-----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, MNaj8uNm/fKSZbSSCXUJzV/YDhXwF7HSpkPxazTCd7IzgyyJNjB82wXecUQmjqn0 YhoZ/SNkYnSYgyCwk9Pp9w== 0000950109-01-502589.txt : 20010807 0000950109-01-502589.hdr.sgml : 20010807 ACCESSION NUMBER: 0000950109-01-502589 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARMSTRONG WORLD INDUSTRIES INC CENTRAL INDEX KEY: 0000007431 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 230366390 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-02116 FILM NUMBER: 1698322 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 d10q.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 June 30, 2001 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 July 31, 2001 - 40,800,542 Part 1 - Financial Information ------------------------------ Item 1 - Financial Statements - ----------------------------- Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Statements of Earnings (in millions, except per share amounts) Unaudited
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $748.6 $791.9 $1,465.1 $1,527.2 Cost of goods sold 551.2 564.0 1,089.3 1,091.5 ------ ------ -------- -------- Gross profit 197.4 227.9 375.8 435.7 Selling, general and administrative expenses 133.1 121.2 263.8 260.3 Charge for asbestos liability, net 6.0 236.0 6.0 236.0 Restructuring and reorganization charges (reversals), net (1.3) - 4.1 - Goodwill amortization 5.7 6.0 11.4 12.0 Equity (earnings) from affiliates, net (4.6) (4.5) (9.0) (9.2) ------ ------ -------- -------- Operating income (loss) 58.5 (130.8) 99.5 (63.4) Interest expense (unrecorded contractual interest of $21.5, $0.0, $42.9, and $0.0) 3.2 27.9 6.3 53.8 Other (income) expense, net 2.6 (5.4) (1.3) (4.8) ------ ------ -------- -------- Earnings (loss) from continuing operations before Chapter 11 reorganization (income) costs and income tax expense (benefit) 52.7 (153.3) 94.5 (112.4) Chapter 11 reorganization (income) costs, net (0.5) - 2.5 - ------ ------ -------- -------- Earnings (loss) from continuing operations before income tax expense (benefit) 53.2 (153.3) 92.0 (112.4) Income tax expense (benefit) 20.2 (50.7) 35.4 (34.8) ------ ------ -------- -------- Earnings (loss) from continuing operations $33.0 ($102.6) $56.6 ($77.6) ------ ------ -------- -------- Income from discontinued operations, net of tax of $2.5 and $5.4 - 3.7 - 9.4 Gain (loss) on sale of discontinued operations, net of tax of $0.0, $41.9, $0.0, and $41.9 (0.9) 106.4 (0.9) 106.4 Net loss on expected disposal of discontinued operations, net of tax of $0.0 - - (3.3) - ------ ------ -------- -------- Earnings (loss) from discontinued operations (0.9) 110.1 (4.2) 115.8 ------ ------ -------- -------- Net earnings $ 32.1 $ 7.5 $ 52.4 $ 38.2 ====== ====== ======== ======== Earnings (loss) per share of common stock, continuing operations: Basic $ 0.82 $(2.55) $ 1.40 $ (1.94) Diluted $ 0.81 $(2.55) $ 1.38 $ (1.94) Earnings per share of common stock, discontinued operations: Basic $ - $ 0.09 $ - $ 0.23 Diluted $ - $ 0.09 $ - $ 0.23 Earnings (loss) per share of common stock, sale of discontinued operations: Basic $(0.02) $ 2.65 $ (0.02) $ 2.65 Diluted $(0.02) $ 2.65 $ (0.02) $ 2.65 Loss per share of common stock, expected disposal of discontinued operations: Basic $ - $ - $ (0.08) $ - Diluted $ - $ - $ (0.08) $ - Net earnings per share of common stock: Basic $ 0.79 $ 0.19 $ 1.30 $ 0.95 Diluted $ 0.78 $ 0.19 $ 1.28 $ 0.95 Average number of common shares outstanding: Basic 40.4 40.2 40.4 40.1 Diluted 40.9 40.3 40.9 40.3
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 6. 2 Armstrong Holdings, Inc., and Subsidiaries Condensed Consolidated Balance Sheets (amounts in millions except share data)
Unaudited Assets June 30, 2001 December 31, 2000 ------ ------------- ----------------- Current assets: Cash and cash equivalents $ 177.5 $ 156.5 Accounts and notes receivable, net 362.4 316.5 Inventories, net 396.4 340.2 Deferred income taxes 10.6 9.8 Net assets of discontinued operations 57.3 48.6 Other current assets 85.1 72.4 --------- --------- Total current assets 1,089.3 944.0 Property, plant and equipment, less accumulated depreciation and amortization of $1,039.5 and $1,006.4, respectively 1,216.8 1,253.5 Insurance receivable for asbestos-related liabilities, noncurrent 208.1 236.1 Investment in affiliates 36.7 37.3 Goodwill, net 832.0 846.0 Other intangibles, net 89.7 91.9 Deferred income tax assets, noncurrent 4.8 22.5 Other noncurrent assets 466.3 443.3 --------- --------- Total assets $ 3,943.7 $ 3,874.6 ========= ========= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $ 11.1 $ 16.6 Current installments of long-term debt 4.7 8.1 Accounts payable and accrued expenses 292.0 238.0 Income taxes 46.2 28.5 --------- --------- Total current liabilities 354.0 291.2 --------- --------- Liabilities subject to compromise 2,360.0 2,385.2 Long-term debt, less current installments 51.5 56.8 Postretirement and postemployment benefit liabilities 244.0 243.6 Pension benefit liabilities 144.9 154.7 Other long-term liabilities 68.9 71.1 Minority interest in subsidiaries 7.9 6.9 --------- --------- Total noncurrent liabilities 2,877.2 2,918.3 Shareholders' equity: Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9 Capital in excess of par value 166.4 162.2 Reduction for ESOP loan guarantee (142.2) (142.2) Retained earnings 1,203.9 1,151.5 Accumulated other comprehensive loss (54.5) (45.2) Treasury stock (513.0) (513.1) --------- --------- Total shareholders' equity 712.5 665.1 --------- --------- Total liabilities and shareholders' equity $ 3,943.7 $ 3,874.6 ========= =========
See accompanying notes 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 except per share data) Unaudited
2001 2000 ---- ---- Common stock, $1 par value: - --------------------------- Balance at beginning of year and June 30 $ 51.9 $ 51.9 --------- --------- Capital in excess of par value: - ------------------------------- Balance at beginning of year $ 162.2 $ 176.4 Stock issuances and other 4.2 4.3 Contribution of treasury stock to ESOP - (5.3) --------- --------- Balance at June 30 $ 166.4 $ 175.4 --------- --------- Reduction for ESOP loan guarantee: - ---------------------------------- Balance at beginning of year $ (142.2) $ (190.3) Principal paid - 13.2 Loans to ESOP - (7.3) Contribution of treasury stock to ESOP - (4.1) Accrued compensation - 3.1 --------- --------- Balance at June 30 $ (142.2) $ (185.4) --------- --------- Retained earnings: - ------------------ Balance at beginning of year $1,151.5 $ 1,196.2 Net earnings for six months 52.4 $52.4 38.2 $38.2 Tax benefit on dividends paid on unallocated ESOP common shares - 0.7 --------- --------- Total $1,203.9 $ 1,235.1 Less common stock dividends - 38.6 --------- --------- Balance at June 30 $1,203.9 $ 1,196.5 --------- --------- Accumulated other comprehensive income (loss): - ---------------------------------------------- Balance at beginning of year $ (45.2) $ (16.5) Foreign currency translation adjustments (10.5) (2.1) Derivative gain, net (1.4) - Investment impairment 2.0 - Unrealized loss on available for sale securities - (2.5) Minimum pension liability adjustments 0.6 (2.1) --------- --------- Total other comprehensive (loss) (9.3) (9.3) (6.7) (6.7) --------- ----- --------- ----- Balance at June 30 $ (54.5) $ (23.2) --------- --------- Comprehensive income $ 43.1 $31.5 - -------------------- ====== ===== Less treasury stock at cost: - ---------------------------- Balance at beginning of year $ 513.1 $ 538.5 Stock issuance activity, net (0.1) (0.6) Contribution of treasury stock to ESOP - (9.4) --------- --------- Balance at June 30 $ 513.0 $ 528.5 --------- --------- Total shareholders' equity $ 712.5 $ 686.7 ========= =========
See accompanying notes 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
Six Months Ended June 30, 2001 2000 ---- ---- Cash flows from operating activities: Net earnings $ 52.4 $38.2 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: Depreciation and amortization, continuing operations 75.0 77.6 Depreciation and amortization, discontinued operations - 5.7 (Gain) loss on sale of businesses 0.9 (148.3) Loss on expected disposal of discontinued operations 3.3 - Deferred income taxes 16.9 (14.1) Equity earnings from affiliates, net (9.0) (9.2) Chapter 11 reorganization costs, net 2.5 - Chapter 11 reorganization payments (6.6) - Restructuring and reorganization charges 4.1 - Restructuring and reorganization payments (6.6) (2.2) Recoveries (payments) for asbestos-related claims, net 16.0 (67.3) Charge for asbestos liability, net 6.0 236.0 Decrease in net assets of businesses held for sale - 2.2 (Increase)/decrease in net assets of discontinued operations (8.7) 16.5 Changes in operating assets and liabilities net of effects of reorganizations, restructuring and dispositions Increase in receivables (55.1) (62.0) Increase in inventories (67.8) (27.7) Increase in other current assets (9.2) (8.1) Increase in other noncurrent assets (34.0) (18.8) Increase/(decrease) in accounts payable and accrued expenses 67.9 (71.4) Increase in income taxes payable 17.7 12.0 Decrease in other long-term liabilities (2.0) (0.3) Other, net 10.5 5.6 ------- ------ Net cash provided by (used for) operating activities 74.2 (35.6) ------- ------ Cash flows used for investing activities: Purchases of property, plant and equipment, continuing operations (42.3) (60.5) Purchases of property, plant and equipment, discontinued operations (2.8) (8.1) Investment in computer software (4.2) (5.5) Acquisitions, net of cash acquired - (8.8) Distributions from equity affiliates 9.0 6.6 Purchase of outstanding minority interest (5.4) - Proceeds from the sale of assets 0.4 3.1 Proceeds from the sale of businesses - 238.4 ------- ------ Net cash provided by (used for) investing activities (45.3) 165.2 ------- ------ Cash flows from financing activities: Increase/(decrease) in short-term debt, net (3.1) 50.2 Payments of long-term debt (1.6) (148.7) Cash dividends paid - (38.6) Purchase of common stock for the treasury, net (0.1) (1.3) Other, net (0.8) - ------- ------ Net cash used for financing activities (5.6) (138.4) ------- ------ Effect of exchange rate changes on cash and cash equivalents (2.3) (0.7) ------- ------ Net increase/(decrease) in cash and cash equivalents $21.0 ($9.5) Cash and cash equivalents at beginning of year $ 156.5 $ 17.2 ------- ------ Cash and cash equivalents at end of period $ 177.5 $ 7.7 ======== =====
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 6. 5 Note 1. BASIS OF PRESENTATION - ----------------------------- Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation incorporated in 1891, which together with its subsidiaries is referred to here as "Armstrong". Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the publicly-held parent holding company of Armstrong. AHI became the parent company of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of exchange under which each share of AWI was automatically exchanged for one share of AHI. AHI was formed for purposes of the share exchange and holds no other significant assets or operations apart from AWI and AWI's subsidiaries. Stock certificates that formerly represented shares of AWI were automatically converted into certificates representing the same number of shares of AHI. The publicly-held debt of AWI was not affected in the transaction. The accompanying condensed consolidated financial statements contain the financial results of AHI. Financial statements of Armstrong are shown due to the existence of publicly-traded debt. See Note 12 for discussion of the financial statement differences between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Operating results for the second quarter of 2001, compared with the corresponding period of 2000 included in this report, are unaudited. However, these condensed consolidated financial statements have been reviewed by AHI's independent public accountants in accordance with established professional standards and procedures for a limited review of interim financial information. In February 2001, AHI determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. On June 12, 2001, negotiations with this investor were terminated. However, AHI still plans to complete the disposition of this segment in the first quarter of 2002. Accordingly, this segment is classified as a discontinued operation. Prior year balances and results have been reclassified to reflect the net assets and results of discontinued operations. Starting with the fourth quarter of 2000, AHI applied the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-010, "Accounting for Shipping and Handling Fees and Costs". Consequently, approximately $34.3 million of second quarter 2000 shipping and handling costs have been reclassified from net sales to cost of goods sold. This change had no effect on gross margins or retained earnings as of any date. In accordance with EITF Issue No. 00-014, "Accounting for Certain Sales Incentives", AHI reclassified certain sales incentives from Selling, General and Administrative ("SG&A") expense to net sales (reducing both) by $0.3 million in the second quarter of 2000. In accordance with EITF Issue No. 00-022, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future," AHI reclassified sales volume incentives from SG&A expense to net sales (reducing both) by $7.6 million in the second quarter of 2000. The accounting policies used in preparing these statements are the same as those used in preparing AHI's consolidated financial statements for the year ended December 31, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in AHI's Form 10-K for the fiscal year ended December 31, 2000. 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 second quarters of the wood products segment ended on June 30, 2001 and July 1, 2000. No events occurred between June 30, 2000 and July 1, 2000 materially affecting AHI's financial position or results of operations. Note 2. CHAPTER 11 REORGANIZATION - --------------------------------- Proceedings under Chapter 11 - ---------------------------- On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court") in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries, Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America, Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the "Chapter 11 Case"). 6 AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Court's approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 Case. Three creditors' committees, one representing personal injury asbestos claimants, one representing property damage asbestos claimants, and the other representing other unsecured creditors, have been appointed in the Chapter 11 Case. In accordance with the provisions of the Bankruptcy Code, they have the right to be heard on matters that come before the Court in the Chapter 11 Case. It is AWI's intention to address all of its prepetition claims, including all asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact AWI's Chapter 11 Case and any reorganization plan will have on the shares of common stock of AWI, all of which are held by AHI and, along with AWI's operating subsidiaries, are the only material asset of AHI. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 Case could take a significant period of time. Currently, AWI has the exclusive right to file a plan of reorganization until October 5, 2001, and this date may be further extended by the Court. Bar Date for Filing Claims - -------------------------- In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as the last date by which holders of prepetition claims against the Debtors must file their claims. Any holder of a claim that is required to file a claim by such deadline and does not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim. This deadline to file claims does not apply to asbestos-related personal injury claims (other than a claim for contribution, indemnity, reimbursement, or subrogation). A bar date for asbestos-related personal injury claims has not been set. The deadline for claims from the U. S. Internal Revenue Service has been extended to December 31, 2001. Financing - --------- On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit facility (the "DIP Facility") from $300 million to $200 million. As of June 30, 2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had $110.6 million of cash and cash equivalents in addition to cash held by its non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash generated from operations, will be more than adequate to address its liquidity needs. Borrowings under the DIP Facility, if any, will constitute superpriority administrative expense claims in the Chapter 11 Case. Accounting Impact - ----------------- AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. AHI has implemented this guidance in the accompanying condensed consolidated financial statements. Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at June 30, 2001 and December 31, 2000. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI's prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWI's asbestos liability is also recorded in liabilities subject to compromise. See Note 10 for further discussion of AWI's asbestos liability. 7 Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization costs. Accordingly, AWI recorded the following Chapter 11 reorganization activities in the second quarter and first six months of 2001:
Three Months Ended Six Months Ended (amounts in millions) June 30, 2001 June 30, 2001 - --------------------- ------------- ------------- Professional fees $ 6.1 $ 11.9 Interest income, post petition (1.0) (2.7) Reductions to prepetition liabilities (0.1) (2.0) Termination of prepetition lease obligation (5.9) (5.9) Other expenses directly related to bankruptcy, net 0.4 1.2 ------ ----- Total Chapter 11 reorganization costs (income), net $ (0.5) $ 2.5 ======= =====
Professional fees represent legal and financial advisory expenses directly related to the Filing. Interest income in the above table is from short-term investments of cash earned by AWI subsequent to the Filing. Reductions to prepetition liabilities represent the difference between the prepetition invoiced amount and the actual cash payment made to certain vendors due to negotiated settlements. These payments of prepetition obligations were made pursuant to authority granted by the Court. Termination of prepetition lease obligation represents the reversal of an accrual for future lease payments for office space in the U.S. that AWI will not pay due to the termination of the lease contract. This amount was previously accrued in the third quarter of 2000 as part of a restructuring charge when the decision to vacate the premises was made. As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements. 8 Note 3. DISCONTINUED OPERATIONS - ------------------------------- In February 2001, AHI determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. On June 12, 2001, negotiations with this investor were terminated. However, AHI still plans to complete the disposition of this segment in the first quarter of 2002. Accordingly, this segment is classified as a discontinued operation. Prior year balances and results have been reclassified to reflect the net assets and results of this segment as discontinued operations. Based on the expected net realizable value of the business, AHI recorded a pretax net loss of $30.3 million in the fourth quarter of 2000, $19.5 million net of tax benefit. AHI also recorded an additional loss of $3.3 million (with no tax benefit) in the first quarter of 2001, as a result of price adjustments resulting from the negotiations. The following comprises the net assets of discontinued operations as of June 30, 2001 and December 31, 2000
(amounts in millions) June 30, 2001 December 31, 2000 ------------- ----------------- Cash $ 3.0 $ 2.6 Accounts receivable, net 47.0 52.5 Inventories, net 63.8 59.7 Property plant and equipment, net 62.2 67.5 Short-term and long-term debt (17.4) (29.8) Accounts payable and accrued expenses (43.8) (54.0) Pension liabilities (3.3) (3.3) Other, net (16.4) (12.1) Adjustment to net realizable value (37.8) (34.5) ------ ------- Net assets of discontinued operations $ 57.3 $ 48.6 ====== =======
During the second quarter of 2001, AHI recorded a pretax loss of $0.9 million related to its May 31, 2000 divestiture of its Insulation Products segment, which was previously reported as a discontinued operation. This loss resulted from certain post-closing adjustments. Note 4. ACQUISITIONS - -------------------- On May 15, 2001, Armstrong Enterprises, Inc., an indirect subsidiary of AHI, entered into an agreement with Skanska A.B. to purchase Skanska's 49% minority equity interest in Armstrong World Industries A.B. The purchase price of $5.0 million was allocated to goodwill. Note 5. LIABILITIES SUBJECT TO COMPROMISE - ----------------------------------------- As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the condensed consolidated balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI's prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of AHI subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWI's asbestos liability is also recorded in liabilities subject to compromise. See Note 10 for further discussion of AWI's asbestos liability. Liabilities subject to compromise at June 30, 2001 and December 31, 2000 are as follows:
(amounts in millions) June 30, December 31, 2001 2000 ---- ---- Debt (at face value) $ 1,400.7 $ 1,400.4 Asbestos-related liability 690.6 690.6 Prepetition trade payables 53.9 60.1 Prepetition other payables and accrued interest 57.1 76.4 ESOP loan guarantee 157.7 157.7 --------- --------- Total liabilities subject to compromise $ 2,360.0 $ 2,385.2 ========= =========
Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. 9 Note 6. INDUSTRY SEGMENTS - -------------------------
(amounts in millions) Three months Six months ended June 30 ended June 30 Net sales to external customers 2001 2000 2001 2000 - ------------------------------- ------- ------- ------- ---------- Floor coverings $ 308.3 $ 340.0 $ 599.4 $ 656.5 Building products 206.5 203.0 422.9 401.9 Wood products 233.8 248.9 442.8 468.8 ------- ------- --------- --------- Total sales to external customers $ 748.6 $ 791.9 $ 1,465.1 $ 1,527.2 ======= ======= ========= ========= Three months Six months ended June 30 ended June 30 Segment operating income (loss) 2001 200 2001 2000 - ------------------------------- ------- -------- ------- ------- Floor coverings $ 27.8 $ 44.7 $ 48.0 $ 72.7 Building products 25.7 31.2 44.2 56.9 Wood products 14.1 29.2 23.8 47.1 All other 0.5 (0.1) 0.5 0.1 ------- -------- ------- --------- Total segment operating income 68.1 105.0 116.5 176.8 Charge for asbestos liability, net (6.0) (236.0) (6.0) (236.0) Unallocated corporate income (expense) (3.6) 0.2 (11.0) (4.2) ------- -------- ------- --------- Total consolidated operating income (loss) $ 58.5 $ (130.8) $ 99.5 $ (63.4) ======= ========= ======= ========= June 30, December 31, Segment assets 2001 2000 - -------------- --------- ----------- Floor coverings $ 937.3 $ 897.6 Building products 539.9 568.5 Wood products 1,402.2 1,358.6 All other 16.5 16.3 --------- ----------- Total segment assets 2,895.9 2,841.0 Assets not assigned to business units 1,047.8 1,033.6 --------- ----------- Total consolidated assets $ 3,943.7 $ 3,874.6 ========= ===========
Prior year amounts for floor coverings, all other, and assets not assigned to business units have been reclassified to reflect the reallocation of certain assets. Note 7. INVENTORY - ------------------
(amounts in millions) June 30, 2001 December 31, 2000 ------------- ----------------- Finished goods $ 255.0 $ 208.9 Goods in process 39.1 39.6 Raw materials and supplies 155.4 143.5 Less LIFO and other reserves (53.1) (51.8) ------- ------- Total inventories, net $ 396.4 $ 340.2 ======= =======
Note 8. RESTRUCTURING AND OTHER ACTIONS - --------------------------------------- The following table summarizes activity in the reorganization and restructuring accruals which are reported within accounts payable and accrued expenses, for the first six months of 2001 and 2000:
Beginning Cash Ending (amounts in millions) balance payments Charges Reversals Other balance ------- -------- ------- --------- ----- ------- 2001 $21.4 ($6.6) $3.8 ($1.3) ($6.7) $ 10.6 2000 12.1 (2.2) - - (0.6) 9.3
