. Such a request shall fully describe the proposed activity and the Committee's determination shall be limited to the specific activity so described. The Committee's right to require forfeiture under this Section 8.9 must be exercised within 90 days after the discovery of an occurrence triggering the Committee's right to require forfeiture but in no event later than 24 months after the Participant's termination of employment with the Company. ARTICLE IX - AMENDMENT AND TERMINATION 9.1 Amendment and Termination The Board of Directors may modify, amend, or terminate the Plan at any time except that, to the extent then required by applicable law, rule, or regulation, approval of the holders of a majority of shares of Common Stock represented in person or by proxy at a meeting of the shareholders will be required to increase the maximum number of shares of Common Stock available for distribution under the Plan (other than increases due to adjustments in accordance with the Plan). No modification, amendment, or termination of the Plan shall adversely affect the rights of a Participant under a grant previously made to him without the consent of such Participant. ARTICLE X - EFFECTIVE DATE, DURATION OF PLAN AND TERMINATION OF PRIOR PLAN 10.1 Effective Date and Duration of Plan The Plan shall become effective immediately upon the approval and adoption thereof at the Annual Meeting of the shareholders on April 26, 1999. All rights granted under the Plan must be granted within ten years from its adoption date by the shareholders of the Company. Any rights outstanding ten years after the adoption of the Plan may be exercised within the periods prescribed under or pursuant to the Plan. 10.2 Termination of Grants Under the Prior Plan Upon the effective date of this Plan, no further grants or awards are permitted under the Prior Plan. All grants and awards under the Prior Plan that remain outstanding shall be administered and paid in accordance with the provisions of the Prior Plan. EX-10.(III)(K) 10 AGREEMENT EXHIBIT (10)(iii)(k) AGREEMENT --------- THIS AGREEMENT, dated as of October 1, 1999, is made by and between Armstrong World Industries, Inc., a Pennsylvania corporation (the "Company"), and ((FirstName)) ((LastName)) (the "Executive"). WHEREAS, the Board considers it essential to the best interests of the Company to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this ------------- Agreement are provided in the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date ----------------- hereof and shall continue in effect through September 30, 2002; provided, -------- however, that commencing on October 1, 2000 and each October 1 thereafter, the - ------- term of this Agreement shall automatically be extended for one additional year unless, not later than June 30 of that year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such October 1; and further provided, however, that if a ------- -------- ------- Change in Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of not less than thirty-six (36) months beyond the month in which such Change in Control occurred. 3. Company's Covenants Summarized. In order to induce the Executive ------------------------------ to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 10.1 hereof, no amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the term of this Agreement. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to ------------------------- the terms and conditions of this Agreement, in the event of a Potential Change in Control during the term of this Agreement, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months after the date of such Potential Change in Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death or Disability, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. ------------------------------------------ 5.1. Following a Change in Control and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2. If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Change in Control or at the time the Notice of Termination is given, whichever is greater, together with all compensation and benefits to which the Executive is entitled in respect of all periods preceding the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements. 5.3. If the Executive's employment shall be terminated for any reason following a Change in Control and during the term of this Agreement, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and -2- arrangements as in effect immediately prior to the Change in Control or, if more favorable to the Executive, as in effect immediately prior to the Date of Termination. 6. Severance Payments. ------------------ 6.1. The Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the term of this Agreement, in addition to any payments and benefits to which the Executive is entitled under Section 5 and 8 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death or Disability, or (iii) by the Executive without Good Reason. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated by the Company without Cause or by the Executive with Good Reason following a Change in Control if (i) the Executive's employment is terminated without Cause prior to a Change in Control which actually occurs during the term of this Agreement and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment with Good Reason prior to a Change in Control which actually occurs during the term of this Agreement and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control which actually occurs during the term of this Agreement; provided that any termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason within the six (6) month period immediately preceding a Change in Control which actually occurs during the term of this Agreement shall be presumed to be a termination by the Company without Cause or by the Executive for Good Reason following a Change in Control, or (iv) the Executive's employment is terminated without Cause after a Potential Change in Control of the type described in paragraph (I) of the definition of "Potential Change in Control". (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or the Executive's annual base salary in effect immediately prior to the Change in Control (the "Change in Control Salary"), and (ii) the higher of the highest annual bonus earned by the Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the -3- three (3) years immediately preceding that year in which the Date of Termination occurs or the highest annual bonus so earned in respect of the three (3) years immediately preceding that in which the Change in Control occurs (the "Change in Control Bonus"). (B) Notwithstanding any provision of any annual incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to a pro rata portion to the Date of Termination of the value of the target incentive award under such plan for the then uncompleted period under such plan, calculated by multiplying the Executive's target award by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. (C) The Company shall (i) establish an irrevocable grantor trust holding an amount of assets sufficient to pay all such remaining premiums owed by the Company (which trust shall be required to pay such premiums), under any insurance policy insuring the life of the Executive under any "split dollar" insurance arrangement in effect between the Executive and the Company, and (ii) assign its interest in such policy or policies to the grantor trust. (D) In addition to the retirement benefits to which the Executive is entitled under each Pension Plan or any successor plan thereto, the Company shall pay the Executive a lump sum amount, in cash, equal to the excess of (i) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity is greatest) which the Executive would have accrued under the terms of all Pension Plans (without regard to any amendment to any Pension Plan made subsequent to the earlier of a Potential Change in Control or a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive were fully vested thereunder and had accumulated (after the Date of Termination) thirty-six (36) additional months of age and service credit thereunder and had been credited under each Pension Plan during such period with compensation at the higher of (1) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Date of Termination or (2) the Executive's compensation (as defined in such Pension Plan) during the twelve (12) months immediately preceding the Change in Control, over (ii) the actuarial equivalent of the aggregate retirement pension (taking into account any early retirement subsidies associated therewith and determined as a straight life annuity commencing at the date (but in no event earlier than the Date of Termination) as -4- of which the actuarial equivalent of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination; provided, that the actuarial equivalent of such payment shall reduce the amount of the benefit enhancement to which the Executive may be entitled under the Company's Retirement Benefit Equity Plan due to enhanced Change in Control benefits under Article I, Section (35), Article VI, Section (2), Article VI, Section (7), and Article VII, Section (6) of the Company's Retirement Income Plan. