-----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, Kfgnjt5Ewra93lLsGVK/44gG3FBeiKhvMuuubCnrJcxTSS3Af8T+Wtcy9BZvAx8x aOCk7fIkTYzEHYNB79GAgA== /in/edgar/work/0000950109-00-004591/0000950109-00-004591.txt : 20001116 0000950109-00-004591.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950109-00-004591 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG HOLDINGS INC /PA/ CENTRAL INDEX KEY: 0001109304 STANDARD INDUSTRIAL CLASSIFICATION: [3089 ] IRS NUMBER: 233033414 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32530 FILM NUMBER: 768359 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG WORLD INDUSTRIES INC CENTRAL INDEX KEY: 0000007431 STANDARD INDUSTRIAL CLASSIFICATION: [3089 ] IRS NUMBER: 230366390 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02116 FILM NUMBER: 768360 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-Q 1 0001.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ----- ARMSTRONG HOLDINGS, INC. ------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 333-32530 23-3033414 - -------------------------------------------------------------------------------- (State or other jurisdiction of Commission file (I.R.S. Employer incorporation or organization) number 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 ----------------------------- ARMSTRONG WORLD INDUSTRIES, INC. -------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 1-2116 23-0366390 - -------------------------------------------------------------------------------- (State or other jurisdiction of Commission file (I.R.S. Employer incorporation or organization) number 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 ----------------------------- Armstrong World Industries, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form in the reduced disclosure format permitted by such Instructions. 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 ------ ------ Number of shares of Armstrong Holdings, Inc.'s common stock outstanding as of October 31, 2000 - 40,863,840 1 Part I - Financial Information ------------------------------ Item 1 - Financial Statements - ----------------------------- Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Statements of Earnings (amounts in millions except for per-share data) Unaudited
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ------- ------- ------- ------- Net sales $835.6 $844.3 $2,443.8 $2,444.4 Cost of goods sold 595.9 554.0 1,709.4 1,614.7 ------- ------- -------- -------- Gross profit 239.7 290.3 734.4 829.7 Selling, general and administrative expense 154.8 159.7 469.8 480.4 Charge for asbestos liability - - 236.0 - Reorganization charges, net 15.7 - 15.7 - Goodwill amortization 5.9 6.5 18.2 18.6 Equity (earnings) from affiliates (4.9) (5.2) (14.1) (13.1) ------- ------- -------- -------- Operating income 68.2 129.3 8.8 343.8 Interest expense 26.0 25.8 79.8 78.9 Other (income) expense, net (61.6) 3.4 (67.0) (4.5) ------- ------- -------- -------- Earnings (loss) from continuing operations before income taxes 103.8 100.1 (4.0) 269.4 Income taxes (benefit) 31.8 38.2 (0.8) 101.3 ------- ------- -------- -------- Earnings (loss) from continuing operations $72.0 $61.9 ($3.2) $168.1 ------- ------- -------- -------- Earnings from discontinued operations, net of tax of $0, $4.3, $3.2, and $11.0, respectively - $9.8 $7.0 $24.7 Gain on sale of discontinued operations, net of tax of $0.9, $0, $42.8 and $0 respectively $2.3 - 108.7 - ------- ------- -------- -------- Earnings from discontinued operations 2.3 9.8 115.7 24.7 Net earnings $74.3 $71.7 $112.5 $192.8 ======= ======= ======== ======== Earnings (loss) per share of common stock, continuing operations: Basic $1.79 $1.55 ($0.08) $4.22 Diluted $1.77 $1.54 ($0.08) $4.18 Earnings per share of common stock, discontinued operations: Basic - $0.25 $0.17 $0.62 Diluted - $0.24 $0.17 $0.61 Earnings per share of common stock, gain on sale of discontinued operations: Basic $0.06 - $2.70 - Diluted $0.06 - $2.70 - Net earnings per share of common stock: Basic $1.84 $1.80 $2.80 $4.84 Diluted $1.83 $1.78 $2.80 $4.80 Average number of common shares outstanding: Basic 40.3 39.9 40.2 39.8 Diluted 40.7 40.2 40.4 40.2
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 6. 2 Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Balance Sheets (amounts in millions)
Unaudited Assets September 30, 2000 December 31, 1999 ------ ------------------ ----------------- Current assets: Cash and cash equivalents $33.6 $26.6 Accounts receivable less allowance for discounts and losses 479.6 403.4 Inventories: Finished goods 263.4 257.9 Work in process 54.4 42.4 Raw materials and supplies 162.5 154.6 -------- -------- Total gross inventories 480.3 454.9 Less LIFO and other reserves 50.8 48.0 -------- -------- Total inventories 429.5 406.9 Deferred income taxes 55.7 40.6 Net assets of discontinued operations - 93.5 Other current assets 84.1 86.7 -------- -------- Total current assets 1,082.5 1,057.7 Property, plant, and equipment 2,365.6 2,481.1 Less accumulated depreciation and amortization 1,061.1 1,123.6 -------- -------- Net property, plant and equipment 1,304.5 1,357.5 Insurance for asbestos-related liabilities, noncurrent 236.1 270.0 Investment in affiliates 35.6 34.2 Goodwill, net 890.5 935.1 Other intangibles, net 55.8 54.9 Other noncurrent assets 427.2 374.4 -------- -------- Total assets $4,032.2 $4,083.8 ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $24.0 $64.7 Current installments of long-term debt 14.8 36.1 Accounts payable and accrued expenses 724.5 636.2 Income taxes 35.8 2.1 -------- -------- Total current liabilities 799.1 739.1 Long-term debt, less current installments 1,314.3 1,412.9 Employee Stock Ownership Plan (ESOP) loan guarantee 142.2 155.3 Postretirement and postemployment benefit liabilities 244.6 244.5 Pension benefit liabilities 147.1 166.2 Asbestos-related long-term liabilities 483.8 506.5 Other long-term liabilities 94.8 105.4 Deferred income taxes 62.7 62.9 Minority interest in subsidiaries 8.3 11.8 -------- -------- Total noncurrent liabilities 2,497.8 2,665.5 Shareholders' equity: Common stock 51.9 51.9 Capital in excess of par value 166.9 176.4 Reduction for ESOP loan guarantee (180.5) (190.3) Retained earnings 1,251.3 1,196.2 Accumulated other comprehensive loss (35.7) (16.5) Treasury stock (518.6) (538.5) -------- -------- Total shareholders' equity 735.3 679.2 -------- -------- Total liabilities and shareholders' equity $4,032.2 $4,083.8 ======== ========
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 6. 3 Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity (amounts in millions) Unaudited
2000 1999 -------- -------- Common stock, $1 par value: - --------------------------- Balance at beginning of year & September 30 $ 51.9 $ 51.9 -------- -------- Capital in excess of par value: - ------------------------------- Balance at beginning of year $ 176.4 $173.0 Stock issuances and other (4.2) 5.9 Contribution of treasury stock to ESOP (5.3) - -------- -------- Balance at September 30 $ 166.9 $178.9 -------- -------- Reduction for ESOP loan guarantee: - ---------------------------------- Balance at beginning of year $(190.3) $ (199.1) Principal paid 13.2 11.2 Loans to ESOP (7.3) (0.8) Contribution of treasury stock to ESOP (4.1) - Accrued compensation 8.0 4.8 -------- -------- Balance at September 30 $(180.5) $ (183.9) -------- -------- Retained earnings: - ------------------ Balance at beginning of year $1,196.2 $1,257.0 Net earnings 112.5 $112.5 192.8 $192.8 Tax benefit on dividends paid on unallocated common shares 0.7 1.4 -------- -------- Total $1,309.4 $1,451.2 Less common stock dividends 58.1 57.7 -------- -------- Balance at September 30 $1,251.3 $1,393.5 -------- -------- Accumulated other comprehensive income (loss): - ---------------------------------------------- Balance at beginning of year $ (16.5) $ (25.4) Foreign currency translation adjustments and hedging activities (13.5) 1.1 Unrealized loss on available for sale securities (2.5) - Minimum pension liability adjustments (3.2) 3.0 -------- -------- Total other comprehensive income (loss) (19.2) (19.2) 4.1 4.1 -------- -------- -------- ------- Balance at September 30 $ (35.7) $ (21.3) -------- -------- Comprehensive income $93.3 $196.9 - -------------------- ======= ======= Less treasury stock at cost: - ---------------------------- Balance at beginning of year $ 538.5 $547.7 Stock purchases 1.4 0.8 Stock issuance activity, net (11.9) (2.4) Contribution of treasury stock to ESOP (9.4) - -------- -------- Balance at September 30 $ 518.6 $546.1 -------- -------- Total shareholders' equity $ 735.3 $873.0 ======== =======
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 6. 4 Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Statements of Cash Flows (amounts in millions) Unaudited
Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $112.5 $192.8 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization, continuing operations 125.7 117.2 Depreciation and amortization, discontinued operations 3.9 7.7 Gain on sale of businesses (211.3) (1.8) Deferred income taxes 1.6 3.3 Equity earnings from affiliates (14.1) (13.1) Reorganization and restructuring payments (2.9) (14.8) Payments for asbestos-related claims, net of recoveries (131.0) (52.4) Charge for asbestos liability 236.0 - Decrease in net assets of businesses held for sale (0.3) (3.7) Increase in net assets of discontinued operations - (7.8) Changes in operating assets and liabilities net of effects of reorganization, restructuring and dispositions: Increase in receivables (67.5) (86.9) (Increase)/decrease in inventories (30.2) 1.6 (Increase)/decrease in other current assets (11.1) 44.8 Increase in other noncurrent assets (44.0) (55.7) Increase in accounts payable and accrued expenses 4.9 73.1 Increase in income taxes payable 29.1 85.5 Increase/(decrease) in other long-term liabilities (8.7) 9.0 Other, net 24.4 (5.0) ------ ------ Net cash provided by operating activities 17.0 293.8 ------ ------ Cash flows from investing activities: Purchases of property, plant and equipment, continuing operations (107.8) (115.3) Purchases of property, plant and equipment, discontinued operations (2.8) (5.6) Investment in computer software (8.5) (6.4) Acquisitions, net of cash acquired (6.5) (3.8) Distributions from equity affiliates 11.1 10.7 Proceeds from the sale of assets 3.3 3.5 Proceeds from the sale of businesses 329.3 87.6 Other, net - (0.2) ------ ------ Net cash provided by (used for) investing activities 218.1 (29.5) ------ ------ Cash flows from financing activities: Decrease in short-term debt, net (42.8) (34.1) Issuance of long-term debt - 200.0 Payments of long-term debt (127.2) (347.6) Cash dividends paid (58.1) (57.7) Purchase of common stock for the treasury, net (1.4) (0.8) Proceeds from exercised stock options 0.1 1.2 Other, net 5.9 (0.3) ------ ------ Net cash used for financing activities (223.5) (239.3) ------ ------ Effect of exchange rate changes on cash and cash equivalents (4.6) (0.1) ------- ------ Net increase in cash and cash equivalents $7.0 $24.9 Cash and cash equivalents at beginning of period $26.6 $38.2 ------- ------ Cash and cash equivalents at end of period $33.6 $63.1 ======= =======
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 6. 5 Note 1. BASIS OF PRESENTATION - ----------------------------- The accompanying consolidated financial statements contain the financial results of Armstrong Holdings, Inc. ("Armstrong"). Armstrong acquired the stock of Armstrong World Industries, Inc. on May 1, 2000. An indirect holding in Armstrong World Industries, Inc. makes up substantially all of the assets of Armstrong. Financial statements of Armstrong World Industries, Inc., a wholly owned subsidiary of Armstrong, are shown due to the existence of publicly-traded debt. Since Armstrong was not a publicly traded company and had no substantial operations prior to May 1, 2000, the 1999 results of operations and financial condition of Armstrong World Industries, Inc. are used for comparative purposes. See Note 12 for discussion of the financial statement differences between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Operating results of 2000, compared with the corresponding period of 1999 included in this report, are unaudited. However, these results have been reviewed by Armstrong's independent public accountants in accordance with established professional standards and procedures for a limited review of interim financial information. Armstrong completed the previously announced sale of its Insulation Products segment on May 31, 2000 (see Note 2). Accordingly, the accompanying condensed consolidated financial statements reflect this business as a discontinued operation and prior periods have been restated. The accounting policies used in preparing these statements are the same as those used in preparing Armstrong's consolidated financial statements for the year ended December 31, 1999. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Armstrong's annual report and Form 10-K for the fiscal year ended December 31, 1999. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings. The third quarters of the wood products segment ended on September 30, 2000 and October 2, 1999. No events occurred between September 30, 1999 and October 2, 1999 materially affecting Armstrong's financial position or results of operations. Note 2. DISCONTINUED OPERATIONS - ------------------------------- On May 31, 2000, Armstrong completed its sale of all of the entities, assets and certain liabilities comprising its Insulation Products segment to Orion Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch investment firm Gilde Investment Management N.V. for $264 million. The transaction resulted in an after tax gain of $106.4 million, or $2.64 per share in Armstrong's second quarter. The after tax gain on sale of $2.3 million recorded in the third quarter relates to certain accrual and post-closing adjustments. Armstrong expects all post-closing adjustments to be finalized in the fourth quarter of 2000. Note 3. DIVESTITURES - -------------------- On July 31, 2000, Armstrong completed the sale of its Installation Products Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million in cash. Ardex purchased substantially all of the assets and liabilities of IPG including its shares of the W.W. Henry Company. The transaction resulted in a gain of $59.9 million ($44.4 million after tax or $1.09 per share) and was recorded in other income during the third quarter. The financial results of IPG were reported as part of the floor coverings segment. The proceeds and gain are subject to certain post-closing adjustments. Under the terms of the agreement and a related supply agreement, Armstrong will purchase some of its installation products needs from Ardex for an initial term of eight years, subject to certain minimums for the first five years after the sale. The agreement also calls for price adjustments based upon changing market prices for raw materials, labor and energy costs. Note 4. ACQUISITIONS - -------------------- On May 18, 2000 Armstrong acquired privately-held Switzerland-based Gema Holdings AG ("Gema"), a leading manufacturer and installer of metal ceilings, for $6 million plus certain contingent consideration based on future results over the next three years. Gema, with annual sales of nearly $50 million, has two manufacturing sites located in Austria and Switzerland and employs nearly 300 people. The acquisition has 6 been recorded under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair market value at the date of acquisition. The purchase price allocation is preliminary. Pro-forma results of Gema have been omitted, as they are not material. Note 5. INDUSTRY SEGMENTS - ------------------------- During the third quarter, it was determined that the textiles and sports flooring operating segment should be separately presented. Previously, this segment was included as part of the floor coverings segment. Prior year amounts have been restated for comparability.
(amounts in millions) Three months Nine months ended September 30 ended September 30 Net sales to external customers 2000 1999 2000 1999 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 339.5 $ 351.3 $ 974.5 $ 986.2 Building products 214.1 200.0 594.8 571.8 Wood products 215.7 210.0 676.8 615.9 Textiles and sports flooring 66.3 76.5 197.7 220.1 All other - 6.5 - 50.4 ------- ------- ---------- ---------- Total sales to external customers $ 835.6 $ 844.3 $ 2,443.8 $ 2,444.4 ======= ======= ========== ==========
Three months Nine months ended September 30 ended September 30 Segment operating income (loss) 2000 1999 2000 1999 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 35.2 $ 70.1 $ 108.2 $ 169.8 Building products 35.4 34.4 92.3 95.1 Wood products 18.5 22.1 65.6 70.6 Textiles and sports flooring (2.6) 4.4 1.1 10.4 All other 0.4 0.8 0.5 5.9 ------- ------- ---------- ---------- Total segment operating income 86.9 131.8 267.7 351.8 Charge for asbestos liability - - (236.0) - Unallocated corporate (expense) (18.7) (2.5) (22.9) (8.0) ------- ------- ---------- ---------- Total consolidated operating income $ 68.2 $ 129.3 $ 8.8 $ 343.8 ======= ======= ========== ==========
September 30 December 31 Segment assets 2000 1999 - -------------- ---- ---- Floor coverings $ 996.0 $1,071.4 Building products 544.6 535.1 Wood products 1,366.4 1,308.0 Textiles and sports flooring 212.4 211.0 All other 16.1 16.0 --------- --------- Total segment assets 3,135.5 3,141.5 Assets not assigned to business units 896.7 942.3 --------- --------- Total consolidated assets $ 4,032.2 $ 4,083.8 ========= =========
Note 6. REORGANIZATION AND RESTRUCTURING ACTIVITIES - --------------------------------------------------- The following table summarizes activity in the reorganization and restructuring accruals for the first nine months of 2000 and 1999:
Beginning Cash Net Charges/ Ending (amounts in millions) balance payments (Reversals) Other balance ------- -------- ----------- ----- ------- 2000 $12.1 ($2.9) $15.7 ($1.0) $ 23.9 1999 30.6 (14.8) - (0.1) 15.7
A $17.0 million pre-tax reorganization charge was recorded in the third quarter of 2000, of which $8.6 million related to severance and enhanced retirement benefits for more than 180 positions (approximately 66% related to salaried positions) within the European Flooring business. Reorganization actions include staff reductions due to the elimination of administrative positions, the consolidation and closing of sales offices in Europe and the closure of the Team Valley, England commercial tile plant. The remaining portion of the reorganization charge primarily related to the remaining payments on a noncancelable operating lease for 7 an office facility in the U.S. The employees who occupied this office facility are being relocated to the corporate headquarters. Armstrong also recorded a $12.2 million charge to cost of goods sold in the third quarter of 2000 for write-downs of inventory and production-line assets that were not categorized as reorganization costs related to the European reorganization efforts. The inventory write-downs were related to changes in product offerings while the write-downs of production-line assets primarily related to changes in production facilities and product offerings. In addition, $1.3 million of the remaining accrual for the 1998 reorganization was reversed, comprising certain severance accruals that were no longer necessary as certain individuals remained employed by Armstrong. The amount in "other" is primarily related to foreign currency translation. Excluding the $17.0 million accrual related to the third quarter 2000 reorganization charge, most of the remaining balance at September 30, 2000 relates to a noncancelable operating lease. Note 7. OTHER COMPREHENSIVE INCOME (LOSS) - ----------------------------------------- The related tax effects allocated to each component of other comprehensive income (loss) for the nine months ended September 30, 2000 are as follows.
Before Net of Tax Tax Tax (amounts in millions) Amount Benefit Amount ------ ------- ------ Foreign currency translation adjustments and hedging activities $(13.5) - $(13.5) Unrealized loss on available for sale securities (2.5) - (2.5) Minimum pension liability adjustment (5.0) $1.8 (3.2) ------- ---- ------- Other comprehensive income (loss) $(21.0) $1.8 $(19.2) ======= ==== =======
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------ (amounts in millions) Nine Months Ended September 30 2000 1999 ---- ---- Interest paid $ 76.3 $ 74.9 Income taxes paid, net $ 11.1 $ 21.1
Note 9. EARNINGS (LOSS) PER SHARE - --------------------------------- The difference between the average number of basic and diluted common shares outstanding is due to contingently issuable shares and the effect of dilutive stock options. Earnings per share components may not add due to rounding. The diluted earnings per share components for the first nine months of 2000 use the basic number of shares due to the loss on continuing operations. Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - ------------------------------------------------------- Personal Injury Litigation Armstrong is involved in significant asbestos-related litigation which is described more fully under the heading "Legal Proceedings" in Item 1 of Part II of this report which should be read in conjunction with this discussion and analysis. During the first nine months of 2000, the Center for Claims Resolution ("Center") received and verified approximately 45,300 claims naming Armstrong as a defendant compared to approximately 40,500 during the first nine months of 1999. Armstrong is a defendant in approximately 173,000 pending personal injury claims as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are covered under the Center's Strategic Settlement Program ("SSP") compared to 36% SSP coverage of the December 31, 1999 pending claims. Asbestos-Related Liability 8 In continually evaluating its estimated asbestos-related 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 second quarter of 2000, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $236.0 million. The increase in the estimated liability reflected higher than anticipated claims and higher average settlement costs for claims during the first half of 2000, primarily for settlements outside of the Center's SSP. In the third quarter of 2000, the number of filed claims was within the current expectations but Armstrong's average cost to settle claims was higher than anticipated. Armstrong will continue to study its experience to identify trends and to assess their impact on the range of liability that is probable and estimable. If additional study determines that current cost levels will continue, an increase in the probable asbestos-related liability will be necessary. Armstrong's estimate of its asbestos-related liability that is probable and estimable through 2006 ranges from $758.8 million to $1,363.3 million as of September 30, 2000. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to settle those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, the cost to settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $275.0 million over the next 12 months and has reflected such amount as a current liability as of September 30, 2000. This compares to total liability payments over the prior 12 months of $220.8 million. The Center is involved in numerous legal proceedings with a former member of the Center related to the former member's refusal to pay its share of certain settlements concluded by the Center while that company was a member. In addition, another Center member has terminated its membership due to exhaustion of the assets of its claims trust. This member has also asserted that it is entitled to reductions of certain payments. While the Center believes the member is not entitled to any adjustment, the impact, if any, on the timing of cash flows or amount of recorded liability is uncertain. In estimating its recorded liability, Armstrong has not anticipated unfavorable outcomes resulting from the legal proceedings or any increases in Armstrong's share of liability stemming from the termination of these former Center members. Armstrong's share of liability could increase should there be any negative developments related to these matters. 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 2006. Accordingly, substantially all of the range discussed above, and as recorded by Armstrong, comprises management's best estimate of claims expected to be filed within the forthcoming 6 years. For claims that may be filed beyond 2006, 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 occur, 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. 9 CODEFENDANT BANKRUPTCIES Certain codefendant companies have filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox, Pittsburgh Corning and Owens Corning. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. However, Armstrong does not expect to see a significant increase in the number of claims filed since it has been named as a defendant in the majority of claims against these co-defendants. Armstrong could see higher settlement demands from claimants as the number of defendants in the litigation has decreased, but the Center plans to negotiate to minimize any impact on settlement costs. Due to the uncertainties involved, the long-term effect of these proceedings on the litigation cannot be predicted and Armstrong believes it could be several months before Armstrong receives the sufficient data to allow it to ascertain the impact. 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 $268.3 million is recorded as of September 30, 2000. Approximately $27.7 million was received in the second quarter of 2000 pursuant to existing settlements. Of the total recorded asset, approximately $75.8 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 6.50%. 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 such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such 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, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS and the financial condition of the insurers, Armstrong may revise its estimate of probable insurance recoveries. Of the $268.3 million asset, $32.2 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 dependent 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. Conclusion 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 record these amounts. These uncertainties include the number of future claims to be filed, the cost to settle claims in the future, which may be influenced by factors including, but not limited to, the financial viability of other defendants, the impact of any potential legislation and the ability of the Center to achieve future SSP agreements, and the impact of the ADR proceedings on the insurance asset. The recorded liability and asset reflect management's best estimate of probable amounts based on current information. 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. Armstrong believes that potential future charges may be material to the periods in which they are taken. See further discussion of Liquidity and Capital Resources in Note 13. Note 11. - ENVIRONMENTAL LIABILITIES - ------------------------------------ Liabilities of $14.8 million and $14.7 million were recorded at September 30, 2000 and December 31, 1999, respectively, 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 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 may be material to earnings in such future period. Note 12 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD - -------------------------------------------------------------------------- INDUSTRIES, INC. ---------------- The difference between the financial statements is primarily due to transactions related to the formation of Armstrong Holdings, Inc. and stock activity. Note 13 - LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- 10 As of September 30, 2000, Armstrong had no outstanding borrowings under Armstrong World Industries, Inc.'s $450 million credit facility that expires in October 2003 or under Armstrong World Industries, Inc.'s $450 million, 364 day credit facility that expired on October 19, 2000. These lines have been in support of commercial paper issuances. The outstanding amount of commercial paper at September 30, 2000 was $352.6 million. On October 5, 2000, Owens Corning voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect on Armstrong's liquidity. In early October, Armstrong was in discussions to obtain a 364 day credit facility of up to $400 million, with the intention of completing the new facility prior to the October 19, 2000 expiration of the existing $450 million, 364 day credit facility. Whereas indications from participant banks led Armstrong to believe the facility would be fully subscribed, following the Owens Corning filing the potential participants in the new credit facility decided to reevaluate their credit exposures to Armstrong, primarily due to Armstrong's asbestos liability. Agreement was not reached on terms for a new facility. Subsequently the $450 million, 364 day credit facility expired on October 19, 2000. On October 25, 2000, both Standard & Poor's and Moody's Investors Services downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term debt ratings to A-3 and P-3, respectively, citing the reduction in committed credit facilities, prospects for weaker operating performance and continued uncertainty surrounding the asbestos liability, owing to among other things, the Owens Corning bankruptcy filing. Both agencies indicated the potential for additional downgrades which could result from, among other things, the inability to increase untapped committed borrowing capacity, significant increases in the cash flow required to service the asbestos liability, or deteriorating operating performance. Since October 25, 2000, Armstrong stopped issuing commercial paper and began to draw on its $450 million credit facility that expires in October 2003. As of November 14, 2000, the $450 million credit facility was fully drawn, approximately $83 million of commercial paper was outstanding and Armstrong had approximately $127 million of cash on deposit. The remaining outstanding commercial paper will mature by November 22, 2000. Armstrong will face liquidity pressures in the near future. Such pressures will be exacerbated should certain events occur. Specifically, should Armstrong's long term debt ratings be further downgraded by both Standard & Poor's and Moody's, holders of Employee Stock Ownership Plan bonds totaling $142.2 million as of September 30, 2000 would have the right to require Armstrong to redeem them under the terms of the Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004. As of November 14, 2000, Armstrong was not in violation of any debt covenants. The $450 million credit facility that expires in 2003 contains customary events of default, including failure to make payments, failure to meet other material obligations within specific time periods and the acceleration of other material indebtedness. In addition, should Armstrong World Indutstires, Inc.'s consolidated net worth decline by more than $180.6 million from its September 30, 2000 balance, Armstrong would violate the minimum consolidated net worth covenant of the $450 million credit facility. Any event of default could result in the acceleration of the maturity of the facility. Other factors could also influence Armstrong's liquidity. The outlook for Armstrong World Industries, Inc.'s asbestos liability cash payments is highly uncertain. See Part II, Item I "Legal Proceedings" for additional information concerning asbestos litigation. Unforeseen deterioration in expected earnings or working capital requirements would also negatively impact liquidity. On October 30, 2000, Armstrong's Board of Directors elected to suspend the quarterly cash dividend payment with the intent to increase financial flexibility. Armstrong has acted to reduce working capital and capital expenditures and is currently evaluating other alternatives to increase liquidity, which include, among other things, selling non-core assets and businesses, obtaining secured financing, and selling receivables. Armstrong believes that sufficient incremental credit will be available to prevent a liquidity crisis in the next few months but it is unclear whether obtaining such incremental credit would be in the best interests of Armstrong. If Armstrong does not obtain sufficient additional liquidity in the next few months, Armstrong will have to consider seeking protection under the U.S. Bankruptcy Code. 11 Independent Auditors' Review Report ----------------------------------- The Board of Directors and Shareholders of Armstrong Holdings, Inc.: We have reviewed the condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of September 30, 2000, and the related condensed consolidated statements of earnings for the three and nine-month periods ended September 30, 2000 and 1999, and the condensed consolidated statements of cash flows and shareholders' equity for the nine-month periods ended September 30, 2000 and 1999. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Armstrong World Industries, Inc., and subsidiaries as of December 31, 1999, and the related consolidated statements of earnings, cash flows and shareholders' equity for the year then ended (not presented herein); and in our report dated February 2, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Philadelphia, Pennsylvania November 14, 2000 12 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Earnings (amounts in millions) Unaudited
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $835.6 $844.3 $2,443.8 $2,444.4 Cost of goods sold 595.9 554.0 1,709.4 1,614.7 ------ ------ -------- -------- Gross profit 239.7 290.3 734.4 829.7 Selling, general and administrative expense 154.8 159.7 469.3 480.4 Charge for asbestos liability - - 236.0 - Reorganization charges, net 15.7 - 15.7 - Goodwill amortization 5.9 6.5 18.2 18.6 Equity (earnings) from affiliates (4.9) (5.2) (14.1) (13.1) ------ ------ -------- -------- Operating income 68.2 129.3 9.3 343.8 Interest expense 26.0 25.8 79.8 78.9 Other (income) expense, net (61.6) 3.4 (67.0) (4.5) ------ ------ -------- -------- Earnings (loss) from continuing operations before income taxes 103.8 100.1 (3.5) 269.4 Income taxes (benefit) 31.8 38.2 (0.6) 101.3 ------ ------ -------- -------- Earnings (loss) from continuing operations $72.0 $61.9 ($2.9) $168.1 ------ ------ -------- -------- Earnings from discontinued operations, net of tax of $0, $4.3, $3.2, and $11.0, respectively - $9.8 $7.0 $24.7 Gain on sale of discontinued operations, net of tax of $0.9, $0, $42.8 and $0 respectively $2.3 - 108.7 - ------ ------ -------- -------- Earnings from discontinued operations 2.3 9.8 115.7 24.7 Net earnings $74.3 $71.7 $112.8 $192.8 ====== ====== ======== ========
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 17. 13 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Balance Sheets (amounts in millions)
Unaudited Assets September 30, 2000 December 31, 1999 ------ ------------------ ----------------- Current assets: Cash and cash equivalents $33.6 $26.6 Accounts receivable less allowance for discounts and losses 479.6 403.4 Inventories: Finished goods 263.4 257.9 Work in process 54.4 42.4 Raw materials and supplies 162.5 154.6 -------- -------- Total gross inventories 480.3 454.9 Less LIFO and other reserves 50.8 48.0 -------- -------- Total inventories 429.5 406.9 Deferred income taxes 55.7 40.6 Net assets of discontinued operations - 93.5 Other current assets 84.1 86.7 -------- -------- Total current assets 1,082.5 1,057.7 Property, plant, and equipment 2,365.6 2,481.1 Less accumulated depreciation and amortization 1,061.1 1,123.6 -------- -------- Net property, plant and equipment 1,304.5 1,357.5 Insurance for asbestos-related liabilities, noncurrent 236.1 270.0 Investment in affiliates 35.6 34.2 Goodwill, net 890.5 935.1 Other intangibles, net 55.8 54.9 Other noncurrent assets 427.2 374.4 -------- -------- Total assets $4,032.2 $4,083.8 ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $24.0 $64.7 Current installments of long-term debt 14.8 36.1 Accounts payable and accrued expenses 724.5 636.2 Income taxes 35.8 2.1 -------- -------- Total current liabilities 799.1 739.1 Long-term debt, less current installments 1,314.3 1,412.9 Long-term amounts payable to parent company 4.7 - Employee Stock Ownership Plan (ESOP) loan guarantee 142.2 155.3 Postretirement and postemployment benefit liabilities 244.6 244.5 Pension benefit liabilities 147.1 166.2 Asbestos-related long-term liabilities 483.8 506.5 Other long-term liabilities 94.8 105.4 Deferred income taxes 62.7 62.9 Minority interest in subsidiaries 8.3 11.8 -------- -------- Total noncurrent liabilities 2,502.5 2,665.5 Shareholders' equity: Common stock 51.9 51.9 Capital in excess of par value 175.8 176.4 Reduction for ESOP loan guarantee (180.5) (190.3) Retained earnings 1,247.6 1,196.2 Accumulated other comprehensive loss (35.7) (16.5) Treasury stock (528.5) (538.5) -------- -------- Total shareholders' equity 730.6 679.2 -------- -------- Total liabilities and shareholders' equity $4,032.2 $4,083.8 ======== ========
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 17. 14 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity (amounts in millions) Unaudited
2000 1999 ---- ---- Common stock, $1 par value: - -------------------------- Balance at beginning of year & September 30 $ 51.9 $ 51.9 --------- --------- Capital in excess of par value: - ------------------------------ Balance at beginning of year $ 176.4 $ 173.0 Stock issuances and other 4.7 5.9 Contribution of treasury stock to ESOP (5.3) - --------- --------- Balance at September 30 $ 175.8 $ 178.9 --------- --------- Reduction for ESOP loan guarantee: - --------------------------------- Balance at beginning of year $ (190.3) $ (199.1) Principal paid 13.2 11.2 Loans to ESOP (7.3) (0.8) Contribution of treasury stock to ESOP (4.1) - Accrued compensation 8.0 4.8 --------- --------- Balance at September 30 $ (180.5) $ (183.9) --------- --------- Retained earnings: - ----------------- Balance at beginning of year $1,196.2 $1,257.0 Net earnings 112.8 $112.8 192.8 $ 192.8 Tax benefit on dividends paid on unallocated common shares 0.7 1.4 --------- --------- Total $1,309.7 $1,451.2 Less rights redemptions 2.0 - Less common stock dividends 60.1 57.7 --------- --------- Balance at September 30 $1,247.6 $1,393.5 --------- --------- Accumulated other comprehensive income (loss): - --------------------------------------------- Balance at beginning of year $ (16.5) $ (25.4) Foreign currency translation adjustments and hedging activities (13.5) 1.1 Unrealized loss on available for sale securities (2.5) - Minimum pension liability adjustments (3.2) 3.0 --------- --------- Total other comprehensive income (loss) (19.2) (19.2) 4.1 4.1 --------- ------- --------- ------- Balance at September 30 $ (35.7) $ (21.3) --------- --------- Comprehensive income $ 93.6 $ 196.9 - -------------------- ======= ======= Less treasury stock at cost: - --------------------------- Balance at beginning of year $ 538.5 $ 547.7 Stock purchases - 0.8 Stock issuance activity, net (0.6) (2.4) Contribution of treasury stock to ESOP (9.4) - --------- --------- Balance at September 30 $ 528.5 $ 546.1 --------- --------- Total shareholders' equity $ 730.6 $ 873.0 ======== ========
See accompanying footnotes to the unaudited condensed consolidated financial statements beginning on page 17. 15 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Cash Flows (amounts in millions) Unaudited
Nine Months Ended September 30, 2000 1999 ---- ---- Cash flows from operating activities: Net earnings $112.8 $192.8 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization, continuing operations 125.7 117.2 Depreciation and amortization, discontinued operations 3.9 7.7 Gain on sale of businesses (211.3) (1.8) Deferred income taxes 1.6 3.3 Equity earnings from affiliates (14.1) (13.1) Reorganization and restructuring payments (2.9) (14.8) Payments for asbestos-related claims, net of recoveries (131.0) (52.4) Charge for asbestos liability 236.0 - Decrease in net assets of businesses held for sale (0.3) (3.7) Increase in net assets of discontinued operations - (7.8) Changes in operating assets and liabilities net of effects of reorganization, restructuring and dispositions: Increase in receivables (67.5) (86.9) (Increase)/decrease in inventories (30.2) 1.6 (Increase)/decrease in other current assets (11.1) 44.8 Increase in other noncurrent assets (44.0) (55.7) Increase in accounts payable and accrued expenses 4.9 73.1 Increase in income taxes payable 29.1 85.5 Increase/(decrease) in other long-term liabilities (8.7) 9.0 Other, net 24.1 (5.0) ------ ------ Net cash provided by operating activities 17.0 293.8 ------ ------ Cash flows from investing activities: Purchases of property, plant and equipment, continuing operations (107.8) (115.3) Purchases of property, plant and equipment, discontinued operations (2.8) (5.6) Investment in computer software (8.5) (6.4) Acquisitions, net of cash acquired (6.5) (3.8) Distributions from equity affiliates 11.1 10.7 Proceeds from the sale of assets 3.3 3.5 Proceeds from the sale of businesses 329.3 87.6 Other, net - (0.2) ------ ------ Net cash provided by (used for) investing activities 218.1 (29.5) ------ ------ Cash flows from financing activities: Decrease in short-term debt, net (42.8) (34.1) Issuance of long-term debt - 200.0 Payments of long-term debt (127.2) (347.6) Cash dividends paid (58.1) (57.7) Purchase of common stock for the treasury, net (1.4) (0.8) Proceeds from exercised stock options 0.1 1.2 Other, net 5.9 (0.3) ------ ------ Net cash used for financing activities (223.5) (239.3) ------ ------ Effect of exchange rate changes on cash and cash equivalents (4.6) (0.1) ------ ------ Net increase in cash and cash equivalents $7.0 $24.9 Cash and cash equivalents at beginning of period $26.6 $38.2 ------ ------ Cash and cash equivalents at end of period $33.6 $63.1 ====== ======
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 17. 16 Note 1. BASIS OF PRESENTATION - ----------------------------- The accompanying consolidated financial statements contain the financial results of Armstrong World Industries, Inc. ("Armstrong"). Armstrong Holdings, Inc. acquired the stock of Armstrong on May 1, 2000. An indirect holding in Armstrong makes up substantially all of the assets of Armstrong Holdings, Inc. Financial statements of Armstrong, a wholly owned subsidiary of Armstrong Holdings, Inc., are shown due to the existence of publicly-traded debt. See Note 11 for discussion of the financial statement differences between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Operating results of 2000, compared with the corresponding period of 1999 included in this report, are unaudited. Armstrong completed the previously announced sale of its Insulation Products segment on May 31, 2000 (see Note 2). Accordingly, the accompanying condensed consolidated financial statements reflect this business as a discontinued operation and prior periods have been restated. The accounting policies used in preparing these statements are the same as those used in preparing Armstrong's consolidated financial statements for the year ended December 31, 1999. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Armstrong's annual report and Form 10-K for the fiscal year ended December 31, 1999. In the opinion of management, all adjustments of a normal recurring nature have been included to provide a fair statement of the results for the reporting periods presented. Quarterly results are not necessarily indicative of annual earnings. The third quarters of the wood products segment ended on September 30, 2000 and October 2, 1999. No events occurred between September 30, 1999 and October 2, 1999 materially affecting Armstrong's financial position or results of operations. Note 2. DISCONTINUED OPERATIONS - ------------------------------- On May 31, 2000, Armstrong completed its sale of all of the entities, assets and certain liabilities comprising its Insulation Products segment to Orion Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch investment firm Gilde Investment Management N.V. for $264 million. The transaction resulted in an after tax gain of $106.4 million, or $2.64 per share in Armstrong's second quarter. The after tax gain on sale of $2.3 million recorded in the third quarter relates to certain accrual and post-closing adjustments. Armstrong expects all post-closing adjustments to be finalized in the fourth quarter of 2000. Note 3. DIVESTITURES - -------------------- On July 31, 2000, Armstrong completed the sale of its Installation Products Group ("IPG") to subsidiaries of the German company Ardex GmbH, for $86 million in cash. Ardex purchased substantially all of the assets and liabilities of IPG including its shares of the W.W. Henry Company. The transaction resulted in a gain of $59.9 million ($44.4 million after tax or $1.09 per share) and was recorded in other income during the third quarter. The financial results of IPG were reported as part of the floor coverings segment. The proceeds and gain are subject to certain post-closing adjustments. Under the terms of the agreement and a related supply agreement, Armstrong will purchase some of its installation products needs from Ardex for an initial term of eight years, subject to certain minimums for the first five years after the sale. The agreement also calls for price adjustments based upon changing market prices for raw materials, labor and energy costs. Note 4. ACQUISITIONS - -------------------- On May 18, 2000 Armstrong acquired privately-held Switzerland-based Gema Holdings AG ("Gema"), a leading manufacturer and installer of metal ceilings, for $6 million plus certain contingent consideration based on future results over the next three years. Gema, with annual sales of nearly $50 million, has two manufacturing sites located in Austria and Switzerland and employs nearly 300 people. The acquisition has been recorded under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair market value at the date of acquisition. The purchase price allocation is preliminary. Pro-forma results of Gema have been omitted, as they are not material. 17 Note 5. INDUSTRY SEGMENTS - ------------------------- During the third quarter, it was determined that the textiles and sports flooring operating segment should be separately presented. Previously, this segment was included as part of the floor coverings segment. Prior year amounts have been restated for comparability.