A $5.4 million pretax restructuring charge was recorded in the first quarter of 2001. The charge related to severance and enhanced retirement benefits for more than 50 corporate and line-of-business salaried staff positions, as a result of streamlining the organization, to reflect staffing needs for current business conditions. This streamlining is expected to result in lower selling, general and administrative expenses of 10 approximately $4.9 million per year. Of the $5.4 million, $1.6 million represented a non-cash charge for enhanced retirement benefits, which is accounted for as a reduction of the prepaid pension asset. In the second quarter of 2001, a $1.1 million reversal was recorded related to a formerly occupied building for which AHI no longer believes it will incur any additional costs. In addition, $0.2 million of the remaining accrual for the first quarter 2001 reorganization was reversed, comprising certain severance accruals that were no longer necessary as certain individuals remained employed by AHI. The amount in "other" is primarily related to the termination of an operating lease for an office facility in the U.S. These lease costs were previously accrued in the third quarter of 2000 as part of the restructuring charge when the decision to vacate the premises was made. The $5.9 million reversal is recorded as a reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See Note 2 for further discussion. The remaining amount in "other" is related to foreign currency translation. Most of the remaining balance at June 30, 2001 relates to terminated employees with extended payouts, the majority of which will be paid during 2001, and a noncancelable operating lease, which extends through 2017. Note 9. SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------ (amounts in millions) Six Months Ended June 30 2001 2000 ----- ------ Interest paid $ 1.5 $ 53.5 Income taxes paid, net $ 1.7 $ 17.1 Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - ------------------------------------------------------- Asbestos-related Litigation - --------------------------- The following is a summary update of asbestos-related litigation; see Item 3 of Armstrong's 2000 Form 10-K filing for additional information. AWI is a defendant in personal injury claims and property damage claims related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a fair and final resolution of its asbestos liability. See Note 2 for further discussion. Asbestos Claims - --------------- Before filing for relief under the Bankruptcy Code, AWI pursued broad-based settlements of claims through the Center for Claims Resolution (the "Center"). The Center had reached Strategic Settlement Program ("SSP") agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant. As a result of the Filing, AWI's obligations with respect to these settlements will be determined in its Chapter 11 Case. Due to the Filing, holders of asbestos claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments with respect to asbestos claims, including payments pursuant to the outstanding SSP agreements. A separate creditors' committee representing the interests of personal injury asbestos claimants has been appointed in the Chapter 11 Case. AWI's present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. AWI believes that the Chapter 11 process provides it with the opportunity to comprehensively address its asbestos liability in one forum. It is anticipated that all present and future asbestos claims will be resolved in the Chapter 11 Case, which could take several years. Asbestos-Related Personal Injury Liability - ------------------------------------------ In evaluating its estimated asbestos-related personal injury liability prior to the Filing, AWI reviewed, among other things, 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, AWI estimated its cost to defend and 11 resolve probable asbestos-related personal injury claims. This estimate was highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could affect the range of the liability. AWI believes the range of probable and estimable liability is more uncertain now than previously. There are significant differences in the way the asbestos claims may be addressed under the bankruptcy process when compared to the tort system. Accordingly, AWI currently is unable to ascertain how prior experience with the number of claims and the amounts to settle claims will impact its ultimate liability in the context of its Chapter 11 Case. As of September 30, 2000, AWI's estimate of its asbestos-related liability that was probable and estimable through 2006 ranged from $758.8 million to $1,363.3 million. AWI concluded that no amount within that range was more likely than any other and, therefore, reflected $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Due to the increased uncertainty created as a result of the Filing, no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October and November 2000. The asbestos-related liability balance recorded at June 30, 2001 and December 31, 2000 is $690.6 million, which is recorded in liabilities subject to compromise. It is reasonably possible, however, that the actual liability could be significantly higher than the recorded liability. As the Chapter 11 Case proceeds, there should be more clarity as to the extent of the liability. Collateral Requirements - ----------------------- During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Center's demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center's motion or the complaint. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. The Court has not yet ruled on these matters. Property Damage Litigation - -------------------------- AWI is also one of many defendants in six pending property damage claims as of June 30, 2001 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, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI 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. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are also stayed due to the Filing. Consistent with prior periods and due to increased uncertainty, AWI has not recorded any liability related to these claims. A separate creditors' committee representing the interests of property damage asbestos claimants has been appointed in the Chapter 11 Case. Insurance Recovery Proceedings - ------------------------------ A substantial portion of AWI'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 AWI's installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution ("ADR") procedure 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 12 reinstatement of prematurely exhausted products hazard insurance is warranted. The nonproducts coverage potentially available is substantial and includes defense costs in addition to limits. During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI 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. A new trial judge has been selected and initial motions were heard in June 2001. It is uncertain at this time if the new proceedings will have any impact on the preliminary decisions of the initial phases of the ADR. Additionally, one of the insurance carriers has been experiencing financial difficulties and was placed under an order of rehabilitation by a state insurance department during the second quarter. Insurance Asset - --------------- An insurance asset in respect of asbestos personal injury claims in the amount of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as of December 31, 2000. The reduction is due to cash receipts during the second quarter of 2001 and management's current assessment of probable insurance recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3 million represents partial settlement for previous claims that 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 AWI's belief in the availability of insurance in this amount, based upon AWI'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 (a former AWI subsidiary that was sold in August 1969) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $84 million of the $246.3 million asset is determined from agreed coverage in place and is therefore directly related to the amount of the liability and could decrease if the final amount of the liability decreases. Of the $246.3 million asset, $38.2 million has been recorded as a current asset as of June 30, 2001 reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. A significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers. Due to the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no change in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact - ---------------- As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in the first six months of 2001. In the first six months of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0 million in asbestos-related insurance recoveries during the first six months of 2001 compared to $27.7 million during the first six months of 2000. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI may continue to receive insurance proceeds under the terms of various settlement agreements. Conclusion - ---------- Many uncertainties exist surrounding the financial impact of AWI's involvement with asbestos litigation. These uncertainties include the impact of the Filing and the Chapter 11 process, the number of future claims to be filed, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition of AWI's insurance carriers. AWI has not revised its previously recorded liability for asbestos-related personal injury claims. In the second quarter of 2001, AWI reduced its previously recorded insurance asset by $16.0 million for cash receipts and by $6.0 million for management's current assessment of probable insurance recoveries. The $6.0 million reduction was recorded as a charge for asbestos liability, net in the accompanying condensed consolidated statement of earnings. AWI will continue to review its asbestos-related liability periodically, although it is likely that no changes will be made to the liability until later in the Chapter 11 Case as significant developments arise. It is reasonably possible 13 that AWI's total exposure to asbestos-related personal injury claims may be significantly different than the recorded liability. Any adjustment to the estimated liability or insurance asset could be material to the results of operations in the period recorded. Note 11. - ENVIRONMENTAL LIABILITIES - ------------------------------------ Liabilities of $13.1 million and $13.5 million were recorded at June 30, 2001 and December 31, 2000, respectively, for potential environmental liabilities that AHI 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. Due to the Chapter 11 Filing, $6.4 million of the June 30, 2001 and December 31, 2000 environmental liabilities are classified as prepetition liabilities subject to compromise. 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 condensed 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 may vary from estimates, given the inherent uncertainties in evaluating environmental liabilities. Subject to the imprecision in estimating environmental remediation costs, AHI believes that any sum it may have to pay in connection with environmental matters in excess of the amounts noted above would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future periods. Note 12 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS AND ARMSTRONG WORLD INDUSTRIES, - -------------------------------------------------------------------------------- INC. ---- The difference between the condensed consolidated financial statements is primarily due to transactions related to the formation of Armstrong Holdings, Inc. and stock activity. Note 13 - EARNINGS 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 calculations for 2000 use the basic number of shares due to the loss on continuing operations. 14 Independent Accountant's Review Report -------------------------------------- The Board of Directors and Shareholders Armstrong Holdings, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of June 30, 2001, and the related condensed consolidated statements of earnings for the three and six-month periods ended June 30, 2001 and 2000, and the condensed consolidated statements of cash flows and shareholders' equity for the six-month periods ended June 30, 2001 and 2000. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the condensed consolidated financial statements, three of the Company's domestic subsidiaries, including Armstrong World Industries, Inc., the Company's major operating subsidiary, filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on December 6, 2000. Armstrong World Industries, Inc. has also defaulted on certain debt obligations. Although these operating subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a plan of reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court. The filing under Chapter 11 and the resulting increased uncertainty regarding the Company's potential asbestos liabilities, as discussed in Note 10 of the condensed consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Armstrong Holdings, Inc., and subsidiaries as of December 31, 2000, 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 26, 2001, 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, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Our report dated February 26, 2001, on the consolidated financial statements of Armstrong Holdings, Inc., and subsidiaries as of and for the year ended December 31, 2000, also contains an explanatory paragraph that states that the filing under Chapter 11 and the resulting increased uncertainty regarding the Company's potential asbestos liability raise substantial doubt about the Company's ability to continue as a going concern. The condensed consolidated balance sheet as of December 31, 2000, does not include any adjustments that might result from the outcome of these uncertainties. /s/ KPMG LLP Philadelphia, Pennsylvania August 3, 2001 15 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Earnings (amounts in millions) Unaudited
Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $748.6 $791.9 $1,465.1 $1,527.2 Cost of goods sold 551.2 564.0 1,089.3 1,091.5 ------ ------ -------- -------- Gross profit 197.4 227.9 375.8 435.7 Selling, general and administrative expenses 133.1 120.7 263.8 259.8 Charge for asbestos liability, net 6.0 236.0 6.0 236.0 Restructuring and reorganization charges (reversals), net (1.3) - 4.1 - Goodwill amortization 5.7 6.0 11.4 12.0 Equity (earnings) from affiliates, net (4.6) (4.5) (9.0) (9.2) ------ ------ -------- -------- Operating income (loss) 58.5 (130.3) 99.5 (62.9) Interest expense (unrecorded contractual interest of $21.5, $0.0, $42.9, and $0.0) 3.2 27.9 6.3 53.8 Other (income) expense, net 2.6 (5.4) (1.3) (4.8) ------ ------ -------- -------- Earnings (loss) from continuing operations before Chapter 11 reorganization (income) costs and income tax expense (benefit) 52.7 (152.8) 94.5 (111.9) Chapter 11 reorganization (income) costs, net (0.5) - 2.5 - ------ ------ -------- -------- Earnings (loss) from continuing operations before income tax expense (benefit) 53.2 (152.8) 92.0 (111.9) Income tax expense (benefit) 20.2 (50.5) 35.4 (34.6) ------ ------ -------- -------- Earnings (loss) from continuing operations $33.0 ($102.3) $56.6 ($77.3) ------ ------ -------- -------- Income from discontinued operations, net of tax of $2.5 and $5.4 - 3.7 - 9.4 Gain (loss) on sale of discontinued operations, net of tax of $0.0, $41.9, $0.0, and $41.9 (0.9) 106.4 (0.9) 106.4 Net loss on expected disposal of discontinued operations, net of tax of $0.0 - - (3.3) - ------ ------ -------- -------- Earnings (loss) from discontinued operations (0.9) 110.1 (4.2) 115.8 ------ ------ -------- -------- Net earnings $32.1 $7.8 $52.4 $38.5 ====== ====== ======== ========
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 20. 16 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Balance Sheets (amounts in millions except share data)
Unaudited Assets June 30, 2001 December 31, 2000 ------ ------------- ----------------- Current assets: Cash and cash equivalents $ 177.5 $ 156.5 Accounts and notes receivable, net 362.4 316.5 Inventories, net 396.4 340.2 Deferred income taxes 10.6 9.8 Net assets of discontinued operations 57.3 48.6 Other current assets 85.1 72.3 -------- -------- Total current assets 1,089.3 943.9 Property, plant and equipment, less accumulated depreciation and amortization of $1,039.5 and $1,006.4, respectively 1,216.8 1,253.5 Insurance receivable for asbestos-related liabilities, noncurrent 208.1 236.1 Investment in affiliates 36.7 37.3 Goodwill, net 832.0 846.0 Other intangibles, net 89.7 91.9 Deferred income tax assets, noncurrent 4.8 22.5 Other noncurrent assets 466.3 443.3 -------- -------- Total assets $3,943.7 $3,874.5 ========= ======== Liabilities and Shareholder's Equity ------------------------------------ Current liabilities: Short-term debt $11.1 $ 16.6 Current installments of long-term debt 4.7 8.1 Accounts payable and accrued expenses 292.0 238.0 Short-term amounts due to affiliates 4.4 - Income taxes 47.7 30.0 -------- -------- Total current liabilities 359.9 292.7 -------- -------- Liabilities subject to compromise 2,365.0 2,390.2 Long-term debt, less current installments 51.5 56.8 Postretirement and postemployment benefit liabilities 244.0 243.6 Pension benefit liabilities 144.9 154.7 Other long-term liabilities 68.9 71.1 Minority interest in subsidiaries 7.9 6.9 -------- -------- Total noncurrent liabilities 2,882.2 2,923.3 Shareholder's equity: Common stock, $1 par value per share Authorized 200 million shares; issued 51,878,910 shares 51.9 51.9 Capital in excess of par value 173.4 173.4 Reduction for ESOP loan guarantee (142.2) (142.2) Retained earnings 1,201.5 1,149.1 Accumulated other comprehensive loss (54.5) (45.2) Treasury stock (528.5) (528.5) -------- -------- Total shareholder's equity 701.6 658.5 -------- -------- Total liabilities and shareholder's equity $3,943.7 $3,874.5 ======== ========
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 20. 17 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Shareholder's Equity (amounts in millions except per share data) Unaudited
2001 2000 ---- ---- Common stock, $1 par value: - --------------------------- Balance at beginning of year and June 30 $ 51.9 $ 51.9 -------- -------- Capital in excess of par value: - ------------------------------- Balance at beginning of year $ 173.4 $ 176.4 Stock issuances and other - 4.2 Contribution of treasury stock to ESOP - (5.3) -------- -------- Balance at June 30 $ 173.4 $ 175.3 -------- -------- Reduction for ESOP loan guarantee: - ---------------------------------- Balance at beginning of year $ (142.2) $ (190.3) Principal paid - 13.2 Loans to ESOP - (7.3) Contribution of treasury stock to ESOP - (4.1) Accrued compensation - 3.1 -------- -------- Balance at June 30 $ (142.2) $ (185.4) -------- -------- Retained earnings: - ------------------ Balance at beginning of year $1,149.1 $1,196.2 Net earnings for six months 52.4 $52.4 38.5 $ 38.5 Tax benefit on dividends paid on unallocated ESOP common shares - 0.7 -------- -------- Total $1,201.5 $1,235.4 Less rights redemptions - 2.0 Less common stock dividends - 38.6 -------- -------- Balance at June 30 $1,201.5 $1,194.8 -------- -------- Accumulated other comprehensive income (loss): - ---------------------------------------------- Balance at beginning of year $ (45.2) $ (16.5) Foreign currency translation adjustments (10.5) (2.1) Derivative gain, net (1.4) - Investment impairment 2.0 - Unrealized loss on available for sale securities - (2.5) Minimum pension liability adjustments 0.6 (2.1) -------- -------- Total other comprehensive (loss) (9.3) (9.3) (6.7) (6.7) -------- ----- -------- ----- Balance at June 30 $ (54.5) $ (23.2) -------- -------- Comprehensive income $43.1 $ 31.8 - -------------------- ===== ====== Less treasury stock at cost: - ---------------------------- Balance at beginning of year $ 528.5 $ 538.5 Stock issuance activity, net - (0.6) Contribution of treasury stock to ESOP - (9.4) -------- -------- Balance at June 30 $ 528.5 $ 528.5 -------- -------- Total shareholder's equity $ 701.6 $ 684.9 ======== ========
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 20. 18 Armstrong World Industries, Inc., and Subsidiaries Condensed Consolidated Statements of Cash Flows (amounts in millions) Unaudited
Six Months Ended June 30, 2001 2000 ---- ---- Cash flows from operating activities: Net earnings $52.4 $38.5 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: Depreciation and amortization, continuing operations 75.0 77.6 Depreciation and amortization, discontinued operations - 5.7 (Gain) loss on sale of businesses 0.9 (148.3) Loss on expected disposal of discontinued operations 3.3 - Deferred income taxes 16.9 (14.1) Equity earnings from affiliates, net (9.0) (9.2) Chapter 11 reorganization costs, net 2.5 - Chapter 11 reorganization payments (6.6) - Restructuring and reorganization charges 4.1 - Restructuring and reorganization payments (6.6) (2.2) Recoveries (payments) for asbestos-related claims, net 16.0 (67.3) Charge for asbestos liability, net 6.0 236.0 Decrease in net assets of businesses held for sale - 2.2 (Increase)/decrease in net assets of discontinued operations (8.7) 16.5 Changes in operating assets and liabilities net of effects of reorganizations, restructuring and dispositions Increase in receivables (55.1) (62.0) Increase in inventories (67.8) (27.7) Increase in other current assets (9.2) (8.1) Increase in other noncurrent assets (34.0) (18.8) Increase/(decrease) in accounts payable and accrued expenses 67.9 (71.4) Increase in income taxes payable 17.7 11.8 Decrease in other long-term liabilities (2.0) (0.4) Other, net 10.5 5.6 ------ ------ Net cash provided by (used for) operating activities 74.2 (35.6) ------ ------ Cash flows used for investing activities: Purchases of property, plant and equipment, continuing operations (42.3) (60.5) Purchases of property, plant and equipment, discontinued operations (2.8) (8.1) Investment in computer software (4.2) (5.5) Acquisitions, net of cash acquired - (8.8) Distributions from equity affiliates 9.0 6.6 Purchase of outstanding minority interest (5.4) - Proceeds from the sale of assets 0.4 3.1 Proceeds from the sale of businesses - 238.4 ------ ------ Net cash provided by (used for) investing activities (45.3) 165.2 ------ ------ Cash flows from financing activities: Increase/(decrease) in short-term debt, net (3.1) 50.2 Payments of long-term debt (1.6) (148.7) Cash dividends paid - (38.6) Purchase of common stock for the treasury, net - (1.3) Other, net (0.9) - ------ ------ Net cash used for financing activities (5.6) (138.4) ------ ------ Effect of exchange rate changes on cash and cash equivalents (2.3) (0.7) ------ ------ Net increase/(decrease) in cash and cash equivalents $21.0 ($9.5) Cash and cash equivalents at beginning of year 156.5 17.2 ------ ------ Cash and cash equivalents at end of period $177.5 $7.7 ====== ======
See accompanying notes to the unaudited condensed consolidated financial statements beginning on page 20. 19 Note 1. BASIS OF PRESENTATION - ----------------------------- Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation incorporated in 1891, which together with its subsidiaries is referred to here as "Armstrong". Armstrong Holdings, Inc. (sometimes referred to as "AHI") is the publicly-held parent holding company of Armstrong. AHI became the parent company of Armstrong on May 1, 2000, following AWI shareholder approval of a plan of exchange under which each share of AWI was automatically exchanged for one share of AHI. AHI was formed for purposes of the share exchange and holds no other significant assets or operations apart from AWI and AWI's subsidiaries. Stock certificates that formerly represented shares of AWI were automatically converted into certificates representing the same number of shares of AHI. The publicly-held debt of AWI was not affected in the transaction. The accompanying condensed consolidated financial statements contain the financial results of Armstrong. Financial statements of Armstrong are shown due to the existence of publicly-traded debt. See Note 12 for discussion of the financial statement differences between Armstrong Holdings, Inc. and Armstrong World Industries, Inc. Operating results for the second quarter of 2001, compared with the corresponding period of 2000 included in this report, are unaudited. In February 2001, Armstrong determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. On June 12, 2001, negotiations with this investor were terminated. However, Armstrong still plans to complete the disposition of this segment in the first quarter of 2002. Accordingly, this segment is classified as a discontinued operation. Prior year balances and results have been reclassified to reflect the net assets and results of discontinued operations. Starting with the fourth quarter of 2000, Armstrong applied the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-010, "Accounting for Shipping and Handling Fees and Costs". Consequently, approximately $34.3 million of second quarter 2000 shipping and handling costs have been reclassified from net sales to cost of goods sold. This change had no effect on gross margins or retained earnings as of any date. In accordance with EITF Issue No. 00-014, "Accounting for Certain Sales Incentives", Armstrong reclassified certain sales incentives from Selling, General and Administrative ("SG&A") expense to net sales (reducing both) by $0.3 million in the second quarter of 2000. In accordance with EITF Issue No. 00-022, "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future," Armstrong reclassified sales volume incentives from SG&A expense to net sales (reducing both) by $7.6 million in the second quarter of 2000. 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, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Armstrong's Form 10-K for the fiscal year ended December 31, 2000. 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 second quarters of the wood products segment ended on June 30, 2001 and July 1, 2000. No events occurred between June 30, 2000 and July 1, 2000 materially affecting Armstrong's financial position or results of operations. Note 2. CHAPTER 11 REORGANIZATION - --------------------------------- Proceedings under Chapter 11 - ---------------------------- On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court") in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries, Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America, Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the "Chapter 11 Case"). 20 AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Court's approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 Case. Three creditors' committees, one representing personal injury asbestos claimants, one representing property damage asbestos claimants, and the other representing other unsecured creditors, have been appointed in the Chapter 11 Case. In accordance with the provisions of the Bankruptcy Code, they have the right to be heard on matters that come before the Court in the Chapter 11 Case. It is AWI's intention to address all of its prepetition claims, including all asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact AWI's Chapter 11 Case and any reorganization plan will have on the shares of common stock of AWI, all of which are held by AHI and, along with AWI's operating subsidiaries, are the only material asset of AHI. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 Case could take a significant period of time. Currently, AWI has the exclusive right to file a plan of reorganization until October 5, 2001, and this date may be further extended by the Court. Bar Date for Filing Claims - -------------------------- In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as the last date by which holders of prepetition claims against the Debtors must file their claims. Any holder of a claim that is required to file a claim by such deadline and does not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim. This deadline to file claims does not apply to asbestos-related personal injury claims (other than a claim for contribution, indemnity, reimbursement, or subrogation). A bar date for asbestos-related personal injury claims has not been set. The deadline for claims from the U. S. Internal Revenue Service has been extended to December 31, 2001. Financing - --------- On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit facility (the "DIP Facility") from $300 million to $200 million. As of June 30, 2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had $110.6 million of cash and cash equivalents in addition to cash held by its non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash generated from operations, will be more than adequate to address its liquidity needs. Borrowings under the DIP Facility, if any, will constitute superpriority administrative expense claims in the Chapter 11 Case. Accounting Impact - ----------------- AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. Armstrong has implemented this guidance in the accompanying condensed consolidated financial statements. Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the balance sheet. See Note 5 for detail of the liabilities subject to compromise at June 30, 2001 and December 31, 2000. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI's prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWI's asbestos liability is also recorded in liabilities subject to compromise. See Note 10 for further discussion of AWI's asbestos liability. 21 Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. SOP 90-7 also requires separate reporting of all revenues, expenses, realized gains and losses, and provision for losses related to the Filing as Chapter 11 reorganization costs. Accordingly, AWI recorded the following Chapter 11 reorganization activities in the second quarter and first six months of 2001:
Three Months Ended Six Months Ended (amounts in millions) June 30, 2001 June 30, 2001 - --------------------- ------------- ------------- Professional fees $ 6.1 $11.9 Interest income, post petition (1.0) (2.7) Reductions to prepetition liabilities (0.1) (2.0) Termination of prepetition lease obligation (5.9) (5.9) Other expenses directly related to bankruptcy, net 0.4 1.2 ----- --- Total Chapter 11 reorganization costs (income), net $(0.5) $ 2.5 ======= =====
Professional fees represent legal and financial advisory expenses directly related to the Filing. Interest income in the above table is from short-term investments of cash earned by AWI subsequent to the Filing. Reductions to prepetition liabilities represent the difference between the prepetition invoiced amount and the actual cash payment made to certain vendors due to negotiated settlements. These payments of prepetition obligations were made pursuant to authority granted by the Court. Termination of prepetition lease obligation represents the reversal of an accrual for future lease payments for office space in the U.S. that AWI will not pay due to the termination of the lease contract. This amount was previously accrued in the third quarter of 2000 as part of a restructuring charge when the decision to vacate the premises was made. As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements. Note 3. DISCONTINUED OPERATIONS - ------------------------------- In February 2001, Armstrong determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. On June 12, 2001, negotiations with this investor were terminated. However, Armstrong still plans to complete the disposition of this segment in the first quarter of 2002. Accordingly, this segment is classified as a discontinued operation. Prior year balances and results have been reclassified to reflect the net assets and results of this segment as discontinued operations. Based on the expected net realizable value of the business, Armstrong recorded a pretax net loss of $30.3 million in the fourth quarter of 2000, $19.5 million net of tax benefit. Armstrong also recorded an additional loss of $3.3 million (with no tax benefit) in the first quarter of 2001, as a result of price adjustments resulting from the negotiations. 22 The following comprises the net assets of discontinued operations as of June 30, 2001 and December 31, 2000.