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under the Company's Retirement Income Plan immediately prior to the Change in Control, to determine lump sum present values under Article VII, Section (7) of the Company's Retirement Income Plan. (E) For the thirty-six (36) month period immediately following the Date of Termination, the Company shall arrange to provide the Executive (which includes the Executive's eligible dependents for purposes of this paragraph (E)) with life, disability, accident and health insurance benefits substantially similar to those which the Executive was receiving immediately prior to the Notice of Termination (without giving effect to any amendment to such benefits made subsequent to the earlier of a Potential Change in Control or a Change in Control which amendment adversely affects in any manner the Executive's entitlement to or the amount of such benefits); provided, however, that, unless the Executive -------- ------- consents to a different method, such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(E) shall be reduced to the extent comparable benefits (including continued coverage for any preexisting medical condition of any person covered by the benefits provided to the Executive and his eligible dependents immediately prior to the Notice of Termination) are actually received by or made available to the Executive by a subsequent employer without cost during the thirty-six (36) month period following the Executive's termination of employment (and any such benefits actually received by or made available to the Executive shall be reported to the Company by the Executive). (F) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans (as in effect immediately prior to a Potential Change in Control, the Change in Control or the Date of Termination, whichever is most favorable to the Executive) had the Executive's employment terminated at any time during the period of thirty-six (36) months after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive (subject to any employee contributions required under the terms of such plans at the level in effect immediately prior to the Change in Control or the Date of Termination, whichever is more favorable to the Executive) commencing on the later of (i) the -5- date that such coverage would have first become available or (ii) the date that benefits described in subsection (E) of this Section 6.1 terminate. (G) The Company will pay the Executive, at a daily salary rate calculated from the higher of the Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or the Executive's annual base salary in effect immediately prior to the Change in Control, an amount equal to all unused vacation days which would have been earned had the Executive continued employment through December 31 of the year in which the Date of Termination occurs. (H) The Company shall pay the reasonable fees and expenses of a full service nationally recognized executive outplacement firm until the earlier of the date the Executive secures new employment or the date which is thirty-six (36) months following the Executive's Date of Termination; provided, that in no event shall the aggregate amount of such payment be greater than 20% of the Executive's Change in Control Salary. 6.2. (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to the excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 6.2(C), all determinations required to be made under this Section 6.2, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by a nationally recognized accounting firm designated by the Company (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days after there has been a Payment, or such earlier time as requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred -6- to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross- Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 6.2(C) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (C) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection -7- with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6.2(C), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to -------- ------- pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6.2(C), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 6.2(C)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6.2(C), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6.3. The payments provided for in subsections (A), (B), (C), (D) and (G) of Section 6.1 hereof shall be made not later than the thirtieth (30th) day following the Date of Termination; provided, however, that if the amounts of -------- ------- such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive of the minimum -8- amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at 120% of the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination; provided, however, that in the event the Executive becomes -------- entitled to Severance Payments pursuant to the second sentence of Section 6.1 (except for a termination occurring with respect to clause (iv) of such sentence, which shall be paid as set forth above) such payments shall be due and payable within thirty (30) days following the actual Change in Control that triggered the Severance Payments. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in Section 1274(b)(2)(B) of the Code). In the event the Company should fail to pay when due the amounts described in subsections (A), (B), (C), (D) and (G) of Section 6.1 hereof, the Executive shall also be entitled to receive from the Company an amount representing interest on any unpaid or untimely paid amounts from the due date, as determined under this Section 6.3 (without regard to any extension of the Date of Termination pursuant to Section 7.3 hereof), to the date of payment at a rate equal to 120% of the rate provided in Section 1274(b)(2)(B) of the Code. 6.4. The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. ------------------------------------------------------ 7.1. Notice of Termination. After a Potential Change in Control --------------------- or, if there is no Potential Change in Control, after a Change in Control and during the term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and -9- an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good-faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2. Date of Termination. "Date of Termination," with respect to ------------------- any purported termination of the Executive's employment after a Change in Control and during the term of this Agreement, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3. Dispute Concerning Termination. If within fifteen (15) days ------------------------------ after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be -------- ------- extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4. Compensation During Dispute. If a purported termination --------------------------- occurs following a Change in Control and during the term of this Agreement and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. -10- 8. Acceleration of Certain Stock-Based Benefits. -------------------------------------------- (A) Upon the occurrence of a Change in Control, all unvested options with respect to the Company's stock held by the Executive shall vest and become immediately exercisable and will be exercisable for a period ending on the later of (i) the fifth anniversary of such Change in Control or (ii) the last date that such option would otherwise be exercisable under the terms of the option agreement