(amounts in millions) Three months Nine months ended September 30 ended September 30 Net sales to external customers 2000 1999 2000 1999 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 339.5 $ 351.3 $ 974.5 $ 986.2 Building products 214.1 200.0 594.8 571.8 Wood products 215.7 210.0 676.8 615.9 Textiles and sports flooring 66.3 76.5 197.7 220.1 All other - 6.5 - 50.4 ------- ------- --------- --------- Total sales to external customers $ 835.6 $ 844.3 $ 2,443.8 $ 2,444.4 ======= ======= ========= ========= Three months Nine months ended September 30 ended September 30 Segment operating income (loss) 2000 1999 2000 1999 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 35.2 $ 70.1 $ 108.2 $ 169.8 Building products 35.4 34.4 92.3 95.1 Wood products 18.5 22.1 65.6 70.6 Textiles and sports flooring (2.6) 4.4 1.1 10.4 All other 0.4 0.8 0.5 5.9 ------- ------- --------- --------- Total segment operating income 86.9 131.8 267.7 351.8 Charge for asbestos liability - - (236.0) - Unallocated corporate (expense) (18.7) (2.5) (22.4) (8.0) ------- ------- --------- --------- Total consolidated operating income $ 68.2 $ 129.3 $ 9.3 $ 343.8 ======= ======= ========= ========= September 30 December 31 Segment assets 2000 1999 - -------------- ---- ---- Floor coverings $ 996.0 $ 1,071.4 Building products 544.6 535.1 Wood products 1,366.4 1,308.0 Textiles and sports flooring 212.4 211.0 All other 16.1 16.0 --------- --------- Total segment assets 3,135.5 3,141.5 Assets not assigned to business units 896.7 942.3 --------- --------- Total consolidated assets $ 4,032.2 $ 4,083.8 ========= =========
Note 6. REORGANIZATION AND RESTRUCTURING ACTIVITIES - --------------------------------------------------- The following table summarizes activity in the reorganization and restructuring accruals for the first nine months of 2000 and 1999:
Beginning Cash Net Charges/ Ending (amounts in millions) balance payments (Reversals) Other balance ------- -------- ----------- ----- ------- 2000 $12.1 ($2.9) $15.7 ($1.0) $ 23.9 1999 30.6 (14.8) - (0.1) 15.7
A $17.0 million pre-tax reorganization charge was recorded in the third quarter of 2000, of which $8.6 million related to severance and enhanced retirement benefits for more than 180 positions (approximately 66% related to salaried positions) within the European Flooring business. Reorganization actions include staff reductions due to the elimination of administrative positions, the consolidation and closing of sales offices in Europe and the closure of the Team Valley, England commercial tile plant. The remaining portion of the reorganization charge primarily related to remaining payments on a noncancelable operating lease for an office facility in the U.S. The employees who occupied this office facility are being relocated to the corporate headquarters. Armstrong also recorded a $12.2 million charge to cost of goods sold in the third quarter of 2000 for write-downs of inventory and production-line assets that were not categorized as reorganization costs related to 18 the European reorganization efforts. The inventory write-downs were related to changes in product offerings while the write-downs of production-line assets primarily related to changes in production facilities and product offerings. In addition, $1.3 million of the remaining accrual for the 1998 reorganization charge was reversed, comprising certain severance accruals that were no longer necessary as certain individuals remained employed by Armstrong. The amount in "other" is primarily related to foreign currency translation. Excluding the $17.0 million accrual related to the third quarter 2000 reorganization charge, most of the remaining balance at September 30, 2000 relates to a noncancelable operating lease. Note 7. OTHER COMPREHENSIVE INCOME (LOSS) - ----------------------------------------- The related tax effects allocated to each component of other comprehensive income (loss) for the nine months ended September 30, 2000 are as follows.
Before Net of Tax Tax Tax (amounts in millions) Amount Benefit Amount ------ ------- ------ Foreign currency translation adjustments and hedging activities $(13.5) - $(13.5) Unrealized loss on available for sale securities (2.5) - (2.5) Minimum pension liability adjustment (5.0) $1.8 (3.2) ------- ---- ------- Other comprehensive income (loss) $(21.0) $1.8 $(19.2) ======= ==== =======
Note 8. SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------ (amounts in millions) Nine Months Ended September 30 2000 1999 ---- ---- Interest paid $ 76.3 $ 74.9 Income taxes paid, net $ 11.1 $ 21.1
Note 9. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - ------------------------------------------------------ Personal Injury Litigation Armstrong is involved in significant asbestos-related litigation which is described more fully under the heading "Legal Proceedings" in Item 1 of Part II of this report which should be read in conjunction with this discussion and analysis. During the first nine months of 2000, the Center for Claims Resolution ("Center") received and verified approximately 45,300 claims naming Armstrong as a defendant compared to approximately 40,500 during the first nine months of 1999. Armstrong is a defendant in approximately 173,000 pending personal injury claims as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are covered under the Center's Strategic Settlement Program ("SSP") compared to 36% SSP coverage of the December 31, 1999 pending claims. Asbestos-Related Liability In continually evaluating its estimated asbestos-related 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. 19 In the second quarter of 2000, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $236.0 million. The increase in the estimated liability reflected higher than anticipated claims and higher average settlement costs for claims during the first half of 2000, primarily for settlements outside of the Center's SSP. In the third quarter of 2000, the number of filed claims was within the current expectations but Armstrong's average cost to settle claims was higher than anticipated. Armstrong will continue to study its experience to identify trends and to assess their impact on the range of liability that is probable and estimable. If additional study determines that current cost levels will continue, an increase in the probable asbestos-related liability will be necessary. Armstrong's estimate of its asbestos-related liability that is probable and estimable through 2006 ranges from $758.8 million to $1,363.3 million as of September 30, 2000. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to settle those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, the cost to settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $275.0 million over the next 12 months and has reflected such amount as a current liability as of September 30, 2000. This compares to total liability payments over the prior 12 months of $220.8 million. The Center is involved in numerous legal proceedings with a former member of the Center related to the former member's refusal to pay its share of certain settlements concluded by the Center while that company was a member. In addition, another Center member has terminated its membership due to exhaustion of the assets of its claims trust. This member has also asserted that it is entitled to reductions of certain payments. While the Center believes the member is not entitled to any adjustment, the impact, if any, on the timing of cash flows or amount of recorded liability is uncertain. In estimating its recorded liability, Armstrong has not anticipated unfavorable outcomes resulting from the legal proceedings or any increases in Armstrong's share of liability stemming from the termination of these former Center members. Armstrong's share of liability could increase should there be any negative developments related to these matters. 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 2006. Accordingly, substantially all of the range discussed above, and as recorded by Armstrong, comprises management's best estimate of claims expected to be filed within the forthcoming 6 years. For claims that may be filed beyond 2006, 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 occur, 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. CODEFENDANT BANKRUPTCIES Certain codefendant companies have filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox, Pittsburgh Corning and Owens Corning. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. However, Armstrong does not expect to see a significant increase in the number of claims filed since it has been named as a defendant in the majority of claims against these co-defendants. Armstrong could see higher settlement demands from claimants as the number of defendants in the litigation has decreased, but the Center plans to negotiate to minimize any impact on settlement costs. Due to the uncertainties involved, the 20 long-term effect of these proceedings on the litigation cannot be predicted and Armstrong believes it could be several months before Armstrong receives the sufficient data to allow it to ascertain the impact. 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 $268.3 million is recorded as of September 30, 2000. Approximately $27.7 million was received in the second quarter of 2000 pursuant to existing settlements. Of the total recorded asset, approximately $75.8 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 6.50%. 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 such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such 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, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS and the financial condition of the insurers, Armstrong may revise its estimate of probable insurance recoveries. Of the $268.3 million asset, $32.2 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 dependent 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. Conclusion 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 record these amounts. These uncertainties include the number of future claims to be filed, the cost to settle claims in the future, which may be influenced by factors including, but not limited to, the financial viability of other defendants, the impact of any potential legislation and the ability of the Center to achieve future SSP agreements, and the impact of the ADR proceedings on the insurance asset. The recorded liability and asset reflect management's best estimate of probable amounts based on current information. 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. Armstrong believes that potential future charges may be material to the periods in which they are taken. See further discussion of Liquidity and Capital Resources in Note 12. Note 10. - ENVIRONMENTAL LIABILITIES - ------------------------------------ Liabilities of $14.8 million and $14.7 million were recorded at September 30, 2000 and December 31, 1999, respectively, 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 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 may be material to earnings in such future period. Note 11 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS INC. AND ARMSTRONG WORLD - -------------------------------------------------------------------------- INDUSTRIES, INC. ---------------- The difference between the financial statements is primarily due to transactions related to the formation of Armstrong Holdings, Inc. and stock activity. Note 12 - LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- As of September 30, 2000, Armstrong had no outstanding borrowings under Armstrong World Industries Inc.'s $450 million credit facility that expires in October 2003 or under Armstrong World Industries Inc.'s $450 million, 364 day credit facility that expired on October 19, 2000. These lines have been in support of commercial paper issuances. The outstanding amount of commercial paper at September 30, 2000 was $352.6 million. On October 5, 2000, Owens Corning voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect on Armstrong's liquidity. In early October, Armstrong was in discussions to obtain a 364 day credit facility of up to $400 million, with the intention of 21 completing the new facility prior to the October 19, 2000 expiration of the existing $450 million, 364 day credit facility. Whereas indications from participant banks led Armstrong to believe the facility would be fully subscribed, following the Owens Corning filing the potential participants in the new credit facility decided to reevaluate their credit exposures to Armstrong, primarily due to Armstrong's asbestos liability. Agreement was not reached on terms for a new facility. Subsequently the $450 million, 364 day credit facility expired on October 19, 2000. On October 25, 2000, both Standard & Poor's and Moody's Investors Services downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term debt ratings to A-3 and P-3, respectively, citing the reduction in committed credit facilities, prospects for weaker operating performance and continued uncertainty surrounding the asbestos liability, owing to among other things, the Owens Corning bankruptcy filing. Both agencies indicated the potential for additional downgrades which could result from, among other things, the inability to increase untapped committed borrowing capacity, significant increases in the cash flow required to service the asbestos liability, or deteriorating operating performance. Since October 25, 2000, Armstrong stopped issuing commercial paper and began to draw on its $450 million credit facility that expires in October 2003. As of November 14, 2000, the $450 million credit facility was fully drawn, approximately $83 million of commercial paper was outstanding and Armstrong had approximately $127 million of cash on deposit. The remaining outstanding commercial paper will mature by November 22, 2000. Armstrong will face liquidity pressures in the near future. Such pressures will be exacerbated should certain events occur. Specifically, should Armstrong's long term debt ratings be further downgraded by both Standard & Poor's and Moody's, holders of Employee Stock Ownership Plan bonds totaling $142.2 million as of September 30, 2000 would have the right to require Armstrong to redeem them under the terms of the Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004. As of November 14, 2000, Armstrong was not in violation of any debt covenants. The $450 million credit facility that expires in 2003 contains customary events of default, including failure to make payments, failure to meet other material obligations within specific time periods and the acceleration of other material indebtedness. In addition, should Armstrong World Industries, Inc.'s consolidated net worth decline by more than $180.6 million from its September 30, 2000 balance, Armstrong would violate the minimum consolidated net worth covenant of the $450 million credit facility. Any event of default could result in the acceleration of the maturity of the facility. Other factors could also influence Armstrong's liquidity. The outlook for Armstrong's asbestos liability cash payments is highly uncertain. See Part II, Item I "Legal Proceedings" for additional information concerning asbestos litigation. Unforeseen deterioration in expected earnings or working capital requirements would also negatively impact liquidity. On October 30, 2000, Armstrong's Board of Directors elected to suspend the quarterly cash dividend payment with the intent to increase financial flexibility. Armstrong has acted to reduce working capital and capital expenditures and is currently evaluating other alternatives to increase liquidity, which include, among other things, selling non-core assets and businesses, obtaining secured financing, and selling receivables. Armstrong believes that sufficient incremental credit will be available to prevent a liquidity crisis in the next few months but it is unclear whether obtaining such incremental credit would be in the best interests of Armstrong. If Armstrong does not obtain sufficient additional liquidity in the next few months, Armstrong will have to consider seeking protection under the U.S. Bankruptcy Code. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------ ----------------------------------------------------------------------- of Operations ------------- The following discussion and analysis correspond to Armstrong Holdings, Inc. See Notes 1, 2 and 12 to the unaudited condensed consolidated financial statements for further discussion. Financial Condition - ------------------- As shown on the condensed Consolidated Balance Sheets (see page 3), Armstrong had cash and cash equivalents of $33.6 million at September 30, 2000. Working capital was $283.4 million as of September 30, 2000, $35.2 million lower than the $318.6 million recorded at the end of 1999. The ratio of current assets to current liabilities was 1.35 to 1 as of September 30, 2000, compared with 1.43 to 1 as of December 31, 1999. Long-term debt, excluding Armstrong's guarantee of an ESOP loan, decreased in the third quarter of 2000. At September 30, 2000, long-term debt of $1,314.3 million, or 58.9 percent of total capital, compared with $1,412.9 million, or 60.2 percent of total capital, at the end of 1999. At September 30, 2000, and December 31, 1999, the ratios of total debt (including Armstrong's guarantee of the ESOP loan) as a percent of total capital were 67.0 percent and 71.1 percent, respectively. The decrease in long-term debt was primarily due to the receipt of proceeds from the divestitures of the Insulation Products segment and the Installation Products Group, (which was part of the floor coverings segment) which was used to pay outstanding debt. As shown on the condensed Consolidated Statements of Cash Flows (see page 5), net cash provided by operating activities for the nine months ended September 30, 2000, was $17.0 million compared with $293.8 million for the comparable period in 1999. The decrease was primarily due to several items including lower net income, higher net payments for asbestos claims and changes in working capital. Net cash provided by investing activities was $218.1 million for the nine months ended September 30, 2000, compared with net cash used for investing activities of $29.5 million for the nine months ended September 30, 1999. The increase was primarily due to proceeds from the sale of the Insulation Products segment and the Installation Products Group. Net cash used for financing activities was $223.5 million for the nine months ended September 30, 2000 compared with $239.3 million for the nine months ended September 30, 1999. The decrease was primarily due to the $170.0 million net decrease in debt during 2000 compared to the $181.7 million net decrease in debt during 1999. Armstrong is regularly evaluating its various business units and may from time to time dispose of, or restructure, those units. During 2000, Armstrong sold its Insulation Products segment and its Installation Products while reorganizing its European flooring business. Armstrong is also currently in divestiture discussions and evaluations related to its textiles and sports flooring products segment. Asbestos-Related Litigation - --------------------------- Personal Injury Litigation Armstrong is involved in significant asbestos-related litigation which is described more fully under the heading "Legal Proceedings" in Item 1 of Part II of this report which should be read in conjunction with this discussion and analysis. During the first nine months of 2000, the Center for Claims Resolution ("Center") received and verified approximately 45,300 claims naming Armstrong as a defendant compared to approximately 40,500 during the first nine months of 1999. Armstrong is a defendant in approximately 173,000 pending personal injury claims as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are covered under the Center's Strategic Settlement Program ("SSP") compared to 36% SSP coverage of the December 31, 1999 pending claims. Armstrong continues to seek broad-based settlements of claims through the Center. To date, the Center has reached SSP agreements with law firms that cover approximately 130,000 claims that name Armstrong as a defendant, including agreements with 16 law firms covering approximately 36,000 claims during the first nine months of 2000. Some of these claims have already been paid, some are currently pending and some 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 re-negotiation over a period of 2 to 5 years. The plaintiff law firms are required to recommend settlements to 23 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. For some agreements, the component of the agreement that covers future claims is subject to re-negotiation if members leave the Center. As discussed later, several Center members departed in 2000 and the Center is currently in discussions with plaintiff law firms to address the treatment of future claims. Although it is early in the negotiation process, it is possible that the re-negotiation of these agreements could lead to an increase in the asbestos liability. Negotiations with additional law firms engaged in asbestos-related litigation that could resolve additional pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain. Asbestos - Related Liability In continually evaluating its estimated asbestos-related 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 second quarter of 2000, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $236.0 million. The increase in the estimated liability reflected higher than anticipated claims and higher average settlement costs for claims during the first half of 2000, primarily for settlements outside of the Center's SSP. In the third quarter of 2000, the number of filed claims was within the current expectations but Armstrong's average cost to settle claims was higher than anticipated. Armstrong will continue to study its experience to identify trends and to assess their impact on the range of liability that is probable and estimable. If additional study determines that current cost levels will continue, an increase in the probable asbestos-related liability will be necessary. Armstrong's estimate of its asbestos-related liability that is probable and estimable through 2006 ranges from $758.8 million to $1,363.3 million as of September 30, 2000. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to settle those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, the cost to settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $275.0 million over the next 12 months and has reflected such amount as a current liability as of September 30, 2000. This compares to total liability payments over the prior 12 months of $220.8 million. The Center is involved in numerous legal proceedings with a former member of the Center related to the former member's refusal to pay its share of certain settlements concluded by the Center while that company was a member. In addition, another Center member has terminated its membership due to exhaustion of the assets of its claims trust. This member has also asserted that it is entitled to reductions of certain payments. While the Center believes the member is not entitled to any adjustment, the impact, if any, on the timing of cash flows or amount of recorded liability is uncertain. In estimating its recorded liability, Armstrong has not anticipated unfavorable outcomes resulting from the legal proceedings or any increases in Armstrong's share of liability stemming from the termination of these former Center members. Armstrong's share of liability could increase should there be any negative developments related to these matters. 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 2006. Accordingly, substantially all of the range discussed above, and as recorded by Armstrong, comprises management's best estimate of claims expected to be filed within the forthcoming 6 years. For claims that may be filed beyond 2006, 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 24 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 occur, 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. Collateral Requirements As of September 30, 2000, Armstrong had secured $56.2 million of future claim payments with a surety bond to meet minimum collateral requirements established by the Center. On October 27, 2000, the insurance company that underwrote the surety bond informed Armstrong and the Center of its intention not to renew the surety bond effective February 28, 2001. Armstrong is assessing its alternatives relative to the terminated bond. Alternatives include replacing the bond with another insurance company, purchasing a letter of credit from a financial institution, posting cash as collateral or negotiating with the Center to waive the collateral requirement. 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. Armstrong has entered into settlements with a number of the carriers resolving its coverage issues. However, 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 such 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. However, during the third quarter of 2000, it was determined that a new trial judge should be selected for the ADR. That process is underway but a new trial judge has not yet been selected. Armstrong is uncertain at this time as to the impact, if any, this change will have on the preliminary decisions of the initial phases of the ADR. Because of the continuing ADR process and the possibilities for appeal on certain matters, Armstrong has not yet completely determined the financial implications of the decisions. 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 $268.3 million is recorded as of September 30, 2000. Approximately $27.7 million was received in the second quarter of 2000 pursuant to existing settlements. Of the total recorded asset, approximately $75.8 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 6.50%. 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 such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such 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, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS and the financial condition of the insurers, Armstrong may revise its estimate of probable insurance recoveries. Of the $268.3 million asset, $32.2 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 dependent 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 $158.7 million for asbestos related claims in the first nine months of 2000 compared to $111.1 million in the first nine months of 1999. Armstrong currently expects to pay between $243.0 million and $251.0 million for asbestos related claims in 2000 compared to $173.0 million in 1999. Armstrong received $27.7 million in asbestos-related insurance recoveries during the first nine months of 2000 compared to $58.7 million during the first nine months of 1999. Armstrong does not anticipate any additional insurance proceeds during the fourth quarter of 2000 and did not receive any insurance proceeds during the fourth quarter of 1999. Therefore, Armstrong currently expects to pay approximately $140.0 million to $145.0 million for asbestos related claims and expenses in 2000, net of expected insurance recoveries and taxes, compared to $74.3 million in 1999. Conclusion 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 record these amounts. These uncertainties include the number of future claims to be filed, the cost to settle claims in the future, which may be influenced by factors including, but not limited to, the financial viability of other defendants, the impact of any potential legislation and the ability of the Center to achieve future SSP agreements, and the impact of the ADR proceedings on the insurance asset. The recorded liability and asset reflect management's best estimate of probable amounts based on current information. 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. Armstrong believes that potential future charges may be material to the periods in which they are taken. See further discussion of Liquidity and Capital Resources below. 25 Liquidity and Capital Resources - ------------------------------- As of September 30, 2000, Armstrong had no outstanding borrowings under Armstrong World Industries, Inc.'s $450 million credit facility that expires in October 2003 or under Armstrong World Industries, Inc.'s $450 million, 364 day credit facility that expired on October 19, 2000. These lines have been in support of commercial paper issuances. The outstanding amount of commercial paper at September 30, 2000 was $352.6 million. On October 5, 2000, Owens Corning voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. This filing has had a significant effect on Armstrong's liquidity. In early October, Armstrong was in discussions to obtain a 364 day credit facility of up to $400 million, with the intention of completing the new facility prior to the October 19, 2000 expiration of the existing $450 million, 364 day credit facility. Whereas indications from participant banks led Armstrong to believe the facility would be fully subscribed, following the Owens Corning filing the potential participants in the new credit facility decided to reevaluate their credit exposures to Armstrong, primarily due to Armstrong's asbestos liability. Agreement was not reached on terms for a new facility. Subsequently the $450 million, 364 day credit facility expired on October 19, 2000. On October 25, 2000, both Standard & Poor's and Moody's Investors Services downgraded Armstrong's long term debt ratings to BBB- and Baa3 and short term debt ratings to A-3 and P-3, respectively, citing the reduction in committed credit facilities, prospects for weaker operating performance and continued uncertainty surrounding the asbestos liability, owing to among other things, the Owens Corning bankruptcy filing. Both agencies indicated the potential for additional downgrades which could result from, among other things, the inability to increase untapped committed borrowing capacity, significant increases in the cash flow required to service the asbestos liability, or deteriorating operating performance. Since October 25, 2000, Armstrong stopped issuing commercial paper and began to draw on its $450 million credit facility that expires in October 2003. As of November 14, 2000, the $450 million credit facility was fully drawn, approximately $83 million of commercial paper was outstanding and Armstrong had approximately $127 million of cash on deposit. The remaining outstanding commercial paper will mature by November 22, 2000. Armstrong will face liquidity pressures in the near future. Such pressures will be exacerbated should certain events occur. Specifically, should Armstrong's long term debt ratings be further downgraded by both Standard & Poor's and Moody's, holders of Employee Stock Ownership Plan bonds totaling $142.2 million as of September 30, 2000 would have the right to require Armstrong to redeem them under the terms of the Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004. As of November 14, 2000, Armstrong was not in violation of any debt covenants. The $450 million credit facility that expires in 2003 contains customary events of default, including failure to make payments, failure to meet other material obligations within specific time periods and the acceleration of other material indebtedness. In addition, should Armstrong's World Industries, Inc.'s consolidated net worth decline by more than $180.6 million from its September 30, 2000 balance, Armstrong would violate the minimum consolidated net worth covenant of the $450 million credit facility. Any envent of default could result in the acceleration of the maturity of the facility. Other factors could also influence Armstrong's liquidity. The outlook for Armstrong's asbestos liability cash payments is highly uncertain. See Part II, Item I "Legal Proceedings" for additional information concerning asbestos litigation. Unforeseen deterioration in expected earnings or working capital requirements would also negatively impact liquidity. On October 30, 2000, Armstrong's Board of Directors elected to suspend the quarterly cash dividend payment with the intent to increase financial flexibility. Armstrong has acted to reduce working capital and capital expenditures and is currently evaluating other alternatives to increase liquidity, which include, among other things, selling non-core assets and businesses, obtaining secured financing, and selling receivables. Armstrong believes that sufficient incremental credit will be available to prevent a liquidity crisis in the next few months but it is unclear whether obtaining such incremental credit would be in the best interests of Armstrong. If Armstrong does not obtain sufficient additional liquidity in the next few months, Armstrong will have to consider seeking protection under the U.S. Bankruptcy Code. Consolidated Results - -------------------- The following discussions of consolidated results are on a continuing operations basis. Third-quarter net sales of $835.6 million from continuing operations were 1.0% lower than in the third quarter of 1999. Included in the third quarter of 1999 were sales from the textile products business which was sold on September 30, 1999. Excluding the impact of the 1999 divestiture and the impact of unfavorable foreign currency translation, sales increased 3.2%. Building products sales increased 7.1% driven primarily by the second quarter 2000 acquisition of our European metal ceilings subsidiary, Gema. Wood products sales 26 increased 2.7%. Sales in the floor coverings and textile and sports flooring products segments decreased 3.4% and 13.3%, respectively, due mainly to lower unfavorable foreign currency translation in Europe. Third-quarter 2000 earnings from continuing operations were $72.0 million or $1.77 per diluted share. This included a pre-tax gain of $59.9 million from the sale of the Installation Products Group ("IPG"), which was part of the floor coverings segment. The third quarter of 2000 included a pre-tax reorganization charge of $17.0 million, of which $8.6 million related to severance and enhanced retirement benefits for more than 180 positions within the European Flooring business. Reorganization actions included staff reductions due to the elimination of administrative positions, the consolidation and closing of sales offices in Europe and the closure of the Team Valley, England commercial tile plant. The remaining portion of the reorganization charge primarily related to remaining payments on a noncancelable operating lease for an office facility in the U.S. The employees who occupied this office facility are being relocated to the corporate headquarters. In addition, $1.3 million of the remaining accrual for the 1998 reorganization charge was reversed, comprising certain severance accruals that were no longer necessary as certain individuals remained employed by Armstrong. Armstrong also recorded a $12.2 million charge to cost of goods sold in the third quarter of 2000 for write-downs of inventory and production-line assets that were not categorized as reorganization costs related to the European reorganization efforts. The inventory write-downs were related to changes in product offerings while the write-downs of production-line assets primarily related to changes in production facilities and product offerings. In addition, Armstrong recorded $11.2 million within SG&A expense for CEO and management transition costs during the third quarter of 2000. The components of this amount included hiring a new CEO, expenses related to the departure of the prior CEO, covenant agreements related to non-compete arrangements and other management transition costs. There will also be approximately $7.6 million of costs in the fourth quarter of 2000 related to settlements of certain benefit plan obligations for former executive employees. Armstrong also recorded $2.3 million within SG&A expense for fixed asset impairments related to the decision to vacate office space in the U.S. Excluding these items discussed above, earnings from continuing operations for the third quarter of 2000 would have been $54.8 million, or $1.35 per diluted share. Third quarter 1999 earnings from continuing operations were $61.9 million, or $1.54 per diluted share. This included a $5.7 million pre-tax loss from the sale of the textile products business and a $2.6 million pre-tax gain from proceeds from the demutualization of an insurance company with whom the Company has company-owned life insurance policies. Excluding these items, earnings from continuing operations for the third quarter of 1999 would have been $62.9 million, or $1.56 per diluted share. The cost of goods sold in the third quarter was 71.3 percent of net sales compared to 65.6 percent of net sales in the third quarter of 1999. Excluding $12.2 million of expenses associated with the third quarter 2000 reorganization of the European flooring business and a $3.6 million insurance settlement received in 1999 for past product claims, cost of goods sold increased from 66.0% of sales in 1999 to 69.9% of sales in 2000. Higher raw material costs primarily in floor coverings and wood products and higher energy costs in building products were the primary drivers of the increase. Third-quarter 2000 SG&A expenses were 18.5 percent of net sales compared to 18.9 percent of net sales in last year's third quarter. The percentage decrease is primarily due to lower incentive bonus accruals and lower selling expense partially offset by CEO and management transition costs, expenses related to the reorganization of European flooring business and asset write-downs related to the decision to vacate office space in Lancaster, PA. Interest expense of $26.0 million was $0.2 million higher than the amount recorded in the third quarter of 1999 principally due to higher interest rates partially offset by lower outstanding debt. Net sales for the first nine months of 2000 were $2,443.8 million, essentially similar to last year's net sales of $2,444.4 million. Excluding the impact of the 1999 divestitures and the impact of foreign exchange rate translation, sales increased 5.2%. A loss from continuing operations of $3.2 million was recorded for the first nine months of 2000. Excluding the third quarter 2000 items described above (gain on the sale of IPG, costs associated with the reorganization of the European flooring business and CEO and management transition costs), the second 27 quarter 2000 asbestos charge and a second quarter demutualization gain, earnings from continuing operations for the first nine months of 2000 would have been $129.6 million, or $3.21 per diluted share. Earnings from continuing operations for the first nine months of 1999 were $168.1 million, or $4.18 per diluted share. Excluding the loss from the sale of the textile products business, a third quarter 1999 demutualization gain and the gain on the sale of a 65% interest in Armstrong Industrial Specialities, Inc., earnings from continuing operations for the first nine months of 1999 would have been $161.6 million, or $4.02 per diluted share. The effective tax rate from continuing operations for the third quarter was 30.6% versus 38.2% for the third quarter of 1999. Excluding the impact of the gain on sale of Installation Products, the reorganization charge and other related expenses in 2000 and the loss from the sale of textile products business in 1999, the third quarter effective tax rate decreased from 38.1% to 36.1% primarily due to increased foreign tax credit utilization. Industry Segment Results - ------------------------ Floor coverings net sales were $339.5 million and $351.3 million in the third quarter of 2000 and 1999, respectively. Sales in the Americas decreased 0.4% versus prior year. European sales of $64.9 million were 19.6% below 1999 levels as a result of unfavorable foreign exchange rate translation, lower prices and a less favorable mix driven by continued market weakness. Excluding the effects of foreign exchange rate translation, sales in Europe were 8.2% below last year. Pacific area sales increased 5.2% versus 1999. Operating income of $35.2 million was 10.4% of sales compared to $70.1 million in the third quarter of 1999, or 20.0% of sales. Excluding expenses associated with reorganizing the European business, other management changes, and $3.6 million received in 1999 for an insurance settlement for past product claims, operating income was $56.7 million or 14.7% below 1999. Operating margin excluding these expenses decreased from 18.9% to 16.7%. The operating margin reduction was driven primarily by higher manufacturing costs, principally higher raw material and production costs for the new ToughGuard product, lower volume in the Americas, and weaker volume and prices in Europe. Building products net sales of $214.1 million increased from $200.0 million in the third quarter of 1999. Excluding the impact of foreign currency translation, sales increased 10.8%. Americas sales increased 2.1% driven primarily by higher sales in the U.S. commercial channel. In Europe, sales increased 18.3% primarily due to incremental sales from Gema, our metal ceilings subsidiary acquired during the second quarter of 2000, and increased sales to emerging markets. Pacific area sales increased 3.5% versus 1999. Operating income increased $1.0 million to $35.4 million as improved volume and increased price in the Americas was largely offset by higher manufacturing expense including raw materials and energy. Overall operating margins decreased from 17.2% to 16.5%. Wood products net sales of $215.7 million in the third quarter of 2000 compared to net sales of $210.0 million in 1999. Cabinet sales decreased 5.7% due to lower volume. Wood flooring sales increased 5.7% versus 1999 driven primarily by volume growth and improved pricing. Operating margins declined from 10.5% to 8.6% primarily driven by higher lumber costs which are relatively unchanged since the first quarter of 2000 but 10.6% above last year. Textiles and sports flooring products net sales of $66.3 million in the third quarter of 2000 were 13.3% lower than last year. Excluding the impact of unfavorable foreign currency translation, sales increased 2.3% driven by volume growth primarily in the sports flooring business. An operating loss of $2.6 million was incurred compared to operating income of $4.4 million in 1999. Excluding the impact of expenses associated with European reorganization and management changes, the operating loss was $0.6 million or $5.0 million lower than 1999. The operating income reduction was driven mainly by less favorable mix of products sold, increased manufacturing and SG&A expense and unfavorable foreign currency translation which more than offset the impact of volume growth. In the all other segment, sales and operating margin were down $6.5 million and $0.4 million, respectively due to the absence of the textile products business which was sold in the third quarter of 1999. Unallocated corporate expense for the third quarter of 2000 of $18.7 million increased $16.2 million versus 1999. Excluding $19.7 million in expenses related to the CEO transition and other management changes and the decision to vacate an office facility in the U.S., unallocated corporate expense decreased $3.5 million primarily due to lower incentive compensation expense. 28 Recent Accounting Pronouncements - -------------------------------- The Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, as amended on June 26, 2000. SAB No. 101 provides the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues, and is effective beginning in the fourth quarter of 2000. Armstrong is evaluating the effects of implementation, if any, on its financial statements. In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities ("FAS 138"), an amendment of FASB Statement No. 133 ("FAS 133"). FAS 138 amends some accounting and reporting standards contained in FAS 133 and also addresses a limited number of issues causing implementation difficulties in applying FAS 133. Armstrong has formed a team to identify and implement the appropriate systems and processes to adopt these statements effective January 1, 2001. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The effects of these statements on Armstrong's financial position or results of operations have not yet been determined. In October 2000, the FASB issued Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("FAS 140"), a replacement of FASB SFAS No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement is effective March 2001. Armstrong is evaluating the effects of implementation, if any, on its financial statements. Cautionary Statements About Future Results - ------------------------------------------ This discussion is provided under the Private Securities Litigation Reform Act of 1995. Our disclosures in reports here and in other public comments contain forward-looking statements. These statements provide our expectations or forecasts of future events and can be identified by the use of words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "outlook," and others of similar meaning in discussions of future operating or financial performance. In particular, these include statements relating to future liquidity, future earnings per share, dividends, financial results, operating results, prospective products, future performance of current products, future sales or expenses, and the outcome of contingencies such as legal proceedings. Any of these forward-looking statements may turn out to be wrong. Actual future results may vary materially. Consequently, no forward-looking statement can be guaranteed. Many factors could cause our actual results to differ materially from those expected. These factors include: . our ability to secure sufficient additional financial flexibility and liquidity . our asbestos-related and any other litigation . downgrade in our credit rating . greater than expected working capital requirements . variations in raw material and energy costs, and our success in achieving manufacturing efficiencies and price increases, . our success in introducing new products, . product and price competition caused by factors such as worldwide excess industry capacity, . interest, foreign exchange and effective tax rates . integration of our acquisitions, . business combinations among competitors and suppliers, . the strength of domestic and foreign end-use markets and improved efficiencies in the European flooring market, and . impacts to international operations caused by changes in intellectual property protections and trade regulations, and the political climate in emerging markets. This should not be considered to be a complete list of all risks and uncertainties that might affect our future results. We undertake no obligation to update any forward-looking statement. Related disclosures in our most recent report on Form 10-K, in our reports on Form 10-Q and any further disclosures in subsequent 10-Q, 8-K and 10-K reports should also be consulted. 29 Part II - Other Information --------------------------- Item 1. Legal Proceedings - ------ ----------------- ASBESTOS-RELATED LITIGATION - --------------------------- The following is a summary update of asbestos-related litigation; see Note 26 to the financial statements of Armstrong's 1999 Form 10-K filing for additional information. Armstrong World Industries, Inc. is a defendant in personal injury claims and property damage claims related to asbestos containing products. In the discussion in this Item, "Armstrong" means Armstrong World Industries, Inc. 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. During the first nine months of 2000, the Center for Claims Resolution ("Center") received and verified approximately 45,300 claims naming Armstrong as a defendant compared to approximately 40,500 during the first nine months of 1999. Armstrong is a defendant in approximately 173,000 pending personal injury claims as of September 30, 2000. Approximately 85,000 (or 49%) of these claims are covered under the Center's Strategic Settlement Program ("SSP") compared to 36% SSP coverage of the December 31, 1999 pending claims. Armstrong continues to seek broad-based settlements of claims through the Center. To date, the Center has reached SSP agreements with law firms that cover approximately 130,000 claims that name Armstrong as a defendant, including agreements with 16 law firms covering approximately 36,000 claims during the first nine months of 2000. Some of these claims have already been paid, some are currently pending and some 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 re-negotiation 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. For some agreements, the component of the agreement that covers future claims is subject to re-negotiation if members leave the Center. As discussed later, several Center members departed in 2000 and the Center is currently in discussions with plaintiff law firms to address the treatment of future claims. Although it is early in the negotiation process, it is possible that the re-negotiation of these agreements could lead to an increase in the asbestos liability. Negotiations with additional law firms engaged in asbestos-related litigation that could resolve additional pending claims are ongoing. The ultimate success and timing of those negotiations is uncertain. Asbestos-Related Liability In continually evaluating its estimated asbestos-related 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 30 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 second quarter of 2000, Armstrong recorded a charge to increase its estimate of probable asbestos-related liability by $236.0 million. The increase in the estimated liability reflected higher than anticipated claims and higher average settlement costs for claims during the first half of 2000, primarily for settlements outside of the Center's SSP. In the third quarter of 2000, the number of filed claims was within the current expectations but Armstrong's average cost to settle claims was higher than anticipated. Armstrong will continue to study its experience to identify trends and to assess their impact on the range of liability that is probable and estimable. If additional study determines that current cost levels will continue, an increase in the probable asbestos-related liability will be necessary. Armstrong's estimate of its asbestos-related liability that is probable and estimable through 2006 ranges from $758.8 million to $1,363.3 million as of September 30, 2000. The range of probable and estimable liability reflects uncertainty in the number of future claims that will be filed and the cost to settle those claims, which may be influenced by a number of factors, including the outcome of the ongoing broad-based settlement negotiations, the cost to settle claims outside the broad-based settlement program 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 $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Of this amount, management expects to incur asbestos liability payments of approximately $275.0 million over the next 12 months and has reflected such amount as a current liability as of September 30, 2000. This compares to total liability payments over the prior 12 months of $220.8 million. The Center is involved in numerous legal proceedings with a former member of the Center related to the former member's refusal to pay its share of certain settlements concluded by the Center while that company was a member. In addition, another Center member has terminated its membership due to exhaustion of the assets of its claims trust. This member has also asserted that it is entitled to reductions of certain payments. While the Center believes the member is not entitled to any adjustment, the impact, if any, on the timing of cash flows or amount of recorded liability is uncertain. In estimating its recorded liability, Armstrong has not anticipated unfavorable outcomes resulting from the legal proceedings or any increases in Armstrong's share of liability stemming from the termination of these former Center members. Armstrong's share of liability could increase should there be any negative developments related to these matters. 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 2006. Accordingly, substantially all of the range discussed above, and as recorded by Armstrong, comprises management's best estimate of claims expected to be filed within the forthcoming 6 years. For claims that may be filed beyond 2006, 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 occur, 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. CODEFENDANT BANKRUPTCIES Certain codefendant companies have filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code, including recent filings by Babcock & Wilcox, Pittsburgh Corning and Owens Corning. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. However, Armstrong does not expect to see a significant increase in the number of claims filed since it has been named as a defendant in the majority of claims against these co-defendants. Armstrong could see higher 31 settlement demands from claimants as the number of defendants in the litigation has decreased, but the Center plans to negotiate to minimize any impact on settlement costs. Due to the uncertainties involved, the long-term effect of these proceedings on the litigation cannot be predicted and Armstrong believes it could be several months before Armstrong receives the sufficient data to allow it to ascertain the impact. COLLATERAL REQUIREMENTS As of September 30, 2000, Armstrong had secured $56.2 million of future claim payments with a surety bond to meet minimum collateral requirements established by the Center. On October 27, 2000, the insurance company that underwrote the surety bond informed Armstrong and the Center of its intention not to renew the surety bond effective February 28, 2001. Armstrong is assessing its alternatives relative to the terminated bond. Alternatives include replacing the bond with another insurance company, purchasing a letter of credit from a financial institution, posting cash as collateral or negotiating with the Center to waive the collateral requirement. Property Damage Litigation Armstrong is also one of many defendants in seven pending property damage claims as of September 30, 2000, 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. In the second quarter of 2000, Armstrong was served with a lawsuit seeking class certification of Texas residents who own asbestos-containing products. This case includes allegations that Armstrong asbestos-containing products caused damage to buildings and generally seeks compensatory damages and equitable relief, including testing, reimbursement for removal and diminution of property value. Armstrong vigorously denies the validity of the allegations against it in these claims and believes that any costs will be covered by insurance. These claims are handled directly by Armstrong and not by the Center. 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. Armstrong has entered into settlements with a number of the carriers resolving its coverage issues. However, 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 such 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. However, during the third quarter of 2000, it was determined that a new trial judge should be selected for the ADR. That process is underway but a new trial judge has not yet been selected. 32 Armstrong is uncertain at this time as to the impact, if any, this change will have on the preliminary decisions of the initial phases of the ADR. Because of the continuing ADR process and the possibilities for appeal on certain matters, Armstrong has not yet completely determined the financial implications of the decisions. 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 $268.3 million is recorded as of September 30, 2000. Approximately $27.7 million was received in the second quarter of 2000 pursuant to existing settlements. Of the total recorded asset, approximately $75.8 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 6.50%. 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 such coverage, the nonproducts recoveries by other companies and the opinion of outside counsel. Such 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, activities such as settlement discussions with insurance carriers party to the ADR and those not party to the ADR, the final determination of coverage shared with ACandS and the financial condition of the insurers, Armstrong may revise its estimate of probable insurance recoveries. Of the $268.3 million asset, $32.2 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 dependent 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 $158.7 million for asbestos related claims in the first nine months of 2000 compared to $111.1 million in the first nine months of 1999. Armstrong currently expects to pay between $243.0 million and $251.0 million for asbestos related claims in 2000 compared to $173.0 million in 1999. Armstrong received $27.7 million in asbestos-related insurance recoveries during the first nine months of 2000 compared to $58.7 million during the first nine months of 1999. Armstrong does not anticipate any additional insurance proceeds during the fourth quarter of 2000 and did not receive any insurance proceeds during the fourth quarter of 1999. Therefore, Armstrong currently expects to pay approximately $140.0 million to $145.0 million for asbestos related claims and expenses in 2000, net of expected insurance recoveries and taxes, compared to $74.3 million in 1999. Conclusion - 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 record these amounts. These uncertainties include the number of future claims to be filed, the cost to settle claims in the future, which may be influenced by factors including, but not limited to, the financial viability of other defendants, the impact of any potential legislation and the ability of the Center to achieve future SSP agreements, and the impact of the ADR proceedings on the insurance asset. The recorded liability and asset reflect management's best estimate of probable amounts based on current information. 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. Armstrong believes that potential future charges may be material to the periods in which they are taken. See further discussion in the Liquidity and Capital Resources section of Management's Discussion and Analysis. ENVIRONMENTAL MATTERS Armstrong's operations are subject to federal, state, local and foreign environmental laws and regulations. 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. 33 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 Armstrong experience in remediation of contaminated sites. Although current law may impose 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 $14.8 million were recorded at September 30, 2000 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 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 may be material to earnings in such future period. 34 Item 6. - Exhibits and Reports on Form 8-K - ------ -------------------------------- (a) The following exhibits are filed as a part of the Quarterly Report on Form 10-Q: Exhibits -------- No. 4(a) Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong World Industries, Inc. Employee Stock Ownership Plan ("Share in Success Plan") Trust, with Armstrong World Industries, Inc., as guarantor. No. 10(a) Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(b) Employment Agreement between Armstrong Holdings, Inc. and Frank A. Riddick, dated August 7, 2000 No. 10(c) Amended and Restated Employment and Consulting Agreement between Armstrong Holdings, Inc., Armstrong World Industries, Inc. and George A. Lorch, dated August 7, 2000 and as amended October 30, 2000 No. 10(d) Stock Option Surrender Agreement between Armstrong Holdings, Inc. and George A. Lorch, dated September 25, 2000 No. 10(e) Change in Control Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(f) Indemnification Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(g) Management Services Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc., dated August 7, 2000 No. 10(h) Armstrong Holdings, Inc. Stock Award Plan is incorporate by reference herein from Armstrong Holdings, Inc.'s registration statement on Form S-8 filed August 16, 2000, wherein in appeared as Exhibit 4.1. No. 10(i) Terms of Restricted Stock for Stock Option Exchange Program Offered to Employees and Schedule of Participating Executive Officers. No. 15 Letter re Unaudited Interim Financial Information No. 27 Financial Data Schedules (b) The following reports on Form 8-K were filed during the third quarter of 2000. On July 31, 2000, the registrants filed reports on form 8-K reporting Armstrong Holdings, Inc.'s sales and profits for the second quarter of 2000. On July 21, 2000, the registrants filed reports on form 8-K discussing the sale of Armstrong World Industries, Inc.'s Installation Products Group to subsidiaries of the German company Ardex GmbH. 35 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Armstrong Holdings, Inc. Armstrong World Industries, Inc. By: /s/ John N. Rigas ----------------------------------------------- John N. Rigas, Senior Vice President, Secretary and General Counsel By: /s/ William C. Rodruan ----------------------------------------------- William C. Rodruan, Vice President and Controller (Principal Accounting Officer) Date: November 14, 2000 Exhibit Index ------------- Exhibit No. - ---------- No. 4(a) Note Purchase Agreement dated June 19, 1989 for 8.43% Series A Guaranteed Serial ESOP Notes due 1989-2001 and 9.00% Series B Guaranteed Serial ESOP Notes due 2000-2004 for the Armstrong World Industries, Inc. Employee Stock Ownership Plan ("Share in Success Plan") Trust, with Armstrong World Industries, Inc., as guarantor No. 10(a) Employment Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(b) Employment Agreement between Armstrong Holdings, Inc. and Frank A. Riddick, dated August 7, 2000 No. 10(c) Amended and Restated Employment and Consulting Agreement between Armstrong Holdings, Inc., Armstrong World Industries, Inc. and George A. Lorch, dated August 7, 2000 and as amended October 30, 2000 No. 10(d) Stock Option Surrender Agreement between Armstrong Holdings, Inc. and George A. Lorch, dated September 25, 2000 No. 10(e) Change in Control Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(f) Indemnification Agreement between Armstrong Holdings, Inc. and Michael D. Lockhart, dated August 7, 2000 No. 10(g) Management Services Agreement between Armstrong Holdings, Inc. and Armstrong World Industries, Inc., dated August 7, 2000 No. 10(h) Armstrong Holdings, Inc. Stock Award Plan is incorporate by reference herein from Armstrong Holdings, Inc.'s registration statement on Form S-8 filed August 16, 2000, wherein in appeared as Exhibit 4.1. No. 10(i) Terms of Restricted Stock for Stock Option Exchange Program Offered to Employees and Schedule of Participating Executive Officers No. 15 Letter re: Unaudited Interim Financial Information No. 27 Financial Data Schedules EX-4 2 0002.txt EMPLOYEE STOCK OWNERSHIP PLAN Exhibit 4 (a) EXECUTION COPY ============== ARMSTRONG WORLD INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN ("SHARE IN SUCCESS PLAN") TRUST, As Issuer ARMSTRONG WORLD INDUSTRIES, INC., As Guarantor NOTE PURCHASE AGREEMENT 8.43% Series A Guaranteed Serial ESOP Notes Due 1989-2001 9.00% Series B Guaranteed Serial ESOP Notes Due 2001-2004 ($270,000,000) Dates as of June 19, 1989 TABLE OF CONTENTS (Not Part of Agreement) -----------------
Page ---- 1. Authorization of Note............................................................................ 1 2. Purchase and Sale of Notes; Closing.............................................................. 2 3. Conditions for Closing........................................................................... 3 3A. Opinions of Counsel..................................................................... 3 3B. Representations and Warranties; No Default......................................................................... 3 3C. Purchase Permitted by Applicable Laws................................................... 4 3D. ESOP Transaction........................................................................ 4 3E. Compliance with Securities Laws......................................................... 5 3F. Approvals and Consents.................................................................. 5 3G. Proceedings............................................................................. 5 3H. Sale of Notes to Other Purchasers....................................................... 5 4. Payments ........................................................................................ 5 4A. Required Installment Payments........................................................... 5 4B. Optional Prepayment without Premium..................................................... 6 4C. Optional Prepayment with Yield-Maintenance Premium............................................................................ 7 4D. Notice of Prepayments................................................................... 7 4E. Partial Payments Pro Rata............................................................... 7 4F. Acquisition or Retirement of Notes...................................................... 7 5. Affirmative Covenants............................................................................ 8 5A. Financial Statements and Other Reports.................................................. 8 5B. Inspection of Property.................................................................. 11 5C. Payment of Taxes and Claims............................................................. 11 5D. Corporate Existence..................................................................... 12 5E. Maintenance of Properties............................................................... 12 5F. Compliance with Laws.................................................................... 12 5G. Determination Letter.................................................................... 13 5H. Plan Existence.......................................................................... 13 5I. Application of Proceeds................................................................. 13 6. Negative Covenants............................................................................... 14 6A. Limitations on Liens.................................................................... 14 6B. Limitations on Sale and Lease-Back Transactions....................................................................... 15 6C. Consolidation, Merger, Conveyance, Transfer or Lease.............................................................................. 16
(i) TABLE OF CONTENTS (cont'd)
Page ---- 7. Income Taxation.................................................................................. 17 7A. Additional Payments..................................................................... 17 7B. Supplemental Payments................................................................... 18 7C. Payment Dates........................................................................... 20 7D. Interest Rate Adjustment................................................................ 21 7E. Refunds................................................................................. 21 7F. Contest of Disallowance of Section 133 Exclusion.............................................................. 22 7G. Request for Qualifying Opinion of Counsel......................................................................... 25 8. Company Guarantee and Purchase Obligation........................................................ 25 8A. Guarantee by the Company................................................................ 25 8B. Purchases of Notes by the Company....................................................... 28 9. Events of Default................................................................................ 30 9A. Default; Acceleration................................................................... 30 9B. Other Remedies.......................................................................... 35 9C. Rescission of Acceleration.............................................................. 35 10. Representations and Warranties................................................................... 36 10A. Organization; Corporate Authority....................................................... 36 10B. Financial Statements; SEC Reports....................................................... 36 10C. Actions Pending......................................................................... 37 10D. Taxes................................................................................... 38 10E. Title to Property....................................................................... 38 10F. Conflicting Agreements and Other Matters................................................ 38 10G. Offering of Notes....................................................................... 39 10H. Broker's or Finder's Commissions........................................................ 39 10I. Margin Regulations...................................................................... 39 10J. Investment Company Act.................................................................. 39 10K. Public Utility Holding Company Act...................................................... 39 10L. Governmental Consents, Etc.............................................................. 40 10M. ERISA................................................................................... 40 10N. The ESOP................................................................................ 41 10O. Representations as to the Trustee....................................................... 42 10P. Pollution and Other Regulations......................................................... 43 11. Representations of Purchaser..................................................................... 43 12. Definitions...................................................................................... 44 12A. Yield-Maintenance Terms................................................................. 44 12B. Other Terms............................................................................. 46
(ii) TABLE OF CONTENTS (cont'd)
Page ---- 13. Judicial Proceedings............................................................................. 56 13A. Consent to Jurisdiction................................................................. 56 13B. Enforcement of Judgements............................................................... 57 13C. Service of Process...................................................................... 57 13D. No Limitation on Service or Suit........................................................ 57 14. Miscellaneous.................................................................................... 57 14A. Note Payments........................................................................... 57 14B. Expenses................................................................................ 58 14C. Consent to Amendments................................................................... 59 14D. Form, Registration, Transfer and Exchange of Notes; Lost Notes...................................................... 60 14E. Persons Deemed Owners; Participations..................................................................... 61 14F. Survival of Representations and Warranties; Entire Agreement....................................................... 61 14G. Successor and Assigns................................................................... 62 14H. Disclosure to Other Persons............................................................. 62 14I. Notices................................................................................. 62 14J. Descriptive Headings.................................................................... 63 14K. Satisfaction Requirement................................................................ 63 14L. Governing Law........................................................................... 63 14M. Counterparts............................................................................ 63 14N. Reproduction of Documents............................................................... 63 14O. Recourse with Respect to ESOP........................................................... 64
PURCHASER SCHEDULE EXHIBIT A-1 - Form of Note EXHIBIT A-2 - Amortization of Principal EXHIBIT B-1 - Form of Opinion of Buchanan Ingersoll, P.C. EXHIBIT B-2 - Form of Opinion of Lee, Toomey & Kent EXHIBIT B-3 - Form of Opinion of Jones, Day, Reavis & Pogue, Counsel to Trustee EXHIBIT B-4 - Form of Opinion of Willkie, Farr & Gallagher (iii) ARMSTRONG WORLD INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN ("SHARE IN SUCCESS PLAN") TRUST c/o Mellon Bank, N.A. Mellon Bank Center Pittsburgh, Pennsylvania 15258 ARMSTRONG WORLD INDUSTRIES, INC. Liberty and Charlotte Streets Lancaster, Pennsylvania 17604 June 19, 1989 To the Purchaser accepting this Agreement on the signature page hereof Ladies and Gentlemen: The undersigned, Armstrong World Industries, Inc., a Pennsylvania corporation (the "Company"), and Armstrong World Industries, Inc. Employee Stock Ownership Plan ("Share in Success Plan") and the trust established thereunder (the "ESOP") hereby agree with you as follows: 1. AUTHORIZATION OF NOTES. The ESOP will authorize the issuance, sale and ---------------------- delivery of $270,000,000 aggregate principal amount of its Guaranteed Serial ESOP Notes (herein, together with any such notes that may be issued pursuant to any provision of this Agreement or the Other Agreements hereinafter referred to and any such notes that may be issued hereunder or thereunder in substitution or exchange therefor, collectively called the "Notes" and individually called a "Note"), to be issued in two series having interest rates and final maturities as follows: Final Principal Annual Maturity Series Amount Interest Rate Date - ------ ---------- ------------- ---------- A $149,957,000 8.43% June 15, 2001 B $120,043,000 9.00% June 15, 2004 Each note shall be dated the date of issue thereof and shall bear interest on the unpaid principal balance thereof from the date thereof until the principal balance thereof shall become due and payable at the applicable rate per annum specified above (subject to the provisions of paragraph 7) and on overdue principal, premium and interest at the rates specified therein; and the Notes, when issued, sold and delivered pursuant to the Agreements, will be substantially in the form of Exhibit A-1. Interest on the Notes shall accrue at the applicable rate per annum specified above (subject to the provisions of paragraph 7), which interest will be payable semiannually as provided in Exhibit A-1 and will be computed based on a 360-day year comprised of 12 months of 30 days each. Certain capitalized terms used in this Agreement are defined in paragraph 12; references to a paragraph are, unless otherwise specified, to one of the paragraphs of this Agreement and references to an "Exhibit" are, unless otherwise specified, to one of the exhibits attached to this Agreement. 2. PURCHASE AND SALE OF NOTES; CLOSING. Subject to the terms and conditions ----------------------------------- herein set forth, the ESOP hereby agrees to sell to you, and you agree to purchase from the ESOP, Notes in the aggregate principal amount and of the series set forth opposite your name in the Purchaser Schedule attached hereto, in the form of one or more Notes registered in your name or that of your nominee, as you shall request, and in such denominations (subject to paragraph 14D) as you shall request, for an aggregate purchase price of 100% of the principal amount thereof. The issuance, sale and delivery of Notes to be purchased by you shall take place at 10:00 A.M., New York City time, on June 20, 1989, at the offices of Willkie Farr & Gallagher, 153 East 53rd Street, New York, New York, or on such other date as the Company, the ESOP, you and the Other Purchasers may agree upon (the "Closing"). At the Closing, the ESOP will deliver to you the Notes to be purchased by you against payment of the purchase price therefor by wire transfer of immediately available funds to Mellon Bank, N.A., Pittsburgh, Pennsylvania, for credit to the account of the ESOP, account no. 184-588. If at the Closing the ESOP shall fail to tender to you the Notes to be purchased by you as provided above in this paragraph 2, or if any of the conditions specified in paragraph 3 shall not have been satisfied or waived by you, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any other rights you may have by reason of such failure or such non-fulfillment. Concurrently with the exclusion and delivery of this Agreement, the ESOP and the Company are entering into other Note Purchase Agreements (herein referred to as the "Other -2- Agreements" and, with this Agreement, as the "Agreements"), identical with this Agreement (except as to the identity of the purchaser and the series and principal amount of Notes to be purchased thereunder) with the other purchasers (herein called the "Other Purchasers") named in the Purchaser Schedule attached hereto. The sale of the Notes to you and to the Other Purchasers are to be separate and several sales. Notwithstanding the foregoing provisions, the ESOP shall not be required to issue the Notes under the Agreements if you or any of the Other Purchasers defaults in its obligation to purchase Notes under its Agreement. 3. CONDITIONS FOR CLOSING. Your obligation to purchase and pay for the ---------------------- Notes to be purchased by you at the Closing is subject to the satisfaction or waiver, prior to or simultaneously and concurrently with the Closing, of the following conditions: 3A. OPINIONS OF COUNSEL. You shall have received from (i) Buchanan ------------------- Ingersoll, P.C., counsel to the Company, (ii) Lee, Toomey & Kent, counsel to the ESOP, (iii) Jones, Day, Reavis & Pogue, counsel to the Trustee, and (iv) Willkie Farr & Gallagher, your special counsel in connection with the transactions contemplated by this Agreement, favorable opinions substantially in the forms set forth in Exhibits B-1, B-2, B-3 and B-4, respectively, each addressed to you and dated the date of the Closing. To the extent that any opinion referred to above in this paragraph 3A is rendered in reliance upon the opinion of any other counsel, you shall have received a copy of the opinion of such other counsel, dated the date of the Closing and addressed to you, or a letter from such other counsel, dated the date of the Closing and addressed to you, authorizing you to rely on such other counsel's opinion. 3B. REPRESENATIONS AND WARRANTIES; NO DEFAULT. The representations and ----------------------------------------- warranties of the ESOP and the Company contained in paragraph 10 of this Agreement shall be true when made and at the time of the Closing in all material respects, and there shall exist at the time of the Closing and after giving effect to the transactions contemplated hereby, no Event of Default or Default or Purchase Event. Each of the ESOP and the Company shall have delivered to you a certificate (which shall be an Officer's Certificate in the case of the Company), dated the date of the Closing, to all such effects (but limited to the representations and warranties of the ESOP in the case of the ESOP) and further to the effect as to the satisfaction of the conditions (other than any condition which relates to documents being in form and substance satisfactory to you) set forth in paragraph 3D (but limited to the conditions applicable to the ESOP in the case of the ESOP). -3- 3C. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for ------------------------------------- the Notes to be purchased by you on the date of the Closing on the terms and conditions herein provided (including the use of the proceeds of such Notes by the ESOP) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G, T, U or X of the Board of Governors of the Federal Reserve System) or result in a violation of any order of any court or governmental body applicable to you (or any of your employees, directors or affiliates) and shall not subject you to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation or order, and you shall have received such certificates or other evidence as you may request to establish compliance with this condition. 3D. ESOP TRANSACTION. Prior to the Closing, you shall have received true ---------------- and correct copies of the Plan Documents and all other documents having the legal effect of governing the terms or administration of the ESOP; all the terms and provisions thereof shall be satisfactory to you in form and substance (including schedules and exhibits thereto); all such agreements, documents and instruments shall be in full force and effect and no term or condition thereof shall have been amended, modified or waived except with your prior consent; the Trustee shall have made appropriate determinations satisfactory to you establishing that neither the sale of the Notes to you nor the purchase of the Employer Capital Stock as contemplated by the Stock Purchase Agreement nor the consummation of the transactions contemplated by this Agreement is or will constitute a "prohibited transaction" as such term is defined in section 406 of ERISA or section 4975 of the Code for which there is no exemption; and the purchase of Employer Capital Stock in the ESOP Transaction shall be duly and validly consummated concurrently with the Closing hereunder. Except as affected by the transactions contemplated hereby, all conditions precedent to the consummation of the transactions contemplated by the Plan Documents shall have occurred, all governmental authorizations, consents, approvals, exemptions or other actions required in connection with such transactions shall have been duly received or taken (except for the determination letter from the Internal Revenue Service described in paragraph 5G and the registrations and filings referred to in paragraph 10L) and such transactions shall have been consummated substantially in accordance with the terms of such documents. All material matters relating to the ESOP, including, without limitation, the amount and the deductibility of contributions by the Company to the ESOP, the use and sufficiency of such contributions to pay the Notes and the -4- excludibility of 50% of the interest paid by the ESOP on the Notes from your Federal Gross Income, shall be satisfactory to you. 3E. COMPLIANCE WITH SECURITES LAWS. The issuance, sale and delivery of the ------------------------------ Notes under the Agreements and the sale of the Employer Capital tock in the ESOP Transaction shall have complied in all material respects with all applicable requirements of Federal and state securities laws, and you shall have received evidence of such compliance in form and substance reasonably satisfactory to you. 3F. APPROVALS AND CONSENTS. The ESOP and the Company shall each have duly ---------------------- received all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of all Federal, state and local governmental authorities necessary for the issuance, sale and delivery of the Notes pursuant to the Agreements and the sale and delivery of the Employer Capital Stock in the ESOP Transaction ("Approvals and Consents"), and all Approvals and Consents shall be in full force and effect at the time of Closing and shall be effective to permit each such issuance, sale and delivery, and you shall have received such certificates or other evidence as you may reasonably request to establish compliance with this condition. 3G. PROCEEDINGS. All corporate and other proceedings taken or to be taken ----------- in connection with the transactions contemplated hereby, and all documents incident thereto, shall be satisfactory in form and substance to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 3H. SALE OF NOTES TO OTHER PURCHASERS. The ESOP shall, concurrently with --------------------------------- your purchase of Notes hereunder, sell to the Other Purchasers the Notes to be purchased by them at the Closing as provided in the Other Agreements and shall receive payment in full therefor. 4. PAYMENTS. The Notes shall be subject to payment with respect to the -------- Required Installment Payments specified in paragraph 4A and shall be subject to prepayment under the circumstances set forth in paragraphs 4B and 4C. 4A. REQUIRED INSTALLMENT PAYMENTS. The Notes of each series will be due and ----------------------------- payable in semi-annual installments of principal, on June 15 and December 15 (or the next succeeding Business Day), as set forth on Exhibit A-2. Each such installment payment is herein called a "Required Installment Payment" and each such payment date is herein called an -5- "Installment Payment Date." Upon issuance of any Note, the ESOP will annex thereto an amortization schedule with respect to such Note, setting forth the amount of each Required Installment Payment to be allocated and applied on such Note and the amount of the principal of such Note which will remain unpaid after each such Required Installment Payment is made. Each Required Installment Payment shall be allocated and applied on all outstanding Notes of a series in proportion to the respective unpaid principal amounts thereof. Any payment made by the ESOP pursuant to any other provision of this paragraph 4 shall not reduce or otherwise affect its obligation to make any payment required by this paragraph 4A, and upon any partial prepayment of Notes pursuant to paragraph 4B or 4C, or any partial retirement, purchase or other acquisition of Notes by the ESOP or the Company, its Subsidiaries or Affiliates (whether pursuant to paragraph 4F or paragraph 8), the amount of the Required Installment Payments in respect of the outstanding Notes of such series shall remain as specified on Exhibit A-2, and such partial prepayments shall be applied to such amounts in inverse order of their maturity. For the purpose of this paragraph 4A only, (x) all Notes of a series prepaid (except pursuant to subparagraph (a) of paragraph 4B or paragraph 4C), or otherwise retired or purchased or otherwise acquired by the ESOP or the Company or any of its Subsidiaries or Affiliates and (y) all Notes prepaid pursuant to subparagraph (b) of paragraph 4B, shall be deemed outstanding. The ESOP shall deliver to the holder of each Note outstanding after any such prepayment, retirement, purchase or acquisition a revised amortization schedule with respect to such Note, setting forth the amount of each Required Installment Payment thereafter to be allocated and applied on such Note and the amount of the principal of such Note which will remain unpaid after each such Required Installment Payment is made. 4B. OPTIONAL PREPAYMENT WITHOUT PREMIUM. (a) The Notes of each series shall ----------------------------------- be subject to prepayment in part, at the option of the ESOP, on any Installment Payment Date in an aggregate principal amount not to exceed 20% of the Required Installment Payment to be made on the Notes of such series on such date (and not to be less than $250,000), at 100% of the principal amount so to be prepaid, together with accrued interest thereon to the prepayment date, but without premium. The right of the ESOP to prepay Notes pursuant to this paragraph 4B shall be non-cumulative and shall not, to the extent not fully exercised with respect to any Installment Payment Date, increase the amount of Notes which the ESOP may prepay on any subsequent Installment Payment Date pursuant to this paragraph 4B. The aggregate principal amount of Notes that may be prepaid by the ESOP pursuant to this paragraph 4B shall not exceed &7,497,850, in the case of the Series A Notes, and $6,002,150 in the case of the Series B Notes. -6- (b) The ESOP may prepay, on or before June 30, 1989, Notes held by Wachovia Bank and Trust Company, N.A. in the principal amount not exceeding $700,000, at 100% of such principal amount, together with accrued interest thereon to the prepayment date, but without premium. Such prepayment shall be applied to the Required Installment Payments in respect of the Notes held by Wachovia Bank and Trust Company, N.A. in inverse order of their maturity. 4C. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE PREMIUM. The Notes of each -------------------------------------------------- series shall be subject to prepayment, at any time in whole, or from time to time on any Installment Payment Date in part (in a minimum aggregate principal amount of $50,000,000), at the option of the ESOP, at 100% of the principal amount thereof to be prepaid, together with accrued interest thereon to the prepayment date and the Yield-Maintenance Premium, if any, with respect to each Note. 4D. NOTICE OF PREPAYMENTS. The ESOP shall give each holder of Notes --------------------- irrevocable written notice of any prepayment of the Notes pursuant to subparagraph (a) of paragraph 4B or paragraph 4C not less than 30, nor more than 60, days prior to the prepayment date, specifying such prepayment date and the principal amounts of the Notes of each series, and of the Notes held by such holder, to be prepaid on such date and stating that such prepayment is being made pursuant to subparagraph (a) of paragraph 4B or paragraph 4C, as the case may be, whereupon the principal amount of the Notes to be prepaid, together with interest accrued thereon to such prepayment date and the Yield-Maintenance Premium, if any, with respect to each Note, shall become due and payable on such prepayment date. 4E. PARTIAL PAYMENTS PRO RATA. Upon any partial prepayment of the Notes of ------------------------- either series pursuant to subparagraph (a) of paragraph 4B or paragraph 4C, the principal amount so prepaid shall e allocated to all Notes of such series at the time outstanding (including, for the purpose of this paragraph 4E only, (x) all Notes prepaid or otherwise retired or purchased or otherwise acquired by the ESOP or the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to subparagraph (a) of paragraph 4B or paragraph 4C and (y) all Notes prepaid pursuant to subparagraph (b) of paragraph 4B) in proportion to the respective outstanding principal amounts thereof. 