(amounts in millions) June 30, 2001 December 31, 2000 ------------- ----------------- Cash $ 3.0 $ 2.6 Accounts receivable, net 47.0 52.5 Inventories, net 63.8 59.7 Property plant and equipment, net 62.2 67.5 Short-term and long-term debt (17.4) (29.8) Accounts payable and accrued expenses (43.8) (54.0) Pension liabilities (3.3) (3.3) Other, net (16.4) (12.1) Adjustment to net realizable value (37.8) (34.5) ------ ------ Net assets of discontinued operations $57.3 $48.6 ====== ======
During the second quarter of 2001, Armstrong recorded a pretax loss of $0.9 million related to its May 31, 2000 divestiture of its Insulation Products segment, which was previously reported as a discontinued operation. This loss resulted from certain post-closing adjustments. Note 4. ACQUISITIONS - -------------------- On May 15, 2001, Armstrong Enterprises, Inc., an indirect subsidiary of Armstrong, entered into an agreement with Skanska A.B. to purchase Skanska's 49% minority equity interest in Armstrong World Industries A.B. The purchase price of $5.0 million was allocated to goodwill. Note 5. LIABILITIES SUBJECT TO COMPROMISE - ----------------------------------------- As a result of AWI's Chapter 11 filing (see Note 2), pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that are subject to compromise and report them separately on the condensed consolidated balance sheet. Liabilities that may be affected by a plan of reorganization are recorded at the expected amount of the allowed claims, even if they may be settled for lesser amounts. Substantially all of AWI's prepetition debt, now in default, is recorded at face value and is classified within liabilities subject to compromise. Obligations of Armstrong subsidiaries not covered by the Filing remain classified on the condensed consolidated balance sheet based upon maturity date. AWI's asbestos liability is also recorded in liabilities subject to compromise. See Note 10 for further discussion of AWI's asbestos liability. Liabilities subject to compromise at June 30, 2001 and December 31, 2000 are as follows:
(amounts in millions) June 30, December 31, 2001 2000 ---- ---- Debt (at face value) $ 1,400.7 $ 1,400.4 Asbestos-related liability 690.6 690.6 Prepetition trade payables 53.9 60.1 Prepetition other payables and accrued interest 57.1 76.4 ESOP loan guarantee 157.7 157.7 Amounts due to affiliates 5.0 5.0 --- --- Total liabilities subject to compromise $ 2,365.0 $ 2,390.2 ========= =========
Additional prepetition claims (liabilities subject to compromise) may arise due to the rejection of executory contracts or unexpired leases, or as a result of the allowance of contingent or disputed claims. 23 Note 6. INDUSTRY SEGMENTS - -------------------------
(amounts in millions) Three months Six months ended June 30 ended June 30 Net sales to external customers 2001 2000 2001 2000 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 308.3 $ 340.0 $ 599.4 $ 656.5 Building products 206.5 203.0 422.9 401.9 Wood products 233.8 248.9 442.8 468.8 ----- ----- ----- ----- Total sales to external customers $ 748.6 $ 791.9 $ 1,465.1 $ 1,527.2 ======= ======= ========= ========= Three months Six months ended June 30 ended June 30 Segment operating income (loss) 2001 2000 2001 2000 - ------------------------------- ---- ---- ---- ---- Floor coverings $ 27.8 $ 44.7 $ 48.0 $ 72.7 Building products 25.7 31.2 44.2 56.9 Wood products 14.1 29.2 23.8 47.1 All other 0.5 (0.1) 0.5 0.1 ----- -------- ------ ------- Total segment operating income 68.1 105.0 116.5 176.8 Charge for asbestos liability, net (6.0) (236.0) (6.0) (236.0) Unallocated corporate income (expense) (3.6) 0.7 (11.0) (3.7) --------- --- ------ ------- Total consolidated operating income (loss) $ 58.5 $ (130.3) $ 99.5 $ (62.9) ======= ========= ======= ========= June 30, December 31, Segment assets 2001 2000 - -------------- ---- ---- Floor coverings $ 937.3 $ 897.6 Building products 539.9 568.5 Wood products 1,402.2 1,358.6 All other 16.5 16.3 --------- --------- Total segment assets 2,895.9 2,841.0 Assets not assigned to business units 1,047.8 1,033.5 --------- --------- Total consolidated assets $ 3,943.7 $ 3,874.5 ========= =========
Prior year amounts for floor coverings, all other, and assets not assigned to business units have been reclassified to reflect the reallocation of certain assets. Note 7. INVENTORY - ------------------
(amounts in millions) June 30, 2001 December 31, 2000 ------------- ----------------- Finished goods $ 255.0 $ 208.9 Goods in process 39.1 39.6 Raw materials and supplies 155.4 143.5 Less LIFO and other reserves (53.1) (51.8) ------ ------ Total inventories, net $ 396.4 $ 340.2 ======= =======
Note 8. RESTRUCTURING AND OTHER ACTIONS - --------------------------------------- The following table summarizes activity in the reorganization and restructuring accruals, which are reported in accounts payable and accrued expenses, for the first six months of 2001 and 2000:
Beginning Cash Ending (amounts in millions) balance payments Charges Reversals Other balance ------- -------- ------- --------- ----- ------- 2001 $21.4 ($6.6) $3.8 ($1.3) ($6.7) $10.6 2000 12.1 (2.2) - - (0.6) 9.3
A $5.4 million pretax restructuring charge was recorded in the first quarter of 2001. The charge related to severance and enhanced retirement benefits for more than 50 corporate and line-of-business salaried staff positions, as a result of streamlining the organization, to reflect staffing needs for current business conditions. This streamlining is expected to result in lower selling, general and administrative expenses of approximately $4.9 million per year. Of the $5.4 million, $1.6 million represented a non-cash charge for enhanced retirement benefits, which is accounted for as a reduction of the prepaid pension asset. 24 In the second quarter of 2001, a $1.1 million reversal was recorded related to a formerly occupied building for which Armstrong no longer believes it will incur any additional costs. In addition, $0.2 million of the remaining accrual for the first quarter 2001 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 the termination of an operating lease for an office facility in the U.S. These lease costs were previously accrued in the third quarter of 2000 as part of the restructuring charge when the decision to vacate the premises was made. The $5.9 million reversal is recorded as a reduction of Chapter 11 reorganization costs in accordance with SOP 90-7. See Note 2 for further discussion. The remaining amount in "other" is related to foreign currency translation. Most of the remaining balance at June 30, 2001 relates to terminated employees with extended payouts, the majority of which will be paid during 2001, and a noncancelable operating lease, which extends through 2017. Note 9. SUPPLEMENTAL CASH FLOW INFORMATION - ------------------------------------------ (amounts in millions) Six Months Ended June 30 2001 2000 ---- ---- Interest paid $ 1.5 $ 53.5 Income taxes paid, net $ 1.7 $ 17.1 Note 10. OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS - ------------------------------------------------------- Asbestos-related Litigation - --------------------------- The following is a summary update of asbestos-related litigation; see Item 3 of Armstrong's 2000 Form 10-K filing for additional information. AWI is a defendant in personal injury claims and property damage claims related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a fair and final resolution of its asbestos liability. See Note 2 for further discussion. Asbestos Claims - --------------- Before filing for relief under the Bankruptcy Code, AWI pursued broad-based settlements of claims through the Center for Claims Resolution (the "Center"). The Center had reached Strategic Settlement Program ("SSP") agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant. As a result of the Filing, AWI's obligations with respect to these settlements will be determined in its Chapter 11 Case. Due to the Filing, holders of asbestos claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments with respect to asbestos claims, including payments pursuant to the outstanding SSP agreements. A separate creditors' committee representing the interests of personal injury asbestos claimants has been appointed in the Chapter 11 Case. AWI's present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. AWI believes that the Chapter 11 process provides it with the opportunity to comprehensively address its asbestos liability in one forum. It is anticipated that all present and future asbestos claims will be resolved in the Chapter 11 Case, which could take several years. Asbestos-Related Personal Injury Liability - ------------------------------------------ In evaluating its estimated asbestos-related personal injury liability prior to the Filing, AWI reviewed, among other things, 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, AWI estimated its cost to defend and resolve probable asbestos-related personal injury claims. This estimate was highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could affect the range of the liability. 25 AWI believes the range of probable and estimable liability is more uncertain now than previously. There are significant differences in the way the asbestos claims may be addressed under the bankruptcy process when compared to the tort system. Accordingly, AWI currently is unable to ascertain how prior experience with the number of claims and the amounts to settle claims will impact its ultimate liability in the context of its Chapter 11 Case. As of September 30, 2000, AWI's estimate of its asbestos-related liability that was probable and estimable through 2006 ranged from $758.8 million to $1,363.3 million. AWI concluded that no amount within that range was more likely than any other and, therefore, reflected $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Due to the increased uncertainty created as a result of the Filing, no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October and November 2000. The asbestos-related liability balance recorded at June 30, 2001 and December 31, 2000 is $690.6 million, which is recorded in liabilities subject to compromise. It is reasonably possible, however, that the actual liability could be significantly higher than the recorded liability. As the Chapter 11 Case proceeds, there should be more clarity as to the extent of the liability. Collateral Requirements - ----------------------- During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Center's demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center's motion or the complaint. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. The Court has not yet ruled on these matters. Property Damage Litigation - -------------------------- AWI is also one of many defendants in six pending property damage claims as of June 30, 2001 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, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI 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. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are also stayed due to the Filing. Consistent with prior periods and due to increased uncertainty, AWI has not recorded any liability related to these claims. A separate creditors' committee representing the interests of property damage asbestos claimants has been appointed in the Chapter 11 Case. Insurance Recovery Proceedings - ------------------------------ A substantial portion of AWI'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 AWI's installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution ("ADR") procedure 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. 26 During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI 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. A new trial judge has been selected and initial motions were heard in June 2001. It is uncertain at this time if the new proceedings will have any impact on the preliminary decisions of the initial phases of the ADR. Additionally, one of the insurance carriers has been experiencing financial difficulties and was placed under an order of rehabilitation by a state insurance department during the second quarter. Insurance Asset - --------------- An insurance asset in respect of asbestos personal injury claims in the amount of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as of December 31, 2000. The reduction is due to cash receipts during the second quarter of 2001 and management's current assessment of probable insurance recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3 million represents partial settlement for previous claims that 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 AWI's belief in the availability of insurance in this amount, based upon AWI'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 (a former AWI subsidiary that was sold in August 1969) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $84 million of the $246.3 million asset is determined from agreed coverage in place and is therefore directly related to the amount of the liability and could decrease if the final amount of the liability decreases. Of the $246.3 million asset, $38.2 million has been recorded as a current asset as of June 30, 2001 reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. A significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers. Due to the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no change in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact - ---------------- As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in the first six months of 2001. In the first six months of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0 million in asbestos-related insurance recoveries during the first six months of 2001 compared to $27.7 million during the first six months of 2000. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI may continue to receive insurance proceeds under the terms of various settlement agreements. Conclusion - ---------- Many uncertainties exist surrounding the financial impact of AWI's involvement with asbestos litigation. These uncertainties include the impact of the Filing and the Chapter 11 process, the number of future claims to be filed, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition of AWI's insurance carriers. AWI has not revised its previously recorded liability for asbestos-related personal injury claims. In the second quarter of 2001, AWI reduced its previously recorded insurance asset by $16.0 million for cash receipts and by $6.0 million for management's current assessment of probable insurance recoveries. The $6.0 million reduction was recorded as a charge for asbestos liability, net in the accompanying condensed consolidated statement of earnings. AWI will continue to review its asbestos-related liability periodically, although it is likely that no changes will be made to the liability until later in the Chapter 11 Case as significant developments arise. It is reasonably possible that AWI's total exposure to asbestos-related personal injury claims may be significantly different than the recorded liability. Any adjustment to the estimated liability or insurance asset could be material to the results of operations in the period recorded. 27 Note 11. - ENVIRONMENTAL LIABILITIES - ------------------------------------ Liabilities of $13.1 million and $13.5 million were recorded at June 30, 2001 and December 31, 2000, 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. Due to the Chapter 11 Filing, $6.4 million of the June 30, 2001 and December 31, 2000 environmental liabilities are classified as prepetition liabilities subject to compromise. 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 condensed 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 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 would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future periods. Note 12 - DIFFERENCES BETWEEN ARMSTRONG HOLDINGS AND ARMSTRONG WORLD INDUSTRIES, - -------------------------------------------------------------------------------- INC. ---- The difference between the condensed consolidated financial statements is primarily due to transactions related to the formation of Armstrong Holdings, Inc. and stock activity. 28 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, 3 and 12 to the unaudited condensed consolidated financial statements for further discussion. Proceedings under Chapter 11 - ---------------------------- On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Court") in order to use the court-supervised reorganization process to achieve a resolution of its asbestos liability. Also filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries, Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America, Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter 11 cases are being jointly administered under case numbers 00-4469, 00-4470, and 00-4471 (the "Chapter 11 Case"). AWI is operating its business and managing its properties as a debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims or obligations which arose prior to the Filing date (prepetition claims) unless specifically authorized by the Court. Similarly, claimants may not enforce any claims against AWI that arose prior to the date of the Filing unless specifically authorized by the Court. In addition, as a debtor-in-possession, AWI has the right, subject to the Court's approval, to assume or reject any executory contracts and unexpired leases in existence at the date of the Filing. Parties having claims as a result of any such rejection may file claims with the Court which will be dealt with as part of the Chapter 11 Case. Three creditors' committees, one representing personal injury asbestos claimants, one representing property damage asbestos claimants, and the other representing other unsecured creditors, have been appointed in the Chapter 11 Case. In accordance with the provisions of the Bankruptcy Code, they have the right to be heard on matters that come before the Court in the Chapter 11 Case. It is AWI's intention to address all of its prepetition claims, including all asbestos-related claims, in a plan of reorganization in its Chapter 11 Case. At this juncture, it is impossible to predict with any degree of certainty how such a plan will treat such claims and the impact AWI's Chapter 11 Case and any reorganization plan will have on the shares of common stock of AWI, all of which are held by AHI and, along with AWI's operating subsidiaries, are the only material asset of AHI. Generally, under the provisions of the Bankruptcy Code, holders of equity interests may not participate under a plan of reorganization unless the claims of creditors are satisfied in full under the plan or unless creditors accept a reorganization plan which permits holders of equity interests to participate. The formulation and implementation of a plan of reorganization in the Chapter 11 Case could take a significant period of time. Currently, AWI has the exclusive right to file a plan of reorganization until October 5, 2001, and this date may be further extended by the Court. Bar Date for Filing Claims - -------------------------- In connection with the Chapter 11 Cases, the Court has set August 31, 2001 as the last date by which holders of prepetition claims against the Debtors must file their claims. Any holder of a claim that is required to file a claim by such deadline and does not do so will be barred from asserting such claim against any of the Debtors and will not participate in any distribution in any of the Chapter 11 Cases on account of such claim. This deadline to file claims does not apply to asbestos-related personal injury claims (other than a claim for contribution, indemnity, reimbursement, or subrogation). A bar date for asbestos-related personal injury claims has not been set. The deadline for claims from the U. S. Internal Revenue Service has been extended to December 31, 2001. Financing - --------- On May 31, 2001, AWI reduced the amount of its debtor-in-possession credit facility (the "DIP Facility") from $300 million to $200 million. As of June 30, 2001, AWI had no outstanding debt borrowings under the DIP Facility and AWI had $110.6 million of cash and cash equivalents in addition to cash held by its non-debtor subsidiaries. AWI believes that the DIP Facility, together with cash generated from operations, will be more than adequate to address its liquidity needs. Borrowings under the DIP Facility, if any, will constitute superpriority administrative expense claims in the Chapter 11 Case. 29 Accounting Impact - ----------------- AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial reporting guidance for entities that are reorganizing under the Bankruptcy Code. AHI has implemented this guidance in the accompanying condensed consolidated financial statements. As a result of the Filing, realization of assets and liquidation of liabilities are subject to uncertainty. While operating as a debtor-in-possession, AWI may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the condensed consolidated financial statements. Discontinued Operations - ----------------------- In February 2001, AHI determined to permanently exit the Textiles and Sports Flooring segment and on February 20, 2001 entered into negotiations to sell substantially all of the businesses comprising this segment to a private equity investor based in Europe. On June 12, 2001, negotiations with this investor were terminated. However, AHI still plans to complete the disposition of this segment in the first quarter of 2002. Accordingly, this segment is classified as a discontinued operation. Prior year balances and results have been reclassified to reflect the net assets and results of this segment as discontinued operations. Based on the expected net realizable value of the business, AHI recorded a pretax net loss of $30.3 million in the fourth quarter of 2000, $19.5 million net of tax benefit. AHI also recorded an additional loss of $3.3 million (with no tax benefit) in the first quarter of 2001, as a result of price adjustments resulting from the negotiations. During the second quarter of 2001, AHI recorded a pretax loss of $0.9 million related to its May 31, 2000 divestiture of its Insulation Products segment. This loss resulted from certain post-closing adjustments. Other Divestitures - ------------------ On July 31, 2000, AHI 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 $44.1 million ($60.2 million pretax) or $1.09 per share in 2000 and was recorded in other income. The financial results of IPG were reported as part of the floor coverings segment. The proceeds and gain are subject to a post-closing working capital adjustment. Financial Condition - ------------------- As shown on the condensed Consolidated Balance Sheets (see page 3), AHI had cash and cash equivalents of $177.5 million at June 30, 2001. Working capital was $735.3 million as of June 30, 2001, $82.5 million higher than the $652.8 million recorded at the end of 2000. The ratio of current assets to current liabilities was 3.08 to 1 as of June 30, 2001, compared with 3.24 to 1 as of December 31, 2000. The decrease in the ratio is primarily attributable to an increase in accounts payable and accrued expenses which offset the increase in accounts receivable and inventory. Long-term debt, excluding Armstrong's guarantee of an ESOP loan and debt subject to compromise, decreased in the first half of 2001. At June 30, 2001, long-term debt of $51.5 million, or 6.6 percent of total capital, compared with $56.8 million, or 7.6 percent of total capital, at the end of 2000. At June 30, 2001, and December 31, 2000 ratios of total debt (excluding debt subject to compromise) as a percent of total capital were 8.6 percent and 10.9 percent, respectively. As shown on the condensed Consolidated Statements of Cash Flows (see page 5), net cash provided by operating activities for the six months ended June 30, 2001, was $74.2 million compared with net cash used for operating activities of $35.6 million for the comparable period in 2000. The increase was primarily due to the absence of asbestos-related claims payments in 2001 and changes in accounts payable and accrued expenses. Net cash used for investing activities was $45.3 million for the six months ended June 30, 2001, compared with net cash provided by investing activities of $165.2 million for the six months ended June 30, 2000. The decrease in cash provided was primarily due to the receipt of proceeds from the sale of the Insulation Products segment in 2000. 30 Net cash used for financing activities was $5.6 million for the six months ended June 30, 2001 compared with $138.4 million for the six months ended June 30, 2000. The decrease in cash used was primarily due to a decrease in payments of debt and no dividend payments in 2001. DIP Facility - ------------ The Court previously approved a $300 million debtor-in-possession financing facility provided by a bank group led by The Chase Manhattan Bank. On May 31, 2001, AWI reduced the amount of the facility to $200 million. Borrowings under the DIP Facility constitute superpriority administrative expense claims in the Chapter 11 Cases. As of June 30, 2001, AWI had no debt borrowings under the DIP Facility compared with borrowings of $5.0 million as of December 31, 2000. The DIP Facility expires no later than December 6, 2002 and borrowings are limited to an adjusted amount of receivables, inventories and property, plant and equipment. Depending on the amount of borrowings, the DIP Facility carries an interest rate range of either Chase's Alternate Base Rate plus 50 basis points to 100 basis points or LIBOR plus 150 basis points to 200 basis points. The DIP Facility also contains several covenants including, among other things, limits on asset sales, capital expenditures and a required ratio of debt to cash flow. Asbestos-related Litigation - --------------------------- The following is a summary update of asbestos-related litigation; see Item 3 of Armstrong's 2000 Form 10-K filing for additional information. AWI is a defendant in personal injury claims and property damage claims related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a fair and final resolution of its asbestos liability. See Note 2 for further discussion. Asbestos Claims - --------------- Before filing for relief under the Bankruptcy Code, AWI pursued broad-based settlements of claims through the Center for Claims Resolution (the "Center"). The Center had reached Strategic Settlement Program ("SSP") agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant. As a result of the Filing, AWI's obligations with respect to these settlements will be determined in its Chapter 11 Case. Due to the Filing, holders of asbestos claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments with respect to asbestos claims, including payments pursuant to the outstanding SSP agreements. A separate creditors' committee representing the interests of personal injury asbestos claimants has been appointed in the Chapter 11 Case. AWI's present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. AWI believes that the Chapter 11 process provides it with the opportunity to comprehensively address its asbestos liability in one forum. It is anticipated that all present and future asbestos claims will be resolved in the Chapter 11 Case, which could take several years. Asbestos-Related Personal Injury Liability - ------------------------------------------ In evaluating its estimated asbestos-related personal injury liability prior to the Filing, AWI reviewed, among other things, 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, AWI estimated its cost to defend and resolve probable asbestos-related personal injury claims. This estimate was highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could affect the range of the liability. AWI believes the range of probable and estimable liability is more uncertain now than previously. There are significant differences in the way the asbestos claims may be addressed under the bankruptcy process when compared to the tort system. Accordingly, AWI currently is unable to ascertain how prior experience with the number of claims and the amounts to settle claims will impact its ultimate liability in the context of its Chapter 11 Case. 31 As of September 30, 2000, AWI's estimate of its asbestos-related liability that was probable and estimable through 2006 ranged from $758.8 million to $1,363.3 million. AWI concluded that no amount within that range was more likely than any other and, therefore, reflected $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Due to the increased uncertainty created as a result of the Filing, no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October and November 2000. The asbestos-related liability balance recorded at June 30, 2001 and December 31, 2000 is $690.6 million, which is recorded in liabilities subject to compromise. It is reasonably possible, however, that the actual liability could be significantly higher than the recorded liability. As the Chapter 11 Case proceeds, there should be more clarity as to the extent of the liability. Collateral Requirements - ----------------------- During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Center's demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center's motion or the complaint. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. The Court has not yet ruled on these matters. Property Damage Litigation - -------------------------- AWI is also one of many defendants in six pending property damage claims as of June 30, 2001 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, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI 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. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are also stayed due to the Filing. Consistent with prior periods and due to increased uncertainty, AWI has not recorded any liability related to these claims. A separate creditors' committee representing the interests of property damage asbestos claimants has been appointed in the Chapter 11 Case. Insurance Recovery Proceedings - ------------------------------ A substantial portion of AWI'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 AWI's installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution ("ADR") procedure 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. During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI 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. A new trial judge has been selected and initial motions were heard in June 2001. It is uncertain at this time if the new proceedings will have any impact on the preliminary decisions of the initial phases of the ADR. Additionally, one of the insurance carriers has been experiencing financial difficulties and was placed under an order of rehabilitation by a state insurance department during the second quarter. 32 Insurance Asset - --------------- An insurance asset in respect of asbestos personal injury claims in the amount of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as of December 31, 2000. The reduction is due to cash receipts during the second quarter of 2001 and management's current assessment of probable insurance recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3 million represents partial settlement for previous claims that 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 AWI's belief in the availability of insurance in this amount, based upon AWI'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 (a former AWI subsidiary that was sold in August 1969) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $84 million of the $246.3 million asset is determined from agreed coverage in place and is therefore directly related to the amount of the liability and could decrease if the final amount of the liability decreases. Of the $246.3 million asset, $38.2 million has been recorded as a current asset as of June 30, 2001 reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. A significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers. Due to the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no change in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact - ---------------- As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in the first six months of 2001. In the first six months of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0 million in asbestos-related insurance recoveries during the first six months of 2001 compared to $27.7 million during the first six months of 2000. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI may continue to receive insurance proceeds under the terms of various settlement agreements. Conclusion - ---------- Many uncertainties exist surrounding the financial impact of AWI's involvement with asbestos litigation. These uncertainties include the impact of the Filing and the Chapter 11 process, the number of future claims to be filed, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition of AWI's insurance carriers. AWI has not revised its previously recorded liability for asbestos-related personal injury claims. In the second quarter of 2001, AWI reduced its previously recorded insurance asset by $16.0 million for cash receipts and by $6.0 million for management's current assessment of probable insurance recoveries. The $6.0 million reduction was recorded as a charge for asbestos liability, net in the accompanying condensed consolidated statement of earnings. AWI will continue to review its asbestos-related liability periodically, although it is likely that no changes will be made to the liability until later in the Chapter 11 Case as significant developments arise. It is reasonably possible that AWI's total exposure to asbestos-related personal injury claims may be significantly different than the recorded liability. Any adjustment to the estimated liability or insurance asset could be material to the results of operations in the period recorded. Consolidated Results - -------------------- The following discussions of consolidated results are on a continuing operations basis. Second-quarter 2001 net sales of $748.6 million from+ continuing operations were 5.5% lower than in the second quarter of 2000. Excluding the effects of unfavorable foreign exchange rates, the impact of the third-quarter 2000 IPG divestiture and the impact of the second-quarter 2000 Gema acquisition, net sales 33 decreased 3.7%. Wood products sales decreased 6.1% due to lower volume and weaker pricing. Floor coverings sales decreased 9.3% due mainly to the IPG divestiture and lower sales volumes in residential sheet and commercial tile products. Building products sales increased 1.7% as a result of the Gema acquisition partially offset by a decline in commercial volume. Second-quarter 2001 earnings from continuing operations were $33.0 million or $0.81 per share, compared to 2000's second-quarter loss from continuing operations of $102.6 million or $2.55 per share. A $6.0 million non-cash pre-tax charge was recorded in the second quarter of 2001 related to management's current assessment of probable asbestos-related insurance asset recoveries, A $236.0 million non-cash pre-tax charge for an increase in the estimate of probable liability for asbestos-related claims was recorded in the second quarter of 2000 and resulted in an after-tax net earnings impact of $153.4 million or $3.81 per share. The second-quarter 2000 results also include a pre-tax gain of $5.2 million or $0.08 per share from the demutualization of an insurance company with whom AHI had company-owned life insurance policies, which was recorded in other income. Excluding the asbestos charge and the demutualization gain, earnings from continuing operations for the second quarter of 2000 would have been $47.4 million, or $1.18 per share. The cost of goods sold in the second quarter of 2001 was 73.6 % of net sales compared to 71.2% of net sales in the second quarter of 2000. This increase was driven primarily by higher raw material costs, mainly in floor coverings and wood products, and higher energy costs in building products. Second-quarter 2001 selling, general and administrative expenses were 17.8 percent of net sales compared to 15.3 percent of net sales in last year's second quarter. The percentage increase is primarily due to an increase in advertising expenses and to retention compensation expense in 2001. Interest expense of $3.2 million was $24.7 million lower than the amount recorded in the second quarter of 2000. In accordance with SOP 90-7, Armstrong did not record $21.5 million of contractual interest expense on prepetition debt in the second quarter of 2001. Other expense, net of $2.6 million in the second quarter of 2001 compared to other income, net of $5.4 million in the second quarter of 2000. The 2001 other expense was primarily due to a $3.2 million non-cash charge resulting from the impairment of investments. The 2000 other income was primarily due to a gain from the demutualization of an insurance company with whom AHI had company-owned life insurance policies. The effective tax rate from continuing operations was 38.0% and 38.6% for the second quarter of 2001 and 2000, respectively, excluding the impact of the asbestos charge in 2000. First-half 2001 net sales were $1,465.1 million, 4.1 percent lower than last year's first-half net sales of $1,527.2 million. Excluding the unfavorable effects of foreign exchange rates, the impact of the IPG divestiture and the impact of the Gema acquisition, net sales decreased 2.6%. Interest expense of $6.3 million was $47.5 million lower than the amount recorded in the first half of 2001. In accordance with SOP 90-7, Armstrong did not record $42.9 million of contractual interest expense on prepetition debt in the first half of 2001. The first-half earnings from continuing operations of $56.6 million or $1.38 per share compared to 2000's first-half loss from continuing operations of $77.6 million or $1.94 per share. Excluding the asbestos charge and the demutualization gain, earnings from continuing operations for the first half of 2000 would have been $72.4 million, or $1.80 per share. Excluding the impact of the asbestos charge in 2000, Armstrong's effective tax rate for continuing businesses was 38.5% and 38.7% for the first half of 2001 and 2000, respectively. Effective November 1, 2000, an amendment to the Retirement Income Plan (RIP), a qualified US defined benefit plan, established an additional benefit known as the Employee Stock Ownership Plan (ESOP) Pension Account to partially compensate active employee and retiree ESOP shareholders for the decline in the market value of AHI's stock. The effect of this amendment had no material impact to the financial position or results of operations in 2000, but increased the benefit obligation by $79.6 million in 2001 and decreased the first half 2001 pension credit by $5.8 million compared to the first half of 2000. 34 Industry Segment Results - ------------------------ The following discussion of industry segment results compares the second quarter of 2001 with the second quarter of 2000. Floor coverings net sales were $308.3 million and $340.0 million in 2001 and 2000, respectively. Net sales in the Americas decreased 7.6% from prior year as a result of the IPG divestiture and lower sales volumes of residential sheet and commercial tile products. European net sales were 11.2% below 2000 levels as a result of weaker sales of cushion vinyl products. Excluding the unfavorable effects of foreign exchange rates net sales in Europe were 4.2% below last year. Pacific area sales decreased $2.6 million versus 2000. Operating income of $27.8 million in 2001 compared to $44.7 million in 2000. The operating income reduction was driven primarily by the impact of the IPG divestiture and lower sales volumes, which were partially offset by operating cost reductions. Building products net sales of $206.5 million in 2001 increased from $203.0 million in 2000. Excluding the incremental sales from Gema, sales decreased 2.0%. Americas sales were flat versus 2000 as improved product mix and price levels offset the effect of lower volume. In Europe, excluding the incremental sales from Gema and the impact of unfavorable foreign exchange rates, sales increased 2.5%. Pacific area sales decreased 6.3% versus 2000 as a result of unfavorable product mix. Operating income decreased $5.5 million to $25.7 million in 2001 primarily due to higher energy costs partially offset by favorable product mix and price. Wood products net sales of $233.8 million in 2001 compared to net sales of $248.9 million in 2000. Cabinet sales were flat versus 2000. Wood flooring sales decreased 7.5% versus 2000, driven primarily by lower volume and weaker pricing. Operating income declined to $14.1 million in 2001 from $29.2 million in 2000 primarily driven by lower sales volume combined with higher lumber costs. Unallocated corporate expense of $3.6 million in 2001 compared to $0.2 million of income in 2000, primarily due to retention compensation expense in 2001. Recent Accounting Pronouncements - -------------------------------- In the second quarter of 2001, the Emerging Issues Task Force ("EITF") released EITF Issue No. 00-025, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer." This pronouncement requires consideration paid to a reseller or retailer to be shown as a reduction of revenue unless the vendor receives an identifiable separate benefit and that benefit's fair value can be reasonably estimated. This pronouncement will be effective January 1, 2002. AHI is evaluating the effects of implementation, if any, on its financial statements. In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. AHI will be required to test goodwill and intangible assets for impairment in accordance with the provisions of Statement 142 within the first quarter of 2002. Impairment losses, if any, will be measured as of January 1, 2002 and recognized as the cumulative effect of a change in accounting principle in the first quarter of 2002. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." AHI is required to adopt the provisions of Statement 141 immediately and Statement 142 effective January 1, 2002. As of January 1, 2002, AHI expects to have unamortized goodwill of approximately $820 million and unamortized identifiable intangible assets in the amount of $86 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $23.9 million and $11.4 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 35 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on AHI's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Cautionary Factors That May Affect Future Results - ------------------------------------------------- (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) The disclosures and analysis in this report contain some forward-looking statements. This discussion about those statements is provided in accordance with the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with discussions of future operating or financial performance. In particular, these include statements relating to future actions, prospective products, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, Armstrong and/or AHI may also provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements in this report and in any other public statements made may turn out to be wrong. They can be affected by inaccurate assumptions Armstrong and/or AHI might make or by known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Armstrong and/or AHI undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. However, you should consult any further disclosures made by Armstrong and/or AHI on related subjects in 10-Q, 8-K, 10-K or other reports filed with the SEC. Also note the following cautionary discussion of risks and uncertainties relevant to Armstrong businesses. These are some of the factors that could potentially cause actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect Armstrong and/or AHI. . Factors relating to AWI's Chapter 11 Filing, such as: the possible disruption of relationships with creditors, customers, distribution network, suppliers and employees; the ultimate size of AWI's asbestos-related and other liabilities; the ability to confirm and implement a plan of reorganization; the availability of financing and refinancing for both AWI and its subsidiaries that are not parties to its Chapter 11 Filing; and AWI's ability to comply with covenants in its debtor in possession credit facility. . Claims of undetermined merit and amount have been asserted against Armstrong and its subsidiaries for various legal, environmental and tax matters, including AWI's asbestos related litigation. For more information on these matters, see the discussion of Legal Proceedings in Part II, Item 1 in this report. . Balancing investment to create future growth in the constraints of a price-competitive market is a challenge. . Revenues and earnings can be affected by the level of success of new product introductions. . Much of Armstrong's revenues and earnings are exposed to changes in foreign currency exchange rates. Where practical, Armstrong tries to reduce these effects by matching local currency revenues with costs and local currency assets with liabilities. Armstrong also manages foreign exchange risk with foreign currency forward contracts and with purchased foreign currency options. . Notwithstanding Armstrong's efforts to foresee and plan for the effects of changes in fiscal circumstances, Armstrong cannot predict with certainty all changes in currency and interest rates, inflation or other related factors affecting Armstrong businesses. . International operations could be affected by changes in intellectual property legal protections and remedies, trade regulations, and procedures and actions affecting production, pricing and marketing of 36 products, as well as by unstable governments and legal systems, intergovernmental disputes and possible nationalization. . Business combinations among Armstrong's competitors or suppliers could affect Armstrong's competitive position in the hard surface floor covering, ceiling system and wood products businesses. Similarly, combinations or alliances among Armstrong's major customers could increase their purchasing power in dealing with Armstrong. And, of course, if Armstrong should enter into one or more business combinations, Armstrong's business, finances and capital structure could be affected. . Growth in costs and expenses, raw material price increases (for example increases in wood prices or in petroleum-based raw materials such as plasticizers or PVCs), energy cost increases, changes in distribution and product mix, and the impact of divestitures, restructuring and other unusual items that could result from evolving business strategies and organizational restructuring could affect future results. . Revenues and earnings could be affected by various worldwide economic and political factors, including improved efficiencies in the European flooring market and variations in residential and commercial building rates and economic growth rates in various areas of the world in which we do business. These factors could affect the end-use markets for Armstrong products in various parts of the world. . Revenues and earnings could be affected by the extent to which Armstrong successfully achieves integration of and synergies from acquisitions. . Availability of raw materials due to changes in business conditions that impact Armstrong's suppliers, including environmental conditions, laws and regulations and/or business decisions made by Armstrong's suppliers could affect future results. . Revenues and earnings could be affected by business conditions that impact Armstrong's major customers/distribution network and/or business decisions made by Armstrong's major customers/distribution network. 37 Part II - Other Information --------------------------- Item 1. Legal Proceedings - ------- ----------------- ASBESTOS-RELATED LITIGATION - --------------------------- The following is a summary update of asbestos-related litigation; see Item 3 of Armstrong's 2000 Form 10-K filing for additional information. AWI is a defendant in personal injury claims and property damage claims related to asbestos containing products. On December 6, 2000, AWI filed a voluntary petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code to use the court supervised reorganization process to achieve a fair and final resolution of its asbestos liability. See Note 2 for further discussion. Asbestos Claims - --------------- Before filing for relief under the Bankruptcy Code, AWI pursued broad-based settlements of claims through the Center for Claims Resolution (the "Center"). The Center had reached Strategic Settlement Program ("SSP") agreements with law firms that covered approximately 130,000 claims that named AWI as a defendant. As a result of the Filing, AWI's obligations with respect to these settlements will be determined in its Chapter 11 Case. Due to the Filing, holders of asbestos claims are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against AWI. In addition, AWI ceased making payments with respect to asbestos claims, including payments pursuant to the outstanding SSP agreements. A separate creditors' committee representing the interests of personal injury asbestos claimants has been appointed in the Chapter 11 Case. AWI's present and future asbestos liability will be addressed in its Chapter 11 Case rather than through the Center and a multitude of lawsuits in different jurisdictions throughout the U.S. AWI believes that the Chapter 11 process provides it with the opportunity to comprehensively address its asbestos liability in one forum. It is anticipated that all present and future asbestos claims will be resolved in the Chapter 11 Case, which could take several years. Asbestos-Related Personal Injury Liability - ------------------------------------------ In evaluating its estimated asbestos-related personal injury liability prior to the Filing, AWI reviewed, among other things, 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, AWI estimated its cost to defend and resolve probable asbestos-related personal injury claims. This estimate was highly uncertain due to the limitations of the available data and the difficulty of forecasting with any certainty the numerous variables that could affect the range of the liability. AWI believes the range of probable and estimable liability is more uncertain now than previously. There are significant differences in the way the asbestos claims may be addressed under the bankruptcy process when compared to the tort system. Accordingly, AWI currently is unable to ascertain how prior experience with the number of claims and the amounts to settle claims will impact its ultimate liability in the context of its Chapter 11 Case. As of September 30, 2000, AWI's estimate of its asbestos-related liability that was probable and estimable through 2006 ranged from $758.8 million to $1,363.3 million. AWI concluded that no amount within that range was more likely than any other and, therefore, reflected $758.8 million as a liability in the condensed consolidated financial statements in accordance with generally accepted accounting principles. Due to the increased uncertainty created as a result of the Filing, no change has been made to the previously recorded liability except to record payments of $68.2 million against that accrual in October and November 2000. The asbestos-related liability balance recorded at June 30, 2001 and December 31, 2000 is $690.6 million, which is recorded in liabilities subject to compromise. It is reasonably possible, however, that the actual liability could be significantly higher than the recorded liability. As the Chapter 11 Case proceeds, there should be more clarity as to the extent of the liability. 38 Collateral Requirements - ----------------------- During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral requirements established by the Center with respect to asbestos claims asserted against AWI. On October 27, 2000, the insurance company that underwrote the surety bond informed AWI and the Center of its intention not to renew the surety bond effective February 28, 2001. On February 6, 2001, the Center advised the surety of the Center's demand for payment of the face value of the bond. The surety filed a motion with the Court seeking to restrain the Center from drawing on the bond. The motion was not granted. On March 28, 2001, the surety filed an amended complaint in the Court seeking similar relief. The Center has filed a motion to dismiss the amended complaint. The Court has not yet ruled on the Center's motion or the complaint. In addition, on April 27, 2001, AWI filed a complaint and a motion with the Court seeking an order, among other things, enjoining the Center from drawing on the bond or, in the event the Center is permitted to draw on the bond, requiring that the proceeds of any such draw be deposited into a Court-approved account subject to further order of the Court. The Court has not yet ruled on these matters. Property Damage Litigation - -------------------------- AWI is also one of many defendants in six pending property damage claims as of June 30, 2001 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, AWI was served with a lawsuit seeking class certification of Texas residents who own property with asbestos-containing products. This case includes allegations that AWI 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. AWI vigorously denies the validity of the allegations against it in these actions and, in any event, believes that any costs will be covered by insurance. Continued prosecution of these actions and the commencement of any new asbestos property damage actions are also stayed due to the Filing. Consistent with prior periods and due to increased uncertainty, AWI has not recorded any liability related to these claims. A separate creditors' committee representing the interests of property damage asbestos claimants has been appointed in the Chapter 11 Case. Insurance Recovery Proceedings - ------------------------------ A substantial portion of AWI'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 AWI's installation of asbestos insulation materials. AWI has entered into settlements with a number of the carriers resolving its coverage issues. However, an alternative dispute resolution ("ADR") procedure 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. During 1999, AWI received preliminary decisions in the initial phases of the trial proceeding of the ADR, which were generally favorable to AWI 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. A new trial judge has been selected and initial motions were heard in June 2001. It is uncertain at this time if the new proceedings will have any impact on the preliminary decisions of the initial phases of the ADR. Addtionally, one of the insurance carriers has been experiencing financial difficulties and was placed under an order of rehabilitation by a state insurance department during the second quarter. Insurance Asset - --------------- An insurance asset in respect of asbestos personal injury claims in the amount of $246.3 million is recorded as of June 30, 2001 compared to $268.3 million as of December 31, 2000. The reduction is due to cash receipts during the second quarter of 2001 and management's current assessment of probable insurance recoveries. Of the total recorded asset at June 30, 2001, approximately $63.3 million represents partial settlement for previous claims that 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 AWI's belief in the availability of insurance in this amount, based upon AWI'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 39 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 (a former AWI subsidiary that was sold in August 1969) and the financial condition of the insurers, AWI may revise its estimate of probable insurance recoveries. Approximately $84 million of the $246.3 million asset is determined from agreed coverage in place and is therefore directly related to the amount of the liability and could decrease if the final amount of the liability decreases. Of the $246.3 million asset, $38.2 million has been recorded as a current asset as of June 30, 2001 reflecting management's estimate of the minimum insurance payments to be received in the next 12 months. A significant part of the recorded asset relates to insurance that AWI believes is probable and will be obtained through settlements with the various carriers. Due to the Filing, the settlement process may be delayed, pending further clarification as to the asbestos liability. While AWI believes the Chapter 11 process will strengthen its position on resolving disputed insurance and may therefore result in higher settlement amounts than recorded, there has been no change in the recorded amounts due to the uncertainties created by the Filing. Accordingly, this asset could also change significantly based upon events which occur in the Court. Management estimates that the timing of future cash payments for the remainder of the recorded asset may extend beyond 10 years. Cash Flow Impact - ---------------- As a result of the Chapter 11 Filing, AWI did not make any payments for asbestos-related claims in the first six months of 2001. In the first six months of 2000, AWI paid $95.0 million for asbestos-related claims. AWI received $16.0 million in asbestos-related insurance recoveries during the first six months of 2001 compared to $27.7 million during the first six months of 2000. During the pendency of the Chapter 11 Case, AWI does not expect to make any further cash payments for asbestos-related claims, but AWI may continue to receive insurance proceeds under the terms of various settlement agreements. Conclusion - ---------- Many uncertainties exist surrounding the financial impact of AWI's involvement with asbestos litigation. These uncertainties include the impact of the Filing and the Chapter 11 process, the number of future claims to be filed, the impact of any potential legislation, the impact of the ADR proceedings on the insurance asset and the financial condition of AWI's insurance carriers. AWI has not revised its previously recorded liability for asbestos-related personal injury claims. In the second quarter of 2001, AWI reduced its previously recorded insurance asset by $16.0 million for cash receipts and by $6.0 million for management's current assessment of probable insurance recoveries. The $6.0 million reduction was recorded as a charge for asbestos liability, net in the accompanying condensed consolidated statement of earnings. AWI will continue to review its asbestos-related liability periodically, although it is likely that no changes will be made to the liability until later in the Chapter 11 Case as significant developments arise. It is reasonably possible that AWI's total exposure to asbestos-related personal injury claims may be significantly different than the recorded liability. Any adjustment to the estimated liability or insurance asset could be material to the results of operations in the period recorded. 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. 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 has also been remediating environmental contamination resulting from past industrial activity at certain of its current and former plant sites. Armstrong's payments and remediation work on these sites is under review in light of the Chapter 11 filing. 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. 40 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. The Chapter 11 Cases may also affect the ultimate amount of such contributions. Liabilities of $13.1 million were recorded at June 30, 2001 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. Due to the Chapter 11 filing, $6.4 million of the June 30, 2001 environmental liabilities are classified as prepetition liabilities subject to compromise. 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 condensed 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 would not have a material adverse effect on its financial condition, liquidity or results of operations, although the recording of future costs may be material to earnings in such future periods. 41 Item 5. - Other Information - --------- ----------------- Shareholder Proposals and Director Nominations for 2001 Annual Meeting - ---------------------------------------------------------------------- Our 2001 Annual Meeting of Shareholders is currently scheduled to be held on December 10, 2001, which is more than 30 calendar days after the anniversary of our prior annual meeting. As a result, the deadline for submissions of shareholder proposals and director nominations relating to the 2001 Annual Meeting has changed from the dates specified in last year's proxy statement. If a shareholder intends to present a proposal for action at the 2001 Annual Meeting and wishes to have such proposal considered for inclusion in the Company's proxy materials in reliance on Rule 14a-8 under the Securities Exchange Act of 1934, the proposal must be submitted in writing and received by the Secretary of the Company by August 22, 2001. Such proposal must also meet the other requirements of the rules of the Securities and Exchange Commission relating to shareholders' proposals. The Company's bylaws establish an advance notice procedure with regard to certain matters, including shareholder proposals and nominations of individuals for election to the Board of Directors. In general, notice of a shareholder proposal or a director nomination for an annual meeting must be received by the Company within fifteen days after public announcement of the date of the annual meeting and must contain specified information and conform to certain requirements, as set forth in the bylaws. Therefore, any shareholder proposal or nomination for the 2001 annual meeting will need to be received by the Company by August 22, 2001. If the presiding officer at any shareholders' meeting determines that a shareholder proposal or director nomination was not made in accordance with the bylaws, the Company may disregard such proposal or nomination. In addition, if a shareholder submits a proposal outside of Rule 14a-8 for the 2001 Annual Meeting and the proposal fails to comply with the advance notice procedure prescribed by the bylaws, then the Company's proxy may confer discretionary authority on the persons being appointed as proxies on behalf of the Board of Directors to vote on the proposal. Proposals and nominations should be addressed to the Secretary of the Company, John N. Rigas, Armstrong Holdings, Inc., 2500 Columbia Ave., Lancaster, PA 17603. A shareholder may obtain a copy of the relevant portions of the Company's bylaws by making a written request to the Secretary of the Company. 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 Armstrong World Industries, Inc.'s Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended April 12, 2001.* No. 10 Employment agreement between Armstrong World Industries, Inc. and Chan W. Galbato dated May 2, 2001 No. 15 Letter re Unaudited Interim Financial Information *Compensatory Plan. (b) No reports on Form 8-K were filed during the second quarter of 2001. 42 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/ Leonard A. Campanaro -------------------------- Leonard A. Campanaro, Senior Vice President, Chief Financial Officer 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: August 6, 2001 43 Exhibit Index ------------- Exhibit No. - ----------- No. 4 Armstrong World Industries, Inc.'s Retirement Savings and Stock Ownership Plan effective as of October 1, 1996, as amended April 12, 2001.* No. 10 Employment agreement between Armstrong World Industries, Inc. and Chan W. Galbato dated May 2, 2001 No. 15 Letter re: Unaudited Interim Financial Information *Compensatory Plan. 44 EX-4 3 dex4.txt RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN EXHIBIT 4 RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. As Amended and Restated Effective October 1, 1996 THIS WORKING COPY OF THE PLAN INCORPORATES ALL AMENDMENTS ADOPTED THROUGH APRIL 12, 2001 RETIREMENT COMMITTEE MEETING RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. TABLE OF CONTENTS