or the plan pursuant to which such option was granted; provided, that in no event shall any option be exercisable after the expiration of the original term of the option. (B) Upon the occurrence of a Change in Control, all unearned performance restricted shares held by the Executive under the Company's Stock Plan shall be deemed to have been earned to the maximum extent permitted under the Stock Plan for any performance period not then completed and all earned but unvested performance restricted shares, including those deemed to be earned pursuant to this sentence, and all unvested restricted stock awards shall immediately vest and the restrictions on all shares subject to restriction shall lapse. (C) For purposes of the Stock Plan and any stock option plan pursuant to which any stock options, performance restricted shares or restricted stock awards have been issued, this Agreement, which has been approved by the Management Development and Compensation Committee of the Board, shall constitute an amendment of the agreement or other instruments pursuant to which such stock options, performance restricted shares and restricted stock awards were issued in accordance with the terms of such plans. Notwithstanding the foregoing, in the event that this Section 8(C) is determined for any reason to be inconsistent with the terms of any plan pursuant to which such stock options, performance restricted shares and restricted stock awards were issued, the terms of this Agreement shall supersede the terms of such plan. 9. No Mitigation. The Company agrees that, if the Executive's ------------- employment with the Company terminates during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(E) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 10. Successors; Binding Agreement. ----------------------------- 10.1. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business -11- and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 10.2. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 11. Notices. For the purpose of this Agreement, notices and all ------- other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address shown for the Executive in the personnel records of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Armstrong World Industries, Inc. 2500 Columbia Avenue Lancaster, Pennsylvania 17603 Attention: General Counsel 12. Miscellaneous. No provision of this Agreement may be ------------- modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This -12- Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 hereof shall survive the expiration of the term of this Agreement. If the Executive elects not to enter into this Agreement, he will continue to be eligible for change in control benefits provided under the Company's Employment Protection Plan (if applicable), Retirement Income Plan and long-term incentive plans. The Executive agrees that this Agreement replaces the benefits to which he may otherwise be entitled to under the Company's Employment Protection Plan for salaried employees. The Company agrees that it will not argue in any form for any purpose that this Agreement constitutes an "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. 13. Validity. The invalidity or unenforceability of any -------- provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 14. Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 15. Settlement of Disputes; Arbitration. All claims by the ----------------------------------- Executive for benefits under this Agreement shall be directed in writing to and determined by the Committee, which shall give full consideration to the evidentiary standards set forth in this Agreement. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Allegheny County, Pennsylvania in accordance with the rules of the American Arbitration Association then in effect; provided, -------- however, that the evidentiary standards set forth in this Agreement shall apply. - ------- Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek -13- specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 16. Definitions. For purposes of this Agreement, the following ----------- terms shall have the meanings indicated below: (A) "Accounting Firm" shall have the meaning stated in Section 6.2(B) hereof. (B) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (C) "Board" shall mean the Board of Directors of the Company. (D) "Cause" for termination by the Company of the Executive's employment shall mean (i) the deliberate and continued failure by the Executive to devote substantially all the Executive's business time and best efforts to the performance of the Executive's duties after a demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Executive has not substantially performed such duties; (ii) the deliberate engaging by the Executive in gross misconduct which is demonstrably and materially injurious to the Company, monetarily or otherwise, including but not limited to fraud or embezzlement by the Executive; or (iii) the Executive's conviction (or entering into a plea bargain admitting guilt) of any felony. For the purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be considered "deliberate" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that such action or omission was in the best interests of the Company. In the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (E) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or -14- (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or (III) there is consummated a merger or consolidation of the Company (including a triangular merger to which the Company is a party) with any other corporation other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 66 2/3% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its subsidiaries) representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, no "Change in Control" shall be deemed to have occurred if there is consummated -15- any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (F) "Change in Control Salary" shall have the meaning stated in Section 6.1 hereof. (G) "Change in Control Bonus" shall have the meaning stated in Section 6.1 hereof. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six (6) months before a Change in Control, constitute the Management Development and Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). (J) "Company" shall mean Armstrong World Industries, Inc. and, except in determining under Section 16(E) hereof whether or not any Change in Control of the Company has occurred, shall include its subsidiaries and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (K) "Date of Termination" shall have the meaning stated in Section 7.2 hereof. (L) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full- time performance of the Executive's duties. (M) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. -16- (N) "Excise Tax" shall have the meaning stated in Section 6.2(A) hereof. (O) "Executive" shall mean the individual named in the first paragraph of this Agreement. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) or (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V) , (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for (i) across-the-board salary reductions similarly affecting all salaried employees of the Company or (ii) across-the-board salary reductions similarly affecting all senior executive officers of the Company and all senior executives of any Person in control of the Company; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control (unless such relocation is closer to the Executive's principal residence) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company, to pay to the Executive any portion of the Executive's current compensation or to pay to the Executive any portion of an installment of deferred -17- compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's Base Salary Plan, Management Achievement Plan, 1984 Long-Term Stock Option Plan for Key Employees, 1993 Long-Term Stock Incentive Plan, 1999 Long-Term Incentive Plan, Armstrong Deferred Compensation Plan, Retirement Income Plan and Retirement Benefit Equity Plan, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. Notwithstanding anything herein to the contrary, a termination of employment by the Executive for any reason during the 30-day period commencing on the one (1) year anniversary of a Change in Control shall -18- constitute Good Reason; provided, however, that solely for purposes of this -------- ------- paragraph, the term Change in Control shall include a merger described by Section 16(E)(III) in which the Company is the surviving corporation or parent corporation and the holders of the voting securities of the Company outstanding immediately prior to such merger represent less than 66 2/3% of the combined voting power of the securities of the Company outstanding immediately after such merger, only if an event described in Section 16(E)(II) also occurs. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning stated in Section 6.2(A) hereof. (R) "Notice of Termination" shall have the meaning stated in Section 7.1 hereof. (S) "Payment" shall have the meaning stated in Section 6.2(A) hereof. (T) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits. (U) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, or (v) an entity or entities which are eligible to file and have filed a Schedule 13G under Rule 13d-l(b) of the Exchange Act, which Schedule indicates beneficial ownership of 15% or more of the outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities. -19- (V) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; or (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates). (W) "Severance Payments" shall mean those payments described in Section 6.1 hereof. (X) "Stock Plan" shall mean the Company's Long-Term Stock Incentive Plan, as the same may be amended from time to time, and any successor plan to such plan. (Y) "Underpayment" shall have the meaning stated in Section 6.2(B) hereof. ARMSTRONG WORLD INDUSTRIES, INC. By:___________________________________ Name: ((ByName)) Title: ((ByTitle)) ______________________________________ ((FirstName)) ((LastName)) -20- Exhibit No. 10(iii)(k) SCHEDULE OF PARTICIPATING OFFICERS The Company has entered into substantially similar agreements with certain of its officers, including George A. Lorch, Marc R. Olivie, Robert J. Shannon, Douglas L. Boles, Deborah K. Owen, Frank A. Riddick, III, William C. Rodruan, E. Follin Smith, Floyd F. Sherman, and Stephen E. Stockwell. Ms. Owen's agreement has been modified in that it does not include Section 6.1(C); Mr. Sherman's agreement has been modified in that it does not include Sections 6.1(C) & (D); Mr. Rodruan's agreement has been modified in that Section 6.1(A) has been modified to provide a 2X multiplier, and Section 16(P) has been modified to remove the "modified single trigger" provision; Ms. Smith's agreement has been modified in that Section 6.1(A) has been modified to provide a 2X multiplier, it does not include Section 6.1(C), and Section 16(P) has been modified to remove the "modified single trigger" provision. EX-10.(III)(N) 11 EMPLOYMENT AGREEMENT EXHIBIT 10(iii)(n) EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made as of December 13, 1999 (the "Agreement"), by and among Armstrong World Industries, Inc., a Pennsylvania corporation (the "Company"), and George A. Lorch, an individual and resident of Lancaster County, Pennsylvania (the "Executive"). The Executive is currently serving as the Chairman of the Board, President and Chief Executive Officer of the Company. The Company desires to provide for the continued employment of the Executive and the Executive desires to enter into an employment contract with the Company. In order to effect the foregoing, the Company and the Executive desire to enter into an employment agreement on the terms and conditions set forth in this Agreement. Accordingly, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINED TERMS. The definitions of capitalized terms used in this Agreement, unless otherwise defined herein, are provided in the last Section hereof. 2. EMPLOYMENT. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to serve the Company and its subsidiaries and affiliates, on the terms and conditions set forth herein, during the Term of this Agreement. 3. TERM OF AGREEMENT. The Term will commence on the date first above written (the "Effective Date") and shall continue until the fifth anniversary of the Effective Date Time; provided, that commencing on the second anniversary of the Effective Date and on each succeeding anniversary thereafter, the Term of this Agreement shall automatically be extended for one (1) additional year unless the Company or the Executive shall have given written notice to the other at least 180 days prior to any such anniversary date to the effect that the Term of this Agreement shall not be extended. Notwithstanding anything in this Agreement to the contrary, the Company may terminate this Agreement in the event of Executive's Disability; provided, that any such termination shall not, by itself, terminate the Executive's employment with the Company. 4. POSITION AND DUTIES. During the Term of this Agreement, the Executive shall serve as Chairman of the Board, President and Chief Executive Officer of the Company and a member of the Board and shall also serve in any other executive officer position of the Company or its subsidiaries and affiliates as the Board may reasonably request. The Executive shall be the chief executive officer of the Company and shall have such duties and responsibilities as are customary for the Executive's position and such other duties not inconsistent therewith as the Board of Directors may reasonably assign from time to time. During the Term of this Agreement, excluding any periods of vacation and sick leave to which the Executive is entitled under the Company's policies and practices (as the same may be increased in the future), the Executive shall devote substantially all his working time and efforts to the business and affairs of the Company and its subsidiaries and affiliates and shall diligently and faithfully perform his duties to the best of his ability; provided, however, that the Executive may engage in activities relating to personal matters (including personal financial matters) and in such corporate, industry, civic and charitable activities, including membership on corporate and charitable boards of directors or trustees of non- -2- affiliated companies and organizations, so long as such service does not substantially interfere with the performance of his duties hereunder or violate his obligations under Section 10 hereof. 5. COMPENSATION AND RELATED MATTERS. 5.1 BASE SALARY. The Company shall pay, or cause to be paid, to the Executive an annual base salary ("Base Salary") during the Term of this Agreement, which shall be at an initial rate of not less than $800,000 per year. The Base Salary shall be paid in accordance with the Company's payroll practices for its senior officers, but not less frequently than monthly, in arrears. For purposes of this Agreement, "Base Salary" shall include any increases in Base Salary during the Term of this Agreement. The Base Salary in effect from time to time shall not be decreased during the Term of this Agreement except in connection with across-the-board salary reductions similarly affecting all senior officers of the Company and all senior officers of any person in control of the Company which have been agreed to by the Executive. Compensation of the Executive by Base Salary payments shall not be deemed exclusive and shall not prevent the Executive from participating in any other compensation or benefit plan of the Company. The Base Salary payments (including any increased Base Salary payments) shall not in any way limit or reduce any other obligation of the Company hereunder, and no other compensation, benefit or payment hereunder shall in any way limit or reduce the obligation of the Company to pay the Executive's Base Salary. 