4F. ACQUISITION OR RETIREMENT OF NOTES. The Company will not, and will not ---------------------------------- permit any of its Subsidiaries or Affiliates to, and the ESOP will not, retire in whole or in part prior to their stated maturity, or purchase or otherwise acquire, directly or indirectly, (other than by payment -7- pursuant to paragraph 4A, prepayment pursuant to paragraph 4B or 4C or purchase pursuant to paragraph 7B(b) or paragraph 8B or after acceleration pursuant to paragraph 9A), Notes of either series held by any holder unless the Company or such Subsidiary or Affiliate or the ESOP shall have offered in writing to retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes of such series held by each other holder of Notes at the time outstanding upon economically equivalent terms and conditions. To the extent that any holder of the Notes declines such offer (or shall fail to accept such offer within the time period specified therein, which shall be not less than 10 Business Days), the Company or such Subsidiary or Affiliate or the ESOP may purchase or otherwise acquire Notes of such series (pro rata among all such holders who have accepted such offer as aforesaid and otherwise on the same terms as aforesaid) from other holders of Notes in an aggregate amount and for an aggregate purchase price not to exceed the aggregate amount and price originally so offered to all holders of such Notes. Any Notes retired, purchased or otherwise acquired by ESOP shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraphs 4A and 4E. 5. AFFIRMATIVE COVENANTS. The provisions of this paragraph 5 shall remain --------------------- in effect from the date hereof and thereafter so long as any Note shall remain outstanding. 5A. FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants that it -------------------------------------- will deliver to each holder of a Note in quadruplicate: (i) as soon as is practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year commencing with the first such quarter ending after the date of the Closing, a consolidated statement of income of the Company and its Subsidiaries for such quarterly period and for the period from the beginning of such fiscal year to the end of such quarterly period, setting forth in comparative form figures for the corresponding quarterly and year-do-date periods in the preceding fiscal year, a consolidated statement of cash flows of the Company and its Subsidiaries for the period from the beginning of such fiscal year to the end of such quarter, setting forth in comparative form figures for the corresponding period in the preceding fiscal year, and a consolidated balance sheet of the Company and its Subsidiaries as of the end of such -8- Quarter, setting forth in comparative form figures for the preceding fiscal year end, all in reasonable detail and certified as complete and correct and prepared in accordance with generally accepted accounting principles by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, however, that delivery pursuant to clause (iii) below of -------- ------- a copy of the Quarterly Report on Form 10-Q of the Company for such quarterly period shall be deemed to satisfy the requirements of this clause (i), provided that such report contains at least the information required to be delivered pursuant to this clause; (ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, consolidated statements of income and of cash flows of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and accompanied by an opinion, directed to the Company, of Peat Marwick Main & Co. or of other independent public accountants of recognized national standing selected by the Company and reasonably satisfactory to the Required Holder(s), whose opinion shall be in scope and substance reasonably satisfactory to the Required Holder(s) (it being agreed that the form of opinion included in the Historical Financial Statements is satisfactory); provided, however, that deliver pursuant to clause (iii) below of a copy of -------- ------- the Annual Report on Form 10-K (including all incorporated documents) of the Company for such fiscal year shall be deemed to satisfy the requirements of this clause (ii), provided that such report contains at least the information required to be delivered pursuant to this clause; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send or shall be required to send to its public stockholders and copies of all registration statements (without exhibits), other than on Form S-8 or any similar successor form (except to the extent such registration statement on Form S-8 relates to the Plan), and all public reports which it files or is required to file with the Commission; (iv) promptly upon receipt thereof, a copy of each management letter or similar report submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary of the Company; -9- (v) promptly upon its becoming available and any event within 30 days after such time as such reports are required to be filed with the IRS, a copy of the annual report of the ESOP on Form 5500; (vi) promptly upon their becoming available, copies of the Annual Report on Form 11-K of the ESOP as filed with the Commission; (vii) promptly following the Company's obtaining knowledge thereof, a notice of the occurrence of any event (other than matters of general public knowledge) that could, in the reasonable judgment of the Company, be expected to give rise to a change in the interest rate applicable to the Notes or the payment of any amount by the ESOP pursuant to paragraph 7; (viii) promptly upon the Company's receipt thereof, a copy of any notice given by a holder of a Note pursuant to the parenthetical clause contained in clause (b) of the last paragraph of paragraph 9A; and (ix) promptly upon your request therefor, such other information relating to the Company, its Subsidiaries or the ESOP as you may reasonably request. Together with each delivery of financial statements required by clause (i) or (ii) above, the Company will deliver to each holder of Notes an Officer's Certificate stating that, to such officers' knowledge, there exists no Event of Default or Default or Purchase Event, or, if any Event of Default or Default or Purchase Event exists, specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company deliver to each holder of Notes a certificate of such accountants stating that, in making the audit necessary to the certification of such financial statements, they have obtained no knowledge of any Event of Default or Default or Purchase Event, or, if they have obtained knowledge of any Event of Default or Default or Purchase Event, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or Default or Purchase Event which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that forthwith upon the chief executive officer, chief operating officer, principal financial officer, principal accounting officer or treasurer of the Company obtaining actual knowledge -10- of an Event of Default or Default or Purchase Event, it will deliver to each holder of Notes an Officer's Certificate specifying the nature and period of existence thereof and what action the Company is taking on proposes to take with respect thereto. 5B. INSPECTION OF PROPERTY. The Company covenants that it will permit any ---------------------- Person designated by you or any Transferee in writing, at your or such Transferee's expense (or at the Company's expense if there exists an Event of Default or Default or Purchase Event), (i) to visit and inspect any of the properties of the Company and its Subsidiaries, (ii) if a Default or Event of Default has occurred and is continuing, or if Moody's rating of Unsupported Company Debt shall be reduced to "Baa3" or lower, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and (iii) to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its independent public accountants (who are hereby authorized to have such discussions) all (except as otherwise provided in clause (ii)) at such reasonable times and as often as you or such Transferee may reasonably request. 5C. PAYMENT OF TAXES AND CLAIMS. The Company will pay or discharge, or --------------------------- cause to be paid or discharged, before the same shall become delinquent (i) all taxes, assessments and governmental charges (including claims of the IRS and the PBGC and claims made at the instance of the PBGC) levied or imposed upon it or its Subsidiaries or upon its or their income, profits or property, except where non-payment would neither (x) result in an unstayed Lien on a Principal Property nor (y) (either singly or in the aggregate) have a material adverse effect on the Company and its Subsidiaries taken as a whole or the ability of the Company to perform and satisfy its obligations under this Agreement, (ii) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a lien upon its or its Subsidiaries' properties, except where non-payment would neither (x) result in an unstayed Lien on a Principal Property nor (y) (either singly or in the aggregate) have a material adverse effect on the Company and its Subsidiaries taken as a whole or the ability of the Company perform and satisfy its obligations under this Agreement and (iii) all required installments under section 412(m) of the Code and other required payments under section 412 of the Code with respect to any pension plan maintained by the Company or a Code Affiliate; provided, however, that the Company shall not be required to pay or -------- ------- discharge or cause to be paid or -11- discharged any such tax, assessment, charge or claim referred to in clause (i), (ii) or (iii) above whose amount, applicability or validity is being contested in good faith by appropriate proceedings and in respect of which such accrual or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made. 5D. CORPORATE EXISTENCE. Subject to paragraph C, the Company will be or ------------------- cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charger and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such - -------- ------- right or franchise if the Board of Directors (with respect to the Company's rights other than its corporate existence) or the Company (with respect to its franchises) shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the holders of the Notes. 5E. MAINTENANCE OF PROPERTIES. The Company will cause all properties of ------------------------- material value used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvement thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this paragraph 5E shall prevent -------- ------- the Company from taking any acting which, in the judgment of the Company, is desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the holders of the Notes. 5F. COMPLIANCE WITH LAWS. The Company will, and will cause each of its -------------------- Subsidiaries to, comply with the requirements of all applicable laws and regulations of any governmental authority (including, without limitation, those relating to pollution and environmental matters, equal employment opportunity and employee safety), the failure to comply with which would have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole. For purposes of this paragraph 5F, any such failures will be deemed to have such a material adverse effect if the liabilities incurred or reasonably expected to be incurred involved an aggregate amount in excess of 10% of Consolidated Net Tangible Assets. -12- 5G. DETERMINATION LETTER. The Company will promptly (but in no event later -------------------- than August 15, 1989) apply for, and use its best efforts to obtain and deliver to you as promptly as practicable, a determination letter from the IRS to the effect that the ESOP meets the requirements for qualification under section 401(a) of the Code, that the ESOP is a "employee stock ownership plan" under section 4975(e)(7) of the Code and that the trust forming part of the ESOP meets the requirements for tax exemption under section 501(a) of the Code and will comply with any reasonable request from any Indemnitee for assistance in establishing the status of the ESOP as a "employee stock ownership plan" under Section 4975(e) (7) of the Code or the status of the purchase of any Note as a "securities acquisition loan" under section 133 of the Code. 5H. PLAN EXISTENCE. Each of the Company and the ESOP will (i) do all things -------------- necessary to that the loan evidenced by the Notes will qualify as an "exempt loan" to the ESOP as defined in Treasury Regulation sections 54.4975-7 and 54.4975-11 and the requirements, if any, that may be promulgated from time to time with respect to section 133 of the Code; (ii) do all things necessary to maintain and keep in full force and effect the ESOP as an "employee stock ownership plan", within the meaning of section 4975(e)(7) of the Code and section 407(d)(6) of ERISA; (iii) cause the ESOP to be operated and administered at all times and be amended as necessary so as to remain qualified under section 401(a) and 4975(e)(7) of the Code and the trust forming part of the ESOP to remain tax-exempt under section 501(a) of the Code; (iv) cause all other actions to be taken which are necessary for the ESOP to be in material compliance with all applicable requirements of ERISA (including Titles I and II thereof) and the Code and the regulations thereunder as from time to time in effect and applicable to the ESOP; and (v) take no action to amend or otherwise modify any Plan Document in a manner that would result in the extension of credit represented by the Notes ceasing to qualify as a "securities acquisition loan" within the meaning of section 133(b) of the Code. The Company covenants that it will make contributions to the ESOP as required by the Plan Documents. Nothing in this paragraph 5H is intended to give any Person, other than the holders from time to time of the Notes, any rights. 5I. APPLICATION OF PROCEEDS. The ESOP shall use the entire proceeds of the ----------------------- issuance and sale of the Notes promptly to acquire, at not more than adequate consideration (within the meaning of Section 3(18) of ERISA), shares of Employer Capital Stock in accordance with the Stock Purchase Agreement. The ESOP and the Company will furnish to you, if required in connection with your purchase of the Notes hereunder, a -13- statement in conformity with applicable margin requirements of the Federal Reserve under Regulation G or U. 6. NEGATIVE COVENANTS. The provisions of this paragraph 6 shall remain in ------------------ effect only so long as any Note shall remain outstanding. 6A. LIMITATIONS ON LIENS. The Company will not, and will not permit any -------------------- Restricted Subsidiary to, issue, assume or guarantee any Debt secured by a Lien upon any Principal Property of the Company or of any Restricted Subsidiary or upon any shares of stock or Debt of any Restricted Subsidiary without in any such case effectively providing concurrently with the issuance, assumption or guaranty of any such Debt that the Company Obligations shall be secured equally and ratably with (or, at the option of the Company, prior to) such Debt, so long as such Debt shall be so secured, unless after giving effect thereto the aggregate amount of all such Debt so secured, together with all Attributable Debt in respect of sale and leaseback transactions involving Principal Properties, would not exceed 10% of Consolidated Net Tangible Assets. The foregoing restrictions shall not prevent, restrict or apply to Debt secured by: (1) Liens on property, shares of stock or indebtedness of any corporation existing at the time such corporation becomes a Restricted Subsidiary, provided that any such Lien was in existence prior to the time such corporation became a Restricted Subsidiary and was not effected in contemplation of such corporation's becoming a Restricted Subsidiary; (2) Liens on any property (including shares of stock or Debt) existing at the time of acquisition thereof or securing the payment of all or any part of the purchase price or construction cost thereof or securing any Debt incurred prior to, at the time or within 180 days after, the acquisition of such property, shares of stock or Debt or the completion of any such construction, whichever is later, for the purpose of financing all or any part of the purchase price or construction cost thereof; (3) Liens on any property to secure all or any part of the cost of development, operation, construction, alteration, repair or improvement of all or any part of such property, or to secure Debt incurred prior to, at the time of or within 180 days after, the completion of such development, operation, construction, alteration, repair or improvement, whichever is later, for the purpose of financing all or any part of such cost; (4) Liens which secure Debt owing by a Restricted Subsidiary to the Company or to another Restricted Subsidiary or any the Company to a Restricted Subsidiary; (5) Liens securing indebtedness of a corporation which becomes a successor of the Company in a transaction not otherwise prohibited by this Agreement, provided that any such Lien was in existence prior to the consummation of such -14- transaction, was not effected in contemplation of such transaction and does not, upon or after such consummation, extend to any Principal Property held by the Company or a Restricted Subsidiary prior to such consummation except in compliance with the other provisions of this paragraph 6A; (6) Liens on property of the Company or a Restricted Subsidiary in favor of governmental authorities to secure partial, progress, advance or other payments or to secure any indebtedness incurred for the purpose of financing all or any part of the purchase price or the cost of construction of the property subject to such Liens, or in favor of any trustee or mortgagee for the benefit of holders of indebtedness of any such entity incurred for any such purpose; and (7) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Lien referred to in the foregoing clauses (1) to (6), inclusive, or of any Debt secured thereby, provided that such extension, renewal or replacement Lien shall be limited to all or any part of the same property that secured the Lien extended, renewed or replaced (plus any improvements on such property) and shall secure no larger amount of Debt than that existing at the time of such extension, renewal or replacement. 6B. LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS. Neither the Company no ---------------------------------------------- any Restricted Subsidiary shall enter into any sale and leaseback transaction involving any Principal Property, the completion of construction and commencement of full operation of which has occurred more than 180 days prior thereto, unless (a) the Company or such Restricted Subsidiary could incur a Lien on such property under the restrictions set forth in paragraph 6A in an amount equal to the Attributable Debt of the Company or its Restricted Subsidiaries with respect to the sale and leaseback transaction without equally and ratably securing the Company Obligations or (b) the Company, within 180 days, applies to the retirement of Funded Debt of the Company or its Restricted Subsidiaries the greater of (i) the next proceeds of the sale or transfer of the Principal Property so sold and leased back or (ii) the fair value of the Principal Property so sold (as of the date of such sale or transfer) and leased back. The foregoing restriction will not apply to any sale and leaseback transaction (x) between the Company and a Restricted Subsidiary or between Restricted Subsidiaries or (y) involving the taking back of a lease for a period of less than three years. For purposes of this paragraph 6B, the determination of the net proceeds of the sale or transfer of a Principal Property or the fair value of the Principal Property so sold or transferred shall be as determined in good faith by the Board of Directors. -15- 6C. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. (a) The Company ---------------------------------------------------- shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any other Person, unless: (1) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an agreement supplemental hereto, executed and delivered to the holders of the Notes, in form satisfactory to the Required Holders, the due and punctual performance of the Company Obligations and the payment and performance eof every other covenant (including, without limitation, those in respect of the Company Obligations) of this Agreement on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default or Default or Purchase Event, and no event which, after notice or lapse of time or both, would become a Purchase Event, shall have happened and be continuing; and (3) The Company has delivered to the holders of the Notes an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger conveyance, transfer or lease and, if a supplemental agreement is required in connection with such transaction, such supplemental agreement comply with this paragraph 6C and that all conditions precedent herein provided for relating to such transaction have been complied with. (b) Upon any consolidation by the Company with or merger by the Company into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with paragraph 6C(a), the successor corporation formed by such consolidation or with or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Agreement (including, without limitation, those provided for in paragraph 8) with the same -16- effect as if such successor corporation had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under this Agreement. (c) If, upon any consolidation or merger of the Company or any Restricted Subsidiary with or into any other corporation or corporations (whether or not an Affiliate of the Company), or successive consolidations or mergers in which the Company or any Restricted Subsidiary or their successors shall be a party or parties, or upon any sale, conveyance or lease of the property of the Company or any Restricted Subsidiary as an entirety or substantially as an entirety to any other Person (whether or not an Affiliate of the Company), any Principal Property of the Company or of any Restricted Subsidiary owned immediately prior thereto would thereupon become subject to any Lien, the Company or any such Restricted Subsidiary, prior to such consolidation, merger, sale, conveyance or lease, shall by agreement supplemental hereto secure the due and punctual payment of the Company Obligations (equally and ratably with any other indebtedness of the Company then entitled thereto) by a direct Lien on all such Principal Properties of the Company or any such Restricted Subsidiary, prior to all Liens other than any theretofore existing thereon, unless such Lien would be permitted by paragraph 6A, treating, for the purposes of paragraph 6A, the indebtedness of the other Person secured by such Lien as Debt. 7. INCOME TAXATION. --------------- 7A. ADDITIONAL PAYMENTS. In the event that at any time (whether before or ------------------- after payment of the Notes) a Gross-Up Event shall occur with respect to any Indemnitee, the ESOP will pay to such Indemnitee as additional interest in immediately available funds at the time or times specified in paragraph 7C: (a) an amount equal to the excess of (i) the amount of interest which would have been payable on the unpaid principal amount of such Indemnitee's Note during the Additional Payment Period if such Note had borne interest at a rate per annum equal to the Gross-Up Rate (or if the percentage of Interest on such Indemnitee's Note included in its Federal Gross Income shall exceed the Inclusion Rate but shall be less than 100%, the interest rate determined in accordance with paragraph 7D (determined by applying the Adjustment Fraction as if the Inclusion Rate had increased to the percentage of interest on such Indemnitee" Note included in its Federal Gross Income), in lieu of the Gross-Up Rate), over -17- (ii) the amount of interest actually paid or payable under the terms of such Indemnitee's Note during the Additional Payment Period (excluding any additional interest on overdue amounts paid or payable as provided in the Notes); and (b) the sum of (i) the amount of any interest and of any penalties, additions to tax and additional amounts payable under the Code (such penalties, additions to tax and additional amounts being referred to as "Additions to Tax") which are deductible for Federal income tax purposes and are payable (or have been paid) to the United States by the Indemnitee as a consequence of the failure to include more than the Inclusion Rate of the interest referred to in paragraph 7A(a)(ii) in the Federal Gross Income of such Indemnitee, and (ii) an amount which, after giving effect to all taxes attributable to the inclusion of such amount in the gross income of such Indemnitee under the laws of any Federal, state or local governmental taxing authority (such taxes to be calculated at the maximum statutory rate, applicable to such Indemnitee during the relevant taxable period, after taking into account deductions and credits attributable to the imposition of Federal, state and local taxes), shall be equal to the amount of any interest or Additions to Tax which are not deductible for Federal income tax purposes and which are payable (or have been previously paid) to the United States by the Indemnitee as a consequence of the failure to include more than the inclusion Rate of the interest referred to in paragraph 7A(a)(ii) in the Federal Gross Income of such Indemnitee; provided, however, that as to any Gross-Up event, no payment shall be required - -------- ------- pursuant to paragraph 7A(b) on account of any interest and Additions to Tax with respect to periods after all amounts due under paragraph 7A have been paid with respect to such Gross-Up Event. 7B. SUPPLEMENTAL PAYMENTS. --------------------- (a) In the event that any time (whether before or after payment of the Notes), in the reasonable opinion of an Indemnitee, which, at the request and expense of the Company, is confirmed by an opinion of counsel to such Indemnitee, a Change of Law shall occur with respect to such Indemnitee -18- which, in the reasonable opinion of such Indemnitee, results in any Tax Disallowance, the ESOP shall pay to the Indemnitee within 30 days following the receipt of written notice from the Indemnitee, in immediately available funds amounts that shall be equal to the sum of (i) any tax, alternative minimum tax, levy or other cost, including, but not limited to, penalties, additions to taxes or interest related to any of the foregoing, related to the purchase, ownership, or disposition of any Note that arises directly or indirectly, in whole or in part, as a result of such Change of Law (all such taxes to be calculated assuming rate in effect for the tax year or years in which the Tax Disallowance occurs), plus (ii) an amount representing interest (at the Gross-up Rate) on any such tax, levy or other cost listed in (i) above for the period (x) commencing ten days after the Indemnitee shall have given notice to the Company of its intention to pay, but in no event earlier than the date the Indemnitee shall have paid, any such tax, levy or other cost listed in (i) above and (y) ending on the date payment hereunder is received by the Indemnitee, plus (iii) an amount which, after giving effect to all taxes attributable to the inclusion of such amount in the taxable income of the Indemnitee for Federal and state tax purposes, shall equal all taxes due on the payments set forth in (i), but only to the extent such payments set forth in (i) are not items for which the Indemnitee is allowed a tax deduction. Except as provided in 7(C)(b), the determination of all amounts hereunder by the Indemnitee shall be conclusive and binding on the Company absent manifest error. (b) Notwithstanding paragraph 7B(a), if the ESOP determines that any Change of Law has occurred with respect to an Indemnitee which would result in a liability of the ESOP to such Indemnitee pursuant to paragraph 7B(a), the ESOP may, a its option, upon not more than 60 nor less than 30 days notice, cause the terms of all Notes of all Series held by such Indemnitee to be adjusted in the following manner on the date specified in such notice (the "Adjustment Date"): (i) the interest rate on the Notes will be increased to the Gross-Up Rate effective as of the Adjustment Date and (ii) the ESOP will have no liability for payments that otherwise would be due under paragraphs 7A, 7B and 7D, except for payments that may be due under paragraphs 7A, 7B and 7D with respect to periods prior to the Adjustment Date. The ESOP will pay accrued interest on the Notes through the date of adjustment on the Adjustment Date. At the request of such Indemnitee, the ESOP will exchange the adjusted Notes for new Notes solely reflecting the change to the interest rate. -19- 7C. PAYMENT DATES. (a) If the ESOP becomes obligated to make payments to ------------- any Indemnitee pursuant to paragraph 7A, the Indemnitee shall from time to time notify the ESOP and the Company of the amount that is payable in respect of such portion of the Additional Payment Period (i) as had elapsed prior to the occurrence of a Gross-Up Event, which amount shall be due and payable (A) in the case such notice is given prior to payment in full of the Notes, on the first date thereafter on which any interest on the Notes is due and payable (or, if later, 10 days after the date of such notice), or (B) in the case such notice is given after payment in full of the Notes, within 10 days after the date of such notice, and (ii) as had elapsed on and after the occurrence of a Gross-Up event, which amount will be payable on each date thereafter on which any interest on the Notes is due and payable (each notice under this clause (ii) shall be given at least 10 days prior to such interest payment date); provided, however, that if the Gross-Up Event occurs solely as a result of the occurrence of the event described in clause (b)(i) of the definition of Gross-Up Event, and if neither a Purchase Event nor Default has occurred and is continuing, the ESOP and the Company may elect not to make any payments due under paragraph 7A during the period of any contest under paragraph 7F, unless the Indemnitee makes a payment (including reducing any available refund, offset or credit otherwise available) of the increased Federal tax arising from the Gross-Up Event, in which event the amount payable under paragraph 7A shall be paid by the ESOP to the Indemnitee promptly upon its receipt of notice of such payment from the Indemnitee. (b) The computation of any amount payable under paragraph 7A, 7B, 7D or 7E shall be made in good faith by the Indemnitee and shall be explained in writing to the ESOP and the Company, but neither the ESOP nor the Company shall have any right to examine the Indemnitee's Federal income tax returns or any other returns, documents or records of the Indemnitee. At the Company's or the ESOP's request and at the Company's expense, the Indemnitee will cause the Indemnitee's independent auditors to review such computation and certify to the Company or the ESOP, as the case may be, that such computation is accurate in all material respects or shall certify as to the correct computation if such computation is not accurate in all material respects. (c) If the ESOP shall fail to pay any amount payable under paragraphs 7A on the due date pursuant to this paragraph 7C, the ESOP shall also pay, to the extent lawful, interest on such unpaid amount at the rate payable on overdue payments of principal on the Notes, as set forth therein. -20- 7D. INTEREST RATE ADJUSTMENT. In the event that, with respect to an ------------------------ Indemnitee at any time after the date hereof there is for any reason a change in the Federal Tax Rate or the Inclusion Rate which is enacted after the date hereof, then, in that event, the interest rate on the Notes of each series held by such Indemnitee shall be automatically adjusted (but not higher than the Gross-Up Rate nor lower than the Fully Tax Exempt Rate with respect to such Notes), effective as of the effective date of change for each such change, to the rate per annum determined by multiplying the original interest rate applicable to the Notes of such series by the Adjustment Fraction. Such Indemnitee shall determine the adjusted interest rate on its Notes in accordance with the foregoing, subject to the procedures described in paragraph 7C(b). The ESOP unconditionally promises to pay interest on such Notes from the effective date of such change at the rate as so adjusted from time to time. If for any reason (e.g., a retroactive effective date) the effective date of change for any such change is prior to one or more payment dates for which payments were due and payable on such Notes, and adjustments to payments are required under this paragraph 7D, (i) the ESOP shall promptly upon demand by such Indemnitee pay the amount by which interest computed at such rate or rates exceeds the amount of interest actually theretofore paid by the ESOP on the Notes or (ii) the amount by which the interest computed at such rate or rates is exceeded by the amount of interested theretofore paid by the ESOP on the Notes shall be applied as an offset against subsequent payments of interest and principal on the Notes. 7E. REFUNDS. (a) If the ESOP or the Company shall make any payment to any ------- Indemnitee pursuant to paragraph 7A or 7B and such Indemnitee shall thereafter receive a refund, offset or credit of federal tax for any taxable year to which such payment related in respect of a claim that part of the interest on the Notes to which such payment related was excludable from its Federal Gross Income such Indemnitee shall pay to the ESOP or the Company, as the case may be, the sum of: (i) an amount equal to the amount previously paid to such Indemnitee pursuant to paragraph 7A(a) or 7B with respect to all interest on such Notes for such taxable year to which such claim for refund, offset, or credit related (the "Disputed Interest") multiplied by a fraction (not to exceed one) the numerator of which is the amount of the refund or credit received of tax paid with respect to the Disputed Interest and the denominator of which is the amount of all tax paid by such Indemnitee with respect to such Disputed Interest; and -21- (ii) the amount of any refunded, offset or credited interest or Additions to Tax that had been paid with respect to such Disputed Interest and with respect to which such Indemnitee had been paid with respect to such Disputed Interest and with respect to which such Indemnitee had been paid pursuant to paragraph 7A(b) or 7B (except to the extent already paid under clause (I))). (b) Other Adjustments. (i) If the ESOP or the Company shall make any ----------------- payment to an Indemnitee pursuant to paragraph 7B and if, in the Federal income tax return of such Indemnitee or after any adjustment of such return, the amount of the Tax Allowance or other amount by reference to which the amount of the supplemental payments is determined differs form the amount used to compute the amount of such payment, the ESOP or the Company, as the case may be, shall pay to such Indemnitee promptly on written demand any additional amount computed pursuant to paragraph 7B, and the Indemnitee shall promptly refund to the ESOP or the Company, as the case may be, any excess amount paid pursuant to paragraph 7B, attributable to such difference. (ii) In the case of a Gross-Up Event occurring solely as a result of the -------- failure to provide a Qualifying Opinion of Counsel, the Indemnitee shall be treated as receiving a refund if and when it files a federal income tax return excluding interest on the Indemnitee's Note, in an amount equal to the product of the amount paid pursuant to paragraph 7A with respect to such Gross-Up Event multiplied by a fraction (not to exceed 1), the numerator of which is the amount of interest on the Indemnitee's Note excluded on the return, and the denominator of which is the amount of the interest on the Indemnitee's Note that would be excludable assuming application of Section 133 of the Code. 7F. CONTEST OF DISALLOWANCE OF SECTION 133 EXCLUSION. ------------------------------------------------ (a) Notice. If an Indemnitee receives and IRS Notice asserting a claim ------ which, if successful, could result in a Gross-Up Event (an "Exclusion Claim"), the Indemnitee agrees to notify the ESOP and the Company in writing, as promptly as possible, of such Exclusion Claim and provide the ESOP and the Company with any relevant information relating to such Exclusion Claim that may be available to the Indemnitee. The Company will notify all other Indemnitees of such Exclusion Claim. (b) Contest. The Indemnitee further agrees to contest any Exclusion Claim ------- with diligence and in good faith, including appealing any adverse administrative or judicial determination and seeking a refund with respect to any Exclusion Claim if (in provided, however, that: -------- ------- -22- (i) within 30 days after notice by the Indemnitee to the ESOP and the Company of such Exclusion Claim, the ESOP or the Company shall request that such Exclusion Claim be contested; (ii) the amount payable to the Indemnitee under paragraph 7A with respect to such Exclusion Claim would exceed $50,000; (iii) prior to the Indemnitee's taking any such requested action (including appealing any adverse decision), the ESOP or the Company (at the expense of either the ESOP or the Company and upon the written request of the Indemnitee) shall provide the Indemnitee with an opinion, reasonably satisfactory to the Indemnitee, of nationally recognized counsel, independent of the ESOP and the Company and reasonably satisfactory to the Indemnitee to the effect that there exists a substantial authority (within the meaning of Section 6661 of the Code) for contesting such Exclusion Claim; (iv) the ESOP or the Company shall from time to time pay to the Indemnitee within 30 days after receipt by the ESOP and the Company of an itemized written demand therefor and explanation thereof an amount sufficient to reimburse the Indemnitee for all out-of-pocket expenses that the Indemnitee has incurred in connection with contesting or defending such Exclusion Claim or any appeal thereof, including, without limitation, expert witness, attorneys' and accountants' fees and disbursements; and (v) the Indemnitee may, at any time, settle, compromise or otherwise terminate any contest with the consent of the ESOP and the Company, which consent shall not be unreasonably withheld. (c) Control over Contest. Sole control over the conduct of any contest -------------------- under subparagraph (b) of this paragraph 7F shall be vested in the Indemnitee, but the Indemnitee shall consult with the ESOP, the Company and their counsel regarding all aspects of the contest, and shall consider and act on (or refrain from acting on) in good faith any recommendations of the ESOP, the Company, and their counsel as to conduct of the contest. The right of the Indemnitee to control the conduct of any contest shall not be construed to relieve the Indemnitee of its obligation to contest any Exclusion Claim in accordance with paragraph 7F(b). -23- (d) Segregation and Settlement. -------------------------- (i) The Indemnitee shall use its best efforts to segregate the Exclusion Claim triggering a payment under paragraph 7A from other tax issues it may be protesting or litigating with the IRS; provided, however, that the Indemnitee -------- ------- shall not be required to take any action that would in good faith and in its sole discretion, impair the Indemnitee's ability to settle with the IRS with respect to such other issues or materially affect the terms of any such settlement. (ii) If the Indemnitee has made such best efforts as required by clause (i) of this paragraph (d) but has not segregated such Exclusion Claim, then, notwithstanding anything to the contrary contained in subparagraph (a), (b) or (c) of this paragraph 7F, the Indemnitee may in its sole discretion settle or compromise such Exclusion Claim, provided the Indemnitee gives the ESOP and the Company notice of its intention to settle or compromise such Exclusion Claim. If, after receiving the notice referred to in the preceding sentence and within 45 days of an agreement between the Company and the Indemnitee on the identity of counsel, the Company provides the Indemnitee with an opinion, reasonably satisfactory to the Indemnitee, of nationally recognized counsel, independent of the ESOP and the Company and reasonably satisfactory to the Indemnitee, that it is highly probable that the Indemnitee would prevail in litigation with respect to such Exclusion Claim, then, if the Indemnitee settles or compromises such Exclusion Claim, to the extent payment was made by the ESOP or the Company under paragraph 7A as a result of a Gross-Up Event arising solely from such Exclusion Claim, the Indemnitee shall be deemed to have received a refund in the amount of such payment, and shall immediately return such amount to the ESOP or the Company; to the extent payment was not made, such Gross-Up Event shall be deemed not to have occurred. Alternatively, if the Company provides the Indemnitee with an opinion, reasonably satisfactory to the Indemnitee, of nationally recognized counsel, independent of the ESOP and the Company and reasonably satisfactory to the Indemnitee, that it is more likely than not that the Indemnitee would prevail in litigation with respect to such Exclusion Claim, then, if the Indemnitee settles or compromises such Exclusion Claim, if the amount paid by the ESOP or the Company exceeds 50% of the amount payable pursuant to paragraph 7A as result of a Gross-Up Event arising solely from such Exclusion Claim, the Indemnitee shall pay such excess to the ESOP or the Company, as appropriate; and if 50% of the amount payable pursuant to -24- paragraph 7A as a result of such Gross-Up Event exceeds the amount paid by the ESOP or the Company, the ESOP or the Company, as the case may be, shall pay the amount of such excess to the Indemnitee in complete accord and satisfaction of its obligations as to such issue under paragraph 7A. 7G. REQUEST FOR QUALIFYING OPINION OF COUNSEL. If any Indemnitee ----------------------------------------- determines, in good faith after consultation with independent nationally recognized counsel, that there is a reasonable likelihood for any reason whatsoever that any Qualified Holder will be required to include more than that percentage of the interest on the Notes which is equal to the Inclusion Rate in its Federal Gross Income, such Indemnitee shall be entitled to request, at the Company's expense, a Qualifying Opinion of counsel with respect to interest on the Notes for a period commencing with the date of issuance of the Notes and continuing through the date of such request or for any lesser period specified in such Indemnitee's request. If such a request is made, such Indemnitee shall supply the counsel rendering such opinion with such information, reasonably available to such Indemnitee, as may be reasonably requested by such counsel in order for it to form a basis for rendering the opinion requested. 