PAGE ---- PREAMBLE...................................................................................1 Article 1. Definitions..................................................................4 1.01 Acquisition Loan.............................................................4 1.02 Actual Deferral Percentage...................................................4 1.03 Affiliated Company...........................................................5 1.04 Beneficiary..................................................................6 1.05 Board of Directors...........................................................6 1.06 Break in Service.............................................................6 1.07 Change in Control............................................................6 1.08 Code.........................................................................7 1.09 Committee....................................................................7 1.10 Company......................................................................7 1.11 Company Stock................................................................7 1.12 Company Suspense Account.....................................................7 1.13 Compensation.................................................................7 1.14 Effective Date...............................................................9 1.15 Eligible Employee............................................................9 1.16 Employee....................................................................10 1.17 Equity Account..............................................................10 1.18 Equity Allocations..........................................................10 1.19 ERISA.......................................................................10 1.20 Excess Sheltered Contributions..............................................10 1.21 Excess Standard and Retirement Savings Matching Contributions...............12 1.22 Exchange Contribution Account...............................................14 1.23 Exchange Contributions......................................................14 1.24 Full-Time Employee..........................................................14 1.25 Highly Compensated Employee.................................................14 1.26 Hour of Service.............................................................16 1.27 Investment Fund.............................................................16 1.28 Leveraged Shares............................................................16 1.29 Match Account...............................................................16 1.30 Matching Allocations........................................................17 1.31 Member......................................................................17 1.32 Member Account or Account...................................................17 1.33 Non-Leveraged Shares........................................................17 1.34 Parental Leave..............................................................17 1.35 Participating Company.......................................................17
i 1.36 Part-Time Employee..........................................................17 1.37 Plan........................................................................18 1.38 Plan Fiduciary..............................................................18 1.39 Plan Year...................................................................18 1.40 Qualifying Year of Employment...............................................18 1.41 Released Leveraged Shares...................................................18 1.42 Retirement..................................................................18 1.43 Retirement Savings Account..................................................19 1.44 Retirement Savings Matching Contributions...................................19 1.45 Retirement Savings Trustee..................................................19 1.46 Rollover Contributions......................................................19 1.47 Service.....................................................................19 1.48 Sheltered Contributions.....................................................20 1.49 Standard Contributions......................................................20 1.50 Standard and Retirement Savings Matching Contributions Percentage...........20 1.51 Stock Ownership Account.....................................................21 1.52 Stock Ownership Allocation Period...........................................21 1.53 Stock Ownership Plan........................................................22 1.54 Stock Ownership Trustee.....................................................22 1.55 Tax Deductible Contributions................................................22 1.56 Transferred Exchange Contributions..........................................22 1.57 Trust.......................................................................23 1.58 Trust Agreement.............................................................23 1.59 Trust Fund..................................................................23 1.60 Valuation Date..............................................................23 1.61 Year of Service.............................................................23 Article 2. Eligibility and Membership..................................................24 2.01 Eligibility.................................................................24 2.02 Excluded Employees..........................................................24 2.03 Membership..................................................................25 2.04 Events Affecting Membership.................................................26 2.05 Membership Upon Reemployment................................................26 Article 3. Service.....................................................................28 3.01 Companies For Whom Credited.................................................28 3.02 Hours of Service............................................................28 3.03 Additional Service Credit...................................................32 3.04 Credit for Military Leave Required Under USERRA.............................32 Article 4. Contributions...............................................................33 4.01 Member Sheltered Contributions..............................................33 4.02 Standard Contributions......................................................34 4.03 Change or Suspension in Member Contributions................................35 4.04 Retirement Savings Matching Contributions...................................36 4.05 Stock Ownership Contributions...............................................36
ii 4.06 Deductible Contributions....................................................37 4.07 Manner of Contributions.....................................................37 4.08 Return of Contributions.....................................................38 4.09 Dividends on Company Stock..................................................38 4.10 Correction of Errors in Contributions.......................................39 4.11 Rollover Contributions......................................................40 4.12 Other Matching Contributions................................................42 Article 5. Acquisition Loans...........................................................44 5.01 Acquisition Loan............................................................44 5.02 Allocation of Leveraged Shares..............................................45 Article 6. Limitations on Contributions................................................48 6.01 Limitation on Sheltered Contributions Affecting Highly Compensated Employees.......................................................48 6.02 Maximum Sheltered Contributions.............................................50 6.03 Limitation on Standard and Retirement Savings Matching Contributions Affecting Highly Compensated Employees...............51 6.04 Limitations on Annual Additions.............................................56 Article 7. Investment of Contributions.................................................62 7.01 Investment Funds............................................................62 7.02 Investment of Contributions.................................................65 7.03 Change of Election..........................................................66 7.04 Transfers Among Funds.......................................................67 7.05 Investment Options..........................................................69 7.06 Valuations..................................................................70 7.07 Annual Statements...........................................................71 7.08 Diversification of Stock Ownership Accounts.................................71 Article 8. In-Service Withdrawals and Loans............................................74 8.01 In-Service Withdrawals......................................................74 8.02 Investment Fund to be Deducted for Withdrawal...............................76 8.03 Loans to Eligible Borrowers.................................................76 Article 9. Vesting and Distributions...................................................82 9.01 Vesting.....................................................................82 9.02 Distribution Upon Retirement or Other Termination of Employment.............84 9.03 Distribution on Account of Death............................................91 9.04 Latest Commencement of Payments.............................................92 9.05 Forfeitures.................................................................93 9.06 Direct Rollover Distributions...............................................95 9.07 Inability to Locate Payee...................................................96
iii Article 10. Management of Funds.........................................................98 10.01 Trust Funds.................................................................98 10.02 Investment of Stock Ownership Contributions.................................99 10.03 Member Accounts............................................................100 10.04 Transfer of Trust Assets...................................................101 10.05 Voting Rights for Company Stock............................................102 10.06 Tender Offer Rights with Respect to Company Stock..........................103 Article 11. Administration of Plan.....................................................106 11.01 Appointment of Committee...................................................106 11.02 Organization and Operation of the Committee................................106 11.03 Duties and Responsibilities of the Committee...............................107 11.04 Required Information.......................................................108 11.05 Indemnification............................................................109 11.06 Claims and Appeal Procedure................................................109 11.07 Expenses of the Plan.......................................................111 Article 12. General Provisions.........................................................112 12.01 Exclusiveness of Benefits..................................................112 12.02 Limitation of Rights.......................................................112 12.03 Non-Assignability..........................................................112 12.04 Construction of Agreement..................................................113 12.05 Severability...............................................................113 12.06 Titles and Headings........................................................114 12.07 Counterparts as Original...................................................114 12.08 Construction...............................................................114 12.09 Source of Benefits.........................................................114 12.10 Top-Heavy Provisions.......................................................115 Article 13. Amendment, Merger And Termination..........................................121 13.01 Amendment..................................................................121 13.02 Termination, Sale of Assets or Sale of Subsidiary..........................121 13.03 Merger of Plans............................................................123 13.04 Additional Participating Companies, Locations, or Divisions................123
iv RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. PREAMBLE The purpose of the Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. (the "Plan"), formerly known as the "Retirement Savings Plan for Salaried Employees of Armstrong World Industries, Inc.," is to build a better and more prosperous Armstrong World Industries, Inc. (the "Company"). The Plan is designed to provide a means for long-term savings and to help provide additional benefits to eligible employees at the time of retirement, disability or termination of service, or for their beneficiaries in the event of their death. The Plan consists of two portions. The first portion is a profit sharing plan with a cash or deferred arrangement intended to qualify under Code Sections 401(a) and 401(k), under which contributions shall be made regardless of the Company's profits. The second portion (the assets of which are invested in the "Stock Ownership Fund") is both a stock bonus plan and an employee stock ownership plan intended to qualify under Sections 401(a), 401(k) and 4975(e)(7) of the Code, and as such is designed to invest primarily in the common stock of Armstrong Holdings, Inc. All Trust assets acquired under the Plan as a result of contributions, income and other additions to the Plan shall be administered, distributed, forfeited and otherwise governed by the provisions of the Plan. The Plan was originally established effective August 1, 1983, and has been amended from time to time since its adoption to comply with changes in the law and 1 certain design changes. The Plan was amended and restated in order to comply with the Tax Reform Act of 1986 and other subsequent legislation and official guidance. Effective as of the close of business on September 30, 1996, the assets and liabilities of the Armstrong World Industries, Inc. Employee Stock Ownership Plan and the portion of the assets and liabilities of the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. attributable to hourly employees employed at the Company's Mobile Plant and to all hourly employees of the Affiliated Companies who are not members of a collective bargaining unit were merged into the Plan. The Plan was amended and restated effective October 1, 1996 to change its name to the "Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc.," to reflect the merger of the Armstrong World Industries, Inc. Employee Stock Ownership Plan and part of the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc., and to make certain changes in the design of the employee stock ownership portion of the Plan. The Plan was amended effective May 1, 2000 to reflect the establishment of Armstrong Holdings, Inc. and the investment, beginning May 1, 2000, in the common stock of Armstrong Holdings Inc. The Plan is amended effective December 1, 2000 (or as soon thereafter as administratively practicable) to cease all future contributions and allocations to the employee stock ownership portion of the Plan. The provisions of the Plan as in effect immediately prior to December 1, 2000 reflected the Exchange Contributions, Matching Allocations, Equity Allocations and Additional ESOP Contributions that were made under the employee stock ownership portion of the Plan before December 1, 2000. 2 The rights of any Member or former Member whose employment terminates prior to the effective date of any amendment or restatement of the Plan, and the rights of the Beneficiary of such Member or former Member, shall be governed by the provisions of the Plan as in effect at the time of the Member's termination of employment, except in the event such Member is rehired and except as otherwise specifically provided herein or as required by law. 3 Article 1. Definitions ----------- 1.01 "Acquisition Loan" means a loan or other extension of credit described in Section 4975(d)(3) of the Code which is used to finance or refinance the purchase of Company Stock by the Trustee. 1.02 "Actual Deferral Percentage" means, with respect to a specified group of Employees, any of whom is a Member or eligible to become a Member for a Plan Year, the average of the ratios, calculated separately for each Employee in that group, of (1) the amount of Sheltered Contributions made on the Employee's behalf pursuant to Section 4.01 for the Plan Year plus the amount of any qualified nonelective contributions made on the Employee's behalf pursuant to Section 6.01(d) for the Plan Year, to (2) the Employee's Compensation for that Plan Year. The percentage is determined by multiplying the ratio by one hundred (100). In determining the Actual Deferral Percentages for a Plan Year, any Member who is suspended from participation pursuant to Section 8.02(b) shall be treated as an eligible Member. In all events, Actual Deferral Percentages will be determined in accordance with all of the applicable requirements (including to the extent applicable, the plan aggregation and disaggregation requirements) of Section 401(k) of the Code, and the regulations issued thereunder. Effective for Plan Years beginning before October 1, 1997, in the case of a Highly Compensated Employee who is subject to the family aggregation requirements of Section 414(q)(6) of the Code, the combined Actual Deferral Percentage for the family group (which is treated as one Highly Compensated Employee) is determined by combining the Sheltered Contributions, Compensation, and amounts treated as Sheltered Contributions that are paid to the Trust Fund on behalf of all eligible family members for such Plan Year. 4 1.03 "Affiliated Company" means any corporation which is a member with the Company of a controlled group of corporations (determined under Section 1563(a) of the Code without regard to Section 1563(a)(4) and (e)(3)(C)); any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with the Company; a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes the Company; and any other entity which is required to be aggregated with the Company pursuant to regulations under Section 414(o) of the Code. Solely for purposes of applying the Code Section 415 limitations under Section 6.08, when determining whether an entity is an "Affiliated Company," "more than 50 percent" shall be substituted for "at least 80 percent" where it appears in Section 1563(a)(1) of the Code. Notwithstanding the foregoing, Armacell, LLC (the successor to the Company's insulation business operated through Armstrong Insulation Products, LLC) and any company with which it is affiliated under Code Section 414(b), (c), (m), or (o) shall be treated as an Affiliated Company separate from the Company and its Affiliated Companies beginning June 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee). Further, notwithstanding the foregoing, Ardex Engineered Cements, Inc. (the successor to the Company's installation products group) and any company with which it is affiliated under Code Section 414(b), (c), (m), or (o) shall be treated as an Affiliated Company separate from the Company and its Affiliated Companies beginning August 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee). 5 1.04 "Beneficiary" means the person, persons or entity designated in writing by a Member (on forms prescribed and filed with the Committee) to receive benefits payable after the Member's death; provided, however, that the surviving spouse of a Member who is married on the date of his death automatically shall be the Beneficiary unless the spouse consents in writing to the Member's designation of another Beneficiary. Any such consent shall be duly witnessed by a Plan representative or notary public and shall acknowledge the effect to the spouse of the Member's designation. If no person or entity is designated as "Beneficiary" or if no designated person or entity survives the Member, the term "Beneficiary" shall mean the Member's surviving spouse, or if none, the Member's estate. 1.05 "Board of Directors" means the Board of Directors of the Company. 1.06 "Break in Service" means a calendar year during which an Employee fails to complete more than 500 Hours of Service. 1.07 "Change in Control" means the occurrence of any of the following events: (1) any "person" becomes the "beneficial owner" of twenty-eight percent (28%) or more of the then outstanding "voting stock" of Armstrong Holdings, Inc. and within five years thereafter, "disinterested directors" cease to constitute a majority of the entire Board of Directors of Armstrong Holdings, Inc.; or (2) a "business combination" with an "interested shareholder" that has not been approved by a majority of disinterested directors occurs. The terms "person," "beneficial owner," "voting stock," "disinterested directors," "business combination," and "interested shareholder" shall have the meaning given to them in Article 7 of the Articles of Incorporation of Armstrong Holdings, Inc. as in effect on May 1, 2000. 6 1.08 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.09 "Committee" means the entity appointed to administer and supervise the Plan as provided in Article 11. 1.10 "Company" means Armstrong World Industries, Inc., a Pennsylvania corporation, or any successor by merger, purchase, or otherwise with respect to its employees. 1.11 "Company Stock" means the common stock of Armstrong Holdings, Inc., which shall constitute employer securities within the meaning of Section 409(l) of the Code. As of May 1, 2000, each share of Company Stock held by the Plan will be converted into a share of common stock of Armstrong Holdings, Inc. Prior to May 1, 2000 and after July 31, 1996, Company Stock under the Plan referred to shares of common stock of the Company. Prior to August 1, 1996, Company Stock under the Stock Ownership Plan included shares of convertible preferred stock of the Company; on August 1, 1996, all such shares under the Stock Ownership Plan were converted to shares of common stock of the Company. 1.12 "Company Suspense Account" means the account under which Leveraged Shares are held until released and allocated pursuant to Section 5.02. 1.13 "Compensation" means the total earnings payable to an Employee while a Member by a Participating Company during a Plan Year. Compensation shall be determined prior to any elective deferrals made on behalf of the Member under this Plan or under any other "qualified cash or deferred arrangement" (as defined 7 under Section 401(k) of the Code and applicable regulations), or under a cafeteria plan (as defined under Section 125 of the Code and applicable regulations) maintained by the Company or an Affiliated Company, and shall not include reimbursements for expenses or any payments made following termination of employment and resulting from such termination, nor shall it include any awards, allowances, cost of living payments, payments on account of long-term disability, payments made in lieu of vacation time, or payments following layoff. Notwithstanding the foregoing, for purposes of Section 6.04, Compensation means an Employee's wages as defined in Section 3401(a) of the Code (without regard to any rules under Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2))) and all other payments of compensation to the Employee by his Participating Company (in the course of the Participating Company's trade or business) for which the Participating Company is required to furnish the Employee a written statement under Sections 6041(d), 6051(a)(3) and 6052 of the Code (a Form W-2). For limitation years beginning on and after January 1, 1998, Compensation for purposes of Section 6.04 shall include any elective deferrals made on behalf of the Member under this Plan or under any other "qualified cash or deferred arrangement" (as defined under Section 401(k) of the Code and applicable regulations), or under a cafeteria plan (as defined under Section 125 of the Code and applicable regulations) maintained by the Company or an Affiliated Company. Further, notwithstanding the foregoing, for purposes of Sections 1.02 and 1.50, Compensation shall be as defined above for purposes of Section 6.04; provided, however, for any Plan Year beginning prior to October 1, 1998, Compensation shall include any elective deferrals made on behalf of the Member under this Plan or under any other qualified cash 8 or deferred arrangement, or under a cafeteria plan maintained by the Company or an Affiliated Company. In the case of a Member who begins, resumes, or ceases to be eligible to make contributions during a Plan Year, the amount of Compensation taken into account in determining the Actual Deferral Percentage and the Standard and Retirement Savings Matching Contributions Percentage is the amount of Compensation received by the Member during the entire Plan Year. Further, for purposes of Sections 1.02 and 1.50, the amount of Compensation taken into account during any Plan Year shall not exceed $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and the regulations and other guidance issued thereunder). If any Plan Year consists of fewer than twelve (12) months, the foregoing annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the Plan Year, and the denominator of which is twelve (12). The annual Compensation limit that is in effect for a calendar year shall apply to any Plan Year that begins in such calendar year. Effective for Plan Years beginning before October 1, 1997, in determining a Member's Compensation for purposes of the annual Compensation limit, the family aggregation rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the Member's spouse and any lineal descendants of the Member who have not attained age 19 before the close of the Plan Year. 1.14 "Effective Date" means August 1, 1983. 1.15 "Eligible Employee" means an Employee who has satisfied the applicable eligibility requirements of Section 2.01. 9 1.16 "Employee" means any person (including leased employees within the meaning of Section 414(n)(2) of the Code) employed by the Company or an Affiliated Company and paid on an hourly or a salaried basis. Notwithstanding the foregoing, the term "Employee" shall not include leased employees (as defined in Section 414(n)(2) of the Code) covered by a plan described in Section 414(n)(5)(B) of the Code if leased employees constitute less than twenty percent (20%) of the Company's nonhighly compensated workforce within the meaning of Section 414(n)(5)(C)(ii) of the Code. 1.17 "Equity Account" means the subaccount established for each Eligible Member under his Stock Ownership Account to hold Equity Allocations made before December 1, 2000. 1.18 "Equity Allocations" means Company Stock allocated on behalf of an Eligible Member to his Stock Ownership Account before December 1, 2000. 1.19 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.20 "Excess Sheltered Contributions" means, with respect to each Highly Compensated Employee, the amount of Sheltered Contributions (including any Transferred Exchange Contributions) made to the Plan on his behalf during the Plan Year (determined after the application of Section 6.01(c) and prior to the application of the leveling procedure described below) minus the product of the Member's Actual Deferral Percentage (determined after the application of Section 6.01(c) and the leveling procedure described below) multiplied by the Member's Compensation (as determined for purposes of Section 1.02). In accordance with the regulations issued under Section 401(k) of the Code, Excess Sheltered Contributions shall be determined by a leveling 10 procedure under which the Actual Deferral Percentage of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.01(a) to be satisfied, or, if it results in a lower reduction, to the extent required to cause such Member's Actual Deferral Percentage to equal the Actual Deferral Percentage of the Highly Compensated Employee with the next highest Actual Deferral Percentage. This leveling procedure shall be repeated until the limitation of Section 6.01(a) is first satisfied. Once the leveling procedure has been completed, the total dollar amounts of Excess Sheltered Contributions shall be determined. This amount shall be distributed as required by Section 6.01(e) and in accordance with a distribution procedure under which the dollar amount of Sheltered Contributions of the Highly Compensated Employee with the highest dollar amount of Sheltered Contributions shall be reduced to the extent required to distribute the total amount of Excess Sheltered Contributions, or if it results in a lower reduction, to the extent required to cause the Highly Compensated Employee's dollar amount of Sheltered Contributions to equal the dollar amount of Sheltered Contributions of the Highly Compensated Employee with the next highest dollar amount of Sheltered Contributions. This distribution process shall be repeated until all Excess Sheltered Contributions have been distributed. For Plan Years beginning before October 1, 1997, the determination and correction of Excess Sheltered Contributions of a Highly Compensated Employee whose Actual Deferral Percentage is determined under the family aggregation requirements of Code Sections 401(k) and 414(q)(6) is accomplished by reducing the family unit's Actual Deferral Percentage under the leveling procedure that was in effect for Plan Years beginning prior to October 1, 1997 and allocating the Excess Sheltered 11 Contributions among the family group in proportion to the Sheltered Contributions made on behalf of each family member that are combined to determine the family unit's Actual Deferral Percentage. 1.21 "Excess Standard and Retirement Savings Matching Contributions" means, effective for Plan Years beginning on and after October 1, 2000 with respect to each Highly Compensated Employee, the amount equal to the sum of (i) his Standard Contributions (including the amount of any Sheltered Contributions recharacterized pursuant to Section 6.03(d)) during the Plan Year plus (ii) any Retirement Savings Matching Contributions made on his behalf for the Plan Year (determined after the application of Section 6.03(c) and prior to the application of the leveling procedure described below), minus the product of the Member's Standard and Retirement Savings Matching Contributions Percentage (determined after the application of both Section 6.03(c) and the leveling procedure described below) multiplied by the Member's Compensation (as such term is defined for purposes of Section 1.50). In accordance with the regulations issued under Section 401(m) of the Code, Excess Standard and Retirement Savings Matching Contributions shall be determined by a leveling procedure under which the Standard and Retirement Savings Matching Contributions Percentage of the Highly Compensated Employee with the highest such percentage shall be reduced to the extent required to enable the limitation of Section 6.03(a) to be satisfied, or, if it results in a lower reduction, to the extent required to cause such Member's Standard and Retirement Savings Matching Contributions Percentage to equal that of the Highly Compensated Employee with the next highest Standard and Retirement Savings Matching Contributions Percentage. This leveling procedure shall be repeated until the 12 limitation of Section 6.03(a) is first satisfied. Once the leveling procedure has been completed, the total dollar amounts of Excess Standard and Retirement Savings Matching Contributions shall be determined. This amount shall be forfeited or distributed as required by Section 6.03(f) and (g) and in accordance with a forfeiture or distribution procedure under which the dollar amount of Standard Contributions (including recharacterized Sheltered Contributions) and Retirement Savings Matching Contributions of the Highly Compensated Employee with the highest dollar amount of Standard Contributions and Retirement Savings Matching Contributions shall be reduced to the extent required to forfeit or distribute the total amount of Excess Standard and Retirement Savings Matching Contributions, or if it results in a lower reduction, to the extent required to cause the Highly Compensated Employee's dollar amount of Standard Contributions and Retirement Savings Matching Contributions to equal the dollar amount of Standard Contributions and Retirement Savings Matching Contributions of the Highly Compensated Employee with the next highest dollar amount of Standard Contributions and Retirement Savings Matching Contributions. This distribution process shall be repeated until all Excess Standard and Retirement Savings Matching Contributions have been distributed or forfeited. For Plan Years beginning before October 1, 1997, the determination and correction of Excess Standard Contributions of a Highly Compensated Employee whose Standard Contribution Percentage is determined under the family aggregation requirements of Code Sections 401(k) and 414(q)(6) is accomplished by reducing the family unit's Actual Deferral Percentage under the leveling procedure that was in effect for Plan Years beginning prior to October 1, 1997 and allocating the Excess Standard Contributions among the family group in proportion to the Standard 13 Contributions made on behalf of each family member that are combined to determine the family unit's Standard Contribution Percentage. 