5.2 BENEFIT PLANS. During the Term, the Executive and his eligible dependents shall be entitled to participate in and receive benefits under all "employee benefit plans" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA")), and employee benefit arrangements in which senior officers of the Company generally participate, including without limitation, (i) all savings, deferred -3- compensation, profit sharing and retirement plans, practices, policies and programs and (ii) all welfare benefit plans, practices, policies and programs (including all medical, prescription, dental, disability, employee life insurance, group life insurance, group hospitalization, health, accidental death and travel accident insurance plans and programs) as are made generally available to senior officers of the Company, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, practices, policies and programs, including provisions which permit such plans, practices, policies and programs to be modified or terminated, provided, that if the Company reduces the benefits provided under or terminates any such employee benefit plan, practice, policy or program in which the Executive participates, the Company shall offer to the Executive participation in another plan or program that provides the Executive with benefits at least comparable to those that were reduced or eliminated. The Executive's participation in such employee benefit plans, practices, policies and programs shall be at a level appropriate for the Executive's position. Such employee benefit plans, practices, policies and programs, shall include, without limitation, the plans, programs, policies and practices in which the Executive participates on the date of this Agreement. 5.3 INCENTIVE COMPENSATION. During the Term of this Agreement, the Executive shall be entitled to participate in and receive benefits under all annual incentive (bonus) plans and long-term incentive compensation plans in which other senior officers of the Company generally participate, including all restricted share, performance restricted share and stock option plans of the Company. The Executive's participation in such incentive plans shall be at a level appropriate for the Executive's position. Without limiting the generality of the foregoing, the Company shall provide the Executive with an annual incentive opportunity, as a percentage of the Executive's Base Salary at target performance levels, that is not less than the -4- opportunity provided to the Executive on the date of this Agreement, which levels shall be reasonable and shall be adjusted for extraordinary events. Such incentive compensation shall be subject to and on a basis consistent with the terms, conditions and overall administration of such plans, including provisions which permit such plans to be modified or terminated, provided, that if the Company reduces the incentive compensation opportunities provided under or terminates any such plan in which the Executive participates, the Company shall offer to the Executive participation in another plan that provides the Executive with an incentive compensation opportunity at least comparable to that which was reduced or eliminated. Such incentive compensation plans shall include, without limitation, the plans in which the Executive participates on the date of this Agreement. 5.4 OTHER BENEFITS. The Executive shall participate on the same terms and conditions as all other senior officers of the Company in all other benefit plans, programs, or arrangements as may be now or hereafter sponsored or maintained for senior officers of the Company generally and shall participate on the same terms and conditions as other senior officers generally participate. 5.5 FRINGE BENEFITS. During the Term of this Agreement, the Executive shall be entitled to receive all perquisites and fringe benefits which the Company makes available to senior officers of the Company generally, including, but not limited to, all perquisites and fringe benefits provided to the Executive on the date of this Agreement. 5.6 EXPENSES. During the Term of this Agreement, the Executive is authorized to incur, and shall be reimbursed by the Company for all reasonable and customary business-related expenses, including travel, entertainment, gifts and similar items, incurred by the Executive in connection with his employment hereunder. -5- 5.7 WORKING FACILITIES. During the Term of this Agreement, the Company shall furnish the Executive with offices and working facilities in the Company's principal executive offices and shall provide secretarial and other assistance suitable to Executive's position and adequate for the performance of his duties hereunder. 5.8 VACATION. During the Term of this Agreement, the Executive shall be entitled to vacation in accordance with the Company's current policies and practices, provided that the Executive shall be entitled to not less than six (6) weeks of vacation during each year of this Agreement, or such greater period as the Board shall approve, without reduction in salary or other benefits. 5.9 ANNUAL REVIEW. During the Term of this Agreement, the Board (or the compensation committee of the Board) shall in good faith review the Executive's total compensation package (including but not limited to the Base Salary provided for in Section 5.1, the benefit plans provided for in Section 5.2 and the short and long-term incentive compensation opportunity provided for in Section 5.3) at least annually for possible increase, taking into account, among other things, (i) the performance of the Executive, (ii) the performance of the Company, and (iii) the overall compensation of executives in similar positions at comparable companies. 6. COMPENSATION IN THE EVENT OF EXECUTIVE'S DISABILITY. During the Term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties hereunder as a result of incapacity due to physical or mental illness, the Company shall pay, or cause to be paid, to the Executive his Base Salary at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or -6- arrangement maintained by the Company for the benefit of the Executive during such period, until this Agreement is terminated by the Company for Disability; provided, however, that such payments shall be reduced by the sum of the amounts, if any, payable to the Executive at or prior to the time of any such payment under disability benefit plans of the Company, which amounts were not previously applied to reduce any such payment. 7. TERMINATION COMPENSATION AND BENEFITS. 7.1 If the Executive's employment is terminated for any reason during the Term of this Agreement, the Company shall pay to the Executive (or in accordance with Section 11.2 in the event of the Executive's death), (i) the Executive's Base Salary through the Date of Termination at the rate in effect immediately prior to the time the Notice of Termination is given, (ii) all compensation and benefits (other than severance compensation and benefits) payable to the Executive through the Date of Termination or thereafter under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period, including any short-term or long-term incentive compensation to which the Executive is entitled, by virtue of previous awards, in accordance with the terms of the long-term incentive plans in which Executive participates, and (iii) any unreimbursed expenses payable pursuant to Section 5.6 of the Agreement that were incurred before the Date of Termination. 7.2 In the event the Executive's employment is terminated during the Term of this Agreement by the Executive for Good Reason or by the Company for any reason other than Cause, death of the Executive or Disability, the Company shall (i) pay the Executive, in addition to amounts payable under Section 7.1 and 7.3, a lump sum cash payment to be made within thirty (30) days after the Date of Termination equal to three times the sum of (x) the higher of the Base Salary in effect immediately prior to the occurrence of the event or circumstance upon which the -7- Notice of Termination is based or the Base Salary in effect immediately prior to the date of the Notice of Termination, and (y) the highest of the annual bonus that may be earned by the Executive if target performance levels are achieved in the year in which the Date of Termination occurs or the highest annual bonus earned by the Executive in respect of the three (3) years immediately preceding the year in which the Date of Termination occurs, in any case, pursuant to any annual incentive (bonus) plan maintained by the Company, and (ii) continue the benefits provided for in Section 5.2 of this Agreement for thirty-six (36) additional months. 7.3 If the Executive's employment is terminated for any reason during the Term of this Agreement, the Company shall pay the Executive's normal post- termination compensation and benefits (other than severance compensation and benefits) to the Executive as such payments become due. Such normal post- termination compensation and benefits (other than severance compensation and benefits) shall be determined under, and paid in accordance with the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements (other than this Agreement), as applicable. 