8. COMPANY GUARANTEE AND PURCHAS OBLIGATION ---------------------------------------- 8A. GUARANTEE BY THE COMPANY. (a) Obligations Guaranteed. The Company, in ------------------------ ---------------------- consideration of the execution and delivery of this Agreement, hereby unconditionally and irrevocably guarantees to you (together with your successors and assigns, hereinafter referred to as the "Purchaser"), and to the holders from time to time of the Notes, the due and punctual payment of the principal of, premium, if any (including the Yield-Maintenance Premium), and interest on the Notes (including post-petition interest in the event of a bankruptcy or similar proceeding) when and as the same shall become due and payable, whether at the maturity thereof, by acceleration, by notice of prepayment or otherwise, according to the terms thereof and of this Agreement, and the due and punctual payment of any other amounts owing to the Purchaser and to such holders under or in respect of the Notes and all other payment obligations of the ESOP hereunder (including, without limitation, amounts payable by the ESOP pursuant to paragraph 7), whether absolute or contingent, liquidated of unliquidated. In the absence of the due observance and performance by the ESOP of any of its other obligations, undertakings and conditions contained in this Agreement, the Company shall use its best efforts, to the extent practicable, to provide reasonably equivalent performance intended to -25- achieve comparable results. If the ESOP shall not punctually pay any such principal, premium (including, without limitation, Yield-Maintenance Premium), interest or other amounts (regardless of whether the holders of the Notes have recourse against the ESOP), the Company shall make such payment forthwith thereafter. If the Purchaser or any of the holders of the Notes shall have the right to declare any or all of the Notes due and payable (or any such right shall be limited by operation of the last sentence of paragraph 9A or otherwise), and acceleration of the payment of such Notes is stayed, enjoined or otherwise prevented for any reason, including, without limitation, because of any bankruptcy proceeding or the provisions of Treasury Regulation section 54.4975-7 or 54.4975-11, the Company, upon demand therefor, shall pay to the Purchaser and each holder of Notes the sums which would have been due to the Purchaser and such holders under this Agreement if such acceleration had occurred, all as permitted by applicable law. (b) Obligations Unconditional. The Company agrees that its obligations ------------------------- hereunder are absolute and unconditional, irrespective of the validity, regularity or enforceability of or any change in or amendment to any Note or this Agreement, the institution or absence of any action to enforce the same, the waiver or consent by the Purchaser or the holder of any Note with respect to the provisions thereof, the obtaining of any judgement against the ESOP or any action to enforce the same, the inability to recover from the ESOP because of any statute of limitations, laches or otherwise or any other circumstance which might otherwise constitute a legal or equitable discharge of or a defense to a guarantor, and that the provisions of this paragraph 8 constitute a guarantee of payment and not of collectibility. (c) Waivers and Agreements. The Company hereby unconditionally: (i) waives ---------------------- notice of acceptance hereof, of any action taken or omitted in reliance hereon and of any defaults in respect of the Notes or in the payment of any other amounts due in respect thereof, diligence, protest, presentment, filing of claims with a court in the event of the bankruptcy of the ESOP (subject to such filings as may be necessary to protect rights of subrogation, but only at the written instance and expense of the Company), any right to require a proceeding first against the ESOP or that the ESOP be joined in any proceeding against the Company, any marshalling of assets of the Company or the ESOP, any notice of default with respect to any of the Notes or this Agreement or any other act or omission or thing or delay to do any other act or thing which might in any manner or to any extent vary the risk of the Company or which might otherwise operate as a discharge of the -26- Company; (ii) agrees that this guarantee shall remain in full force and effect without regard to, and shall not be affected or impaired by, any invalidity, irregularity or unenforceability in whole or in part or any of the Notes or this Agreement or any of the limitations of liability or payment conditions thereunder which may now or hereafter be caused or imposed in any manner whatsoever; (iii) agrees that this guarantee shall not be subject to any counterclaim (other than those which are compulsory in nature), set-off, deduction or defense based upon any claim the Company may have against the ESOP or any holder of the Notes hereunder or otherwise; and (iv) agrees that this guarantee shall be discharged only by complete performance of the undertakings in this paragraph 8. Nothing herein is intended to impair any rights of the Company to enforce any rights it may have against any Person by way of a separate proceeding or action. (d) Obligations Unimpaired. The Company authorizes the Purchaser and the ---------------------- holders of the Notes, without notice or demand to the Company and without affecting its liability hereunder, from time to time (I) to exercise or refrain from exercising any rights against the ESOP or others; and (ii) to apply any sums, by whomsoever paid or however realized, to the payment of the principal of, premium, if any (including the Yield-Maintenance Premium), and interest on the Notes and any other obligation hereunder. The Company waives any right to require the Purchaser and the holders of the Notes to proceed against the ESOP or any other Person or to pursue any other remedy available to the Purchaser or to such holders. (e) Subrogation. In the event the ESOP fails to observe or perform any of ----------- its obligations or undertakings under this Agreement (an "ESOP Default"), the Company will be subrogated and succeed to the rights of the Purchaser and the holders of the Notes which may be asserted against the ESOP by the Purchaser or such holders as a result of any such ESOP Default upon payment or performance of such obligations or undertakings; provided, however, that the Company will not -------- ------- exercise any rights which it may have acquired by way of subrogation under this Agreement, by any payment made hereunder or otherwise, or accept any payment on account of such subrogation rights, unless and until all of the obligations, undertakings or conditions then and thereafter to be performed or observed by the ESOP pursuant to the Notes and this Agreement shall have been performed, observed or paid in full by the ESOP or the Company, and the Company's rights of subrogation hereunder are expressly subordinate to the rights of the Purchaser and holders of the Notes arising out of the Agreements. In the event that the Company receives any payment on account of such subrogation rights, it shall promptly apply -27- such payment to the extent of its obligations hereunder. In the event that the Company pays or causes to be paid all amounts due under any of the Notes, the Purchaser or holder will assign and transfer such Notes to the Company or its designee. In no event shall such subrogation grant to the Company any right or power with respect to the ESOP which it is forbidden to exercise pursuant to ERISA or the Code or the regulations thereunder, including but not limited to Treasury Regulations sections 54.4975-7 and 54.4975-11. (f) Rescission of Payment. This guarantee shall continue to be effective or --------------------- be reinstated, as the case may be, if at any time payment, or a part thereof, of the principal of, premium (including, without limitation, the Yield-Maintenance Premium), if any, or interest on any of the Notes or of any other obligations guaranteed hereby is rescinded or must otherwise be restored or returned by the Purchaser or any holder of Notes upon the insolvency, bankruptcy or reorganization of the ESOP, or otherwise, all as though such payment has not been made. (g) Election to Perform Obligations. The Company may at any time elect to ------------------------------- pay or otherwise perform any obligation of the ESOP under this Agreement or in respect of the Notes, which shall operate as a discharge and release of the ESOP from such obligation to the Purchasers or any subsequent holders of the Notes (but not to the Company as subrogee or as a successor Noteholder), provided that no such election shall release the ESOP from any of its other obligations ----------- hereunder and under the Notes. 8B. PURCHASES OF NOTES BY THE COMPANY. (a) At any time after the occurrence --------------------------------- of a Purchase Event and prior to the expiration of the later of (x) 90 days after receipt of an Event Notice relating thereto and (y) 15 days after receipt of an Other Holder Notice (as defined below), any holder of a Note may deliver a notice to the Company (x) stating that it is electing to exercise its right to require the purchase by the Company pursuant to this paragraph 8B of the Notes then held by it (a "Purchase Notice") and (y) specifying the date on which such purchase shall occur (which date shall not be less than 25 nor more than 35 days after the date on which such holder shall have delivered such Purchase Notice to the Company), and in any such event the Company, on such specified date, shall purchase or cause to be purchased the Note or Notes then held by such holder, without recourse, representation or warranty (other than as to the holder's full right, title and interest, free of any adverse claim, in such Note or Notes), and such holder shall sell such Note or Notes to or at the direction of the Company at a price, payable in immediately available funds by -28- wire transfer to the account specified pursuant to paragraph 14A or to such other account as may be specified in such notice, equal to the then outstanding principal amount thereof, together with interest accrued on such principal amount to the date of purchase, plus a premium equal to the Yield-Maintenance Premium, if any, plus any amounts then due under Section 7 with respect to each Note purchased. Promptly, and in any event within five days following its receipt thereof, the Company will deliver to each holder of a Note a copy of any Purchase Notice received by its pursuant to subparagraph (a) of paragraph 8B of this Agreement or the Other Agreements (an "Other Holder Notice"). The Company shall comply with all applicable laws (including, without limitation, securities laws) in connection with its purchase of Notes hereunder and any related transactions. (b) If either or both of Moody's or Standard & Poor's is not providing public ratings of the Unsupported Company Debt, the Company may (subject to the approval of the Required Holder(s)), and, at the request of the Required Holder(s), shall substitute another rating agency or other rating agencies of national reputation for Moody's and/or Standard & Poor's for the purpose of determining, by reference to the public ratings of two such rating agencies (which shall include Moody's or Standard & Poor's if one of them is providing public ratings of the Unsupported Company Debt), whether the Company shall be obligated pursuant to subparagraph (a) of this paragraph 8B to purchase such holder's Note or Notes as a result of a Purchase Event. If no rating agency of national reputation satisfactory to the Required Holder(s) or only one of such rating agency is providing public ratings of the Unsupported Company Debt, any holder of a Note may request that the Company obtain from either or both, as appropriate, of Moody's and Standard & Poor's a private credit rating for the Unsupported Company Debt for the purpose of determining, by reference to the ratings of either or both as appropriate, of such rating agencies, whether the Company shall be obligated pursuant to subparagraph (a) of this paragraph 8B to purchase such holder's Note or Notes. Upon receipt of any such request, the Company shall promptly, and in any event within 10 days after receiving such request, either or both, as appropriate notify each other holder of a Note of such request and use its best efforts to obtain as promptly as practicable from either or both, as appropriate, of Moody's and Standard & Poor's (or, if either of them declines to provide a private credit rating, the other of them and one rating agency of national reputation, and if both of them so decline, two rating agencies of national reputation, in each case approved by the Required Holder(s)) a private credit rating for such purpose. If the Company does not have any Unsupported Company Debt, the determination of whether the Company shall be obligated pursuant to subparagraph (a) of this paragraph 8B to purchase any holder's Note or Notes shall be -29- made as aforesaid, but by reference to a credit rating of the Notes instead of Unsupported Company Debt. If the Company is required pursuant to this subparagraph (b) of this paragraph 8B to seek a private credit rating and fails to obtain such private credit rating within 60 days of any holder's request therefor, such rating shall be deemed to be less than Baa3 or BBB- (or any comparable rating then in existence). In the event another rating agency of national reputation is substituted for Moody's or Standard & Poor's, such determination shall be made by reference to the rating of such substituted agency that it most nearly comparable to Baa3 of Moody's and BBB- of Standard & Poor's (or, in either case, the comparable ratings then in existence). Suspension of a rating by a rating agency shall be deemed to have the effect of such agency's providing no rating. (c) The Company covenants that it will deliver to each holder of a Note promptly, and in any event within 10 days following the occurrence thereof, (x) a notice of any change in the credit rating (whether public or private), or any cessation of the credit rating, of the Unsupported Company Debt by Moody's or Standard & Poor's, together, in the case of any such change, with a statement of the date of such occurrence and a reasonably detailed description of the facts and circumstances underlying such occurrence know to it, and (y) a notice of the occurrence of a Purchase Event, together with a statement of the date of occurrence of such Purchase Event and a reasonably detailed description of the facts and circumstances underlying such occurrence know to it, and which states that the Company is obligated, upon receipt of a Purchase Notice described in subparagraph (a) of this paragraph 8B, to purchase Notes pursuant to subparagraph (a) of this paragraph 8B (an "Event Notice"). 9. EVENTS OF DEFAULT. ----------------- 9A. DEFAULT; ACCELERATION. If any of the following events shall occur and --------------------- be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) default in the payment of any principal (including any Required Installment Payment) of or Yield-Maintenance Premium on any Note when the same shall become due, whether at maturity or at the times specified in paragraph 4A, 4B or 4C or otherwise, either by the terms thereof or otherwise as herein provided; default in the discharge by the Company of its obligations to purchase Notes pursuant to paragraph 8B when required by the provisions of said paragraph; or default in the payment of any interest on any Note when the same shall become due and such default shall continue for more than 10 days; or -30- (ii) the Company states or otherwise claims in writing that any of its obligations under paragraph 8 is not enforceable in accordance with its terms; or (iii) default in the performance, or breach, of any covenant of the Company or the ESOP in this Agreement (other than a covenant a default in whose performance or whose breach is elsewhere in this paragraph 9A specifically dealt with), and continuance of such default or breach for a period of 30 days after the chief executive officer, chief operating officer, principal financial officer, principal accounting officer, treasurer or any other executive officer of the Company has obtained actual knowledge of such default or breach; or (iv) any representation or warranty made by the Company or the ESOP herein or in any writing furnished pursuant to the requirements of this Agreement shall be false in any material respect on the date as of which made; or (v) the Company or a Restricted Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (vi) any decree or order for relief in respect of the Company or any Restricted Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any jurisdiction; or (vii) the Company or any Restricted Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Restricted Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to the Company or any Restricted Subsidiary under the Bankruptcy Law of any other jurisdiction; or (viii) any petition or application referred to in clause (vii) above is filed, or any such proceedings are commenced, against the Company or any Restricted Subsidiary and the Company or such Restricted Subsidiary, by any corporate act, consents thereto or acquiesces therein, or -31- an order, judgement or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 90 days; or (ix) any order, judgment or decree is entered in any proceedings against the Company or any Restricted Subsidiary decreeing the dissolution of the Company or such Restricted Subsidiary and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (x) any order, judgment or decree is entered in any proceeding against the Company or any Restricted Subsidiary decreeing a split-up of the Company or such Restricted Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Restricted Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Restricted Subsidiary, which shall have contributed a substantial part of the consolidated net income of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days (for the purpose of this clause (x), substantial shall mean 25% of Consolidated Net Tangible Assets); or (xi) any "reportable event" as such term is defined in section 4043 of ERISA occurs in connection with any ERISA Plan or trust created thereunder for which the thirty-day notice requirement has not been waived under applicable regulations, or an event occurs requiring the Company or any ERISA Affiliate to provide security to an ERISA Plan under section 401(a)(29) of the Code; any "prohibited transaction" occurs, as such term is defined in section 4975 of the Code or in section 406 of ERISA, in connection with any ERISA Plan or any trust created thereunder, for which there is no exemption; any notice of intent to terminate an ERISA Plan is filed under Title IV of ERISA by the Company or any ERISA Affiliate, any ERISA Plan administrator or any combination of the foregoing; any proceedings are instituted by the PBGC to terminate or to cause a trustee to be appointed to administer any ERISA Plan; any partial or complete withdrawal is made by the Company or an ERISA Affiliate from any Multiemployer Plan; any proceedings are instituted by a fiduciary of any ERISA -32- Plan against the Company or any Code Affiliate to enforce section 515 of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; the Company or a Code Affiliate fails to make a required installment under section 412(m) of the Code or to pay any amount or amounts which it shall have become liable to pay to the PBGC or to an ERISA Plan under Title IV of ERISA on or before the due date; any application is filed by the Company or a Code Affiliate for a waiver of the minimum funding standard under section 412 of the Code or section 302 of ERISA; or any "reorganization" (as defined in section 418 of the Code or Title IV of ERISA) of any plan which is a Multiemployer Plan occurs; and each such instance individually, or any two or more such instances in the aggregate, would, in the reasonable judgment of the Required Holders, more likely than not result in liability of the Company or any Code Affiliate or ERISA Affiliate to the IRS, the PBGC, the United States Department of Labor or an ERISA Plan in an aggregate amount exceeding $20,000,000; or (xii) any order, judgment or decree is entered in any proceeding by a court of competent jurisdiction decreeing that the Plan, the ESOP or the ESOP Transaction has not been properly established or consummated, as the case may be (other than as specified in clause (ii) of the definition of Purchase Event), in any material respect, and such order, judgment or decree remains unstayed and in effect for more than 60 days and no appeal is filed by the Company or the ESOP therefrom within 60 days of the time such order, judgment or decree first becomes appealable; or (xiii) the Company or any Subsidiary defaults in any payment of principal of or interest on any other obligation for money borrowed (or any capitalized lease obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafts accepted representing extension of credit), other than the Notes, beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement (other than the Other Agreements) under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause (without any action by or on behalf of the holder or holders of such obligation), or as a result thereof the holder or holders of such obligation (or a trustee on behalf of such holder -33- or holders) shall have caused, such obligation to become due prior to any stated maturity; provided that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or resulting in acceleration shall occur and be continuing exceeds $20,000,000; then (a) if such event is an Event of Default specified in clause (vi), (vii) or (viii) of this paragraph 9A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at the principal amount thereof together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company and the ESOP, and (b) if such event is an Event of Default specified in clause (i) of this paragraph 9A the holder or holders of at least 25% of the aggregate principal amount of the Notes at the time outstanding, and if such event is an Event of Default specified in clause (ii), (iii), (iv), (v), (ix), (x), (xi), (xii) or (xiii) of this paragraph 9A the holder or holders of at least 50% of the aggregate principal amount of the Notes at the time outstanding, may at its or their option, by notice in writing to the Company and the ESOP, declare all of the Notes to be, and all of the Notes shall thereupon be and become (except that, if such event is an Event of Default specified in clause (i) of this paragraph 9A with respect to any Note, the holder of such Note may at its option by notice in writing to the Company and the ESOP declare such Note to be, and such Note shall thereupon be and become) immediately due and payable at the principal amount thereof together with interest accrued thereon and the Yield-Maintenance Premium, if any, with respect thereto without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company and the ESOP, provided that the Yield-Maintenance -------- Premium, if any, with respect to each Note shall be due and payable upon such declaration only if (x) such event is an Event of Default specified in any of clauses (i) to (v), inclusive, and clauses (xi), (xii) and (xiii) of this paragraph 9A, (y) the holder or holders making such declaration shall have given to the Company and the ESOP, at least 10 Business Days before such declaration, written notice stating its or their intention so to declare the Notes to be immediately due and payable and identifying one or more such Events of Default whose occurrence on or before the date of such notice permits such declaration and (z) one of more of the Events of Default so identified shall be continuing at the time of such declaration. Nothing in this Agreement shall permit (i) a transfer of assets of the ESOP to any Person in excess of the amount permitted under Treasury Regulation ss. 54.4975-7(b) (5) or (6) or (ii) if a holder of any Note is a disqualified person within the meaning -34- of section 4975 of the Code or the Regulations thereunder, the transfer of assets of the ESOP to such holder except upon the failure of the ESOP to make payment of regularly scheduled payments of principal of and interest on such Notes, and then only to the extent of such failure. 9B. OTHER REMEDIES. If any Event of Default or Default shall occur and be -------------- continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon you or any other holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statue or otherwise. 9C. RESCISSION OF ACCELERATION. At any time after any declaration of -------------------------- acceleration of any of the Notes shall have been made pursuant to paragraph 9A by any holder or holders of the Notes and before a judgment or decree for the payment of money due has been obtained by such holder or holders, the holder or holders of at least 50% of the aggregate principal account of the Notes at the time outstanding may, by written notice to the Company and the ESOP and to the other holders of the Notes, rescind and annul such declaration and its consequences, provided that (i) the principal of and interest on the Notes which -------- shall have become due otherwise than by such declaration of acceleration shall have been duly paid and (ii) all Events of Default, other than the nonpayment of principal of and interest on the Note which have become due solely by any such declaration of acceleration, shall have been cured or expressly waived by such holder or holders of not less than 50% of the aggregate principal amount of the Notes at the time outstanding; provided further, however, that (x) no waiver -------- ------- ------- referred to in clause (ii) above in respect of any matter referred to in the proviso contained in the first sentence of paragraph 14C(a) shall be effective without the consent of each holder of Notes affected by such waiver and (y) no declaration pursuant to the parenthetical clause contained in clause (b) of the last paragraph of paragraph 9A may be rescinded or annulled except by the holder of Notes that made such declaration. No rescission or annulment referred to above shall affect any subsequent Default or any right, power or remedy arising out of such subsequent Default. -35- 10. REPRESENTATIONS AND WARRANTIES. The Company and, in the case of ------------------------------ paragraphs 10G, 10I, 10N, and 100, the ESOP, as to the ESOP, and, in the case of paragraph 100, the Trustee, as to the Trustee, represent and warrant that: 10A. ORGANIZATION; CORPORATE AUTHORITY. The Company and each of its --------------------------------- Restricted Subsidiaries are corporations duly organized and validly existing in good standing under the laws of their respective states of incorporation and have all requisite power, and have all material governmental licenses, authorizations, consents and approvals, necessary to own their assets and carry on their business as now being conducted, except where the failure to have such power, licenses, authorizations, consents and approvals would not, individually or in the aggregate, have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole. The Company and each of its Restricted Subsidiaries are qualified to do business in all jurisdictions in which the nature of the business conducted by them makes such qualification necessary and where failure to do so would have a material adverse effect on the business, property, financial condition or results of operations of the Company and its Subsidiaries taken as a whole. The execution, delivery and performance of this Agreement and the Plan Documents, and compliance with the provisions hereof and the consummation of any other transactions contemplated hereby and by the Plan Documents, are within the corporate power of the Company, have been duly authorized by all necessary corporate action and are valid obligations of the Company, legally binding upon and enforceable against the Company in accordance with their respective terms. 10B. FINANCIAL STATEMENTS; SEC REPORTS. The Company has furnished you with --------------------------------- the audited consolidated balance sheets of the Company and its Subsidiaries at December 31, 1988 and December 31, 1987 and the related audited consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1988, all reported on by Peat Marwick Main & Co. (the "Historical Financial Statements"). The Historical Financial Statements (a) are complete and correct in all material respects, (b) have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and (c) present fairly, in all material respects, the consolidate financial position of the Company and its Subsidiaries at the dates indicated and their results of operations and cash flows for the periods indicated. The Company has also furnished you with (i) copies of the Company's Annual Report on Form 10-K for its fiscal year ended -36- December 31, 1988 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 1989 (collectively, the "SEC Reports") and (ii) the Confidential -- Private Placement Memorandum, dated May 1989, submitted to you by Goldman, Sachs & Co. (the "Placement Memorandum"). The SEC Reports have been prepared in conformity with the rules and regulations of the Commission applicable thereto and, in accordance with such rules and regulations, accurately describe the business conducted by the Company and its Subsidiaries and the properties owned and operated in connection therewith. The Historical Financial Statements, the SEC Reports, the Placement Memorandum and all other documents and reports delivered by or on behalf of the Company to you in connection with the transactions contemplated by this Agreement are herein collectively called the "Disclosure Documents". The Disclosure Documents did not, as of their respective dates, and taken as a whole, and this Agreement does not as of the date hereof, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. There is no fact peculiar to the Company which materially adversely affects or in the future would reasonably be expected to (so far as the Company can now foresee) materially adversely affect the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole which has not been set forth in this Agreement or in the Disclosure Documents. Since December 31, 1988, there has not been any material adverse change, or any development which the Company has reasonable cause to believe will involve a material adverse change, in or affecting the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole, otherwise than as set forth or contemplated in the Disclosure Documents. 10C. ACTIONS PENDING. There are no actions or proceedings filed or --------------- investigations pending or (to the best knowledge of the Company) threatened against the Company or the ESOP which question the validity or legality of or seek damages in connection with this Agreement or any action taken or to be taken pursuant to this Agreement or any of the transactions contemplated hereby (including the ESOP Transaction), and no order or judgment has been issued or entered restraining or enjoining the Company or the ESOP from the consummation of the transactions contemplated by this Agreement (including the ESOP Transaction) or which affects the ESOP or the Company or any of the ESOP's or the Company's properties or rights, or any of the ESOP's or the Company's affiliates, associates, officers or directors in relation to such matters, nor is there any action or proceeding which involves a significant possibility of an adverse determination which would have any such effect. There -37- are no legal or governmental proceedings pending to which the Company or any of its Subsidiaries is a party or of which any property of the Company or any of its Subsidiaries is the subject other than (i) as set forth in the Disclosure Documents and ( ii ) legal or governmental proceedings which would not, in the reasonable judgment of the Company, in the aggregate have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole; and no such proceedings are known by the Company to be threatened or contemplated by governmental authorities or threatened by others. 10D. TAXES. The Company has and each of its Subsidiaries has filed all ----- Federal, state and other income tax returns which are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings for which adequate reserves have been recorded on the books of the Company and its Subsidiaries in accordance with generally accepted accounting principles. 10E. TITLE TO PROPERTY. The Company and its Restricted Subsidiaries have ----------------- good and marketable title to all real property and good title to all personal property owned by them, free and clear of all liens, encumbrances and defects in each case except such as are described in the Disclosure Documents or such as do not materially affect the value of any material property and do materially interfere with the use made and proposed to be made of such property by the Company and its Restricted Subsidiaries; and any real property and buildings held under lease by the Company and its Restricted Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Restricted Subsidiaries. 10F. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution nor ---------------------------------------- delivery of this Agreement or the Plan Documents, nor the offering, issuance and sale of the Notes or the consummation of the ESOP Transaction, nor fulfillment of or compliance with the terms and provisions hereof and thereof will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the material properties or assets of the Company or any of its Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement, -38- instrument, order, judgment or decree, to which the Company or any of its Subsidiaries or any of their respective properties is subject. The Company is not a party to any contract, agreement or arrangement with any of the Other Purchasers relating to the transactions contemplated by the Agreements, other than the Agreements. 10G. OFFERING OF NOTES. Neither the Company, the ESOP nor Goldman, Sachs & ----------------- Co. (the only Person authorized or employed by the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Notes or any similar security) has, directly or indirectly offered any of the Notes, or any similar security for sale to, or solicited any offers to buy any of the Notes, or any similar security from, or otherwise approached or negotiated with respect thereto with, any Person or Persons other than you, the Other Purchasers and no more than 21 other institutional investors; and neither the Company, the ESOP nor any agent acting on their behalf has taken or will take any action which would subject the issuance or sale of any of the Notes to the provisions of Section 5 of the Securities Act or violate the provisions of any securities or blue sky law of any applicable jurisdiction. 10H. BROKER'S OR FINDER'S COMMISSIONS. No broker's or finder's fee or -------------------------------- commission will be payable by the Company or the ESOP with respect to the issuance and sale of the Notes or the transactions contemplated hereby, except for fees paid or payable to Goldman, Sachs & Co., and the Company agrees that such fees shall be paid by it and that it will hold you harmless from any claim, demand or liability for broker's or finder's fees or commissions alleged to have been incurred in connection with this transaction. 10I. MARGIN REGULATIONS. Neither the Company nor the ESOP will, directly or ------------------ indirectly, use any of the proceeds of the issue and sale of the Notes or otherwise take or permit to be taken any action which would result in the issue and sale of the Notes, or the carrying out of any of the other transactions contemplated hereby or by the ESOP Transaction, being violative of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. 10J. INVESTMENT COMPANY ACT. Neither the Company nor any of its ---------------------- Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 10K. PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Company nor any of its ---------------------------------- Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an -39- "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 10L. GOVERNMENTAL CONSENTS, ETC. No consent, approval or authorization of, -------------------------- or the making of any declaration or filing with, any governmental authority is required as a condition to the valid execution or delivery of this Agreement or the Plan Documents or the consummation of the transactions contemplated hereby and thereby except (i) the filing of the Plan Documents with the IRS as contemplated by paragraph 5F, ( ii ) the filing of a Statement Effecting Class or Series with the Pennsylvania Department of State with respect to the Employer Capital Stock, ( iii ) with respect to the ESOP, the filing of a Registration Statement on Form S-8 under the Securities Act and notice filings under certain state securities laws, and ( iv ) with respect to the Company Common Stock issuable upon conversion of the Employer Capital Stock, the filing of a listing application with the New York Stock Exchange for the listing thereof. 10M. ERISA. (a) Prohibited Transactions. Neither the Company or any ERISA ----- ----------------------- Affiliate has engaged in a transaction in connection with which the Company would be subject to a material liability for either a civil penalty assessed pursuant to section 502( i ) of ERISA or a tax imposed by section 4975 of the Code. (b) ERISA Plan Termination; Material Liabilities. There has been no -------------------------------------------- termination of an ERISA Plan or trust created under any ERISA Plan that would give rise to a material liability to the PBGC on the part of the Company or an ERISA Affiliate. No material liability to the PBGC has been or is expected by the Company to be incurred with respect to any ERISA Plan by the Company or an ERISA Affiliate. The PBGC has not instituted proceedings to terminate any ERISA Plan which is maintained or is to be maintained by the Company or an ERISA Affiliate. There exists no condition or set of circumstances which presents a material risk of termination or partial termination of any ERISA Plan by the PBGC or restoration of any ERISA Plan heretofore terminated. The Company and each Code Affiliate is current in the payment of all premiums to the PBGC. (c) Accumulated Funding Deficiency. Full payment has been made of all ------------------------------ amounts which are required under the terms of each ERISA Plan to have been paid as contributions to such ERISA Plan as of the last day of the most recent fiscal year of such ERISA Plan ended on or before the date of this Agreement, and no accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not -40- waived, exists with respect to any ERISA Plan or any employee pension benefit plan maintained by the Company or a Code Affiliate. The Company and each Code Affiliate is current with all required installments under section 412 (m) of the Code. (d) Relationship of Benefits to Pension Plan Assets. The current value of ----------------------------------------------- the benefit liabilities (as defined in section 4001(a) (16) of ERISA) of each ERISA Plan does not exceed the fair market value of the assets of such ERISA Plan. Neither the Company nor any Code Affiliate is required to provide security to an ERISA Plan or an employee pension benefit plan maintained by a Code Affiliate under section 401(a)(29) of the Code. No lien under section 412(n) of the Code or sections 312(f) or 4068 of ERISA has been or is reasonably expected by the Company to be imposed on the assets of the Company or any ERISA Affiliate. (e) Withdrawal Liability Neither the Company nor any ERISA Affiliate -------------------- participates or, since September 26, 1980, has participated in any Multiemployer Plan. (f) Compliance with ERISA All employee pension benefit plans (as defined in --------------------- section 3(2) of ERISA) maintained by the Company or an ERISA Affiliate which are intended to be "qualified" are "qualified" under section 401(A) of the Code. All employee benefit plans (as defined in section 3(3) of ERISA) maintained by the Company or an ERISA Affiliate have been administered substantially in compliance with ERISA and the applicable provisions of the Code. There are no pending issues before the IRS or any court of competent jurisdiction related to the qualification of the Plan except for the filing of the Plan with the IRS as contemplated by paragraph 5F. Neither the Company nor any Code Affiliate has any material liability under the Consolidate Omnibus Budget Reconciliation Act of 1985, as amended. (g) Execution of Agreement The execution and delivery of this Agreement and ---------------------- the consummation of the transactions contemplated by this Agreement will not involve any transaction which is subject to the prohibitions of section 406 of ERISA for which there is no exemption or in connection with which a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the preceding sentence is made in reliance upon and subject to the accuracy of your representation in paragraph 11 as to the source of funds used to pay the purchase price of the Notes. 10N. THE ESOP. (a) The ESOP is an "employee stock ownership plan" within -------- the meaning of section 4975(e)(7) of the Code and is qualified under section 401(a) of the Code. The -41- ESOP has been duly constituted in accordance with the Trust Agreement, is validly existing and is tax-exempt under section 501(a) of the Code. The ESOP has the requisite power and authority to own its properties and assets. The execution, delivery and performance of this Agreement and the consummation of the ESOP Transaction by the parties thereto will not involve any transaction which is subject to the prohibitions of section 406 of ERISA for which there is no exemption and will not otherwise constitute a violation of, or give rise to any liability under, any other provision of Title I of ERISA or section 4975 of the Code. The issuance and sale of the Notes hereunder to you by the ESOP qualifies as a "securities acquisition loan" within the meaning of section 133 of the Code as in effect on the date hereof and, as a result thereof, 50% of the interest on the Notes is currently excludible from the gross income of any holder of the Notes for Federal income tax purposes, assuming that such holder is a Qualified Holder. (b) The ESOP has not incurred any Debt and, as of the Closing, will not have incurred any Debt other than Debt represented by the Notes. The ESOP has been established by the Company for a valid corporate purpose. The Company and the ESOP have delivered to you true and correct copies of the Plan Documents and all other documents presently in effect and having the legal effect of governing the terms or administration of the ESOP. The ESOP Transaction as of the date hereof has been and after giving effect to the transactions contemplated hereby will be duly and validly consummated and all Plan Documents are and will be legal, valid, binding and enforceable obligations of the respective parties thereto. 10O. REPRESENTATIONS AS TO THE TRUSTEE (a) The Trustee has all requisite --------------------------------- power and authority to execute and deliver and to perform all of the obligations of the ESOP under this Agreement and the Notes and to carry out the ESOP Transaction; (b) the execution, delivery and performance by the Trustee of this Agreement and the Notes and the consummation by the ESOP of the ESOP Transaction will not violate any provision of any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Trustee; (c) this Agreement constitutes, and the Notes when delivered hereunder will constitute, legal, valid and binding obligations of the ESOP enforceable against the ESOP in accordance with their terms; and (d) there are no actions, suits or proceedings pending or, to the best knowledge of the Company or the ESOP, threatened against or affecting the ESOP or its properties before any court or governmental department, -42- commission, board, bureau, agency or instrumentality, domestic or foreign, which ( i ) draw into question the validity of the Trust Agreement, this Agreement, the Notes or the ESOP Transaction or ( ii ) if determined adversely to the ESOP, would materially adversely affect the ability of the Trustee to perform its obligations under the Trust Agreement or of the ESOP to perform its obligations under this Agreement or the Notes or of any of them to consummate the ESOP Transaction. The following representations and warranties are made only by the Trustee in its individual capacity and not for any purpose of this Agreement or any certificate delivered pursuant to paragraph 3B, by the company or the ESOP: The Trustee, in its individual capacity, represents and warranties the ( i ) the Trustee is a national banking association with corporate trust powers duly organized, validly existing and in good standing under the laws of the United States and has all requisite power and authority, corporate and otherwise to conduct its business and to execute and deliver, and to perform all its obligations and to execute and deliver, and to perform all its obligations under the Trust Agreement; ( ii ) the Trustee is not in default under any provision of any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Trustee or any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Trustee is a party or by which it or its properties are bound or affected, which default would materially affect the ability of the Trustee to perform its obligations under the Trust Agreement; and ( iii ) the execution, delivery and performance by the Trustee of the Plan Documents, this Agreement and the Notes and the consummation by the ESOP of the ESOP Transaction do not and will not violate any provision of the articles of association or by-laws of the Trustee. 