1.22 "Exchange Contribution Account" means the subaccount established for each Member under his Stock Ownership Account to hold Exchange Contributions and Stock Ownership Contributions made before December 1, 2000. 1.23 "Exchange Contributions" means that portion of a Member's Compensation which was deferred and contributed to his Stock Ownership Account before December 1, 2000 (or as soon thereafter as is administratively practicable), in accordance with Section 401(k) of the Code. 1.24 "Full-Time Employee" means any Employee who is employed on a continuing basis and is expected to work the normal number of work hours for the location as determined by the Participating Company. 1.25 "Highly Compensated Employee" means an Employee of the Company or an Affiliated Company who: (a) was a 5% owner, as defined in Section 416(i)(1) of the Code, at any time during the Plan Year or the preceding Plan Year; or (b) for the preceding Plan Year performed services for the Company or an Affiliated Company and received Compensation in excess of $80,000 (adjusted at the same time and in the same manner as under Section 415(d) of the Code). Notwithstanding the foregoing, the Committee may make a "top-paid group" election under the regulations or other guidance issued pursuant to Section 414(q) of the Code with respect to any preceding Plan Year. If such election is made, the foregoing provisions of this Section 1.25 shall be applied in accordance with such election. The 14 "top-paid group" shall include all Employees who are in the top 20% of all Employees on the basis of Compensation. For purposes of determining the number of Employees in the "top-paid group," the following Employees shall be excluded: (i) Employees who have not completed 6 months of service by the end of the year; (ii) Employees who normally work less than 17 1/2 hours per week for the year; (iii) Employees who normally work during not more than 6 months during any year; (iv) Employees who have not attained age 21 by the end of such year; and (v) Employees who are nonresident aliens receiving no United States source income within the meaning of Sections 861(a)(3) and 911(d)(2) of the Code. Solely for purposes of determining whether an Employee is a Highly Compensated Employee for the Plan Year beginning October 1, 1997 the foregoing provisions of this Section 1.25 are treated as having been in effect for the Plan Year beginning October 1, 1996. Further, notwithstanding the foregoing, the determination of Highly Compensated Employees may be made under the calendar year calculation election under the regulations and other guidance issued pursuant to Code Section 414(q). In accordance with such election, if it is made by the Committee or its designee, the "preceding Plan Year" as used in subsection (b) above shall be the calendar year beginning with or within the applicable preceding Plan Year. Such election shall apply to all other plans maintained by an Affiliated Company. The Committee or its designee may elect to apply the calendar year election for any Plan Year. In accordance with the foregoing, the Committee has elected to apply the calendar year election with respect to each Plan Year beginning with the Plan Year that commenced October 1, 1997. 15 Further, for purposes of applying the definition of "Highly Compensated Employee" for the period beginning June 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee), Code Section 414(q) and the rules set forth herein shall be applied separately to the Employees of Armacell, LLC and any company with which it is affiliated under Code Section 414(b), (c), (m), or (o). Further, for purposes of applying the definition of "Highly Compensated Employee" for the period beginning August 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee), Code Section 414(q) and the rules set forth herein shall be applied separately to the Employees of Ardex Engineered Cements, Inc. and any company with which it is affiliated under Code Section 414(b), (c), (m), or (o). 1.26 "Hour of Service" means each hour credited under Section 3.02. 1.27 "Investment Fund" means any of the separate funds in which contributions to the Plan are invested in accordance with Article 7. 1.28 "Leveraged Shares" means shares of Company Stock acquired by the Trustee with the proceeds of an Acquisition Loan pursuant to Section 5.01. Except as required by Section 409(h) of the Code and by Treasury Regulation Sections 54.4975-7(b)(9) and (10), or as otherwise required by applicable law, no Leveraged Shares may be subject to a put, call or other option, or buy-sell or similar arrangement while held by, or when distributed from, the Plan, whether or not the Plan is an employee stock ownership plan, within the meaning of Code Section 4975(e)(7), at that time. 1.29 "Match Account" means the subaccount established for each Eligible Member under his Stock Ownership Account to hold Matching Allocations made before 16 December 1, 2000 and to hold bonus allocations made under the Stock Ownership Plan before October 1, 1996. 1.30 "Matching Allocations" means Company Stock allocated on behalf of an Eligible Member to his Stock Ownership Account before December 1, 2000. 1.31 "Member" means any Eligible Employee included in the membership of the Plan, as provided in Article 2. 1.32 "Member Account" or "Account" means, as of any Valuation Date, the total value of each Member's Retirement Savings Account and Stock Ownership Account. 1.33 "Non-Leveraged Shares" means any shares of Company Stock held in the Stock Ownership Trust that are not Leveraged Shares, whether or not released. 1.34 "Parental Leave" means a period in which the Employee is absent from work immediately following his active employment because of the Employee's pregnancy, the birth of the Employee's child or the placement of a child with the Employee in connection with the adoption of that child by the Employee, or for purposes of caring for that child for a period beginning immediately following that birth or placement. Parental leave shall include such periods of leave described in the Family and Medical Leave Act of 1993 solely to the extent required thereunder. 1.35 "Participating Company" means the Company and any other Affiliated Company which adopts the Plan as provided in Section 13.04. 1.36 "Part-Time Employee" means any Employee who is employed on a continuing basis and is expected to work less than the normal number of work hours for the location as determined by the Participating Company, or any Employee who is not employed on a continuing basis as determined by the Participating Company. 17 1.37 "Plan" means the Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. (formerly named the Retirement Savings Plan for Salaried Employees of Armstrong World Industries, Inc.), as set forth in this document or as amended from time to time. 1.38 "Plan Fiduciary" means the boards of directors of the Participating Companies, the Committee, the Trustees, and all other persons who exercise discretionary authority or have responsibility of a fiduciary nature as described in Title I of ERISA. 1.39 "Plan Year" means a period of twelve consecutive months commencing on each October 1 and ending on September 30. 1.40 "Qualifying Year of Employment" means the twelve consecutive month period beginning on a Part-Time Employee's first date of employment (or date of re-employment, if applicable) or any calendar year commencing after such date, during which the Part-Time Employee completes at least 1,000 Hours of Service. 1.41 "Released Leveraged Shares" means the Leveraged Shares that are released from the Company Suspense Account as a result of loan amortization payments. 1.42 "Retirement" means early, disability, normal or deferred retirement under the Retirement Income Plan for Employees of Armstrong World Industries, Inc. or any other retirement plan maintained by an Affiliated Company provided such retirement results in the Member's separation from the employment of the Company or Affiliated Company with no continuing employment immediately thereafter with any Affiliated Company. "Retirement" for Members not covered by any such retirement plan shall mean separation from Service on or after attaining age 65. 18 1.43 "Retirement Savings Account" means the portion of a Member's Account that is attributable to Sheltered Contributions, Transferred Exchange Contributions, Standard Contributions, Rollover Contributions, Tax Deductible Contributions, and Retirement Savings Matching Contributions, determined as of any Valuation Date. 1.44 "Retirement Savings Matching Contributions" means those contributions to the Plan that were made as of no later than December 31, 1989 by Participating Companies to match Tax Deferred Contributions to the Plan and those matching contributions to the Plan made on and after December 1, 2000 by Participating Companies pursuant to Section 4.04. 1.45 "Retirement Savings Trustee" means the party or parties, individual or corporate, named in a Trust Agreement who holds the assets of the Plan determined as of September 30, 1996; amounts attributable to Sheltered Contributions, Standard Contributions, and Rollover Contributions made subsequent to September 30, 1996; amounts attributable to Exchange Contributions made before December 1, 2000 that were temporarily invested in a Money Market Fund; amounts attributable to the shares of Company Stock that are diversified in accordance with Section 7.08; amounts attributable to Transferred Exchange Contributions; and amounts attributable to Retirement Savings Matching Contributions made on and after December 1, 2000, as provided in Article 10. 1.46 "Rollover Contributions" means contributions made by an Eligible Employee who is eligible to make Sheltered Contributions and Standard Contributions, in accordance with Section 4.09. 1.47 "Service" means service credited pursuant to Article 3 of the Plan. 19 1.48 "Sheltered Contributions" means that portion of a Member's Compensation which is deferred and contributed to the profit sharing portion of the Plan, in accordance with Section 401(k) of the Code and as described in Section 4.01(a) and which were referred to as "Tax Deferred Contributions" prior to October 1, 1996. A Member's Sheltered Contributions shall include Transferred Exchange Contributions attributable to such Member. 1.49 "Standard Contributions" means contributions made by a Member to the profit sharing portion of the Plan, in accordance with Section 4.02 and which were, prior to October 1, 1996, referred to as "Additional (After Tax) Contributions" and included "Catch-Up Contributions," if any, that were made under the Plan prior to January 1, 1990. 1.50 "Standard and Retirement Savings Matching Contributions Percentage" means, effective for Plan Years beginning on and after October 1, 2000 with respect to a specified group of Employees, any of whom is a Member or eligible to become a Member for a Plan Year, the average of the ratios, calculated separately for each Employee in that group, of (1) the sum of (a) the Standard Contributions made pursuant to Section 4.02 for such Plan Year; (b) any Sheltered Contributions that are recharacterized as Standard Contributions pursuant to Section 6.03(d) for such Plan Year; (c) any Sheltered Contributions that are utilized in satisfying the requirements of Section 6.03(a) for such Plan Year; (d) any qualified nonelective contributions made on the Employee's behalf pursuant to Section 6.03(e) for the Plan Year; and (e) any Retirement Savings Matching Contributions made on the Employee's behalf pursuant to Section 4.04 for the Plan Year, to (2) the Employee's Compensation for that Plan Year. The 20 percentage is determined by multiplying the ratio by one hundred (100). In determining the Standard and Retirement Savings Matching Contributions Percentages for a Plan Year, any Member who is suspended from participation pursuant to Section 8.02(b) shall be treated as an Eligible Member. In all events, Standard and Retirement Savings Matching Contributions Percentages will be determined in accordance with all of the applicable requirements (including to the extent applicable, the plan aggregation and disaggregation requirements) of Section 401(m) of the Code, and the regulations issued thereunder. Effective for Plan Years beginning before October 1, 1997, in the case of a Highly Compensated Employee who is subject to the family aggregation requirements of Section 414(q)(6) of the Code, the combined Standard Contributions Percentage for the family group (which is treated as one Highly Compensated Employee) is determined by combining the Standard Contributions, the recharacterized Sheltered Contributions, the Sheltered Contributions that are utilized in satisfying the requirements of Section 6.07(a), qualified nonelective contributions, and Compensation, on behalf of all eligible family members for such Plan Year. 1.51 "Stock Ownership Account" means, as of any Valuation Date, all Released Leveraged Shares, all Non-Leveraged Shares and all other assets held by the Stock Ownership Trustee under the Plan and allocated for the benefit of a Member, including amounts attributable to Exchange Contributions; provided, however, a Member's Transferred Exchange Contributions shall not be part of such Member's Stock Ownership Account. 1.52 "Stock Ownership Allocation Period" means the period for which an allocation of Released Leveraged Shares or Non-Leveraged Shares is made to Members' 21 Stock Ownership Accounts; the Stock Ownership Allocation Period initially shall be the period beginning July 1, 1996 and ending December 12, 1996, and thereafter, shall be the approximate six-month period ending on the second prior day on which the New York Stock Exchange is open for trading that immediately precedes the scheduled repayment of principal and interest on the Acquisition Loan. 1.53 "Stock Ownership Plan" means the Armstrong World Industries, Inc. Employee Stock Ownership Plan, which was merged into this Plan on September 30, 1996. 1.54 "Stock Ownership Trustee" means the party or parties, individual or corporate, named in a Trust Agreement that hold the funds of the employee stock ownership portion of the Plan (other than amounts attributable to the shares of Company Stock that are diversified in accordance with Section 7.08, and amounts attributable to Transferred Exchange Contributions), as provided in Article 10. 1.55 "Tax Deductible Contributions" means a Member's contributions to the Plan made prior to January 1, 1987, that were tax deductible, in accordance with Section 219 of the Code and as described in Section 3.06 of the Plan in effect immediately preceding October 1, 1996. 1.56 "Transferred Exchange Contributions" means any Exchange Contributions made by a Member for the Stock Ownership Allocation Period ending December 13, 2000 that are transferred from the Money Market Fund in which such Exchange Contributions are temporarily invested pursuant to Section 7.01(f) to the Investment Fund or Funds (other than the Stock Ownership Fund) the Member has designated for the investment of his Sheltered Contributions pursuant to Section 7.02. 22 1.57 "Trust" means the legal entity resulting from the Trust Agreements between the Company and the Stock Ownership and Retirement Savings Trustees. 1.58 "Trust Agreement" means the individual agreements entered into between the Company or the Committee and the Stock Ownership Trustee and the Company or the Committee and the Retirement Savings Trustee, which fix the rights and liabilities of each such party with respect to holding and administering the applicable Trust Fund for the purposes of the Plan. 1.59 "Trust Fund" means, depending on the context in which used, the portion of the Trust consisting of all Members' Retirement Savings Accounts and/or the portion of the Trust consisting of all Members' Stock Ownership Accounts. 1.60 "Valuation Date" means each day that the New York Stock Exchange is open for trading. 1.61 "Year of Service" means any calendar year in which an Employee has completed 1,000 or more Hours of Service. For purposes of determining a Member's vested interest in his Equity Account, his Match Account and the portion of his Retirement Savings Matching Account attributable to Retirement Savings Matching Contributions made on or after December 1, 2000 under Section 9.01(b), the following years shall be recognized: (a) the Member's service with Triangle Pacific Corp. before such entity became an Affiliated Company but only to the extent such service would otherwise be recognized under the Plan; and (b) the Member's service with Worthington Armstrong Venture ("WAVE") provided the Member commences employment with the Company or an Affiliated Company directly following his termination of employment with WAVE. 23 Article 2. Eligibility and Membership --------------------------- 2.01 Eligibility ----------- On or after October 1, 1996 and prior to January 1, 1999, each Full- Time Employee (other than a Full-Time Employee excluded under Section 2.02) shall become an Eligible Employee on the first date on which he is credited with an Hour of Service, and each Part-Time Employee (other than a Part-Time Employee excluded under Section 2.02) shall become an Eligible Employee on the first day of the month next following the date upon which he completes a Qualifying Year of Employment. Effective January 1, 1999, any Employee (other than an Employee excluded under Section 2.02) shall become an Eligible Employee as of the earlier of January 1, 1999 or the date on which the Employee is first credited with an Hour of Service. Notwithstanding Section 2.02(a), each hourly Employee employed at the Company's Mobile Plant also shall be eligible to become a Member in the manner indicated in the preceding two sentences. 2.02 Excluded Employees ------------------ The following Employees shall be excluded from becoming Eligible Employees under the Plan: (a) An Employee who is (or becomes) a member of a collective bargaining unit that is a party to a collective bargaining agreement with a Participating Company unless there is in effect an agreement making the Plan available to Employees in such unit. (b) Any Employee who is a leased employee of a Participating Company and who is employed by a leasing organization (as defined in Code Section 414(n)(2)) which is not an Affiliated Company. 24 (c) Any foreign national whose services are performed primarily for and at a branch facility of the Participating Company outside the United States. (d) Any citizen of a territorial possession of the United States whose employment relationship or contract of employment originates at, and whose services are performed primarily for and at, a branch facility of the Participating Company outside the United States (e) Any person not employed by a Participating Company unless designated as eligible by the Committee. (f) Any person employed by a Participating Company at locations established or acquired after June 1, 1989, unless included pursuant to Section 13.04. (g) Any person employed on an hourly basis by Armstrong Industrial Specialties, Inc. or The W.W. Henry Company. 2.03 Membership ---------- An Eligible Employee under Section 2.01 or Section 2.05(a) shall become a Member under the Plan by designating a percentage of his Compensation to be contributed to the Plan under Section 4.01(a) and/or 4.02(a). Any designation under the preceding sentence shall become effective as soon as practicable after it is made, provided the designation is made in the manner authorized by the Committee and is accompanied by: (a) an authorization for the Participating Company to make regular payroll deductions to cover the amount of such contributions elected pursuant to Section 4.01 and/or Section 4.02; 25 (b) an investment election with respect to Sheltered Contributions under Section 4.01(a), Standard Contributions under Section 4.02(a), Retirement Savings Matching Contributions under Section 4.04, and the remaining portion of his Retirement Savings Account, if any; and (c) a designation of Beneficiary. 2.04 Events Affecting Membership --------------------------- If a Member is no longer employed by a Participating Company, is transferred to employment with an Affiliated Company that is not a Participating Company, or is transferred to a position with the Company or an Affiliated Company that makes him ineligible to be a Member under Section 2.02, his active participation under the Plan shall be suspended and, during the period of his unemployment or his employment in such ineligible position, he shall not be eligible to have allocated to his Retirement Savings Account any contributions made under Section 4.01, 4.02 or 4.04. 2.05 Membership Upon Reemployment ---------------------------- (a) Each individual described in Section 2.04 who is reemployed by a Participating Company or who ceases to be an excluded Employee under Section 2.02, shall again be an Eligible Employee on his date of reemployment or the date he ceases to be an excluded Employee, in accordance with such rules and regulations which are adopted by the Committee. Any such Eligible Employee shall again become a Member in accordance with Section 2.03. (b) A Part-Time Employee who terminates employment with the Company or an Affiliated Company prior to becoming an Eligible Employee and who is rehired by the Company or an Affiliated Company prior to January 1, 1999 and after a one-year 26 Break in Service, shall be treated as a newly-hired Employee upon his reemployment. A Part-Time Employee who terminates employment with the Company or an Affiliated Company prior to becoming an Eligible Employee and who is rehired prior to January 1, 1999 and before the end of a one-year Break in Service, shall be eligible to become a Member in accordance with Sections 2.01, 2.02 and 2.03, based on his original date of hire. Effective January 1, 1999, any Part-Time Employee whose Continuous Employment has terminated and who is reemployed prior to January 1, 1999 shall be eligible to become a Member as of January 1, 1999. 27 Article 3. Service ------- 3.01 Companies For Whom Credited --------------------------- Service shall mean periods of an Employee's employment with the Company, an Affiliated Company (on and after the date of affiliation unless determined otherwise by the Committee), and any predecessor corporation of a Participating Company, or a corporation merged, consolidated or liquidated into the Participating Company or a predecessor of the Participating Company, or a corporation, substantially all of the assets of which have been acquired by the Participating Company, if the Participating Company maintains a plan of such a predecessor corporation. If the Participating Company does not maintain a plan maintained by such a predecessor, periods of employment with such a predecessor shall be credited as Service only to the extent required under regulations prescribed by the Secretary of the Treasury pursuant to Section 414(a)(2) of the Code. 3.02 Hours of Service ---------------- For purposes of determining an Employee's eligibility to participate under Section 2.01 of the Plan and a Member's vested interest in his Match Account and Equity Account under Section 9.01, with respect to any applicable computation period: (a) An Employee shall be credited with Hours of Service during periods for which he is directly or indirectly paid by, or entitled to payment from the Company or an Affiliated Company for the performance of duties; (b) An Employee shall be credited with Hours of Service during periods when no duties are performed: (i) Due to vacation, holiday, layoff, or leave of absence; and during which he is paid or entitled to payment from the Company or an Affiliated Company; 28 (ii) Because of temporary total disability due to sickness, injury, or incapacity; for which he receives or is entitled to receive either disability benefits or Worker's Compensation, directly or indirectly from the Company or an Affiliated Company; (iii) Due to total disability for which he receives or is entitled to receive benefits under a long-term disability income plan maintained by the Company or an Affiliated Company or under the provisions of Article VI, Section (8) of the Retirement Income Plan for Employees of Armstrong World Industries, Inc.; or (iv) Due to jury duty or military duty in the Armed Forces of the United States; and during which he is paid or entitled to payment from the Company or an Affiliated Company. (c) An Employee shall be credited with Hours of Service during periods for which back pay, irrespective of mitigation of damages, has been awarded or agreed to by the Company or an Affiliated Company. (d) The Committee shall determine whether an Employee is entitled to credit for an Hour of Service on the basis of records of hours worked and payments made or due. An exempt salaried Employee shall be credited with 45 Hours of Service for each week for which it is determined that he is entitled to credit for at least one such Hour of Service. (e) Hours of Service credited under Section 3.02(b) or (c) hereof for a period during which the Employee is not performing duties but for which he is paid or entitled to payment, directly or indirectly, by the Company or an Affiliated Company shall be subject to the following rules: 29 (i) If payments made for a period of absence are computed with specific reference to units of time, the number of Hours of Service credited shall be the number of regularly scheduled working hours included in the units of time on the basis of which the payment is calculated, consistently determined with respect to all Employees within the same job classification. (ii) If payments made for a period of absence are computed without regard to units of time, the number of Hours credited shall be equal to the amount of the payment made with respect to such period of absence divided by the Employee's most recent hourly rate of pay or its equivalent. (iii) Hours of Service credited hereunder for an absence shall be credited to the calendar year during which the period of absence occurs; provided, however, that if the period of absence falls within more than one calendar year, the Committee, following uniform rules and governmental regulations, may prorate such Hours between such calendar years. Hours of Service credited by reason of an award or agreement for back pay shall be credited to the calendar year to which the award or agreement pertains. (iv) The Hours of Service credited hereunder for any period of absence shall not exceed the number of working hours regularly scheduled for the performance of duties during such period of absence, as determined in accordance with procedures consistently applied by the Committee with respect to all Employees within any one job classification. Nothing contained herein shall result in double credit for the same period. 30 (v) No more than 501 Hours of Service shall be credited for a period described under Section 3.02(b) or (c) on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period). (vi) No credit shall be given under this Section 3.02 during periods for which payments are made or due under a plan maintained solely to comply with applicable worker's compensation laws or unemployment compensation laws, for which payments are made solely to reimburse an Employee for medical or medically-related expenses incurred by the Employee, or for which payments are made for the period following retirement. (vii) The number of Hours of Service credited under the Plan for military service or for any other period described in Section 3.02(b)(iv) hereof during which the Employee is not paid or entitled to payment, directly or indirectly, from the Company or an Affiliated Company shall be determined on the basis of the number of regularly scheduled hours the Employee was working prior to the absence. (f) For the purposes of determining whether an Employee has incurred a Break in Service, an Employee who is absent from work due to Parental Leave and who is not entitled to credit for such absence under any of the other provisions of this Section 3.02 shall be credited with a number of Hours of Service for such absence equal to the number of Hours of Service that would have been credited to the Employee had he been performing duties during the absence or, if the Committee is unable to determine the number of such Hours, eight (8) Hours of Service per day of such absence; provided, however, that in no event shall more than 501 Hours of Service be credited for any single 31 continuous period of absence described in this Section 3.02(f). If in the year in which the absence begins, the Employee has not yet been credited with 501 Hours of Service, then the Hours of Service credited by reason of this Section shall be credited in such year; in any other case, the Hours of Service credited by reason of this Section shall be credited in the year following the year in which the absence begins. 3.03 Additional Service Credit ------------------------- The Committee, in its sole discretion, may provide additional credit for eligibility or vesting purposes for periods not required to be credited under this Article 3, provided that the Committee shall act in a nondiscriminatory manner. 3.04 Credit for Military Leave Required Under USERRA ----------------------------------------------- Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credits with respect to a Member's qualified military service will be provided in accordance with Section 414(u) of the Code. 32 Article 4. Contributions ------------- 4.01 Member Sheltered Contributions ------------------------------ (a) Each Member may authorize the Participating Company by which he is employed, in the manner described in Section 2.03, to reduce his Compensation by not less than 1% and not more than 15% (or such lower maximum percentage as the Committee may from time to time determine), in multiples of 1% as elected by the Member, and have that amount contributed to the Plan by the Participating Company as Sheltered Contributions, subject to the limits of Sections 6.01 and 6.02. The specified portion of the Member's Compensation which would otherwise be paid to the Member shall be paid by the Participating Company to the Retirement Savings Trustee as soon as practicable after the end of each payroll period, and will be credited to the Member's Sheltered Account. (b) In the event that Sheltered Contributions made under this Section are returned to the Employer in accordance with Section 4.08, the elections to reduce Compensation which were made by Members on whose behalf those contributions were made shall be void retroactively to the beginning of the period for which those contributions were made. (c) Notwithstanding anything to the contrary in this Section 4.01, the Committee may at any time reduce the maximum percentage by which some or all Members may reduce their Compensation pursuant to Subsection (a) above. The duration of such reduction shall be determined by the Committee at such time. (d) Notwithstanding any other provision of the Plan to the contrary, in no event may the Sheltered Contributions under Subsection (a) above by any Member 33 exceed in a Plan Year an amount equal to 15% (or such lower maximum percentage as set by the Committee pursuant to Sections 6.01) multiplied by the Member's Compensation not in excess of $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and the regulations and other guidance issued thereunder). This limitation shall be applied on a Plan Year basis, shall not be prorated for any part of such Plan Year, and shall be applied only with respect to amounts earned after becoming a Member. 