7.4 (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, benefit, or distribution by the Company or its affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment ("Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), -8- including, without limitation, any income taxes and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 7.4(c) hereof, all determinations required to be made under this Section 7.4, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be used in arriving at such determinations, shall be made by the Company's principal outside accounting firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Board and the Executive within fifteen (15) business days after the Date of Termination and/or such earlier date(s) as may be requested by the Company or the Executive (each such date and the Date of Termination shall be referred to as a "Determination Date" for purposes of this Section 7.4(b) and Section 7.5 hereof). All fees and expenses of the Accounting Firm shall be borne solely by the Company. The initial Gross-Up Payment, if any, as determined pursuant to this Section 7.4(b), shall be paid by the Company to the Executive within thirty (30) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm under this Section 7.4(b) shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") consistent with the calculations required to be made hereunder. In the event that the Company exhausts its -9- remedies pursuant to Section 7.4(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of an Underpayment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and -10- (iv) permit the Company to participate in any proceeding relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.4(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the -11- Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.4(c) hereof, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's compliance with the requirements of Section 7.4(c) hereof) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7.4(c) hereof, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid. 7.5 The payments provided for in Section 7.4 hereof (other than Section 7.4(c) and (d)) shall be made not later than the thirtieth (30th) day following each Determination Date; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined by the Executive, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the forty-fifth (45th) day after each Determination Date. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth -12- (5th) business day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 8. TERMINATION PROCEDURES. 8.1 NOTICE OF TERMINATION. During the Term of this Agreement, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 12 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and, in the case of a termination by the Company for Cause or by the Executive for Good Reason, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in the definition of Cause herein, and specifying the particulars thereof in detail. 8.2 DATE OF TERMINATION. "Date of Termination," with respect to any purported termination of the Executive's employment during the Term of this Agreement, shall mean (i) if the Executive's employment is terminated by his death, the date of his death, (ii) if the Executive's employment is terminated by the Executive other than for Good Reason, the date specified in the Notice of Termination (which shall not be less than one hundred eighty (180) -13- days) after such Notice of Termination is given, (iii) if the Executive's employment is terminated by the Company for Cause, on the date that the Notice of Termination is sent by the Board in accordance with Section 8.1, and (iv) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which shall not be less than sixty (60) days) after such Notice of Termination is given. 9. NO MITIGATION. The Company agrees that, if the Executive's employment hereunder is terminated during the Term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company hereunder. Further, the amount of any payment or benefit provided for hereunder (other than pursuant to Section 7.4(d) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 10. CONFIDENTIALITY AND NONCOMPETITION. 10.1 The Executive shall not, during or after the Term of this Agreement, without the prior written consent of the Company disclose to any entity or person any information which is treated as confidential by the Company or any of their subsidiaries or affiliates (each, a "Company Entity"), and is not generally known or available in to the public, provided, that the Executive may make disclosures of such confidential information (i) during the Term of this Agreement in the course of and to the extent required by and consistent with the performance of his duties hereunder, and (ii) to the extent required by law or legal process. 10.2 Except as permitted by the Company with its prior written consent, the Executive shall not, during the Executive's employment with the Company and for the period ending -14- twenty-four (24) months after the Executive's employment with the Company terminates for any reason, directly or indirectly, own, enter into the employ of or render, any services (whether as a consultant or otherwise) to any person, firm or corporation within the United States or any foreign country in which the Company is doing or is contemplating doing business on the Date of Termination which is a competitor of any Company Entity with respect to products which any Company Entity is then producing or services which any Company Entity is then providing (a "Competitor"), or approach, canvass, solicit, or otherwise endeavor to entice away from the Company, any customer in respect of any service or product in any way competitive with the services or products supplied by any Company Entity to such customer, or solicit the services of, or endeavor to entice away from the Company, any director, executive officer or employee of the Company; provided, that it shall not be a violation of this provision for the Executive to be employed by, or render services to, a Competitor, if the Executive renders those services only with respect to those lines of business of the Competitor which are not directly competitive with a line of business of any Company Entity or are located in any country in which the Company does not do business and was not contemplating doing business on the Date of Termination. 10.3 The Executive acknowledges and agrees that any breach of this Section 10 by the Executive will result in immediate and irreparable harm to the Company, the amount of which will be extremely difficult to ascertain, and that the Buyer could not be reasonably or adequately compensated by damages in an action at law. For these reasons, the Company shall have the right to obtain such preliminary, temporary or permanent mandatory or restraining injunctions, orders or decrees as may be necessary to protect the Company against or on account of any breach by the Executive of the provisions of this Section 10 without proof of any actual damage caused to the Company. -15- 11. SUCCESSORS; BINDING AGREEMENT. 11.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, as the case may be, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement upon the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 11.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 12. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered -16- or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addressees set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Armstrong World Industries, Inc. 2500 Columbia Avenue Lancaster, PA 17603 Attention: Senior Vice President, Human Resources Telecopy: 717-396-6119 To the Executive: At the Executive's residence address as maintained by the Company in the regular course of its business for payroll purposes. 13. MISCELLANEOUS. If the Executive, in his capacity as a director, votes for, or in his capacity as an officer, approves in writing, any action that will adversely affect the Executive's rights under this Agreement, such vote or approval shall be deemed to constitute the Executive's consent to such action under this Agreement; otherwise, no provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officers as may be specifically designated by the Board. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not expressly set forth in this Agreement. This Agreement sets forth the entire agreement of the parties hereto in -17- respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled, except as otherwise provided in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Pennsylvania, without giving effect to choice of law principles. All references to sections of the Code shall be deemed also to refer to any successor provisions to such sections. There shall be withheld from any payments provided for hereunder any amounts required to be withheld under federal, state or local law and any additional withholding amounts to which the Executive has agreed. The obligations under this Agreement of the Company or the Executive which by their nature and terms require satisfaction after the end of the Term shall survive such event and shall remain binding upon such party. 14. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. SETTLEMENT OF DISPUTES; ARBITRATION. All claims by the Executive for benefits under this Agreement shall be in writing and shall be directed to and initially determined by the Board. Any denial by the Board of a claim -18- for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. To the extent permitted by applicable law and subject to the right of the Company to seek equitable relief in a court pursuant to Section 10.3, any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Allegheny County, Pennsylvania, in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 17. FEES AND EXPENSES. The Company shall pay to the Executive all reasonable legal fees and expenses incurred by the Executive in disputing any termination or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder; provided, however, the Company shall not be required to pay to the Executive legal fees and expenses to the extent such legal fees and expenses were incurred in connection with a contest controlled by the Company pursuant to Section 7.4(c) hereof in connection with which the Company complied with its obligations under said Section 7.4(d). Such payments shall be made within thirty (30) business days after delivery of the Executive's written request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. -19- 18. COORDINATION OF BENEFITS. Notwithstanding anything in this Agreement to the contrary, if the Executive is paid "Severance Payments" under that certain Agreement dated as of October 1________, 1999 between the Company and the Executive in connection with a Change of Control (as defined therein), then this Agreement (including Section 10.2 hereof) shall forthwith terminate and the Executive shall not be entitled to the payment of any amounts under this Agreement other than pursuant to Section 7.1 hereof (and any amounts theretofore paid to the Executive pursuant to Section 7.2, hereof shall be credited against any "Severance Payments" to which the Executive is entitled under said Change in Control Agreement). 19. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meaning indicated below: (a) "Base Salary" shall have the meaning stated in Section 5.1 hereof. (b) "Board" shall mean the Board of Directors of the Company. (c) "Cause" for termination by the Company of the Executive's employment, for purposes of this Agreement, shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 8.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, -20- monetarily or otherwise, including but not limited to fraud or embezzlement by the Executive, or (iii) the Executive's conviction (or entering into a plea bargain admitting guilt) of any felony, or (iv) a material breach by the Executive of this Agreement, including a violation of Section 10. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Date of Termination" shall have the meaning stated in Section 8.2 hereof. (f) "Disability" shall be deemed the reason for the termination of this Agreement by the Company, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties hereunder for a period of six (6) consecutive months. (g) "Excise Tax" shall have the meaning stated in Section 7.4(a) hereof. (h) "Executive" shall mean the individual named in the first paragraph of this Agreement. (i) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraphs (i) or (ii) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: -21- (i) the assignment to the Executive of any duties inconsistent with the Executive's status as an executive officer of the Company or a substantial alteration in the nature or status of the Executive's responsibilities consistent with the title set forth in Section 4; (ii) any material breach of any provision of this Agreement by the Company; (iii) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment (unless such relocation is closer to the Executive's principal residence) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (iv) a reduction by the Company in the Executive's Base Salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior officers of the Company and all senior officers of any person in control of the Company; or (v) the failure by the Company to continue in effect any employee benefit plan or incentive compensation plan in which the Executive currently participates which is material to the Executive's total compensation, unless such plan or arrangement has been replaced by a new plan on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's -22- continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (j) "Gross-Up Payment" shall have the meaning stated in Section 7.4(a) hereof. (k) "Notice of Termination" shall have the meaning stated in Section 8.1 hereof. (l) "Severance Payments" shall mean those payments described in Section 7.2 hereof. (m) "Term" shall have the meaning stated in Section 3 hereof. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG WORLD INDUSTRIES, INC. By: /s/ ------------------------------------------ Name: Douglas L. Boles ---------------------------------------- Title: Senior Vice President, Human Resources --------------------------------------- Executive /s/ --------------------- -23- EX-11.A 12 COMPUTATION FOR BASIC EARNINGS PER SHARE Exhibit No. 11(a) COMPUTATION FOR BASIC EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31 (AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA) 1999 1998 1997 ---- ---- ---- Basic Earnings (Loss) Per Share - ------------------------------- Net Earnings (loss) $14.3 $ (9.3) $185.0 ===== ====== ====== Average number of common shares outstanding 39.9 39.8 40.6 ----- ------ ------ Basic Earnings (Loss) per share $0.36 $(0.23) $ 4.55 ===== ====== ====== EX-11.B 13 COMPUTATION FOR DILUTED EARNINGS PER SHARE Exhibit No. 11(b) COMPUTATION FOR DILUTED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31 (AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA) 1999 1998 1997 ---- ---- ---- Diluted Earnings (Loss) Per Share - --------------------------------- Net Earnings (loss) $14.3 $ (9.3) $185.0 ===== ====== ====== Average number of common shares outstanding 39.9 39.8 40.6 Average number of common shares issuable under stock options 0.3 0.6 0.4 --- --- --- Average number of common and common stock equivalents outstanding 40.2 40.4 41.0 ---- ---- ---- Diluted Earnings (Loss) per share $0.36 $(0.23) $ 4.50 ===== ====== ====== Diluted earnings (loss) per share for 1998 was antidilutive. EX-12 14 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 ARMSTRONG WORLD INDUSTRIES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($ millions, except ratios)
Year Ended December 31, 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- DETERMINATION OF EARNINGS Income from continuing operations before income taxes, minority interests and equity earnings $ 14.4 $(35.3) $326.5 $221.4 $ 8.2 Add: Fixed charges 117.3 78.8 35.7 39.3 59.0 Distributed income from affiliates 40.8 11.4 6.2 1.4 0.0 Amortization of capitalized interest 0.9 0.8 0.6 0.0 0.0 Less: Capitalized interest (4.3) (5.8) (1.8) (2.9) 0.0 Preferred dividends 0.0 0.0 0.0 (8.9) (18.8) ------ ------ ------ ------ ------ Total earnings as defined $169.1 $ 49.9 $367.2 $250.3 $ 42.8 ------ ------ ------ ------ ------ FIXED CHARGES Interest expense 1 $105.9 $ 64.3 $ 28.7 $ 23.1 $ 34.2 Capitalized interest 4.3 5.8 1.8 2.9 0.0 Preferred dividends 0.0 0.0 0.0 8.9 18.8 Estimate of interest included in rent expense 7.1 8.7 5.2 4.4 6.0 ------ ------ ------ ------ ------ Total fixed charges $117.3 $ 78.8 $ 35.7 $ 39.3 $ 59.0 ------ ------ ------ ------ ------ RATIO OF EARNINGS TO FIXED CHARGES 1.44 0.63 10.29 6.37 0.73 ====== ====== ====== ====== ======