10P. POLLUTION AND OTHER REGULATIONS. The company and its Restricted ------------------------------- Subsidiaries are in compliance in all material respects with all laws and regulations, including, without limitation, those relating to pollution and environmental matters, equal employment opportunity and employee safety, in all jurisdictions in which they are presently doing business except where the failure to do so would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its Subsidiaries taken as a whole. 11. REPRESENTATIONS OF PURCHASER You represent, and in making this sale to ---------------------------- you it is specifically understood and agreed, that you are not acquiring the Notes to be purchased by -43- you hereunder with a view to or for sale in connection with any distribution or public offering thereof within the meaning of the Securities Act, provided that -------- the disposition of your property shall at all times be and remain within your control. You also represent that the funds being used by you to pay the purchase price of the Notes being purchased by you hereunder constitute either part of your general asset account (or your general assets if you are not an insurance company) or constitute assets allocated to ( I ) a separate account (as defined in section 3 of ERISA) which is a "guaranteed contract separate account" (as defined in Department of Labor ("DOL") Prohibited Transaction Exemption 81-82 issued September 18, 1981), in which case you further warrant that all requirements for an exemption under DOL Prohibited Transaction Exemption 81-82 are met with respect to the use of such funds to pay the purchase price of the Notes; ( ii ) a collective investment fund (as defined in section IV of DOL Prohibited Transaction Exemption 80-51 issued July 21, 1980) maintained by you, in which case you further warrant that all requirements for an exemption under DOL Prohibited Transaction Exemption 80-51 are met with respect to use of such funds to pay the purchase price of the Notes; or ( iii ) an investment fund (as defined in Part V of DOL Prohibited Transaction Exemption 84-14, issued March 13, 1984), in which case you further warrant that all requirements for an exemption under DOL Prohibited Transaction Exemption 84-14 are met with respect to the use of such funds to pay the purchase price of the Notes. 12. DEFINITIONS. As used herein, the following terms shall have the ----------- following meaning (terms defined in the singular to have the same meanings when used in the plural and vice versa): ---- ----- 12A. YIELD-MAINTENANCE TERMS. ----------------------- "Called Principal" shall mean, with respect to any Note the principal of ---------------- such Note that is to be prepaid pursuant to paragraph 4C (any partial prepayment being applied in satisfaction of required payments of principal in inverse order of their scheduled due dates), purchased by the Company pursuant to paragraph 8B or is declared to be immediately due and payable pursuant to paragraph 9A, as the context requires. "Discounted Value" shall mean, with respect to the Called Principal of any ---------------- Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a -44- discount factor (applied on a semiannual basis) equal to the Reinvestment Yield with respect to such Called Principal. "Federal Reserve Board Statistical Release" shall mean the weekly ----------------------------------------- Statistical Release H.15(519) of the Federal Reserve Board of Governors or any successor or substitute publication. "Reinvestment Yield" shall mean, with respect to the Called Principal of ------------------ any Note, the sum of (x) the yield to maturity implied by ( i ) the yields reported, as of 10:00 A.M. (New York City time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, ( ii ) the Treasury Constant Maturity Series yields reported for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in the Federal Reserve Statistical Release for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date (such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between reported yields) and (y) 0.50%. "Remaining Average Life" shall mean, with respect to the Called Principal ---------------------- of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing ( i ) such Called Principal into ( ii ) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. Calculations pursuant to this definition shall be made on the basis of the application of all partial prepayments in satisfaction of required payments of principal in inverse order of their scheduled due dates. "Remaining Scheduled Payments" shall mean, with respect to the Called ---------------------------- Principal of any Note, all payments of such Called Principal and interest thereon (computed for this purpose as if the rate of interest on the Notes were 10.61% per -45- annum in the case of the Series A Notes and 11.32% per annum in the case of the Series B Notes) that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. Calculations pursuant to this definition shall be made on the basis of the application of all partial prepayments in satisfaction of required payments of principal in inverse order of their scheduled due dates. "Settlement Date" shall mean, with respect to the Called Principal of any --------------- Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4C or purchase pursuant to paragraph 8B or is declared to be immediately due and payable pursuant to paragraph 9A, as the context requires. "Yield-Maintenance Premium" shall mean, with respect to any Note, a premium ------------------------- equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of ( i ) such Called Principal ( ii ) interest accrued thereon as of (including interest due on ) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Premium shall in no event be less than zero. 12B. OTHER TERMS. ----------- "Additional Payment Period" shall mean, as to any Indemnitee, the period ------------------------- from and at all times after the earliest date as of which more than the then current Inclusion Rate of the interest on such Indemnitee's Note (or interest therein) is included in such Indemnitee's Federal Gross Income as a result of one or more Gross-Up Events ;until the earlier of (a) the latest date as of which more than the then current Inclusion Rate of the interest on such Indemnitee's Note (or interest therein) is included in such Indemnitee's Federal Gross Income and (b) payment in full of such Indemnitee's Note, together with accrued interest and Yield-Maintenance Premium, if any, thereon. "Additions to Tax" shall have the meaning specified in paragraph 7A. ---------------- "Adjustment Fraction" shall mean the following fraction resulting from the ------------------- following formula: (1 - (Xo x Fo) ) x )1 - Fn --------------------------- (1 - (Xn x Fn) ) x (1 - Fo) where -46- Xo - 50% (the Inclusion Rate on the date hereof) Fo - 34% (the Federal Tax Rate on the date hereof) Xn - the Inclusion Rate in effect on the date of application of the Adjustment Fraction, giving effect to any change therein. Fn = the Federal Tax Rate in effect on the date of application of the Adjustment Fraction, giving effect to any change therein. The Adjustment Fraction will be rounded to three decimal places with rounding up if the fourth decimal place is .0005 or higher, and rounded down otherwise. "Affiliate" shall mean, with respect to any Person, and Person directly or --------- indirectly controlling, controlled by, or under direct or indirect common control with, such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have correlative meanings to the foregoing. "Agreements" shall have the meaning specified in paragraph 2. ---------- "Attributable Debt" in respect of any sale and leaseback transaction shall ----------------- mean, as of any time, the present value (discounted at the rate of interest implicit in the terms of the lease involved in such sale and leaseback transaction, as determined in good faith by the Company), of the obligation of the lessee thereunder for net rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, services, insurance, taxes, assessments, water rates and similar charges or any amounts required to be paid by such lessee thereunder contingent upon monetary inflation or the amount of sales, maintenance and repairs, insurance, taxes, assessments, water rates or similar charges) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Bankruptcy Law" shall have the meaning specified in paragraph 9A and shall -------------- include but not be limited to Title II of the United States Code. -47- "Board of Directors" shall mean either the board of directors of the ------------------ Company or any duly authorized committee of that board. "Business Day" shall mean any day which is not a Saturday or a Sunday or a ------------ bank holiday in New York, New York or Pittsburgh, Pennsylvania. "Change of Law" shall mean any amendment to the Code or amendment to other ------------- statute enacted by the Congress of the United State of America, or any temporary, proposed or final regulation or rule promulgated by any agency or department of the United State government, or any official or judicial interpretation of any of the foregoing after the date of this Agreement, and for purposes hereof shall include, but not be limited to, any law or temporary, proposed or final regulation enacted after the date prior thereto, except that a Change of Law shall not include any change in the Federal tax Rate or the Inclusion Rate. The currently scheduled replacement of Section 56(f) of the Code with 56(g) is not a Change of Law. "Closing" shall have the meaning specified in paragraph 2. ------- "Code" shall mean the Internal Revenue Code of 1986, as amended from time ---- to time. "Code Affiliate" shall mean each trade or business (whether or not -------------- incorporated) which together with the Company is treated as a "single employer" under subsection (b), (c), (m), (n), or (o) of section 414 of the Code. "Commission" shall mean the United States Securities and Exchange ---------- Commission and any successor Federal agency having similar powers. "Company" shall have the meaning specified in the introduction to this ------- Agreement and shall include any successor thereto. "Company Obligations" shall mean the obligations of the Company under ------------------- paragraph 8. "Consolidated Net Tangible Assets" shall mean the aggregate amount of -------------------------------- assets (less applicable reserves and another properly deductible items) after deducting therefrom (a) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles and (b) all current liabilities; all as reflected in the Company's audited -48- consolidated balance sheet most recently provided to holders of the Notes pursuant to paragraph 5A. "Debt" shall mean indebtedness for borrowed money. ---- "Disclosure Documents" shall have the meaning specified in paragraph 10B. -------------------- "DOL" shall have meaning specified in paragraph 11. --- "Employer Capital Stock" shall mean the Company's Series A ESOP Convertible ---------------------- Preferred Stock. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each trade or business (whether or not --------------- incorporated) which together with the Company would be deemed to be a "single employer" within the meaning of section 414(b) or (c) of the Code. "ERISA Plan" shall mean any employee pension benefit plan within the ---------- meaning of section 3(2) of ERISA maintained or contributed to by the Company or an ERISA Affiliate. "ESOP" shall have the meaning specified in the introduction to this ---- Agreement and shall include any successor thereto. "ESOP Default" shall have the meaning specified in subparagraph (e) of ------------ paragraph 8A. "ESOP Transaction" shall mean the execution and delivery of the Notes by ---------------- the ESOP and the purchase by the ESOP of shares of Employer Capital Stock from the Company pursuant to the Stock Purchase Agreement for an aggregate purchase price of $270,000,000. "Event of Default" shall mean any of the events specified in paragraph 9A, ---------------- provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or both, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. -49- "Event Notice" shall have the meaning specified in paragraph 8B(c). ------------ "Exchange Act" shall mean the Securities Exchange Act of 1934. ------------ "Federal Gross Income" shall mean gross income within the meaning of the -------------------- Code. "Federal Tax Rate" shall mean, ( i ) in the case of a life insurance ---------------- company, the maximum incremental percentage rate from time to time applicable to the taxable income of such company as determined under section 801 of the Code, or any successor thereto, ( ii ) in the case of any other insurance company, the maximum incremental percentage rate from time to time applicable to the taxable income of such company as determined under section 831 of the Code, or any successor provision, and ( iii ) in the case of any other Person the maximum incremental percentage rate from time to time applicable to the taxable income of any ordinary business corporation imposed under section 11 of the Code, or any successor thereto. "Fully Tax-Exempt Rate" shall mean, with respect to each series of Notes, --------------------- the annual rate of interest set forth below: Series Fully Tax-Exempt Rate ------ --------------------- A 7.00% B 7.47% "Funded Debt" shall mean Debt maturing, or by its terms extendable or ----------- renewable to a date that is, at least twelve months after the date of determination thereof. "Gross-Up Event" shall mean, with respect to any Indemnitee, (a) the -------------- failure by such Indemnitee to receive a Qualifying Opinion of Counsel, requested pursuant to paragraph 7G, within 45 days after the receipt by the Company of such request therefor and agreement by the Indemnitee and the Company as to the identity of such counsel, or (b) an increase in such Indemnitee's Federal income tax liability, a reduction of such Indemnitee's net operating loss, an offset liability against any Federal tax refund or other amount otherwise due such Indemnitee with respect to such Indemnitee's Federal tax liability, or a utilization of an amount otherwise available to such Indemnitee as a credit against Federal tax, caused by and computed solely with reference to an inclusion in such Indemnitee's Federal Gross Income (other than by reason of a -50- Change of Law) of a percentage of the interest received or accrued by such Indemnitee with respect to such Indemnitee's Note exceeding the then current Inclusion Rate following or as a consequence of any one or more of the events set forth below: ( i ) the issuance of an IRS Notice to such Indemnitee; ( ii ) the occurrence of a final decision, judgment, decree or other order by the Tax Court or by any other court of competent jurisdiction with respect to such Indemnitee or any other Indemnitee and the expiration of the period for appealing such decision without an appeal being docketed; ( iii ) the execution of a closing agreement by such Indemnitee under section 7121 of the Code; or ( iv ) the occurrence of one of the events described in clause ( ii ) of the definition of Purchase Event. "Gross-Up Rate" shall mean with respect to each series of Notes, the annual ------------- rate of interest set forth below: Series Gross-Up Rate ------ ------------- A 10.61% B 11.32% "Historical Financial Statements" shall have the meaning specified in ------------------------------- paragraph 10B. "Inclusion Rate" shall mean at any time, the percentage of interest income -------------- received or accrued by, an Indemnitee on securities acquisition loans which may not be excluded from such entity's Federal Gross Income. The Inclusion Rate shall be deemed to have been changed to 100% with respect to an Indemnitee if legislation repealing Section 133 of the Code is enacted and is effective with respect to the Notes. "Indemnitee" shall mean you and your direct and indirect successors and ---------- assigns in any of the Notes (or any interest therein), including any assignee, participant or other transferee of all or any portion of any Indemnitee's interest in the Notes (whether or not the Indemnitee has an interest in any Note at the time amounts are payable to such Indemnitee hereunder) and any affiliated group (within the meaning of section 1504 of the Code) of which any Indemnitee is a member; provided that, for purposes of paragraphs 7A, 7B, and 7D. the term -------- "Indemnitee" shall not include any assignee, participant -51- or other transferee that is not a Qualified Holder with respect to the Notes at the time the assignee, participant or other transferee acquires an interest in the Notes (unless the assignor or transferor was in Indemnitee but was not a Qualified Holder at the time of the assignment or transfer), and shall not include any Person that no longer qualifies as a Qualified Holder (other than by reason of a Change of Law or a repeal of section 133 of the Code) but only with respect to the period such Person owned or held an interest in the Note while so disqualified. "Indemnitee's Notes" shall mean, with respect to any Indemnitee, the Note ------------------ (or participation or other interest in the Note) held by such Indemnitee at any time. "IRS" shall mean the United States Internal Revenue Service and any --- successor Federal agency having similar powers. "IRS Notice" shall mean, with respect to any Indemnitee, a revenue agent's ---------- report or notice of proposed adjustment or a notice of deficiency issued by the IRS to such Indemnitee with respect to the inclusion in Federal Gross Income a percentage of the interest on such Indemnitee's Note exceeding the Inclusion Rate. "Lien" shall mean any mortgage, pledge, security interest, lien, ---- conditional sale or other title retention agreement or other encumbrance. "Moody's" shall mean Moody's Investors Service, Inc. and any successor ------- thereto which is a nationally recognized rating agency. "Multiemployer Plan" shall mean "multiemployer plan" (as such term is ------------------ defined in section 3(37) of ERISA and section 414(f) of the Code) to which contributions are or have been made by the Company or any of its Subsidiaries. "Notes" shall have the meaning specified in paragraph 1. "Officer's Certificate" shall mean a certificate signed in the name of the --------------------- Company by its Chief Executive Officer Chief Operating Officer, Chief Financial and Administrative Officer, Vice President and Controller or Vice President and Treasurer or any other officer of the Company performing functions similar to the functions of such officers as of the date of this Agreement. -52- "Opinion of Counsel" shall mean a written opinion of counsel, who may be ------------------ counsel for the Company, and who shall be acceptable to the Required Holder(s). "Other Agreements" shall have the meaning specified in paragraph 2. ---------------- "Other Holder Notice" shall have the meaning specified in paragraph 8B(a). ------------------- "Other Purchasers" shall have meaning specified in paragraph 2. ---------------- "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity ---- succeeding to any or all of its functions under ERISA. "Person" shall mean and include an individual, an association, a ------ partnership, a joint venture, a corporation, a joint-stock company, a trust, an unincorporated organization and a government or any department or agency or political subdivision thereof. "Placement Memorandum" shall have the meaning specified in paragraph 10B. -------------------- "Plan Documents" shall mean the Plan, the Trust Agreement and the Stock -------------- Purchase Agreement. "Principal Property" shall mean any single manufacturing plant, research ------------------ laboratory or other similar facility (including property, plant and equipment) located within the United States of America (other than it territories and possessions) and owned by, or leased to, the Company or any Subsidiary, the book value of the property, plant and equipment of which (as shown, net of depreciation, on the books of the owner or owners) is not less than 2% of Consolidated Net Tangible Assets at the end of the most recent fiscal year of the Company for which audited consolidated financial statements have been provided to the holders of the Notes pursuant to paragraph 5A, except (a) any such plant or facility ( i ) owner or leased jointly or in common with one or more Persons other than the Company and its Subsidiaries, in which the interest of the Company and its Restricted Subsidiaries does not exceed 50%, or ( ii ) which the Board of Directors determines by board resolution in good faith is not of material importance to the total business conducted, or assets owned, by the Company and its subsidiaries as an entirety, or (b) any portion of any such plant or facility which the Board of Directors determines by board resolution in food faith not to be of material importance to the use or operation thereof. -53- "Purchase Event" shall mean the occurrence for any reason whatsoever (and -------------- whether such occurrence shall be voluntary or come about or be effected by operation of law or otherwise) of any of the following events: (i) Unsupported Company Debt shall be rated less than "Baa3" by Moody's and less than "BBB-" by Standard & Poor's (or in either case, the comparable ratings then in existence) (as modified pursuant to paragraph 8B (b)); or (ii) the ESOP shall have been terminated, the ESOP shall fail to hold "qualifying employer securities" or otherwise fail to satisfy any applicable condition necessary to provide that the indebtedness evidenced by the Notes constitutes a "securities acquisition loan" within the meaning of section 133 of the Code as in effect on the date hereof or the Company shall fail to obtain from the IRS by the Qualification Date a favorable written determination to the effect that the ESOP is an "employee stock ownership plan" within the meaning of section 4975 (e) (7) of the Code and is qualified under section 401 (a) of the Code and that the ESOP meets the requirements for tax exemption under section 501 (a) of the Code. "Purchaser" shall have the meaning specified in subparagraph (a) of --------- paragraph 8A. "Qualification Date" shall mean the earliest of the following dates: (I) ------------------ the date on which the Company and the ESOP shall receive, after the exhaustion of all legal remedies, a final determination that the ESOP fails to qualify under Section 401(a) of the Code or is not an "employee stock ownership plan" within the meaning of section 4975 (e) (7) of the Code or that the ESOP fails to met the requirements for tax exemption under section 501 (a) of the Code; and (ii) December 31, 1990, provided that such date shall be extended by the length of any period of time during which the Internal Revenue Service has suspended determinations under section 401 (a), 501 (a) or 4975 (e) (7) of the Code for a category of plans which includes ESOP. "Qualified Holder" shall mean any entity described in section 133 (a) of ---------------- the Code which is not a member of the same controlled group of corporations, as such term is defined in section 133 (b) (4) of the Code, as the Company. "Qualifying Opinion of Counsel" shall mean a written opinion of recognized ----------------------------- tax counsel, selected by the Company and -54- satisfactory to the Indemnitee requesting such opinion, to the effect that interest on the Indemnitee's Note in an amount equal to the excess over the then current Inclusion Rate is excludible from such Indemnitee's Federal Gross Income during the applicable period under paragraph 7G. "Required Holder (s)" shall mean the holder or holders of at least 66 2/3% ------------------- of the aggregate principal amount of the Notes from time to time outstanding. "Required Installment Payment" shall have the meaning specified in ---------------------------- paragraph 4A. "Restricted Subsidiary" shall mean any Subsidiary substantially all the --------------------- property of which is located, or substantially all of the business of which is carried on, within the United States of America (excluding its territories and possessions) which shall at the time, directly or indirectly through one or more Subsidiaries or in a combination with on or more other Subsidiaries, own or be a lessee of a Principal Property. "Securities Act" means the Securities Act of 1933, as amended. -------------- "Standard & Poor's" shall mean Standard & Poor's Corporation and any ----------------- successor thereto that is a nationally recognized rating agency. "Stock Purchase Agreement" shall mean the Stock Purchase Agreement between ------------------------ the Company and the ESOP, in the form delivered as contemplated by paragraph 3D. "Subsidiary" shall mean a corporation more than 50% of the outstanding ---------- voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries. For the purposes of this definition, "voting stock" ------------ means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Supplemental Payment Period" as to any Indemnitee shall mean, with respect --------------------------- to any Change of Law, the period from the earliest date as of which such Change of Law is effective with respect to such Indemnitee until the earlier of (I) the payment in full of such Indemnitee's Note, together with all accrued interest and premium, if any, thereon and (ii) the last date as of which such Change of Law remains effective. -55- "Tax Allowance" shall mean any deduction, credit, exclusion or other ------------- allowance allowable in computing liability for any Federal Tax. "Tax Disallowance" shall mean (I) the reduction directly or indirectly of ---------------- any deduction (including, but not limited to, any net operating loss deduction or the extension of the provisions of Sections 265 (a) (2) or (b) of the Code), exclusion (including, but not limited to, the exclusion provided in Section 812 (g) of the Code), credit or other allowance that would but for the Change of Law, have been allowable in computing the Purchaser's liability for any Federal tax, whether currently in existence or not, including, but not limited to, the tax imposed under Section 11 of the Code, or any successor thereto, (ii) the imposition of any Federal tax or levy of any nature (including, but not limited to, preference, excise or alternative minimum taxes), (iii) the increase in any rate of Federal tax, rate of inclusion of any item of adjustment to the alternative minimum taxable income of an Indemnitee, or levy upon an Indemnitee (including, but not limited to, preference, excise or alternative minimum taxes) on some or all of the payments on the Notes, or (iv) any reduction in the net after-tax yield on any Note to an Indemnitee (using the then current Federal Tax Rate and Inclusion Rate) below the after-tax yield on a fully taxable Note bearing interest at the Gross-Up Rate. "Transferee" shall mean any direct or indirect transferee of all or any ---------- part of any Note purchased by you under the Agreement. "Trust Agreement" shall mean the Trust Agreement, effective as of June 13, --------------- 1989, by and between the Company and the Trustee, as from time to time in effect, pursuant to which the ESOP was created. "Trustee" shall mean Mellon Bank, N.A., as trustee of the ESOP together ------- with its successors as such trustee. "Unsupported Company Debt" shall mean the long-term senior unsecured ------------------------ indebtedness of the Company, the creditworthiness of which is not supported through defeasance, guarantees, credit enhancement or otherwise. 13. JUDICIAL PROCEEDINGS. -------------------- 13A. CONSENT TO JURISDICTION. EACH OF THE COMPANY AND THE ESOP IRREVOCABLY - ------------------------------------------------------------------------------- SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY NEW YORK STATE OR FEDERAL COURT - -------------------------------------------------------------------------------- SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, OVER ANY SUIT, - --------------------------------------------------------------------- -56- ACTION OR PROCEEDING BETWEEN OR AMONG ANY OF THE PARTIES TO THE AGREEMENTS OR ANY PERSON WHO IS OR WAS A NOTEHOLDER AND ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES. TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, EACH OF THE COMPANY AND THE ESOP IRREVOCABLY WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION AS A DEFENSE OR OTHERWISE, ANY CLAIM THAT IT IS NOT SUBJECT TO THE SUBJECT-MATTER JURISDICTION OF ANY SUCH COURT IN ANY SUCH CASE, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VUNUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEESING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 13B. ENFORCEMENT OF JUDGMENTS. Each of the Company and the ESOP agrees, to ------------------------ the fullest extent it may effectively do so under applicable law, that a judgment in any suit, action or proceeding of the nature referred to in paragraph 13A brought in any such court shall be conclusive and binding upon the Company or the ESOP, as the case may be, and may be enforced in the courts of the United States of America or the Sate of New York (or any other courts to the jurisdiction of which the Company or the ESOP, as the case may be, is or may be subject) by a suit upon such judgment. 13C. SERVICE OF PROCESS. Each of the Company and the ESOP consents to ------------------ process being served in any suit, action or proceeding of the nature referred to in paragraph 13A by mailing a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to the address of the Company or the ESOP, as the case may be, specified in or designated pursuant to paragraph 14I. The Company and the ESOP agree that such service (I) shall be deemed in every respect effective service of process upon the Company or the ESOP, as the case may be, in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to the Company or the ESOP, as the case may be. 13D. NO LIMITATION ON SERVICE OR SUIT. Nothing in this paragraph 13 shall affect the right of you or any holder of a Note to serve process in any manner permitted by law, or limit any right that the holders of any Notes may have to bring proceedings against the Company or the ESOP in the courts of any jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction. 14. MISCELLANEOUS. ------------- 14A. NOTE PAYMENTS. So long as you shall hold any Note, payments of ------------- principal of, premium and interest on the -57- Notes which comply with the terms of this Agreement shall be made, without presentment or notation, by wire transfer of immediately available funds for credit to your account or accounts, as specified in the Purchaser Schedule attached hereto, or to such other account or accounts in the United States as you may designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. You agree that, before transferring of any Note, you will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. Each of the Company and the ESOP agrees to afford the benefits of this paragraph 14A to any Transferee which shall have made the same agreements as you have made in this paragraph 14A. 14B. EXPENSES. The Company agrees, whether or not the transactions hereby -------- contemplated shall be consummated, to pay, and save you and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with this Agreement, the Notes, the Plan Documents and the transactions hereby and thereby contemplated, including, without limitation, (I) all such expenses incurred with respect to the enforcement of any provision of any such agreement or instrument or with respect to complying with any subpoena or other legal process or informal investigative order upon you or any Transferee or any of your or any Transferee's employees or agents in connection with this Agreement or the transactions contemplated hereby or by reason of your or any Transferee's having acquired any Note, or with respect to any proposed modifications, consents, amendments or waivers (whether or not the same become effective) under or in respect of any such agreement or instrument, and all expenses incurred in connection with the preparation of such agreements and instruments, (ii) all stamp, documentary or other similar issuance or transaction taxes (together in each case with interest and penalties, if any, and any income tax payable by you or any Transferee in respect of any reimbursement therefor) which may be payable in respect of the execution and delivery of such agreements or instruments, or the issuance, delivery or purchase by you of any Note, including, without limitation, any excise taxes imposed under the Code by reason of the failure of the ESOP Transaction to satisfy the requirements of section 4975 of the Code for exemption from the provisions thereof, and (iii) all document production and duplication charges and the reasonable fees and expenses of your special counsel and all local counsel retained in connection with such agreements and instruments, and the transactions hereby and thereby contemplated, including the enforcement of any provision hereof -58- or thereof, and any such proposed modifications, consents, amendments or waivers (whether or not the same become affective), including without limitation costs and expenses incurred in any bankruptcy case, and your costs incurred in obtaining a PPN number from a rating agency in connection with your purchase of Notes hereunder. The Company further agrees to indemnify and save harmless you and any Transferee and each of your and any Transferee's officers, directors, employees and agents (each herein called an "indemnified person") from and against any and all actions, causes of action, suits, losses, liabilities and damages, and expenses (including, without limitation, attorneys' fees and disbursements provided, in any related series of actions involving different Persons but with common interests and with no conflicting interest, only one counsel's fees and disbursements shall be so reimbursed) in connection therewith payable to any third party (herein called the "indemnified liabilities") incurred by any indemnified person as a result of, or arising out of, or relating to any of the transactions contemplated hereby, except for any indemnified liabilities arising on account of the gross negligence or willful misconduct of such indemnified person provided that, if and to the extent the Company's agreement to indemnify may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the indemnified liabilities which shall be permissible under applicable law. 14C. CONSENT TO AMENDMENTS. (a) this Agreement may be amended with the --------------------- consent of both the Company and the ESOP, and with such consent the Company or the ESOP, as the case may be, may take any action herein prohibited, or omit to perform any act herein required to be performed by it, but in any of the foregoing cases only if there shall have been obtained the written consent to ---- such amendment, action or omission to act of the Required Holders, provided, -------- however, that, without the written consent of the holder or holders of all Notes - ------- at the time outstanding, no amendment to this Agreement shall change the maturity of any Note or the right of any holder of a Note to accelerate such Note pursuant to paragraph 9A, or change the principal of, or the rate or time of payment of interest or any premium payable with respect to any Note, or change any of the provisions of paragraph 7 or 8, or affect the time, amount or allocation of any Required Installment Payments, or change any of the provisions of paragraph 4, or change any of the definitions contained in paragraph 12 that are used in paragraph 4, 7, or 8, or reduce the proportion of the principal amount of the Notes required with respect to any consent, waiver or rescission. Each holder of a Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 14C, whether or not such Note shall have been -59- marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the ESOP or the Company and any holder of a Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of such holder of a Note. As used herein and in the Notes, the term "this Agreement" or references thereto shall mean this Agreement as it may from time to time be amended or supplemented. (b) Neither the ESOP nor the Company will solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement or the Notes unless each holder of Notes (irrespective of the amount of Notes then held by it) shall be informed thereof by the ESOP of the Company, as the case may be, and shall be afforded an opportunity of considering the same and shall be supplied by the ESOP or the Company, as the case may be, with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of any waiver or consent effected pursuant to the provisions of this Agreement shall be delivered by the ESOP or the Company, as the case may be, to each holder of Notes forthwith following the date on which the same shall have been executed and delivered by the holder or holders of the requisite percentage of outstanding Notes. Neither the ESOP nor the Company will, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, to any holder of Notes as consideration for or as an inducement to the entering into by such holder of Notes of any waiver or amendment of any of the terms and provisions of this Agreement unless such remuneration is concurrently paid, on the same terms, ratably to all such holders of Notes. 14D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The -------------------------------------------------------------- Notes are issuable as registered Notes without coupons in denominations of at least $500,000, except as may be necessary to reflect any principal amount not evenly divisible by $500,000. The ESOP shall keep or cause to be kept at its principal office or at the offices of its designated agent (the "ESOP Agent"), which shall initially be the Trustee or such other ESOP Agent as the ESOP shall from time to time designate and so notify the holders of the Notes, a register in which it shall provide for the registration of Notes and of transfers of Notes. Any registered holder of a Note shall be entitled, upon its written request, to receive from the ESOP Agent a list of the registered holders of the Notes and the respective principal amounts of Notes held by such holders. Upon surrender for registration of transfer of any Note at the -60- principal office of the ESOP Agent it shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, which Notes shall be registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the ESOP Agent. Whenever any Notes are so surrendered for exchange, the ESOP shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange and shall be accompanied by the amortization schedule required by paragraph 4A. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the ESOP will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note, which shall be accompanied by the amortization schedule required by paragraph 4A. 14E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for ------------------------------------- registration of transfer, the ESOP may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and premium, if any, and interest on, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the ESOP shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion, subject to compliance with all applicable securities laws and in transactions which are consistent with the representations made in paragraph 11. 14F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All ------------------------------------------------------------ representations and warranties contained herein or made in writing by or on behalf of the parties hereto in connection herewith shall survive the execution and delivery -61- of this Agreement and the Notes, the transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of you or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you, the ESOP and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. The obligations of the Company and/or the ESOP under paragraph 7, paragraph 8, and paragraph 14B shall survive the transfer, purchase or payment of any Note (in whole or in part) and the rights of each Person arising under said paragraphs may not be changed without the consent of such Person. 14G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this ---------------------- Agreement made by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 14H. DISCLOSURE TO OTHER PERSONS. Each of the Company and the ESOP --------------------------- acknowledges that the holder of any Note may deliver copies of any financial statements and other documents delivered to such holder, and disclose any other information disclosed to such holder, by or on behalf of the ESOP, the Company or any Subsidiary in connection with or pursuant to this Agreement to (I) such holder's directors, officers, employees, agents and professional consultants in connection with such holder's general investment activities, (ii) any other holder of any Note, (iii) any Person to which such holder offers to sell such Note or any part thereof, (iv) any Person to which such holder sells or offers to sell a participation in all or any part of such Note, (v) any Federal or state regulatory authority having jurisdiction over such holder, (vi) the National Association of Insurance Commissioners or any similar organization or (vii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) in compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process or informal investigative order, (c) in connection with any litigation to which such holder is a party or (d) in order to protect such holder's investment in such Note. 14I. NOTICES. All communications provided for hereunder shall be sent by ------- first class mail or nationwide overnight delivery service (with charges prepaid) and (I) if to you, addressed to you at the address specified for such -62- communications in the Purchaser Schedule hereto attached, or at such other address as you may have designated to the other parties hereto in writing, (ii) if to any other holder of any Notes, addressed to such holder at the registered address of such holder as set forth in the register kept by the ESOP at its principal office as provided in paragraph 14D, or at such other address as such holder may have designated to the other parties hereto in writing, (iii) if to the Company, addressed to it at 333 West Liberty Street, Lancaster, Pennsylvania 17603, Attention: Treasurer, and (iv) if to the ESOP addressed to it at c/o Mellon Bank, N. A., Mellon Bank Center, Pittsburgh, Pennsylvania 15258, Attention: John J. Dagenhard, Vice President, or to such other address or addresses as the Company or the ESOP may have designated in writing to you and each other holder of any of the Notes at the time outstanding; provided, -------- however, that any such communication to the Company may also, at your option, be - ------- either delivered to the Company at its address set forth above or to any principal executive or financial officer of the Company. 14J. DESCRIPTIVE HEADINGS. The descriptive headings of the several -------------------- paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 14K. SATISFACTION REQUIREMENT. If any agreement, certificate or other ------------------------ writing, or any action taken or to be taken, is by the terms of this Agreement required to be reasonably satisfactory to you or the Required Holder(s), the determination of such reasonable satisfaction shall be made by you or the Required Holder (s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 14L. GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ------------- ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAW THEREOF. 14M. COUNTERPARTS. This agreement may be executed simultaneously in two or ------------ more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 14N. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating ------------------------- hereto, including, without limitation (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by any party at the closing (except the Notes themselves), and (c) financial statements, -63- certificates and other information previously or hereafter furnished to any party may be reproduced by such party by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and such party may destroy any original documents so reproduced. The parties hereto agree and stipulate that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. 