4.02 Standard Contributions ---------------------- (a) Each Member may authorize contributions by payroll deduction on an after-tax basis of a stated whole percentage of Compensation from 1% to 10%, with such amount being rounded to the next higher multiple of one dollar per pay period and with such amount being subject to the limits of Section 6.03. The specified portion of the Member's Compensation shall be paid by the Participating Company to the Retirement Savings Trustee as soon as practicable after the end of each payroll period, and will be credited to the Member's Standard Account. (b) Notwithstanding anything to the contrary in this Section 4.02, the Committee may at any time reduce the maximum percentage by which some or all Members may reduce their Compensation pursuant to Subsection (a) above. The duration of such reduction shall be determined by the Committee at such time. (c) Notwithstanding any other provision of the Plan to the contrary, in no event may the Standard Contributions under Subsection (a) above by any Member in a Plan Year exceed an amount equal to 10% (or such lower maximum percentage as set by the Committee pursuant to Section 6.03) multiplied by the Member's Compensation not in excess of $150,000 (adjusted in accordance with Section 401(a)(17) of the Code and 34 the regulations and other guidance issued thereunder). This limitation shall be applied on a Plan Year basis, shall not be prorated for any part of such Plan Year, and shall be applied only with respect to amounts earned after becoming a Member. 4.03 Change or Suspension in Member Contributions -------------------------------------------- The percentages of Compensation designated by a Member to measure the Sheltered Contributions and Standard Contributions made to his Retirement Savings Account will continue in effect, notwithstanding any change in his Compensation, until he elects to change or suspend such percentage. A Member may change or suspend such percentage at any time by applying to make such change or suspension in the manner prescribed by the Committee (including telephonic application). Any such change or suspension will become effective as of the first day of the payroll period that begins as soon as practicable after the Member applies to make such change or suspension. In the event a Member becomes an inactive Member, his Sheltered Contributions and Standard Contributions shall be deemed suspended on the first day of such Member's payroll period next following the date he becomes an inactive Member and such suspension shall end on the first day of such Member's payroll period subsequent to the date he again becomes an active Member. A Member who is granted a hardship withdrawal shall have his Sheltered Contributions and Standard Contributions automatically suspended for the 12-month period beginning with the first day of the Member's payroll period next following the date the hardship withdrawal is granted, and the percentages of Compensation designated by the Member to measure such Sheltered Contributions and Standard Contributions in effect immediately preceding such suspension shall automatically be reinstated as soon as practicable following the end of such 12-month 35 period. 4.04 Retirement Savings Matching Contributions ----------------------------------------- (a) Each Participating Company that is an Affiliated Company with the Company shall contribute to the Retirement Savings Trust on behalf of each Eligible Member (as such term was defined under Section 6.01(c) of the Plan as in effect immediately prior to December 1, 2000) it employs, a Retirement Savings Matching Contribution equal to 50% of the Exchange Contributions made by or on behalf of such Member during the Stock Ownership Allocation Period ending December 13, 2000. (b) Effective for pay periods ending on or after March 1, 2001, each Participating Company that is an Affiliated Company with the Company shall make a Retirement Savings Matching Contribution on behalf of each Member it employs for the pay period in an amount equal to 50% of the first 6% of the Member's Sheltered Contributions for such pay period (i.e., the Retirement Savings Matching Contributions made on behalf of the Member shall not exceed 3% of the Member's Compensation). (c) All such Retirement Savings Matching Contributions made on behalf of a Member under this Section 4.04 shall be credited to the Member's Retirement Savings Matching Account. 4.05 Stock Ownership Contributions ----------------------------- Effective December 1, 2000 (or as soon thereafter as is administratively practicable), all contributions and allocations to the employee stock ownership portion of the Plan shall cease. Any Exchange Contributions made by a Member during the Stock Ownership Allocation Period ending December 13, 2000 shall be transferred from the Money Market Fund in which the Member's Exchange Contributions have been 36 temporarily invested pursuant to Section 7.01(f) to the Investment Fund or Funds (other than the Stock Ownership Fund or the Company Stock Fund) the Member has designated for the investment of his Sheltered Contributions pursuant to Section 7.02. Further, for the Stock Ownership Allocation Period ending December 13, 2000, the Company shall make on behalf of each Eligible Member (as such term is defined under Section 6.01(b) of the Plan as in effect immediately prior to December 1, 2000) a cash contribution equal to the dollar value of the shares of Company Stock that would otherwise have been allocated to such Member's Equity Account under Section 6.02(c) of the Plan as in effect immediately prior to December 1, 2000 for such Stock Ownership Allocation Period. Any such contribution made on behalf of an Eligible Member under the preceding sentence shall be credited to the Member's Retirement Savings Account. 4.06 Deductible Contributions ------------------------ All contributions to the Plan made by a Participating Company on behalf of the Members it employs (including but not limited to Sheltered Contributions and Retirement Savings Matching Contributions) are conditioned upon such amounts being deductible from the Participating Company's income tax return for the tax year that ends with or within the Plan Year under Section 404 of the Code. 4.07 Manner of Contributions ----------------------- Each Participating Company shall make its contributions for a Plan Year in cash or Company Stock on any date or dates which the Company may select; provided that the total contributions for any Plan Year shall be paid within the time prescribed by law for filing the Company's Federal income tax return for such taxable year, including extensions thereof. 37 4.08 Return of Contributions ----------------------- Notwithstanding anything herein to the contrary, a contribution which (i) was made under a mistake of fact, or (ii) was conditioned upon deduction of the contributions under Section 404 of the Code and such deduction is disallowed, shall be returned to the Participating Company within one year after the payment of the mistaken contribution or the disallowance of the deduction (to the extent disallowed), whichever is applicable. 4.09 Dividends on Company Stock -------------------------- The Retirement Committee, in its sole discretion, shall determine whether the cash dividends on Company Stock held in the Stock Ownership Fund and earnings thereon are to be utilized to repay an Acquisition Loan. Accordingly, the cash dividends on Company Stock held in the Stock Ownership Fund and earnings thereon and allocated to a Member's Stock Ownership Account during the Stock Ownership Allocation Period ending December 13, 2000 shall not be used to repay any Acquisition Loan, but instead shall be transferred from the Stock Ownership Fund to the Retirement Savings Trust for investment in the Investment Fund or Funds such Member has designated, pursuant to Section 7.02, in accordance with the following rules: (i) to the extent such dividends are attributable to the Member's Exchange Contributions, the dividends shall be invested in the manner designated by the Member for the investment of his Sheltered Account; and (ii) to the extent such dividends are attributable to Equity Account Allocations or Match Allocations made on the Member's behalf under Section 6.02(c) and (d), respectively, of the Plan as in effect immediately prior to December 1, 2000, the dividends shall be invested in the manner designated by the Member for the investment of his Retirement Savings Matching Account. Further, any unallocated cash dividends on Company Stock 38 (and earnings thereon) held in the Stock Ownership Trust declared during the Stock Ownership Allocations and ending December 13, 2000 shall be transferred from the Stock Ownership Fund to the Retirement Savings Trust to be used for purposes of making the Retirement Savings Matching Contribution under Section 4.04 by reducing the amount to be paid by the Participating Companies. 4.10 Correction of Errors in Contributions ------------------------------------- If, with respect to any Plan Year, any Member's Retirement Savings Account is not credited with the Member's designated amount of Sheltered Contributions or Standard Contributions, or the Retirement Savings Matching Contributions payable on behalf of such Member under Section 4.04, or earnings on any such contributions to which such Member is entitled under the Plan are not credited to the appropriate account, and such failure is due to administrative error in determining or allocating the proper amount of such contributions or earnings, or any other error or mistake of fact in determining an individual's eligibility for a contribution, the Committee may correct such error by reallocation of amounts among Members' Retirement Savings Accounts and/or the Participating Company may make additional contributions to the Retirement Savings Account of any affected Member to place the affected Member's Retirement Savings Account in the position that would have existed if the error had not been made; provided that any such reallocations or additional contributions are made on a uniform and nondiscriminatory basis. In addition to the foregoing, if an error is made with respect to the investment of the Trust's assets which results in an error in the amount credited to a Member's Account, the Committee may correct such error by reallocation of amounts among Members' Accounts and/or the Participating Company may make additional 39 contributions to the Account of any affected Member to place the affected Member's Account in the position that would have existed if the error had not been made; provided that any such reallocations or additional contributions are made on a uniform and nondiscriminatory basis. 4.11 Rollover Contributions ---------------------- (a) An Eligible Employee who is eligible to make Sheltered Contributions and Standard Contributions may, with the permission of the Committee (which shall be uniformly applied), make a Rollover Contribution. Such Eligible Employee's Rollover Contribution shall be paid to the Retirement Savings Trustee as soon as practicable and shall be credited to his "Rollover Contribution Account" under his Retirement Savings Account. (b) The term "Rollover Contribution" means the contribution of an "eligible rollover distribution" to the Trustee by the Eligible Employee on or before the 60th day immediately following the day such Eligible Employee receives the "eligible rollover distribution" or a contribution of an "eligible rollover distribution" to the Trustee by the Eligible Employee or the trustee of another "eligible retirement plan" (as defined in Section 402(c)(8) of the Code) in the form of a direct transfer under Section 401(a)(31) of the Code. (c) The term "eligible rollover distribution" means: (i) part or all of a distribution to the Eligible Employee from an individual retirement account or individual retirement annuity (as defined in Section 408 of the Code) maintained for the benefit of such Employee making the Rollover Contribution, the funds of which are solely attributable to an eligible rollover distribution 40 from an employee plan and trust described in Section 401(a) of the Code which is exempt from tax under Section 501(a) of the Code (a "conduit IRA"); or (ii) part or all of the amount (other than nondeductible employee contributions) received by such Eligible Employee or distributed directly to this Plan on such Employee's behalf from an employee plan and trust described in Code Section 401(a) which is exempt from tax under Code Section 501(a). In all events, such amount shall constitute an "eligible rollover distribution" only if such amount qualifies as such under Code Section 402(c) and the regulations and other guidance thereunder and is a distribution of all or any portion of the balance to the credit of the Employee from the distributing plan or conduit IRA other than any distribution: (i) that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or for a specified period of ten years or more; (ii) to the extent such distribution is required under Code Section 401(a)(9); (iii) to the extent such distribution is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); or (iv) that is made to a non-spouse beneficiary. (d) Once accepted by the Trust, an amount rolled over pursuant to this Section 4.11 shall be credited to the Member's "Rollover Contributions Account" under his Retirement Savings Account, and thereafter, such Rollover Contributions shall be administered and invested in accordance with Article 7 and subject to the withdrawal and distribution provisions set forth in Articles 8 and 9. The limitations of Sections 6.01 through 6.04 shall not apply to Rollover Contributions. All Rollover Contributions shall be made in cash and shall be fully vested. 41 4.12 Other Matching Contributions ---------------------------- (a) Armacell, LLC shall make matching contributions on behalf of each Member who is actively employed by Armacell, LLC on September 30, 2000 in an amount equal to 50% of the Member's Sheltered Contributions from June 1, 2000 through September 30, 2000, to the extent such matching contributions do not exceed 6% of the Member's Compensation for such period. Further, Armacell, LLC shall make matching contributions on behalf of each Member who is actively employed by Armacell, LLC on December 31, 2000 in an amount equal to 50% of the Member's Sheltered Contributions from October 1, 2000 through December 31, 2000, to the extent such matching contributions do not exceed 6% of the Member's Compensation for such period. Any matching contributions made on behalf of a Member shall be allocated to a newly established subaccount in the Member's Retirement Savings Account. Notwithstanding anything herein to the contrary, in determining the Standard and Retirement Savings Matching Contributions Percentage with respect to Members who are employed by Armacell, LLC and applying the limitation described in Section 6.03(a) (including the determination of any Excess Standard and Retirement Savings Matching Contributions), the matching contributions made under this Section 4.12(a) shall be taken into account as required by Code Section 401(m) and the regulations issued thereunder. (b) Ardex Engineered Cements, Inc. ("Ardex") shall make matching contributions on behalf of each Member who is actively employed by Ardex on September 30, 2000 in an amount equal to 50% of the Member's Sheltered Contributions from August 1, 2000 through September 30, 2000, to the extent such matching contributions do not exceed 6% of the Member's Compensation for such period. Further, 42 Ardex shall make matching contributions on behalf of each Member who is actively employed by Ardex on December 31, 2000 in an amount equal to 50% of the Member's Sheltered Contributions from October 1, 2000 through December 31, 2000, to the extent such matching contributions do not exceed 6% of the Member's Compensation for such period. Any matching contributions made on behalf of a Member shall be allocated to a newly established subaccount in the Member's Retirement Savings Account. Notwithstanding anything herein to the contrary, in determining the Standard and Retirement Savings Matching Contributions Percentage with respect to Members who are employed by Ardex and applying the limitation described in Section 6.03(a) (including the determination of any Excess Standard and Retirement Savings Matching Contributions), the matching contributions made under this Section 4.12(b) shall be taken into account as required by Code Section 401(m) and the regulations issued thereunder. 43 Article 5. Acquisition Loans ----------------- 5.01 Acquisition Loan ---------------- The Company may direct the Trustee to incur Acquisition Loans from time to time to finance the acquisition of Leveraged Shares or to repay a prior Acquisition Loan. Any Acquisition Loan shall be primarily for the benefit of Members and their beneficiaries. The proceeds of any Acquisition Loan shall be used within a reasonable period of time only to finance the acquisition of Leveraged Shares or to repay a prior Acquisition Loan. Any Acquisition Loan shall be for a specific term, shall bear a reasonable rate of interest, and shall not be payable on demand except in the event of default. In the event of default upon an Acquisition Loan, the value of Trust assets transferred in satisfaction of any Acquisition Loan shall not exceed the amount of the default. Any Acquisition Loan may be secured by collateral pledge of the Leveraged Shares so acquired. No other Trust assets may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against Trust assets other than any Leveraged Shares remaining subject to pledge. Any pledge of Leveraged Shares must provide for the release of shares so pledged on a pro rata basis as principal and interest on the Acquisition Loan are repaid by the Stock Ownership Trustee and such Released Leveraged Shares shall be allocated to Members' Stock Ownership Accounts as provided under Section 6.02 of the Plan as in effect immediately prior to December 1, 2000. Except upon termination of the Plan or the employee stock ownership portion of the Plan as provided under Section 13.02, repayments of principal and interest on any Acquisition Loan shall be made by the Trustee (as directed by the Committee) only from Stock Ownership Contributions, Exchange Contributions (and earnings thereon), any cash 44 dividends received by the Stock Ownership Trustee on Company Stock held by the Stock Ownership Trustee and earnings thereon, and from another Acquisition Loan that refinances such Acquisition Loan. The Committee, in its sole discretion, may determine that Exchange Contributions (and earnings thereon) and/or any such cash dividends for a Stock Ownership Allocation Period shall not be applied to the payment of principal and interest on any Acquisition Loan. Any Acquisition Loan that refinances an earlier Acquisition Loan shall bear an interest rate based on the market conditions at the time such loan is made, and may be prepaid at any time, without penalty. Any prepayment of an Acquisition Loan within the 30-day period immediately following the end of the Stock Ownership Allocation Period shall be deemed to be a repayment of principal and interest on the Acquisition Loan for such Stock Ownership Allocation Period. In acquiring Leveraged Shares, the Trustee shall pay no more than "adequate consideration" (as defined in Section 3(18) of ERISA). 5.02 Allocation of Leveraged Shares ------------------------------ (a) Any Leveraged Shares shall initially be credited to the Company Suspense Account and shall be allocated to the Members' Stock Ownership Accounts for each Stock Ownership Allocation Period only as payments of principal and interest on the Acquisition Loan used to purchase such Leveraged Shares are made by the Trustee. The number of Leveraged Shares to be released from the Company Suspense Account following any amortization of an Acquisition Loan shall equal the number of Leveraged Shares in the Company Suspense Account immediately before release multiplied by a fraction. The numerator of the fraction shall be the sum of: (i) the Stock Ownership Contributions made for the Stock Ownership Allocation Period, (ii) the Exchange 45 Contributions (and earnings thereon) made during the Stock Ownership Allocation Period that the Committee determines, in its sole discretion, are to be applied to the payment of the Acquisition Loan, and (iii) any dividends on Company Stock declared during the Stock Ownership Allocation Period that the Committee, in its sole discretion, determines are to be applied to the payment of the Acquisition Loan. The denominator of the fraction shall be the sum of the numerator plus the principal and interest to be paid for all future periods over the duration of the Acquisition Loan repayment period, including the principal and interest to be paid on an Acquisition Loan that refinances such Acquisition Loan. For this purpose, the number of future Allocation Periods under the Acquisition Loan must be definitely ascertainable and must be determined without taking into account any possible extensions or renewal periods. If the interest rate under the Acquisition Loan is variable, the interest to be paid in future Allocation Periods shall be computed by using the interest rate applicable as of the end of the Plan Year. Any Leveraged Shares released within thirty (30) days following the end of the Stock Ownership Allocation Period shall be deemed to be "Released Leveraged Shares" for purposes of Section 6.02 of the Plan as in effect immediately prior to December 1, 2000. (b) In connection with the release of Leveraged Shares from the Company Suspense Account as a result of a loan amortization payment made in whole or in part with cash dividends on Company Stock held in Members' Stock Ownership Accounts ("Allocated Dividends"), a portion of the total number of shares so released, calculated with respect to each class of Company Stock, shall be released for allocation to the Members' Accounts as of a date during the Plan Year which is no later than the last day of the Plan Year in which the Allocated Dividends are paid, based on the amount of such 46 Allocated Dividends used to make the loan amortization payment. The number of released shares with respect to Allocated Dividends shall be the total number of shares released on account of the loan amortization payment multiplied by a fraction. The numerator of the fraction shall be the amount of the Allocated Dividends used to make the loan amortization payment. The denominator of the fraction shall be the fair market value of the total number of shares released as a result of the loan amortization payment. The number of released shares with respect to Allocated Dividends shall be allocated among the Members in the same proportion that each Member's Allocated Dividends used to make the loan amortization payment bears to the total amount of such Allocated Dividends, in accordance with Section 6.02(a) of the Plan as in effect immediately prior to December 1, 2000. 47 Article 6. Limitations on Contributions ---------------------------- 6.01 Limitation on Sheltered Contributions Affecting Highly Compensated ------------------------------------------------------------------ Employees --------- (a) Notwithstanding anything herein to the contrary, in no event shall the Sheltered Contributions made on behalf of Highly Compensated Employees who are eligible to participate in the Plan with respect to any Plan Year result in an Actual Deferral Percentage for such group of Highly Compensated Employees that exceeds the greater of: (i) an amount equal to 125% of the Actual Deferral Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year; or (ii) an amount equal to the sum of the Actual Deferral Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year and two percent (2%), provided that such amount does not exceed 200% of the Actual Deferral Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year. (b) Notwithstanding the foregoing, the Committee may elect to determine the permissible Actual Deferral Percentage for Highly Compensated Employees who are eligible to participate in the Plan for any Plan Year beginning on or after October 1, 1997 on the basis of the Actual Deferral Percentage for the current Plan Year rather than the preceding Plan Year, of all other Employees who are eligible to participate in the Plan, in accordance with such regulations, notices or other guidelines issued under Section 401(k) 48 of the Code (the "current year testing election"). Pursuant to such election right, the Committee has elected to make the current year testing election for Plan Years commencing October 1, 1997, 1998 and 1999. (c) The Committee shall be authorized to implement rules limiting the Sheltered Contributions that may be made on behalf of Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.01(a) is satisfied. (d) Notwithstanding any reductions pursuant to Section 6.01(c), if the limitation under Section 6.01(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee (in the case of Armacell, LLC, in the discretion of its board of directors or similar governing body and in the case of Ardex Engineered Cements, Inc., in the discretion of its board of directors) and in accordance with the regulations issued under Section 401(k) of the Code, make additional contributions to the Sheltered Accounts of Members who are not Highly Compensated Employees, which additional contributions shall be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, up to an amount necessary to assure that the limitation under Section 6.01(a) is not exceeded in the Plan Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Sheltered Contributions under the Plan. (e) To the extent the limitation under Section 6.01(a) continues to be exceeded following the contribution of such qualified nonelective contributions, if any, such Excess Sheltered Contributions made on behalf of Highly Compensated Employees 49 with respect to a Plan Year and income allocable thereto shall be distributed to such Highly Compensated Employees as soon as practicable after the close of such Plan Year, but no later than twelve months after the close of such Plan Year. The amount of income allocable to Excess Sheltered Contributions shall be determined in accordance with the regulations issued under Section 401(k) of the Code. The amount of any Excess Sheltered Contributions distributed to any Member under this Section 6.01(e) shall be reduced by the amount of any excess deferrals attributable to Sheltered Contributions previously distributed to such Member pursuant to Section 6.02, if any, for such Plan Year. Any amount returned to a Member pursuant to this Section 6.01(e) shall be withdrawn from the Investment Fund or Funds in which the Member's Sheltered Contributions are invested in accordance with such uniform rules as the Committee shall adopt from time to time. (f) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods in Sections 6.01(c), (d) or (e) to assure that the limitation of Section 6.01(a) is satisfied. 6.02 Maximum Sheltered Contributions ------------------------------- Notwithstanding any other provision of the Plan including the limitations of Section 6.01(a), in no event may the total of Sheltered Contributions to this Plan on behalf of any Member, in addition to all such deferrals on behalf of such Member under all other cash or deferred arrangements (as defined in Section 401(k) of the Code) maintained by the Company or any Affiliated Company in which the Member participates, exceed $7,000 (indexed as provided in Section 402(g)(5) of the Code) in any calendar year of the Member. If a Member participates in another cash or deferred 50 arrangement in any calendar year which is not maintained by the Company or an Affiliated Company, and his total elective deferral contributions under this Plan and such other plan exceed $7,000 (as indexed) in a calendar year, he may request to receive a distribution of the amount of the excess deferral (a deferral in excess of $7,000, as indexed) that is attributable to Sheltered Contributions in this Plan together with earnings thereon, notwithstanding any limitations on distributions contained in this Plan. Such distribution shall be made by the April 15 following the calendar year of the Sheltered Contributions were made, provided that the Member notifies the Committee of the amount of the excess deferral that is attributable to Sheltered Contributions to this Plan and requests such a distribution. The Member's notice must be received by the Committee no later than the March 1 following the calendar year of the excess deferral. In the absence of such notice, the amount of such excess deferral attributable to Sheltered Contributions to this Plan shall be subject to all limitations on withdrawals and distributions in this Plan. The amount of excess deferrals that may be distributed under this Section 6.02 with respect to any Member for any Plan Year shall be reduced by the amount of any Excess Sheltered Contributions previously distributed pursuant to Section 6.01(a), if any, for such Plan Year. 6.03 Limitation on Standard and Retirement Savings Matching ------------------------------------------------------ Contributions Affecting Highly Compensated Employees ---------------------------------------------------- (a) Notwithstanding anything herein to the contrary, in no event shall the Standard Contributions and Retirement Savings Matching Contributions made on behalf of Highly Compensated Employees who are eligible to participate in the Plan with respect to any Plan Year beginning on or after October 1, 2000 result in a Standard and 51 Retirement Savings Matching Contributions Percentage for such group of Highly Compensated Employees that exceeds the greater of: (i) an amount equal to 125% of the Standard and Retirement Savings Matching Contributions Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year; or (ii) an amount equal to the sum of the Standard and Retirement Savings Matching Contributions Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year and two percent (2%), provided that such amount does not exceed 200% of the Standard and Retirement Savings Matching Contributions Percentage for the preceding Plan Year of all Employees other than Highly Compensated Employees who were eligible to participate in the Plan during such preceding Plan Year. (b) Notwithstanding the foregoing, the Committee may elect to determine the permissible Standard and Retirement Savings Matching Contributions Percentage for Highly Compensated Employees who are eligible to participate in the Plan for any Plan Year on the basis of the Standard and Retirement Savings Matching Contributions Percentage for the current Plan Year rather than the preceding Plan Year, of all other Employees who are eligible to participate in the Plan, in accordance with such regulations, notices or other guidelines issued under Section 401(m) of the Code (the "current year testing election"). Pursuant to such election right, the Committee has elected to make the current year testing election for Plan Years commencing October 1, 1997, 1998 and 1999. 