1 Includes amortization of capitalized interest and debt premiums and discounts In 1995, Adjusted Earnings were inadequate to cover Fixed Charges by $16.2 million. In 1998, Adjusted Earnings were inadequate to cover Fixed Charges by $28.9 million. EX-21 15 SUBSIDIARIES OF THE REGISTRANT EXHIBIT NO. 21 (as of January 2000) Jurisdiction of Domestic Subsidiaries Incorporation - --------------------- -------------- Armstrong Cork Finance Corporation Delaware Armstrong Enterprises, Inc. Vermont Armstrong Holdings Canada, Inc. Delaware Armstrong Insulation Products LLC Delaware Armstrong Realty Group, Inc. Pennsylvania Armstrong Ventures, Inc. Delaware Armstrong World Industries Asia, Inc. Nevada Armstrong World Industries (Delaware) Inc. Delaware Armstrong World Industries (India) Inc. Nevada Armstrong World Industries Latin America, Inc. Nevada Armstrong.com Holding Company Delaware A W I (NEVADA), INC. Nevada IWF, Inc. Nevada I.W. Insurance Company Vermont The W. W. Henry Company California Triangle Pacific Corp. Delaware The Worthington Armstrong Venture (50%-owned unincorporated affiliate) Foreign Subsidiaries - -------------------- A&S (1998) United Kingdom Alphacoustic (UK) Ltd. United Kingdom Armstrong (Floor) Holdings, B.V. Netherlands Armstrong (Floor) Holdings Ltd. United Kingdom Armstrong (Japan) K.K. Japan Armstrong (Singapore) Pte. Ltd. Singapore Armstrong (U.K.) Investments United Kingdom Armstrong Acquisition Canada, Inc. Canada Armstrong Architectural Products S.L. Spain Armstrong Building Products United Kingdom Armstrong Building Products B.V. Netherlands Armstrong Building Products Company (Shanghai) Ltd. People's Republic of China Armstrong Building Products G.m.b.H. Germany Armstrong Building Products S.A. France Armstrong Building Products S.r.l. Italy Armstrong Europa G.m.b.H. Germany Armstrong Europe Services United Kingdom Armstrong FSC, Ltd. Bermuda Armstrong Floor Products Europe G.m.b.H. Germany Armstrong Floor Products Europe Ltd. United Kingdom Armstrong Floor Products Europe Ltd. (Rep Office) Spain Armstrong Floor Products Europe S.a.r.l. France Armstrong Hunter Douglas Limited United Kingdom Armstrong Insulation (Panyu) Co. Ltd. People's Republic of China Armstrong Insulation Products A.G. Switzerland Armstrong Insulation Products Benelux SPRL Belgium Armstrong Insulation Products G.m.b.H. Germany Armstrong Insulation Products Limited United Kingdom Armstrong Insulation Products Ltd. Hong Kong Armstrong Insulation Products Pty. Ltd. Australia Armstrong Insulation Products S.A. Spain Armstrong Insulation Products S.A. France Armstrong Insulation Products Sp. zo. o. Poland Armstrong Insulation Products S.r.l. Italy Armstrong Insulation Products U.K. United Kingdom Armstrong Insulation Rus. Russia Armstrong Nova Scotia Unlimited Liability Company Canada Armstrong Parafon A.B. Sweden Armstrong World Industries (Australia) Pty. Ltd. (formerly Australia Armstrong-Nylex Pty. Ltd.) Armstrong World Industries (China) Ltd. People's Republic of China Armstrong World Industries (H.K.) Limited Hong Kong Armstrong World Industries (Thailand) Ltd. Thailand Armstrong World Industries AB Sweden Armstrong World Industries Canada Ltd. Canada Armstrong World Industries Holding G.m.b.H. Germany Armstrong World Industries Ltd. United Kingdom Armstrong World Industries Mauritius Mauritius Armstrong World Industries Pty. Ltd. Australia Armstrong World Industries de Mexico, S.A. de C.V. Mexico Armstrong World Industries do Brasil Ltda. Brazil Armstrong World Industries, G.m.b.H. Germany DLW Aktiengesellschaft Germany Liberty Commercial Services Ltd. Bermuda EX-23 16 CONSENT OF INDEPENDENT AUDITORS Exhibit No. 23 Consent of Independent Auditors ------------------------------- The Board of Directors Armstrong World Industries, Inc.: We consent to incorporation by reference in Registration Statement No. 333-74501 on Form S-3 and the Registration Statements No., 2-91890, 33-18996, 33-18997, 33-29768, 33-65768, 333-74633 and 333-79093 on Form S-8 of Armstrong World Industries, Inc. of our report dated February 2, 2000, relating to the consolidated balance sheets of Armstrong World Industries, Inc., and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of earnings, cash flows and shareholders' equity and the related financial statement schedule for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Armstrong World Industries, Inc. KPMG LLP Philadelphia, Pennsylvania March 10, 2000 EX-24 17 POWER OF ATTORNEY Exhibit No. 24 POWER OF ATTORNEY ----------------- Re: 1999 Annual Report on Form 10-K - I, James E. Marley, as a Director of Armstrong World Industries, Inc., do hereby constitute and appoint, GEORGE A. LORCH or, in the case of his absence or inability to act as such, FRANK A. RIDDICK, III, or, in the case of his absence or inability to act as such, DEBORAH K. OWEN, my agent, to sign in my name and on my behalf the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and any amendments thereto, to be filed by the Company with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, with the same effect as if such signature were made by me personally. /s/ James E. Marley --------------------- James E. Marley Dated February 28, 2000 -------------------- - 2 - (Exhibit No. 24) All powers of attorney required to be filed are substantially identical in all material respects. Therefore, in accordance with SEC Regulation 229.601(a) Instruction 2, only the foregoing copy is being included except, however, that the manually signed copy filed with the Securities and Exchange Commission includes a complete set of powers of attorney. All powers of attorney differ only from the form of the foregoing in that they are executed by the following parties in the capacities indicated on or about February 28, 2000, and the power by Frank A. Riddick appoints only George A. Lorch or Deborah K. Owen as his agent: Frank A. Riddick, III Senior Vice-President, Finance (Principal Financial Officer) William C. Rodruan Vice President and Controller (Principal Accounting Officer) H. Jesse Arnelle Director Van C. Campbell Director Donald C. Clark Director Judith R. Haberkorn Director John A. Krol Director David M. LeVan Director James E. Marley Director David W. Raisbeck Director Jerre L. Stead Director - 3 - (Exhibit No. 24) I, Deborah K. Owen, Senior Vice President and Secretary of Armstrong World Industries, Inc., a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, do hereby certify that, at a meeting of the Board of Directors of said corporation duly held on the 28th day of February, 2000, at which a quorum was present and acting throughout, the following resolutions were adopted and are now in full force and effect: RESOLVED That the 1999 annual report on Form 10-K in the form presented to this meeting has been reviewed by the Board of Directors; and the execution thereof on behalf of the Company by George A. Lorch, Frank A. Riddick, III or Deborah K. Owen, with such changes therein and additions or deletions thereto as any of them and the legal counsel to the Company may approve, and the filing thereof with the Securities and Exchange Commission after being so executed by the requisite number of directors personally or by their respective attorneys-in-fact, are hereby authorized. FURTHER RESOLVED That the execution of the 1999 annual report on Form 10-K by George A. Lorch, Frank A. Riddick, III and William C. Rodruan, personally or by their respective attorneys-in-fact, as principal executive officer, principal financial officer and principal accounting officer, respectively, of the Company, is hereby authorized. IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said corporation this 15 day of March, 2000. /s/ Deborah K. Owen ------------------------------------ Sr. Vice President & Secretary EX-27 18 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 36 0 436 48 430 1,030 1,439 1,213 4,165 785 1,413 0 0 52 627 4,165 3,444 3,444 2,290 2,290 1,008 12 105 29 15 14 0 0 0 14 0.36 0.36
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