14O. RECOURSE WITH RESPECT TO ESOP. ----------------------------- The holders of the Notes shall not have any recourse against the ESOP or the Trustee, except to the extent of the assets of the ESOP that are permitted under Treasury Regulation section 54.4975-7 (b) (f) and 54.4975-7 (b) (6) and any successor thereto, to be used to repay the Notes. If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the undersigned, whereupon this letter shall become a binding agreement between you and the undersigned. Very truly yours, ARMSTRONG WORLD INDUSTRIES, INC. EMPLOYEE STOCK OWNERSHIP PLAN ("SHARE IN SUCCESS PLAN") TRUST By: Mellon Bank, N.A., as Trustee By: ------------------------------- Title: -64- ARMSTRONG WORLD INDUSTRIES, INC. By: ----------------------------- Title: The foregoing Agreement is hereby accepted as of the date first above written. THE FRANKLIN LIFE INSURANCE COMPANY By --------------------------------- Title: -65- EX-10.1 3 0003.txt EMPLOYMENT AGREEMENT EXHIBIT 10(a) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of August 7, 2000 (the "Agreement") by and between ARMSTRONG HOLDINGS, INC., a Pennsylvania corporation (the "Company"), and MICHAEL D. LOCKHART (the "Executive"); WITNESSETH: WHEREAS, the Company desires to employ the Executive and the Executive desires to become an employee of the Company on the terms and conditions set forth in this Agreement; NOW, THEREFORE, 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 third anniversary of the Effective Date; provided, that, the Term of this Agreement shall automatically be extended for one (1) additional year on such third anniversary date and each succeeding anniversary date unless the Company shall have given written notice to the Executive at least 180 days prior to the third anniversary date or any succeeding anniversary date thereafter 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 and Chief Executive Officer of the Company and as a member of the Board and shall also serve in any other executive officer position of the Company and 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 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-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 HIRING COMPENSATION. ------------------- (a) On the Effective Date, the Company shall pay to the Executive a cash signing bonus of $5,000,000. (b) As of the Effective Date, the Company shall award the Executive 150,000 shares of restricted Common Stock under the Company's Stock Award Plan, which shares of restricted Common Stock shall vest and shall become free of restrictions in equal annual installments on the first, second and third anniversary of the Effective Date and the Executive shall have the opportunity to make a voluntary deferral election prior to the lapse of the restrictions on such restricted Common Stock. Notwithstanding anything in the Company's Stock Award Plan to the contrary, the Executive shall be entitled to receive any cash dividends paid on the shares of restricted Common Stock. At the Executive's election, the Executive will either pay the Company an amount of cash or authorize the Company to withhold shares from any shares of Common Stock which vest and become free of restrictions, in order to permit the Company to satisfy its tax withholding obligations with respect to such shares. (c) The Company shall grant the Executive stock options for 300,000 shares of Common Stock under the Company's Long-Term Incentive Plan, which options shall be granted as follows: (i) 100,000 options on the Effective Date, (ii) 100,000 options on the four month anniversary of the Effective Date and (iii) 100,000 options on the eight month anniversary of the Effective Date. Such stock options shall have an exercise price equal to the fair market value of the Common Stock on the date of grant. Each such stock option shall vest in equal annual installments over a term of three years from the date of grant and will have a ten year term. Notwithstanding anything in the Company's Long-Term Incentive Plan to the contrary, in the event of the termination of the Executive's employment, vested options shall be exercisable as follows: (A) in the event of the Executive's death or disability (as defined for purposes of the Company's Long-Term Incentive Plan), for a period equal to the remaining Term under this Agreement, (B) in the event of the Executive's retirement which is approved by the Board, for the remaining Term of this Agreement, (C) in the event of the termination of the Executive's employment by the Executive for Good Reason or by the Company without Cause, for the remaining Term of this Agreement, (D) in the event of a termination of the Executive's 2 employment by the Executive other than for Good Reason, for the three (3) months after the Date of Termination, and (E) in the event of the termination of the Executive for Cause, the stock options shall not be exercisable and shall be forfeited, and the agreement evidencing the grant shall so provide. (d) The Company will hold the Executive harmless against any and all losses that he may directly or indirectly incur as a result of (i) any third party claims brought against the Executive (other than by any taxing authority) with respect to the Company's performance of, or (ii) the Company's failure to perform any commitment made to the Executive in, this Section 5. 5.2 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. 5.3 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 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, and provided, further, that all eligibility requirements under any such plan, practice, policy or program shall be waived. The Executive shall not be entitled to credit for service at any prior employer for purposes of the level of benefits to which the Executive is entitled under any such plan, practice, policy or program. The Executive's participation in such employee benefit plans, 3 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 senior officers of the Company generally participate on the date of this Agreement. Notwithstanding anything to the contrary in this Agreement, in the Company's Retirement Income Plan or in the Company's Retirement Benefit Equity Plan, the Executive shall be credited with that amount of service equal to two times the service with which he would otherwise be credited for purposes of determining his retirement benefits under the Retirement Income Plan. To the extent that the Executive's retirement benefits as so determined are not payable under the Retirement Income Plan, they shall be paid by the Company under the Retirement Benefit Equity Plan or otherwise. 5.4 INCENTIVE COMPENSATION. ---------------------- (a) 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. Except as otherwise provided in this Agreement, 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. The target performance measures under the Company's annual incentive program for each year shall be based on a reasonably achievable level of net income, Economic Value Added or other performance measures established by the Management Development and Compensation Committee of the Board, adjusted for extraordinary events. (b) Without limiting the generality of the foregoing Section 5.4(a), (i) during the Term of this Agreement, the Company shall provide the Executive with an annual cash incentive opportunity which at target performance levels is at least equal to 125% of the Executive's Base Salary, provided, however, that the minimum cash incentive award payable to the Executive for the remainder of calendar year 2000 shall not be less than a pro rata portion of $1,000,000, based on the period from the Effective Date to December 31, 2000; and (ii) beginning in March 2001, the Company shall provide the Executive with annual long-term incentive awards under the Company's stock incentive plan or plans then in effect and available for the issuance of long-term incentive awards to senior officers of the Company generally, consisting of approximately 40% stock options and 60% three-year performance restricted share grants (based on the present value of the awards), with an aggregate present value on the date of grant at least equal to 150% of Executive's target annual cash compensation for the year, which is the sum of the Executive's Base Salary and annual incentive opportunity at target performance levels. For purposes of the preceding sentence, the present value of the awards shall be determined applying reasonable Black Scholes assumptions in the case of stock options and using the market value of the Common Stock on the date of grant in the case of restricted stock. 4 5.5 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. 5.6 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. Without limiting the generality of the foregoing, the Executive shall be entitled to (i) the reasonable use of the Company's aircraft for personal use, provided such aircraft is available, and (ii) the reimbursement of all reasonable and documented expenses of relocating his home to Lancaster, Pennsylvania, and in each case, the Company shall pay to the Executive, promptly upon receipt of a certification from the Executive's tax preparer, a "gross up" payment in an amount such that after payment by the Executive of all taxes, including, without limitation, any income taxes imposed upon such gross-up payment, the Executive retains an amount of such gross-up payment equal to the income tax imposed with respect to such benefits. 5.7 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. 5.8 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. 5.9 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 five (5) 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. 5.10 ANNUAL REVIEW. During the Term of this Agreement, the Board (or the ------------- Management Development and 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 5.2, the benefit plans provided for in Section 5.3 and the short and long-term incentive compensation opportunity provided for in Section 5.4) 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 5 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 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 plans in which Executive participates, and (iii) any unreimbursed expenses payable pursuant to Section 5.7 of the Agreement that were incurred before the Date of Termination. 7.2 In the event the Executive's employment is terminated prior to the third anniversary of the Effective Date 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 7.5, a lump sum cash payment to be made within thirty (30) days after the Date of Termination equal to the product of (A) the sum of (w) the higher of the Base Salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or the Base Salary in effect immediately prior to the date of the Notice of Termination plus (x) the higher of the annual cash incentive award 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 incentive award that was actually paid by the Company to the Executive for any year in the three preceding years, times (B) the greater of (y) two or (z) the number of years and fraction thereof remaining in the Term of this Agreement from the Date of Termination; and (ii) continue the benefits provided for in Section 5.3 of this Agreement for a period equal to the greater of (A) two years, or (B) the remaining Term of this Agreement, provided that such benefits shall be discontinued if comparable benefits are obtained from a subsequent employer during the remaining Term of this Agreement. 7.3 In the event the Executive's employment is terminated after the third anniversary of the Effective Date 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 7.5, a lump sum cash payment to be made within thirty (30) days after the Date of Termination equal to the product of (A) the sum of (w) 6 the higher of the Base Salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based or the Base Salary in effect immediately prior to the date of the Notice of Termination plus (x) the higher of the annual cash incentive award 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 incentive award that was actually paid by the Company to the Executive for any year in the three preceding years, times (B) the greater of (y) one or (z) a fraction the numerator of which is the number of months (rounded up to the nearest whole month) remaining in the Term of this Agreement from the Date of Termination and the denominator of which is 12; and (ii) continue the benefits provided for in Section 5.3 of this Agreement for the remaining Term of this Agreement, provided that such benefits shall be discontinued if comparable benefits are obtained from a subsequent employer during the remaining Term of this Agreement. 7.4 In the event that the Executive's employment is terminated by the Executive for any reason other than death, Disability or Good Reason or is terminated by the Company for Cause, the Company shall pay the Executive any amounts due pursuant to Section 7.1 and 7.5 hereof and the Executive shall pay the Company: (i) a lump sum cash payment of $3,000,000 if such termination is prior to the second anniversary date of the Effective Date; or (ii) a lump sum cash payment of $1,500,000 if such termination is prior to the third anniversary date of the Effective Date; 7.5 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. 7.6 (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), 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 7.6(c) hereof, all determinations required to be made under this Section 7.6, 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 7 "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 7.6(b) and Section 7.7 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 7.6(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 7.6(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 remedies pursuant to Section 7.6(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 (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 8 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 7.6(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 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 7.6(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 7.6(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 7.6(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. 7.7 The payments provided for in Section 7.6 hereof (other than Section 7.6(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 (5th) business day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). 9 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) 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 7.2, 7.3, 7.4 or 7.6(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, provided, that the proviso to Section 7.2(ii), Section 7.3(ii), Section 7.4 and Section 7.6(d) shall apply. 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 10 "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 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. 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 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 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 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 Holdings, Inc. 2500 Columbia Avenue Lancaster, PA 17603 Attention: Executive 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, provided that nothing contained herein shall be interpreted to amend or nullify those obligations of the Company and the Executive pursuant to the Change in Control Agreement and the Indemnification Agreement by and between the Company and the Executive, as the same may be amended from time to time. This Agreement sets forth the entire agreement of the parties hereto in 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. 13 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 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 rules for the resolution of employment law disputes 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 (i) in connection with his pre-signing review of this Agreement and the related Change in Control Agreement and Indemnification Agreement, and (ii) 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 7.6(c) hereof in connection with which the Company complied with its obligations under said Section 7.6(d). Such payments shall be made within thirty (30) 14 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. 18. OTHER AGREEMENTS. ---------------- Simultaneously with the execution of this Agreement, the Company and the Executive shall enter into a Change in Control Agreement ("Change in Control Agreement") and a Indemnification Agreement ("Indemnification Agreement"), and forms of which are attached hereto as Exhibits A and B, respectively. 19. COORDINATION OF BENEFITS. ------------------------ Notwithstanding anything in this Agreement to the contrary, if the Executive is paid "Severance Payments" under the Change in Control Agreement dated the date hereof between the Company and the Executive, in connection with a Change in 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 or 7.3 hereof shall be credited against any "Severance Payments" to which the Executive is entitled under said Change in Control Agreement). 20. 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 Armstrong Holdings, Inc. (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, 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. In the event of a dispute concerning the application of this provision, 15 no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Common Stock" shall mean the common stock, par value $1.00 per share of the Company. (f) "Date of Termination" shall have the meaning stated in Section 8.2 hereof. (g) "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, the Company shall have given the Executive 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. (h) "Excise Tax" shall have the meaning stated in Section 7.6(a) hereof. (i) "Executive" shall mean the individual named in the first paragraph of this Agreement. (j) "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: (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, unless the Executive has indicated to the Company his intention to terminate his employment prior to the end of the Term, and such assignment or alteration is made by the Board in good faith in order to facilitate a transition to successor management; (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 250 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 16 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 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. (k) "Gross-Up Payment" shall have the meaning stated in Section 7.6(a) hereof. (l) "Notice of Termination" shall have the meaning stated in Section 8.1 hereof. (m) "Severance Payments" shall mean those payments described in Section 7.2 and 7.3 hereof. (n) "Term" shall have the meaning stated in Section 3 hereof. 17 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG HOLDINGS, INC. By: --------------------------- Name: Douglas L. Boles Title: Executive Vice President, Human Resources The undersigned, Armstrong World Industries, Inc., agrees to be jointly and severally bound by the terms of this Agreement, including specifically with respect to the obligations of the Company hereunder. ARMSTRONG WORLD INDUSTRIES, INC. By: --------------------------- Name: Douglas L. Boles Title: Executive Vice President, Human Resources EXECUTIVE --------------------------------- Michael D. Lockhart 18 EX-10.2 4 0004.txt EMPLOYMENT AGREEMENT EXHIBIT 10(b) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is made as of August 7, 2000 (the "Agreement"), by and among Armstrong Holdings, Inc., a Pennsylvania corporation (the "Company"), and Frank A. Riddick III, an individual and resident of Lancaster County, Pennsylvania (the "Executive"); WITNESSETH: WHEREAS, the Executive is currently serving as the Chief Operating Officer of the Company; and WHEREAS, the Company desires to provide for the continued employment of the Executive and the Executive desires to serve the Company, in each case, on the terms and conditions set forth herein; NOW, THEREFORE, 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 third 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. 1 4. POSITION AND DUTIES. ------------------- During the Term of this Agreement, the Executive shall serve as President and Chief Operating Officer of the Company 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 operating 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-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 HIRING COMPENSATION. On the Effective Date, the Company shall grant the ------------------- Executive 50,000 shares of restricted Common Stock under the Company's Stock Award Plan, which shares of restricted Common Stock shall vest and shall become free of restrictions in equal annual installments on the first, second and third anniversary of the Effective Date. The Executive shall have the opportunity to make a voluntary deferral election prior to the lapse of the restrictions on such Common Stock. 5.2 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 $600,000 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. 2 5.3 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 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. 5.4 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 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. 5.5 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. 3 5.6 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. 5.7 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. 5.8 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. 5.9 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 five (5) 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. 5.10 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 5.2, the benefit plans provided for in Section 5.3 and the short and long-term incentive compensation opportunity provided for in Section 5.4) 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 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. ------------------------------------- 4 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 5.7 of the Agreement that were incurred before the Date of Termination. 7.2 (a) 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, (i) the Company shall pay the Executive, in addition to amounts payable under Sections 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 "Multiplier") 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 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, (ii) the restricted Common Stock awarded to the Executive pursuant to Section 5.1 shall vest and shall become free of restrictions upon the Date of Termination and (iii) the Company shall continue the benefits provided for in Section 5.3 of this Agreement for thirty-six (36) additional months after the Date of Termination. The payments provided for in this Section 7.2(a) shall be in lieu of any severance compensation to which the Executive would otherwise be entitled under any severance plan or policy applicable to the Executive. (b) In the event that the Company gives notice to the Executive in accordance with Section 3 of the Agreement that this Agreement shall not be extended and will terminate at the end of the then current Term, then (i) the Company shall, within thirty (30) days after the end of the Term, pay the Executive a lump sum cash payment in an amount determined in accordance with Section 7.2(a)(i) except that the Multiplier shall be one and one-half (1-1/2) instead of three (3), (ii) the restricted Common Stock awarded to the Executive pursuant to Section 5.1 shall vest and shall become free of restrictions at the end of the Term, and (iii) the Company shall continue the benefits provided for in Section 5.3 of this Agreement for eighteen (18) additional months after the end of the Term. The payments provided for in this Section 7.2(b) shall be in lieu of any severance compensation to which the Executive would otherwise be entitled under any severance plan or policy applicable to the Executive. 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 5 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), 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 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 6 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 (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 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. 7 (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 (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 8 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) 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 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 9 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. 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 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: 10 Armstrong World Industries, Inc. 2500 Columbia Avenue Lancaster, PA 17603 Attention: Executive 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 an officer, approves in writing, or if the Executive is elected as a director, if the Executive, in his capacity as a director, votes for 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 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. Nothing in this Section 13 shall affect the Executive's rights under the Change in Control Agreement or the Indemnification Agreement between the Company and the Executive. 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. -------- 11 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 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. 18. COORDINATION OF BENEFITS. ------------------------ Notwithstanding anything in this Agreement to the contrary, if the Executive is paid "Severance Payments" under that certain Agreement dated between the Company and the Executive in connection with a Change in Control (as defined therein), then this Agreement (including Section 10.2 hereof) shall forthwith terminate and the Executive shall not be entitled 12 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 5.2 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, 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. 13 (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: (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, unless the Executive has indicated to the Company his intention to terminate his employment prior to the end of the Term, and such assignment or alteration is made by the Board in good faith in order to facilitate a transition to successor management; (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 250 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 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. 14 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG HOLDINGS, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources The undersigned, Armstrong World Industries, Inc., agrees to be jointly and several bound by the terms of this Agreement, including specifically with respect to the obligations of the Company hereunder. ARMSTRONG WORLD INDUSTRIES, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources EXECUTIVE --------------------------------- Frank A. Riddick III 15 EX-10.3 5 0005.txt AMENDED AND RESTATED EMPLOYMENT & CONSULTING AGR. EXHIBIT 10(c) AMENDED AND RESTATED EMPLOYMENT AND CONSULTING AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AND CONSULTING AGREEMENT is made as of August 7, 2000 (the "Agreement") among ARMSTRONG HOLDINGS, INC., a Pennsylvania corporation (the "Company"), ARMSTRONG WORLD INDUSTRIES, INC., a Pennsylvania corporation and an indirect wholly-owned subsidiary of the Company ("Armstrong"), and GEORGE A. LORCH, an individual and resident of Lancaster County, Pennsylvania (the "Executive"); WITNESSETH: WHEREAS, the Executive, Armstrong and the Company are parties to an Employment Agreement dated December 13, 1999, as amended (the "Original Agreement"), pursuant to which the Executive serves as Chairman of the Board, President and Chief Executive Officer of the Company; and WHEREAS, the Executive and the Company desire to implement the transition to successor management of the Company that was begun in January 2000, and to that end they desire to amend and restate the Original Agreement its entirety to provide for (i) the continued employment of the Executive in a non-executive capacity, and (ii) a period after the termination of Executive's employment during which he will provide consulting services. NOW THEREFORE, 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 AND CONSULTING ENGAGEMENT. ------------------------------------ The Company hereby agrees to employ the Executive and to thereafter engage the Executive as a consultant, 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 January 31, 2003. 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 or consulting engagement with the Company. 4. POSITION AND DUTIES. ------------------- (a) Effective at the close of business on the Effective Date, which shall be the effective date of the appointment by the Board of Directors of a Chairman of the Board and Chief Executive Officer of the Company to succeed the Executive, the Executive agrees to resign as Chairman of the Board, President and Chief Executive Officer of the Company and as a director and officer of its subsidiaries and affiliates, and such resignations shall be effective without any further action by the Executive. (b) From the Effective Date until January 31, 2001 (the "Initial Period"), the Company agrees to employ the Executive with the title Advisor to the Chairman of the Board and Chief Executive Officer. In that capacity, the Executive shall assist the new Chairman of the Board and Chief Executive Officer of the Company with the transition to his office and to that end the Executive will (i) advise the new Chairman of the Board and Chief Executive Officer on issues and other matters affecting the Company, (ii) introduce the new Chairman of the Board and Chief Executive Officer to customers and suppliers of the Company, and (iii) perform such other duties, which duties shall not be inconsistent with the foregoing, and have such other responsibilities as the new Chairman of the Board and Chief Executive Officer of the Company or the Board of Directors shall prescribe. During the Initial Period, the Executive shall devote his full professional time and attention to the duties and responsibilities of his position; provided, that so long as such activities do not substantially interfere with the duties the Executive may devote a reasonable amount of time to (i) service as a director on one or more corporate boards of directors, (ii) civic and charitable activities, and (iii) personal estate and financial planning and investment activities. The Executive will retire as an employee of the Company effective February 1, 2001. (c) The Executive will continue to serve as a director of the Company through the December 2000 meeting of the Board of Directors of the Company, which is presently scheduled for December 11, 2000. Upon the appointment of his successor to the office of Chairman of the Board of the Company, the Executive shall have the title Chairman Emeritus of the Board of Directors of the Company. (d) From February 1, 2001 until January 31, 2003, the Company agrees to engage the Executive as a consultant and the Executive agrees to serve the Company in a consulting capacity (the "Consulting Period"). In that capacity, the Executive shall make himself available to the Company upon the Company's reasonable request at such times as the Company and the Executive shall mutually agree to: (i) consult with officers and advisors to the Company regarding issues and matters affecting the Company, (ii) introduce the new Chairman and Chief Executive Officer customers and suppliers of the Company and otherwise entertain customers and suppliers for the Company, and (iii) perform such other functions as the Company and the Executive shall mutually agree. 5. COMPENSATION AND RELATED MATTERS. -------------------------------- 5.1 BASE SALARY. During the Initial Period, the Company shall pay to the ----------- Executive a base salary ("Base Salary") at a rate of $835,000 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. Compensation of the Executive by Base Salary payments 2 shall not be deemed exclusive and shall not prevent the Executive from participating in the incentive compensation and other benefits provided by the Company as specified herein. The 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 INCENTIVE COMPENSATION. For the period through December 31, 2000, the ---------------------- Executive shall be entitled to participate in and receive benefits under the Management Achievement Plan at the level specified for the Executive prior to the date of this Agreement. Such incentive compensation shall be subject to and on a basis consistent with the terms, conditions and overall administration of such plans. 5.3 OTHER COMPENSATION. Following the Executive's retirement as an employee ------------------ and during the Consulting Period, the Company shall pay the Executive cash compensation as follows: (a) $1.8 million in cash on February 1, 2001, and (b) $125,000 cash per quarter, payable on February 1, May 1, August 1, and November 1 of each year commencing February 1, 2001 and ending November 1, 2002; provided, that if during the Consulting Period the Executive is asked by the Company to perform services for the Company for more than 10 days per quarter, then, in addition to the foregoing, the Company shall also pay the Executive a per diem of $1,500 per day for such additional days. These payments shall be in lieu of any further compensation that would otherwise be due the Executive under the Original Agreement. The Executive shall not be entitled to any incentive or other compensation during the Consulting Period. 5.4 FRINGE BENEFITS. During the Initial Period of this Agreement, and not --------------- thereafter, 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. 5.5 EXPENSES. During the Term of this Agreement, the Executive 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 services hereunder; provided, that the Company may establish a reasonable policy for the documentation and approval of such expenses. 5.6 WORKING FACILITIES. During the Initial Period of this Agreement, and ------------------ not thereafter, 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. During the Consulting Period, the Executive shall be responsible for obtaining and maintaining such working facilities and administrative assistance as are reasonably necessary for the performance of his duties and responsibilities under this Agreement. 5.7 VACATION. During the Initial Period 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, or such greater period as the Board shall approve, without reduction in salary or other benefits. 3 6. COMPENSATION IN THE EVENT OF EXECUTIVE'S DEATH OR DISABILITY. ------------------------------------------------------------ During the Term of this Agreement, during any period that the Executive is unable to perform the Executive's duties hereunder as a result of incapacity due to physical or mental illness, the Company shall pay, or cause to be paid, all amounts payable to the Executive pursuant to this Agreement as they become due. In the event that the Company terminates this Agreement prior to February 1, 2001 pursuant the last sentence of Section 3 as a result of the Executive's Disability or the Executive dies prior to February 1, 2001, the Company shall nevertheless pay to the Executive (or his estate) on February 1, 2001 the cash amount payable to him on February 1, 2001 pursuant to Section 5.3(a). 7. TERMINATION COMPENSATION AND BENEFITS. ------------------------------------- 7.1 (a) If the Executive's employment or consulting engagement is terminated by the Company other than for Cause during the Term of this Agreement or in the event the Executive's employment or consulting engagement is terminated during the Term of this Agreement by the Executive for Good Reason, the Company shall pay to the Executive (or in accordance with Section 11.2 in the event of the Executive's death), (i) all remaining amounts payable to the Executive under this Agreement through February 1, 2003, in a lump sum payable within thirty (30) days after the Date of Termination, and (ii) any unreimbursed expenses payable pursuant to Section 5.5 of the Agreement that were incurred before the Date of Termination. (b) In the event the Executive's employment or consulting engagement is terminated during the Term of this Agreement by the Company for Cause or by the Executive other than for Good Reason, the Company shall pay the Executive any amounts due pursuant to this Agreement as of the Date of Termination and all other amounts payable to the Executive under this Agreement shall be forfeited. 7.2 (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), 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 7.2(c) hereof, all determinations required to be made under this Section 7.2, 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 4 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 7.2(b) and Section 7.3 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 7.2(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 7.2(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 remedies pursuant to Section 7.2(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 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 (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 5 representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 7.2(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 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 7.2(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 7.2(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 7.2(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. 7.3 The payments provided for in Section 7.2 hereof (other than Section 7.2(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 (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. ---------------------- 6 8.1 NOTICE OF TERMINATION. During the Term of this Agreement, any purported --------------------- termination of the Executive's employment or consulting engagement by the Company or the Executive (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 13 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 or consulting engagement 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 or consulting engagement during the Term of this Agreement, shall mean (i) if the Executive's employment or consulting engagement is terminated by his death, the date of his death, (ii) if the Executive's employment or consulting engagement 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) days) after such Notice of Termination is given, (iii) if the Executive's employment or consulting engagement 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 or consulting engagement is terminated by the Company or the Executive 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 or consulting engagement hereunder is terminated during the Term of this Agreement, the Executive is not required to seek other employment or consulting engagements 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 7.2(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 7 Executive may make disclosures of such confidential information (i) during the Initial Period 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 period ending January 31, 2003, 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 at the time contemplating doing business which is a substantial and direct 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 is not contemplating doing business. 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 Company 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. 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 or consulting engagement 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, 8 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. CHANGE OF CONTROL. ----------------- Notwithstanding anything in this Agreement to the contrary, that certain Agreement between the Company and the Executive in connection with a Change of Control (as defined therein) (the "Change in Control Agreement") shall remain in full force and effect through January 31, 2001 and if the Executive is paid any benefits under the Change in Control Agreement, 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 (and any amounts theretofore paid to the Executive pursuant to Section 7.1 hereof shall be credited against any "Severance Payments" to which the Executive is entitled under said Change in Control Agreement). After January 31, 2001, the Change of Control Agreement shall terminate (except that those provisions respecting the acceleration of benefits under any employee benefit plan of the Company, including the acceleration of vesting of unvested stock options, which shall survive for the Term of this Agreement) and, thereafter, upon the occurrence of a Change of Control, the Company shall pay to the Executive, within thirty (30) days after the Change of Control, all amounts payable to the Executive pursuant to this Agreement through February 1, 2003 in a lump sum cash payment. 13. 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 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 and Armstrong: Armstrong Holdings, Inc. 2500 Columbia Avenue Lancaster, PA 17603 Attention: Executive 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. 14. MISCELLANEOUS. ------------- 9 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, provided that nothing contained herein shall be interpreted to amend or nullify those obligations of the Company and the Executive pursuant to the Indemnification Agreement between the Company and the Executive. This Agreement sets forth the entire agreement of the parties hereto in 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. 15. 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. 16. 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. 17. SETTLEMENT OF DISPUTES; ARBITRATION. ----------------------------------- All claims by the Executive for payments 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 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 either Allegheny County or Philadelphia County, Pennsylvania, as the parties shall mutually agree or, if the parties are unable to agree, in either such county as the Board of Directors of the Company (or the compensation committee thereof) shall specify, in accordance with the 10 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. 18. 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 right or benefit 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 7.2(c) hereof in connection with which the Company complied with its obligations under said Section 7.2(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. 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) "Change of Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: A. any person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the 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 transactions described in clause (i) of paragraph (C) below; or B. 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 wither were directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or C. 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 11 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 of 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 of indirectly, of the 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 D. 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 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. (d) "Cause" for termination by the Company of the Executive's employment or consulting engagement, 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, 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. (e) "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 12 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 7.2(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 or consulting engagement 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: (i) the assignment to the Executive of any duties which are materially inconsistent with the duties specified in Sections 4(b)(i) and (ii) or 4(d)(i) and (ii), unless the Executive has indicated to the Company his intention to terminate his employment prior to the end of the Initial Period, and such assignment is made by the Board in good faith in order to facilitate the transition of the Executive; (ii) any material breach of any provision of this Agreement by the Company; (iii) the relocation of the Executive's principal place of employment or consulting engagement to a location more than 250 miles from the Executive's principal place of employment or consulting (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 consulting (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 during the Initial Term 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 during the Initial Period 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 or consulting engagement for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment or consulting shall not constitute 13 consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (k) "Gross-Up Payment" shall have the meaning stated in Section 7.2(a) hereof. (l) "Notice of Termination" shall have the meaning stated in Section 8.1 hereof. (m) "Term" shall have the meaning stated in Section 3 hereof. 14 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG HOLDINGS, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources ARMSTRONG WORLD INDUSTRIES, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources EXECUTIVE --------------------------------- George A. Lorch 15 [Letterhead of Michael D. Lockhart] October 30, 2000 Dear George: This will confirm our discussions relative to your continued relationship with Armstrong under your Amended and Restated Employment Agreement dated as of August 7, 2000. . Your role as Advisor to the Chairman of the Board and Chief Executive Officer is now complete. To that end, you are electing to accelerate your retirement as a director and as an employee of Armstrong to December 1, 2000. In doing so, you will not receive any compensation to which you would have been entitled as a director and as an employee under your Amended and Restated Employment Agreement. Your execution of this letter will constitute your resignation as a director effective December 1, 2000. . Armstrong remains obligated to pay you the $2.8 million due to you on February 1, 2001 under your Amended and Restated Employment Agreement and under your Stock Option Surrender Agreement dated September 25, 2000 (less any required withholdings). . From the date of your retirement as an employee of Armstrong, you stand ready to serve Armstrong as a consultant in accordance with the terms of your Amended and Restated Employment Agreement and you remain bound by the non-compete and the other provisions of that Agreement. Please acknowledge your agreement with the foregoing by signing this letter where indicated below and returning it to me. This letter effectively amends the Amended and Restated Employment Agreement. On behalf of the Board of Directors, thank you for your service to Armstrong. Very truly yours, ARMSTRONG HOLDINGS, INC. By: ____________________________ Michael D. Lockhart President and Chief Executive Officer, on behalf of Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Acknowledged and agreed, intending to be legally bound: - ---------------------------- George A. Lorch 16 EX-10.4 6 0006.txt STOCK OPTION SURRENDER AGREEMENT EXHIBIT 10(d) STOCK OPTION SURRENDER AGREEMENT THIS STOCK OPTION SURRENDER AGREEMENT (this "Agreement") is made as of September 25, 2000, by and between George A. Lorch ("Executive") and Armstrong Holdings, Inc., a Pennsylvania corporation ("Company"). WITNESSETH: WHEREAS, Executive holds options to purchase 559,380 shares of Common Stock of the Company with an exercise price of greater than $50.00 per share which the Executive desires and is willing to surrender in exchange for $1,000,000 cash from the Company; NOW, THEREFORE, in consideration of the premises and the mutual promises set forth herein, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Surrender. For good and valuable consideration, the receipt and --------- sufficiency of which are acknowledged, the Executive hereby surrenders, releases and forfeits as of the date of this Agreement all of his right, title and interest in and to options which he holds to purchase 559,380 shares of Common Stock of the Company, which have an exercise price greater than $50.00 per share and which were previously granted to the Executive by the Company in consideration for his services as an employee of the Company and its affiliates (the "Options"). Such Options are more particularly identified on Exhibit A hereto. 2. Payment. In consideration of the Executive's surrender, release and ------- forfeiture of such Options, the Company agrees to pay the Executive $1,000,000 in cash, less any tax withholdings required under applicable law, on February 1, 2001. 3. Stock Option Agreements. Effective as of the date of this Agreement, the ----------------------- stock option agreements evidencing the Options are void and of no further force or effect. 4. Amendment. This Agreement cannot be amended, modified or terminated --------- except in writing and no waiver, extension or consent will be effective unless evidenced by an instrument in writing duly executed by the party which is sought to be charged with having granted the same. 5. Headings. The section headings of this Agreement are for convenience of -------- reference only and do not form a part of this Agreement and do not in any way modify, interpret, or otherwise affect the intentions of the parties. 6. Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the Commonwealth of Pennsylvania without regard to its conflicts of laws principles. IN WITNESS HEREOF, the parties hereto have executed this Agreement on the day and year first above written. ----------------------------------------- George A. Lorch ARMSTRONG HOLDINGS, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- -2- EX-10.5 7 0007.txt AGREEMENT EXHIBIT 10(e) ------------- AGREEMENT --------- THIS AGREEMENT, dated as of August 7, 2000, is made by and between, Armstrong Holdings, Inc., a Pennsylvania corporation (the "Company"), and ------- Michael D. Lockhart (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 undue concern for their personal financial and employment security arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby, 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 the third anniversary of such date; provided, -------- however, that commencing on the third anniversary and each anniversary - ------- thereafter, the term of this Agreement shall be extended for one additional year unless, if not later than 180 days prior to such anniversary, 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 anniversary; 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 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 -2- 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 without Cause 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, or (iv) the Executive's employment is terminated without Cause after a Potential Change in Control of the type described in paragraphs (I) or (IV) 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 (x) the highest annual bonus earned by the ------ Executive pursuant to any annual bonus or incentive plan maintained by the Company in respect of the three (3) years immediately preceding that year in which the Date of Termination occurs or (y) the annual target bonus in respect of the year 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) Notwithstanding any provision to the contrary within paragraphs (A) and (B) of this Section 6.1, the Company shall honor any election that the Executive makes with respect to the timing of any benefit payments due under this section (provided the Executive makes the election more than 90 days before a Change in Control and the period over which payments are elected to be made ends not more than 15 years after the Change in Control). In any event, not later than ten business days after a Change in Control, the Company shall (i) establish an irrevocable grantor trust (the "Trust") designed in accordance with Revenue Procedure 92-64 and having a trustee independent of the Company, (ii) assign to the Trust the Company's interest in any policy or policies insuring the Executive under any insurance policy insuring the life of the Executive under any "split-dollar" or corporate-owned insurance arrangement in effect between the Executive and the Company, (iii) deposit in said Trust an amount sufficient to pay all -3- remaining premiums owed by the Company on such insurance policies (with the Trust being required to pay such premiums), and all amounts that could become payable after the Change in Control pursuant to either paragraphs (A) or (B) of this Section 6.1 or pursuant to any other plan or program under which the Executive may be entitled to collect deferred compensation, supplemental retirement benefits, or welfare benefits after the date of the Change in Control, and (iv) provide the trustee of the Trust with a written direction to hold said amount and any investment return thereon in a segregated account for the benefit of the Executive, and to follow the procedures set forth herein as to the payment of such amounts from the Trust. During the 39-consecutive month period after a Change in Control, the Employee may provide the trustee of the Trust with a written notice directing that the trustee pay to the Executive an amount designated in the notice as being payable pursuant to this Agreement. Within three business days after receiving said notice, the trustee of the Trust shall pay such amount to the Executive, and coincidentally shall provide the Company or its successor with notice of such payment. Upon the earlier of the Trust's final payment of all amounts due under paragraphs (A) and (B) of this Section 6.1 or the date 36 months after the Change in Control, the trustee of the Trust shall pay to the Company the entire balance remaining in the segregated account maintained for the benefit of the Employee. The Employee shall thereafter have no further interest in the 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 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 of which the actuarial equivalent -4- of such annuity is greatest) which the Executive had accrued pursuant to the provisions of the Pension Plans as of the Date of Termination. For purposes of this Section 6.1(D), "actuarial equivalent" shall be determined using the same assumptions utilized under 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 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 enhance 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 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 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. From the end of the period described in the preceding sentence until the Executive and his spouse (if any, as of the Change in Control) become entitled to Medicare coverage, the Company will permit them to purchase, at COBRA rates or less, any health care coverage that they were receiving on the date of the Change in Control; provided that the Company may instead hold them harmless from any cost and associated income taxes that they incur in order to purchase substitute health insurance at premiums above the COBRA premiums that they would have paid to the Company. -5- (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 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 -6- 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 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 -7- 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 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. 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 -8- 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 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. -9- 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. 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 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 (D) The Company will hold the Executive harmless against any and all losses that he may directly or indirectly incur as a result of (i) any third party claims brought against the Executive (other than by any taxing authority) with respect to the Company's performance of, or (ii) the Company's failure to perform any commitment made to the Executive in, this Section 8. 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 -10- 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 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 Holdings, 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 -11- 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 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, without regard to its conflicts of law provisions. 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 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 for the resolution of employment law disputes 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 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. The Company shall reimburse the Executive for all costs and expenses relating to litigation arising hereunder, including reasonable attorney's fees and expenses, promptly upon receipt of a written -12- demand therefor and regardless of whether such litigation results in any settlement or judgment or order in favor of any party. 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) conviction of the Executive for (or a plea of nolo contendre by the Executive with respect to) a felony or of a misdemeanor involving moral turpitude; or (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 deliberate and continued failure to substantially perform the duties and responsibilities of such Executive's office. 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 (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 -13- 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 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 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. -14- (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 Holdings, 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. (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 clause (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VIII) 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: -15- (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, which in the Executive's reasonable judgment, represents a substantial reduction of the status, title, position or 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 as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 30 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 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) any material breach of any provision of this Agreement or any employment that the Executive may have with the Company; -16- (VII) 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 (VIII) 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, termination of employment by the Executive for any reason during the 30-day period commencing one (1) year anniversary of a Change in Control shall constitute Good Reason; provided however, that soley 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 -17- 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. (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; (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); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (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 and the Company's Stock Award Plan, as the same may be amended from time to time, and any successor plan or plans to such plans. (Y) "Underpayment" shall have the meaning stated in Section 6.2(B) ------------ hereof. -18- (Z) IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG HOLDINGS, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources The undersigned, Armstrong World Industries, Inc., agrees to be jointly and severally bound by the terms of this Agreement, including specifically with respect to the obligations of the Company hereunder. ARMSTRONG WORLD INDUSTRIES, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources EXECUTIVE --------------------------------- Michael D. Lockhart -19- EX-10.6 8 0008.txt INDEMNIFICATION AGREEMENT EXHIBIT 10(f) ------------- INDEMNIFICATION AGREEMENT ------------------------- This Agreement is made effective as of the 7th day of August, 2000, by and between Armstrong Holdings, Inc., a Pennsylvania corporation (the "Corporation") and MICHAEL D. LOCKHART (the "Indemnitee"), a director of the Corporation. WHEREAS, it is essential that the Corporation retain and attract as directors and officers the most capable persons available; and WHEREAS, Indemnitee is a member of the Board of Directors of the Corporation and in that capacity is performing a valuable service for the Corporation; and WHEREAS, the Corporation has purchased and maintained policies of Directors and Officers Liability Insurance ("D & O Insurance") covering certain liabilities which may be incurred by its directors and officers in their performance of services for the Corporation; and WHEREAS, developments with respect to the terms, renewal, and availability of D & O Insurance have raised questions concerning the continued adequacy and reliability of the protection available to corporate directors and officers; and WHEREAS, the shareholders of the Corporation have adopted a bylaw (the "Bylaw") which provides for indemnification of and advancement of expenses to the officers and directors of the Corporation unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness, and the Bylaw and the applicable indemnification statutes of the Commonwealth of Pennsylvania provide that they are not exclusive; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Corporation in an effective manner, the increasing difficulty in obtaining satisfactory D & O Insurance coverage, and Indemnitee's reliance on the Bylaws, and in part to provide Indemnitee with specific contractual assurance that the protection promised by the Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the Bylaws or any change in the composition of the Corporation's Board of Directors or acquisition transaction relating to the Corporation), the Corporation wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of indemnitee under the Corporation's D & 0 Insurance policies. NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Corporation directly or, at its request, another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Indemnity of Indemnitee. (a) The Corporation shall hold harmless and indemnify the Indemnitee against any and all reasonable expenses, including attorneys' fees, and any and all liability and loss, including judgments, fines, excise taxes (including any unpaid excise taxes under ERISA) or penalties and amounts paid or to be paid in settlement, incurred or paid by Indemnitee in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter "a proceeding") and whether or not by or in the right of the Corporation or otherwise, to which the Indemnitee is, was or at any time becomes a party, or is threatened to be made a party or is involved (as a witness or otherwise) by reason of the fact that Indemnitee is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as director, officer, trustee or representative of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity, or in any other capacity while serving, as a director, officer, trustee or representative, unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness; provided, however, that the Corporation shall indemnify the Indemnitee in connection with a proceeding (or part thereof) initiated by the Indemnitee (other than a proceeding to enforce the Indemnitee's rights to indemnification under this Agreement or otherwise) prior to a Change of Control, as defined in Section 2(d), only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. (b) Subject to the foregoing limitation concerning certain proceedings initiated by the Indemnitee prior to a Change of Control, the Corporation shall pay the expenses (including attorneys' fees) incurred by Indemnitee in connection with any proceeding in advance of the final disposition thereof promptly after receipt by the Corporation of a request therefor stating in reasonable detail the expenses incurred or to be incurred. (c) If a claim under paragraph (a) or (b) of this section is not paid in full by the Corporation within forty-five (45) days after a written claim has been received by the Corporation, the Indemnitee may, at any time thereafter, bring suit against the Corporation to recover the unpaid amount of the claim. The burden of proving that indemnification or advances are not appropriate shall be on the Corporation. The Indemnitee shall also be entitled to be paid the expenses of prosecuting such claim to the extent he or she is successful in whole or in part on the merits or otherwise in establishing his or her right to indemnification or to the advancement of expenses. The Corporation shall pay such fees and expenses in advance of the final disposition of such action on the terms and conditions set forth in Section 1(b). 2. Maintenance of Insurance and Funding. (a) The Corporation represents that as of August 7, 2000, it had in force and effect the following policies of D & O Insurance (the "Insurance Policies"): 2 Insurer Amount* Primary: National Union Fire Insurance Company (AIG) $25,000,000 Excess: ACE $35,000,000 *Deductible zero where Company not permitted/required to indemnify; otherwise $2 million. Subject only to the provisions of Section 2(b) hereof, the Corporation agrees that, so long as Indemnitee shall continue to serve as an officer or director of the Corporation (or shall continue at the request of the Corporation to serve as a director, officer, trustee or representative of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan) and thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Indemnitee was a director or officer of the Corporation (or served in any of said other capacities), the Corporation shall purchase and maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policy or policies of D & 0 Insurance providing coverage at least comparable to that provided pursuant to the Insurance Policies. (b) The Corporation shall not be required to maintain said policy or policies of D & 0 Insurance in effect if, in the reasonable business judgment of the then directors of the Corporation (i) the premium cost for such insurance is substantially disproportionate to the amount of coverage, (ii) the coverage provided by such insurance is so limited by exclusions that there is insufficient benefit from such insurance or (iii) said insurance is not otherwise reasonably available; provided however, that in the event the then directors make such a judgment, the Corporation shall purchase and maintain in force a policy or policies of D & O Insurance in the amount and with such coverage as the then directors determine to be reasonably available. Notwithstanding the general provisions of this Section 2(b), following a Change of Control, any decision not to maintain any policy or policies of D & O Insurance or to reduce the amount or coverage under any such policy or policies shall be effective only if there are "disinterested directors" (as defined in Section 2(d) hereof) and shall require the concurrence of a majority of the "disinterested directors." (c) If and to the extent the Corporation, acting under Section 2(b), does not purchase and maintain in effect the policy or policies of D & O Insurance described in Section 2(a), the Corporation shall indemnify and hold harmless the Indemnitee to the full extent of the coverage which would otherwise have been provided by such policies. The rights of the Indemnitee hereunder shall be in addition to all other rights of Indemnitee under the remaining provisions of this Agreement. (d) In the event of a Potential Change of Control or if and to the extent the Corporation is not required to maintain in effect the policy or policies of D & O Insurance described in Section 2(a) pursuant to the provisions of Section 2(b), the Corporation shall, upon written request by indemnitee, create a "Trust" for the benefit of Indemnitee and from time to 3 time, upon written request by Indemnitee, shall fund such Trust in an amount sufficient to pay any and all expenses, including attorneys' fees, and any and all liability and loss, including judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement actually and reasonably incurred by him or on his behalf for which the Indemnitee is entitled to indemnification or with respect to which indemnification is claimed, reasonably anticipated or proposed to be paid in accordance with the terms of this Agreement or otherwise; provided that in no event shall more than $100,000 be required to be deposited in any Trust created hereunder in excess of the amounts deposited in respect of reasonably anticipated expenses, including attorneys' fees. The amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Reviewing Person whose determination shall be final and conclusive. The Reviewing Person shall have no liability to the Indemnitee for his decisions hereunder. The terms of the Trust shall provide that upon a Change of Control (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the Trust shall advance, within two business days of a request by the Indemnitee, any and all expenses, including attorneys' fees, to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the circumstances under which the Indemnitee would be required to reimburse the Trustee under Section 5 of this Agreement), (iii) the Trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in such Trust shall revert to the Corporation upon a final determination by the Reviewing Party or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The Trustee shall be a bank or trust company or other individual or entity chosen by the Indemnitee and acceptable and approved of by the Corporation. (e) For the purposes of this Agreement: (i) a "Change of Control" shall occur if and when (A) 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 (B) there shall occur a "business combination" with an "interested shareholder" not approved by a majority of the "disinterested directors". (ii) a "Potential Change of Control" shall occur if (A) the Corporation enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control; (B) any person publicly announces a tender offer or comparable action which if consummated would constitute a Change of Control; (C) any person (other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation acting in such capacity or a corporation owned, directly or indirectly, by 4 the shareholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), who is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 10% or more of the combined voting stock increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof; or (D) the Board adopts a resolution to the effect that, for the purposes of this Agreement, a Potential Change of Control has occurred. (iii) a "Reviewing Person" means any appropriate person or body consisting of a member or members of the Corporation's Board of Directors or any other person or body appointed by the Board which, following a Change of Control, shall require the concurrence of a majority of the "disinterested directors" or shall be independent legal counsel approved and accepted by the Indemnitee who is not a party to the particular claim for which Indemnitee is seeking indemnification. For purposes of this subsection, 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 l, 2000. 3. Continuation of Indemnity. All agreements and obligations of the Corporation contained in this Agreement shall continue during the period the Indemnitee is a director or officer of the Corporation (or is or was serving at the request of the Corporation as a director, officer, trustee or representative of another corporation, partnership, joint venture, trust or other enterprise, including any employee benefit plan) and shall continue thereafter so long as the Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that the Indemnitee was a director or officer of the Corporation or serving in any other capacity referred to herein. 4. Notification and Defense of Claim. As soon as practicable after receipt by the Indemnitee of actual knowledge of any action, suit or proceeding the Indemnitee will notify the Corporation thereof, if a claim in respect thereof may be or is being made by the Indemnitee against the Corporation under this Agreement. With respect to any action, suit or proceeding as to which the Indemnitee has so notified the Corporation: (a) The Corporation will be entitled to participate therein at its own expense; and 5 (b) Except as otherwise provided below, the Corporation may assume the defense thereof, with counsel reasonably satisfactory to the Indemnitee. After the Corporation notifies the Indemnitee of its election to so assume the defense, the Corporation will not be liable to the Indemnitee under this Agreement for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense, other than reasonable costs of investigation, including an investigation in connection with determining whether there exists a conflict of interest of the type described in (ii) of this paragraph, or as otherwise provided in this paragraph. The Indemnitee shall have the right to employ his or her counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after the Corporation notifies the Indemnitee of its assumption of the defense shall be at the expense of the Indemnitee unless (i) the Corporation authorizes the Indemnitee's employment of counsel which, following a "Change of Control", shall be effective if authorized by a majority of the "disinterested directors" (which terms are defined in Section 2(d)), although less than a quorum or majority of a quorum of the directors then in office; (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Indemnitee in the conduct of the defense or (iii) the Corporation shall not have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which the Indemnitee shall have made the conclusion described in (ii) of this paragraph. (c) The Corporation shall not be obligated to indemnify the Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Corporation shall not settle any action or claim in any manner which would impose any penalty limitation on the Indemnitee without the Indemnitee's written consent. Neither the Corporation nor the Indemnitee shall unreasonably withhold their consent to any proposed settlement. 5. Undertaking to Repay Expenses. In the event it shall ultimately be determined that the Indemnitee is not entitled to be indemnified for the expenses paid by the Corporation pursuant to Section 1(b) hereof or otherwise or was not entitled to be fully indemnified, the Indemnitee shall repay to the Corporation such amount of the expenses or the appropriate portion thereof, so paid or advanced. 6. Notice. Any notice to the Corporation shall be directed to Armstrong Holdings, Inc., 2500 Columbia Avenue, Lancaster, Pennsylvania 17604-3001 Attention: Secretary (or such other address as the Corporation shall designate in writing to the Indemnitee). 7. Enforcement. In the event the Indemnitee is required to bring any action to enforce rights or to collect monies due under this Agreement, the Corporation shall pay to the Indemnitee the fees and expenses incurred by the Indemnitee in bringing and pursuing such action to the extent the 6 Indemnitee is successful, in whole or in part, on the merits or otherwise, in such action. The Corporation shall pay such fees and expenses in advance of the final disposition of such action on the terms and conditions set forth in Section 1(b). 8. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions o this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 9. Indemnification Under this Agreement Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under the Articles of Incorporation of the Corporation or its bylaws, any other agreement, any vote of stockholders or directors, or otherwise, both as to action in the Indemnitee's official capacity and as to action in another capacity while holding such office. 10. Miscellaneous: (a) This Agreement shall be interpreted and enforced in accordance with the laws of the Commonwealth of Pennsylvania. (b) This Agreement shall be binding upon the Indemnitee and upon the Corporation, its successors and assigns, and shall inure to the benefit of the Indemnitee, his heirs, executors, personal representatives and assigns and to the benefit of the Corporation, its successors and assigns. If the Corporation shall merge or consolidate with another corporation or shall sell, lease, transfer or otherwise dispose of all or substantially all of its assets to one or more persons or groups (in one transaction or series of transactions), (i) the Corporation shall cause the successor in the merger or consolidation or the transferee of the assets that is receiving the greatest portion of the assets or earning power transferred pursuant to the transfer of the assets, by agreement in form and substance satisfactory to the Indemnitee, to expressly assume all of the Corporation's obligations under and agree to perform this Agreement, and (ii) the term "Corporation" whenever used in this Agreement shall mean and include any such successor or transferee. 7 (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both of the parties hereto. 8 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG HOLDINGS, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources The undersigned, Armstrong World Industries, Inc., agrees to be jointly and severally bound by the terms of this Agreement, including specifically with respect to the obligations of the Company hereunder. ARMSTRONG WORLD INDUSTRIES, INC. By: ___________________________ Name: Douglas L. Boles Title: Executive Vice President, Human Resources INDEMNITEE _________________________________ Michael D. Lockhart Title: Chairman of the Board and Chief Executive Officer 9 EX-10.7 9 0009.txt MANAGEMENT SSERVICES AGREEMENT EXHIBIT 10(g) MANAGEMENT SERVICES AGREEMENT This Management Services Agreement is made and entered into as of August 7, 2000 by and between Armstrong Holdings, Inc., a Pennsylvania corporation ("Holdings") and Armstrong World Industries, Inc., also a Pennsylvania corporation ("World"), in connection with contracts made this day by Holdings with three executives. Holdings and World are also parties to an "Affiliate Agreement" dated as of May 1, 2000 concerning, among other things, an allocation of expenses between them and non-solicitation of each other's employees. In consideration of the promises and mutual covenants, and subject to the terms and conditions hereof, Holdings and World now agree as follows: 1. Individuals holding the posts of Chief Executive Officer, President, Chief Operating Officer and Advisor to the Chairman of the Board and Chief Operating Officer shall be under contract to Holdings and such action shall not violate the "Nonsolicitation of Employees" provisions of the aforesaid Affiliate Agreement. 2. The executives of Holdings in said positions shall provide management services to World and its subsidiaries. World agrees to treat them as employees and pay or reimburse all expenses and obligations of Holdings in connection with the contracts, compensation, benefits and any severance of said individuals, including salary, bonus, other direct and indirect compensation, and any other sums due, and such individuals shall participate at World's expense in the same perquisites and benefit plans of World as heretofore available to executives in similar positions. 3. From time to time, certain employees of World may be elected to serve as officers of Holdings in Finance, Human Resources, Legal and other functions. Except to the extent such services to Holdings create additional costs or fall within the specific categories of services enumerated in the second sentence of Section 1 of said Affiliate Agreement, World shall bear all expenses related to such employees. 4. World recognizes that, because Holdings is the ultimate shareholder of World and its subsidiaries, issues relating to the business and operations of World and its subsidiaries are reviewed and analyzed by the board of directors of Holdings. Although the directors of World are not bound by the determinations of the board of directors of Holdings, World recognizes that it benefits from the analysis and deliberations of the board of directors of Holdings. Accordingly, effective July 1, 2000, World will pay or reimburse Holdings for all costs and expenses relating to Holdings' Board of Directors, including fees, travel expenses and support costs, provided that any increase in fees to Holdings' Directors must be approved by World in advance. 5. This Agreement shall be deemed an amendment of said Affiliate Agreement, and shall be subject to the same dispute resolution, limitation of liability and other provisions as provided therein. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. ARMSTRONG HOLDINGS INC. ARMSTRONG WORLD INDUSTRIES, INC. By: _______________________________ By: _______________________________ Title: ____________________________ Title: ____________________________ EX-10.8 10 0010.txt STOCK OPTION EXCHANGE PROGRAM TO EMPLOYEES EXHIBIT 10(i) TERMS OF RESTRICTED STOCK FOR STOCK OPTION EXCHANGE PROGRAM OFFERED TO EMPLOYEES. On behalf of the Management Development and Compensation Committee of the Board of Directors, we are extending a one-time opportunity for you to exchange your stock options with exercise prices above $50 per share for shares of Armstrong stock and restricted stock. This will be done at either a 6 to 1 or an 11 to 1 conversion ratio depending on the exercise price of the option. You will have to decide which of these stock options, if any, you want to exchange. The shares of Armstrong stock will be granted to you with the following conditions: . 1/3 of the shares will be issued as a stock award on 9/18/00. For individuals subject to United States income tax, the value of these shares will be considered taxable income to you on the date of grant. . 1/3 of the shares will be issued as a restricted stock award which will become free of restrictions on 9/18/01. . 1/3 of the shares will be issued as a restricted stock award which will become free of restrictions on 9/18/02. ILLUSTRATIVE EXAMPLE --------------------
------------------- ------------------ ----------------- ----------------- ----------------- ------------------ # of Shares of Value at Grant Date Exercise Price # of Options Conversion Ratio Stock $16/Share ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ 2/22/99 $50.9375 1,200 6:1 200 $3,200 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ 2/28/98 73.125 1,100 11:1 100 1,600 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ 2/23/97 69.875 1,100 11:1 100 1,600 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ 2/25/96 59.875 1,210 11:1 110 1,760 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ 2/24/94 54.625 550 11:1 50 800 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------ TOTAL 5,160 560 $8,960 ------------------- ------------------ ----------------- ----------------- ----------------- ------------------
You are able to elect to exchange these options on a grant-by-grant basis. Incentive Stock Options and Nonstatutory Stock Options have been shown as separate grants. The exchange of each identified grant would need to be done on ---- an all or nothing basis. You can, however, elect to exchange some grants but not others. The election is strictly voluntary on your part. WHAT IS A RESTRICTED STOCK AWARD? - --------------------------------- A restricted stock award is a grant of Armstrong common stock where your rights to the shares are restricted for a defined period of time and the shares are subject to forfeiture under certain circumstances. The shares of stock are registered in your name at the time of the award but you do not have access to them until the conclusion of the restriction period. During the restriction period, you are able to vote the shares, and declared dividends are used to purchase additional shares of stock which are subject to the same restriction period. At the conclusion of the restriction period, you will receive a certificate for the shares awarded and the shares purchased with the reinvested dividend payments. For individuals subject to United States tax law, there will be ordinary income tax assessed on the value of the shares on the date the restrictions lapse. CONVERSION OF YOUR STOCK OPTION GRANTS - -------------------------------------- Enclosed is a listing of your stock option grants with exercise prices above $50 per share. You will see that we have indicated the conversion ratio as well as the number of shares of common stock that would result from the exchange of each stock option grant. The last column of this summary provides a space for you to indicate whether you wish to convert each of the corresponding stock option grants. If you wish to exchange a stock option grant for stock and restricted stock, write "Yes" in the space provided. If you do not want to exchange the -- --- stock option grant, write "No" or leave the space blank in order to continue to hold the stock option grant. WE HAVE ESTABLISHED A DEADLINE OF THURSDAY, SEPTEMBER 7, 2000, TO RECEIVE YOUR COMPLETED AND SIGNED CONVERSION RESPONSE. It is important that you sign and date the form in the lower right-hand corner. Your form should be returned to Scott Webster in Compensation and Benefits. INDIVIDUALS WHO WORK OUTSIDE OF LANCASTER SHOULD FAX THEIR FORMS TO (717) 396-6119. TERMS AND CONDITIONS OF AWARDS - ------------------------------ If you decide to exchange any of your stock options, shares of stock and restricted stock will be issued under the Armstrong Holdings, Inc. Stock Award Plan. We have provided a copy of the plan document and the plan prospectus which contains additional information about the plan. Following the approval of the stock and restricted stock awards on September 18, 2000, you will receive transmittal letters and award agreements that specify the terms and conditions of the awards. You should understand the following points with respect to these awards: General - No fractional shares will be issued. The number of shares issued ------- will be rounded to the nearest whole share. Taxation - Employees subject to United States income tax law will have -------- immediate ordinary income on the market value of the shares issued as a stock award on September 18, 2000, (i.e., approximately one-third of the total shares issued under the conversion). Restricted stock awards are subject to ordinary income tax based on the value of the shares on the date the restrictions lapse. You are responsible for satisfying any tax withholding obligations that arise with respect to stock and restricted stock awards. Individuals subject to United States income tax law may satisfy tax withholding obligations by requesting that the company withhold shares of common stock that would otherwise be delivered to you. This tax withholding decision will be made at a later date. Termination of Employment During a Restriction Period - If you terminate ----------------------------------------------------- employment during a restriction period for any reason other than death, disability or retirement, you will forfeit all shares of restricted stock subject to a restriction period. If your termination is due to retirement, restrictions will lapse on a proportion of shares subject to restriction at the time of retirement. The number of shares you would be entitled to receive will be prorated for the number of months of your employment during the restriction period. Any applicable restriction period would continue in effect for the prorated number of shares. If you terminate employment due to death or disability, restrictions will lapse on all shares of restricted stock. Certain Forfeitures - If you are discharged for willful, deliberate or ------------------- gross misconduct, or engage in activities found to be injurious to the company's financial interest, you may be required to forfeit and/or return stock received under these awards. These provisions are described under Section 8.7 of the plan text. SCHEDULE OF PARTICIPATING EXECUTIVE OFFICERS Name Number of Number of Total # of Options Options Stock Award Above $50 Converted Shares Frank A. Riddick, III 189,720 189,720 20,278 Marc R. Olivie 101,300 101,300 11,103 Floyd F. Sherman 87,000 87,000 10,712 E. Follin Smith 52,240 52,240 8,707 Stephen E. Stockwell 56,750 56,750 6,068 Stephen J. Senkowski 16,630 16,630 2,004 Matthew J. Angello 13,300 13,300 1,626 William C. Rodruan 9,280 9,280 977 EX-15 11 0011.txt EXHIBIT 15 Exhibit No. 15 Armstrong Holdings, Inc. Lancaster, Pennsylvania Ladies and Gentlemen: RE: Registration Statement Nos. 33-74501; 33-91890; 33-18996; 33-29768; 33-18997; 33-65768; 333-74633; 333-79093. With respect to the subject Registration Statements, we acknowledge our awareness of the incorporation by reference therein of our report dated November 14, 2000, related to our review of interim financial information of Armstrong Holdings, Inc. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. KPMG LLP Philadelphia, Pennsylvania November 14, 2000 EX-27 12 0012.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Armstrong Holdings and Subsidiaries Unaudited Condensed Financial Statements as of and for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0001109304 ARMSTRONG HOLDINGS 9-MOS DEC-31-2000 SEP-30-2000 34 0 527 47 430 1,083 2,366 1,061 4,032 799 1,314 0 0 219 517 4,032 2,444 2,444 1,709 1,709 648 11 80 (4) (1) (3) 116 0 0 113 2.80 2.80
EX-27.1 13 0013.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Armstrong World Industries, Inc. and Subsidiaries Unaudited Condensed Financial Statements as of and for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000007431 ARMSTRONG WORLD INDUSTRIES, INC. 9-MOS DEC-31-2000 SEP-30-2000 34 0 527 47 430 1,083 2,366 1,061 4,032 799 1,314 0 0 228 503 4,032 2,444 2,444 1,709 1,709 647 11 80 (4) (1) (3) 116 0 0 113 0 0
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