52 (c) The Committee shall be authorized to implement rules authorizing or requiring reductions in the Standard Contributions that may be made by Highly Compensated Employees during the Plan Year (prior to any contributions to the Trust) so that the limitation of Section 6.03a) is satisfied. (d) Notwithstanding any reductions pursuant to Section 6.03(c), if the limitation under Section 6.03(a) is exceeded in any Plan Year, the Committee may, in accordance with the regulations issued under Sections 401(k) and 401(m) of the Code, elect to treat amounts attributable to Sheltered Contributions as additional Standard Contributions solely for the purposes of satisfying the limitation of Section 6.03(a). (e) Notwithstanding any reductions pursuant to Section 6.03(c), if the limitation under Section 6.03(a) is exceeded in any Plan Year, a Participating Company may, in the sole discretion of the Committee (in the case of Armacell, LLC, in the discretion of its board of directors or similar governing body and in the case of Ardex Engineered Cements, Inc., in the discretion of its board of directors) and in accordance with the regulations issued under Section 401(m) of the Code, make additional contributions to the Standard Accounts of Members who are not Highly Compensated Employees, which additional contributions shall be qualified nonelective contributions as described in Section 401(m)(4)(C) of the Code and the regulations issued thereunder, up to an amount necessary to assure that the limitation under Section 6.03(a) is not exceeded in the Plan Year. Qualified nonelective contributions shall be nonforfeitable when made and are distributable only in accordance with the distribution and withdrawal provisions that are applicable to Sheltered Contributions under the Plan. 53 (f) To the extent the limitation under Section 6.03(a) continues to be exceeded following the contribution of such additional contributions, if any, the amount of Excess Standard and Retirement Savings Matching Contributions attributable to Standard Contributions made with respect to Highly Compensated Employees with respect to a Plan Year and income allocable thereto shall then be distributed to such Highly Compensated Employees, as soon as practicable after the close of the Plan Year in which they occur, but no later than twelve months after the close of such Plan Year. The amount of income allocable to such Excess Standard Contributions shall be determined in accordance with the regulations issued under Code Section 401(m). Any amount returned to a Member pursuant to this Section 6.03(f) shall be withdrawn from the Investment Fund or Funds in which the Member's Standard Contributions are invested in accordance with such uniform rules as the Committee shall adopt from time to time. (g) If the limitation under Section 6.03(a) continues to be exceeded following the application of Section 6.03(d) and (e) and after any distributions under Section 6.03(f), the amount of Excess Standard and Retirement Savings Matching Contributions attributable to Retirement Savings Matching Contributions made with respect to Highly Compensated Employees with respect to the Plan Year and income allocable thereto shall be distributed to Highly Compensated Employees to the extent vested pursuant to Section 9.01, or if not vested, forfeited to the extent of the remaining Excess Standard and Retirement Savings Matching Contributions. Any such forfeitures shall be applied in accordance with Section 9.05(a). Such distribution or forfeiture shall occur as soon as practicable after the close of the Plan Year in which the Excess Standard 54 and Retirement Savings Matching Contributions occur, but no later than twelve months after the close of such Plan Year. The amount of income allocable to such Retirement Savings Matching Contributions shall be determined in accordance with the regulations issued under Code Section 401(m). Any amount forfeited by or distributed to a Member pursuant to this Section 6.03(g) shall be withdrawn from the Investment Fund or Funds in which the Member's Retirement Savings Matching Contributions are invested in accordance with such uniform rules as the Committee shall adopt from time to time. (h) The Committee is authorized to implement rules under which it may utilize any combination of the foregoing methods described in Section 6.03(c), (d), (e), (f) and (g) to assure that the limitation of Section 6.03(a) is satisfied. (i) Notwithstanding anything to the contrary in Section 6.01 or this Section 6.03, Sheltered Contributions, Standard Contributions and Retirement Savings Matching Contributions may not be made to this Plan in violation of the rules prohibiting multiple use of the alternative limitation described in Sections 401(k)(3)(A)(ii)(II) and 401(m)(2)(A)(ii) of the Code and the provisions of Treasury Regulation section 1.401(m)-2(b) and any further guidance issued thereunder. If such multiple use occurs, the Standard and Retirement Savings Matching Contributions Percentages for all Highly Compensated Employees (determined after applying the foregoing provisions of Sections 6.01 and 6.03) shall be reduced in accordance with Treasury Regulation section 1.401(m)-2(c) and any further guidance issued thereunder in order to prevent such multiple use of the alternative limitation. (j) Notwithstanding anything in the Plan to the contrary, if the rate of Retirement Savings Matching Contributions (determined after application of the 55 corrective mechanisms described in the foregoing provisions of Section 6.01, Section 6.02 or this Section 6.03) discriminates in favor of Highly Compensated Employees, the Retirement Savings Matching Contributions attributable to any Excess Standard and Retirement Savings Matching Contributions, Excess Sheltered Contributions or excess deferrals (as described in Section 6.02) of each affected Highly Compensated Employee shall be forfeited so that the rate of Retirement Savings Matching Contributions is nondiscriminatory. Any such forfeitures shall be made no later than the end of the Plan Year following the Plan Year for which the Retirement Savings Matching Contributions were made. Forfeitures, if any, shall be applied as set forth in Section 9.05(a). 6.04 Limitations on Annual Additions ------------------------------- (a) Basic Limitation ---------------- Subject to the adjustments hereinafter set forth, the maximum aggregate Annual Addition allocated to a Member's Account in any calendar year (which shall be the Limitation Year) shall not exceed the lesser of: (i) 25% of the Member's Compensation in such Limitation Year, or (ii) $30,000 or such greater amount in effect as established by regulations issued pursuant to Section 415(d) of the Code. (b) Limitation for Members in a Combination of Plans ------------------------------------------------ Notwithstanding the foregoing, effective for Limitation Years beginning before January 1, 2000, in the case of a Member who participates in this Plan and a qualified defined benefit plan maintained by the Company or an Affiliated Company, the sum of the defined contribution plan fraction (as defined in Section 56 415(e)(3) of the Code) and the defined benefit plan fraction (as defined in Section 415(e)(2) of the Code) in any Limitation Year shall not exceed 1.0. (c) Preclusion of Excess Annual Additions; Reduction of --------------------------------------------------- Benefits -------- The Committee shall maintain records showing the contributions allocated to a Member's Account in any Limitation Year, and prior to the allocation of any contributions, the Committee shall determine whether the amount to be allocated would cause the limitations prescribed hereunder to be exceeded with respect to any Member. (i) In the event that the Committee determines that the allocation of a contribution would cause the restrictions imposed by Section 6.04(a) to be exceeded with respect to this Plan when combined with any other defined contribution plan pursuant to Section 6.04(e), allocations shall be reduced in the following order, but only to the extent necessary to satisfy such restrictions: (1) First, the Annual Additions under any other qualified defined contribution plan maintained by the Company or an Affiliated Company; (2) Second, the Annual Additions under this Plan. (ii) If it becomes necessary to make an adjustment in Annual Additions to a Member's Account under this Plan, either because of the limitations as applied to this Plan alone or as applied to this Plan in combination with another qualified defined contribution plan, the excess Annual Addition under this Plan with respect to the affected Member shall be reallocated proportionately in the same manner as Contributions are allocated to the Accounts of other Members until the Annual Addition to the Account of each Member reaches the limits of Section 415 of the Code. 57 (iii) Notwithstanding Paragraph (i) above, if the combination limitation prescribed under Section 6.04(b) hereof would be exceeded in any Limitation Year that begins prior to January 1, 2000, benefits under the defined benefit plan shall be frozen, or reduced if necessary, prior to making any reductions in this Plan or any other qualified defined contribution plan; provided, however, if in a subsequent year the limitations are increased due to cost of living adjustments or any other factor, the freeze or reduction of the Member's benefits shall lapse to the extent that additional benefits may be payable under the increased limitations. (iv) The Committee shall advise an affected Member of any limitation on his Annual Addition required by this Section 6.04. (d) Disposal of Excess Annual Additions ----------------------------------- In the event that, notwithstanding the foregoing, the limitations with respect to Annual Additions prescribed hereunder are exceeded with respect to any Member, and such excess arises as a consequence of the allocation of forfeitures, a reasonable error in estimating the Member's Compensation, a reasonable error in determining the amount of Sheltered Contributions that may be made with respect to the Member under the limits of Code Section 415, or under other limited facts and circumstances that the Commissioner finds justify the availability of the rules set forth in this Section 6.04(d), such excess amounts shall not be deemed Annual Additions in that Limitation Year to the extent corrected hereunder. First, Standard Contributions (together with earnings thereon) shall be returned to each affected Member to the extent that such distribution would reduce the excess amounts in the Member's Account. These amounts shall be disregarded in applying the limitations of Sections 6.03. To the extent 58 excess amounts remain after any such distribution, Sheltered Contributions (together with earnings thereon) shall be returned to each affected Member to the extent that such distribution would reduce the excess amounts in the Member's Account. These amounts shall be disregarded in applying the limitations of Sections 6.01 and 6.02. To the extent excess amounts remain after all such distributions, such excess amounts shall be used to reduce future contributions on behalf of the Member for the next succeeding Limitation Year and succeeding Limitation Years as necessary. If the Member is not covered by the Plan as of the end of such succeeding year, but an excess amount still exists, such excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future contributions on behalf of the other Members entitled to an allocation, in that Limitation Year, and succeeding Limitation Years, if necessary. (e) Aggregation of Plans -------------------- For purposes of this Section 6.04, all qualified defined contribution plans maintained by the Company or any Affiliated Company shall be treated as a single plan, and all qualified defined benefit plans maintained by the Company or any Affiliated Company shall be treated as a single plan. (f) Definition of "Annual Additions" ------------------------------- For purposes of this Section, the term "Annual Additions" shall mean the sum for any Limitation Year of the following amounts allocated to an account on behalf of a Member: (i) Retirement Savings Matching Contributions, Stock Ownership Contributions before December 1, 2000, and any other Company or Affiliated Company contributions allocated to the Member's account under any defined contribution plan 59 maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; (ii) Sheltered Contributions, Standard Contributions, and any other contributions (including Exchange Contributions before December 1, 2000) by the Member or on behalf of the Member to any defined contribution plan maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; (iii) Any forfeitures allocated to the Member's account under any other defined contribution plan maintained by the Company or an Affiliated Company and qualified under Section 401(a) of the Code; and (iv) Amounts described in Sections 415(l)(1) and 419A(d)(2) of the Code. Notwithstanding the above, any contributions under this Plan which are applied by the Trustee (not later than the due date, including extension, for filing the Company's federal income tax return for the taxable year which ends with or within such Limitation Year) to pay interest on an Acquisition Loan, and any forfeitures allocated to a Member's Stock Ownership Account shall not be "Annual Additions." In any case where an Acquisition Loan has been made to finance the acquisition of Leveraged Shares for the Trust or to repay a prior Acquisition Loan, the Annual Additions with respect to the Leveraged Shares that are released and allocated to a Member's Account for the Limitation Year shall be based on the fair market value of such released and allocated Leveraged Shares (with such fair market value being determined as of the date the Leveraged Shares are allocated to the Member's Account) to the extent the Annual Additions as so calculated are lower than the Annual Additions 60 calculated on the basis of the contributions which are used to repay principal on the Acquisition Loan to release such Leveraged Shares during such Limitation Year. 61 Article 7. Investment of Contributions --------------------------- 7.01 Investment Funds ---------------- The Committee shall designate the Investment Funds of the Trust which shall include, but not be limited to, the following Investment Funds: (a) Equity Investment Fund ---------------------- One or more diversified equity funds, as may be available from time to time, invested in equity securities or securities convertible into equity securities or in a commingled equity trust for the collective investment of funds of employee benefit plans qualified under Section 401(a) of the Code (or corresponding provisions of any subsequent Federal revenue law at the time in effect), excluding, however, any stocks or other securities of the Retirement Savings Trustee. This exclusion shall not apply to any investment in a commingled trust or insurance company account not proscribed by applicable law. Pending the selection and purchase of suitable investments for this Fund, any part of this Fund may be invested in short-term and medium-term fixed income securities, such as commercial paper, notes of finance companies, and obligations of the U.S. Government and any agency or instrumentality thereof. (b) Fixed Income Investment Fund ---------------------------- One or more fixed income funds, as may be available from time to time, invested in, but not limited to, guaranteed income contracts, bonds, notes, debentures, asset-backed securities and fixed income derivatives, excluding securities of the Retirement Savings Trustee. This exclusion shall not apply to any investment in a commingled trust or insurance company account not prescribed by applicable law. Pending the selection and purchase of suitable investments for this Fund, any part of this 62 Fund may be invested in short-term and medium-term fixed income securities, such as commercial paper, notes of finance companies, bankers acceptances, certificates of deposit, and obligations of the U.S. Government and any agency or instrumentality thereof. (c) Money Market Fund ----------------- One or more money market funds, as may be available from time to time, invested in short-term obligations of the United States Government, bank certificates of deposit, commercial paper, bankers' acceptances, shares of money market mutual funds and other similar types of short-term investments which may include investment in any commingled trust fund qualified under Section 401(a) of the Code (or corresponding provisions of any subsequent Federal revenue law at the time in effect) and which is invested primarily in similar types of securities. (d) Balanced Fund ------------- One or more balanced funds, as may be available from time to time, that invest in a mixture of bonds, equities, and short-term instruments, as determined by the Fund manager. (e) Company Stock Fund ------------------ A fund designed solely to invest in Company Stock or to hold Company Stock contributed to the Plan by the Company. Up to 100% of the assets of a Member's Retirement Savings Account may be invested in the Company Stock Fund. Notwithstanding the foregoing, effective with respect to any contributions to a Member's Retirement Savings Account that are processed on and after December 27, 2000, the Company Stock Fund shall not be available as an Investment Fund with respect to an 63 initial investment designation under Section 7.02 or a change in the election of Investment Funds under Section 7.03. Further, effective with respect to any transfers among Investment Funds under Section 7.04 on and after January 1, 2001, the Company Stock Fund shall not be available as an Investment Fund. (f) Stock Ownership Fund -------------------- A fund consisting of Company Stock and cash for fractional shares and earnings attributable thereto. All amounts credited to a Member's Stock Ownership Account shall be invested in the Stock Ownership Fund (except that a Member's Exchange Contributions made in each Stock Ownership Allocation Period shall be invested in a Money Market Fund until the allocation of Released Leveraged Shares and Non-Leveraged Shares for such Stock Ownership Allocation Period under Section 6.02(b) of the Plan as in effect immediately preceding December 1, 2000) and may not be transferred from such fund to any of the other Investment Funds, except as provided in Section 7.08. Notwithstanding the preceding sentence, a Member's Exchange Contributions and earnings thereon made during the Stock Ownership Allocation Period ending December 13, 2000 shall be transferred from the Money Market Fund to the Investment Fund or Funds (other than this Stock Ownership Fund) that each such Member has designated for the investment of his Sheltered Contributions, subject to the rules of Section 7.02 in the event such Member fails to designate the investment of his Sheltered Contributions. If there shall be available for investment at any time more than one Equity Investment Fund, Fixed Income Investment Fund, Money Market Fund or Balanced Fund, there shall be separate accounting for each available Fund. To the extent allowed 64 by applicable law and all other provisions of this Plan, all or any portion of a Fund identified above in (a) through (d) may be invested in securities of a foreign corporation or a foreign government and in other property located outside the United States. Each such Fund may keep such amounts of cash and cash equivalents as its managers shall deem necessary or advisable as a part of such Fund, all within the limitations specified in the applicable Trust Agreement. Dividends, interest and other distributions received on the assets held in each Fund shall be reinvested in the respective Fund. 7.02 Investment of Contributions --------------------------- Each Member, as a part of the application for membership in the Plan, shall designate the Investment Fund or Funds (other than the Stock Ownership Fund and effective with respect to contributions processed on and after December 27, 2000, the Company Stock Fund) in which his Sheltered Contributions, Standard Contributions, Retirement Savings Matching Contributions, and Rollover Contributions, if any, shall be invested. The designated investments shall be in 1% increments, provided that the total designated equals 100% of the contributions to his Retirement Savings Account. In the event a Member fails to designate the investment of his Retirement Savings Account, the Member's Sheltered Contributions, Standard Contributions, Retirement Savings Matching Contributions, and Rollover Contributions shall be invested in one or more Fixed Income Investment Funds until the Member properly designates other Funds. Amounts held in a Member's Stock Ownership Account may not be invested in any Fund other than the Stock Ownership Fund, provided, however, a Member's Exchange Contributions made in each Stock Ownership Allocation Period shall be invested in a Money Market Fund until the allocation of Released Leveraged Shares and Non- 65 Leveraged Shares under Section 6.02(b) of the Plan as in effect immediately before December 1, 2000 and all or a portion of a Member's Stock Ownership Account may be invested in any of the Investment Funds described in Section 7.01(a), (b), or (d), pursuant to Section 7.08. Notwithstanding the preceding sentence, a Member's Exchange Contributions and earnings thereon made during the Stock Ownership Allocation Period ending December 13, 2000 shall be transferred from the Money Market Fund to the Investment Fund or Funds (other than the Stock Ownership Fund) that each such Member has designated for the investment of his Sheltered Contributions, subject to the rules of this Section 7.02 in the event such Member fails to designate the investment of his Sheltered Contributions. Notwithstanding anything herein to the contrary, any contributions to a Member's Retirement Savings Account that are designated by the Member to be invested in the Company Stock Fund shall be invested in a Money Market Fund until the Member properly designates the investment of such Retirement Savings Account contributions in and among the other Investment Funds available under Section 7.01 (other than the Stock Ownership Fund). 7.03 Change of Election ------------------ A Member, by notice to the Retirement Savings Trustee in a format approved by the Committee, may change the election of the Investment Funds (other than the Company Stock Fund with respect to contributions processed on and after December 27, 2000) in which future contributions to his Retirement Savings Account shall be invested. A Member may change the election of the Investment Funds (other than the Company Stock Fund with respect to contributions processed on and after December 27, 2000) in which such contributions are to be invested by designating the percentage of 66 contributions that shall be invested in each of the Investment Funds, in 1% increments, provided the total equals 100%. Such change shall be effective as soon as practicable after such notice is received by the Retirement Savings Trustee. 7.04 Transfers Among Funds --------------------- (a) An active or inactive Member may elect to transfer all or any portion of the value of his Retirement Savings Account in one of the Investment Funds to any other Investment Fund (except the Stock Ownership Fund and effective with respect to transfer requests processed on and after January 1, 2001, the Company Stock Fund) at the following times (and under such uniform rules as the Committee may adopt from time to time): (i) Any election to transfer between and among the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund and the Balanced Fund (and any related funds maintained in the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund and the Balanced Fund) may be made at any time, to be effective as soon as practicable thereafter; and (ii) Any election to transfer from the Company Stock Fund may be made at any time, to be effective as follows: elections initiated by the fifteenth day of the month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteenth day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. 67 (b) An active or inactive Member who has diversified all or part of his Stock Ownership Account pursuant to Section 7.08 may elect to transfer the diversified portion of his Stock Ownership Account in one of the Investment Funds to any other Investment Fund (except the Stock Ownership Fund, the Money Market Fund with respect to transfer requests processed prior to May 1, 2001, and the Company Stock Fund, effective with respect to transfer requests processed on an after January 1, 2001) at the following times (and under such uniform rules as the Committee may adopt from time to time): (i) Any election to transfer between and among the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund, and the Balanced Fund (and any related funds maintained in the Equity Investment Fund, the Fixed Income Investment Fund, the Money Market Fund, and the Balanced Fund) may be made at any time, to be effective as soon as practicable thereafter; and (ii) Any election to transfer from the Company Stock Fund may be made at any time, to be effective as follows: elections initiated by the fifteenth day of the month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteen day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. 68 (c) Notwithstanding the foregoing: (i) no direct transfers are permitted from (A) the Fixed Income Investment Fund to the Money Market Fund, or (B) from the Fixed Income Investment Fund to any fund maintained in the Balanced Fund that is designated by the Company as having goals and objectives comparable to the Fixed Income Investment Fund (referred to as a "Balanced Income Fund"); provided, however, effective May 1, 2001, direct transfers are permitted from the Fixed Income Investment Fund to the Fidelity Asset Manager: Income Fund; and (ii) amounts transferred from the Fixed Income Investment Fund to any other Fund may not thereafter be transferred to the Money Market Fund or any Balanced Income Fund (other than the Fidelity Asset Manager: Income Fund with respect to transfers occurring on and after May 1, 2000) for three (3) months following such transfer. (d) Except as otherwise provided, transfers pursuant to this Section 7.04 may be made by telephoning notice to the Retirement Savings Trustee, and shall be effective as soon as practicable following the Retirement Savings Trustee's receipt of the notice. 7.05 Investment Options ------------------ Each active and inactive Member is solely responsible for the selection of his investment options with respect to the amounts in his Retirement Savings Account. The Retirement Savings Trustee, the Committee, the Participating Companies or any of the officers or supervisors of the Participating Companies are not empowered to advise a Member as to the manner in which his Retirement Savings Account shall be invested. 69 The fact that a security is available to Members for investment under the Plan shall not be construed as a recommendation for the purchase of that security, nor shall the designation of any option impose any liability on any Participating Company, its directors, officers or employees, the Retirement Savings Trustee, the Committee or any Member of the Plan. 7.06 Valuations ---------- (a) The market value of each Investment Fund (other than the Stock Ownership Fund) shall be determined by the Retirement Savings Trustee as of each Valuation Date. The valuation shall reflect all income, as well as the payment of brokerage fees and transfer taxes applicable to purchases and sales for each Fund and all similar transactions, and any Plan administrative expenses to the extent they are not paid by a Participating Company, occurring since the last Valuation Date with respect to each Fund. The value of a Member's interest in each Investment Fund shall be represented by mutual fund shares, shares of Company stock, or in dollars, whichever is applicable. Contributions made by a Member for any payroll period shall be invested based on the value of the Fund as of the last Valuation Date in that payroll period, regardless of when such contributions are actually paid to and become part of an Investment Fund. The Trust Fund attributable to Members' Retirement Savings Accounts, and each Member's allocable share of such Trust Fund, shall be valued at fair market value periodically as determined necessary by the Retirement Savings Trustee or as requested by the Committee. (b) The market value of the Trust Fund attributable to Members' Stock Ownership Accounts, and each Member's allocable share of such Trust Fund, shall be determined by the Stock Ownership Trustee as of each Valuation Date. 70 7.07 Annual Statements ----------------- At least once each Plan Year, each active and inactive Member shall be furnished with a statement setting forth the value of his Retirement Savings Account and Stock Ownership Account. 7.08 Diversification of Stock Ownership Accounts ------------------------------------------- (a) Eligibility for Diversification ------------------------------- Effective before January 1, 2001, each Member who has completed five (5) Years of Service and attained an age specified in the schedule below shall be permitted to direct the investment of up to a corresponding percentage of the number of shares of Company Stock in his Stock Ownership Account, as specified in the schedule below and as determined in Subsection 7.08(b), in any of the Investment Funds described in Section 7.01(a), (b), (c), or (d). Maximum Percentage of Stock Ownership Account Eligible for Diversification Age Before January 1, 2001 --- ---------------------- 50-54 25% 55-59 50% 60 and older 100% In addition to the foregoing, a Member who is fully vested in his Stock Ownership Account upon his termination of employment and who has not received a distribution of his Stock Ownership Account in accordance with Section 9.02, shall be permitted to direct the investment of up to 100% of the shares of Company Stock in his Stock Ownership Account in accordance with any of the Investment Funds described in Section 7.01(a), (b), (c), or (d). 71 Effective on and after January 1, 2001, each Member who has a Stock Ownership Account shall be permitted to direct the investment of up to 100% of the number of shares of Company Stock in his Stock Ownership Account, in any of the Investment Funds described in Section 7.01(a), (b), (c), or (d). (b) Maximum Number of Shares Permitted to be Diversified ---------------------------------------------------- The maximum number of shares of Company Stock that may be directed by a Member under this Section 7.08 shall equal the total number of shares of Company Stock that have ever been allocated to the Member's Stock Ownership Account multiplied by the applicable percentage (based on the schedule in Subsection (a) above), and then reduced by the number of shares of Company Stock previously directed by the Member under this Section 7.08, rounded to the nearest whole integer. (c) Separate Diversification Elections ---------------------------------- A Member who is eligible to diversify his Stock Ownership Account under Subsection (a) above shall be permitted to designate separately the percentage of his Exchange Contribution Account, Equity Account, and Match Account to be diversified, in accordance with the maximum percentages specified above. (d) Direction to Diversify ---------------------- A Member's direction to diversify pursuant to this Section 7.08 may be at any time, to be effective as follows: elections initiated by the fifteenth day of a month shall be effective as soon as practicable after the fifteenth day of the month; elections initiated after the fifteenth day of the month and by the last day of the month shall be effective as soon as practicable after the last day of the month. If the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of the month 72 shall be deemed to be the last business day preceding the fifteenth or last day of the month, respectively. Any direction to diversify may be made by telephoning direction to the Retirement Savings Trustee. Any direction to diversify may be revoked or modified before the fifteenth or last day of the month next following the request in the manner authorized by the Committee (including telephonically). All directions shall be in accordance with any notice, rulings, or regulations or other guidance issued by the Internal Revenue Service with respect to Section 401(a)(28)(B) of the Code. (e) Diversified Shares ------------------ Notwithstanding a Member's direction to diversify under this Section 7.08, any amounts invested in the Investment Funds described in Section 7.01(a), (b), (c), or (d) as a result of such direction shall continue to be part of the Member's Stock Ownership Account. 73 Article 8. In-Service Withdrawals and Loans -------------------------------- 8.01 In-Service Withdrawals ---------------------- (a) A Member who is actively employed by the Company or any Affiliated Company may elect in the manner prescribed by the Committee (including telephonically) to withdraw in cash a portion or all of his Standard Contributions Account, Tax Deductible Contributions Account, Rollover Account, or Sheltered Account, less the amount of any outstanding loan (but shall not be permitted to withdraw any portion of his Retirement Savings Match Account or Stock Ownership Account while he is actively employed). Any such cash withdrawals shall be made according to the order in which the following Subsections are presented, as the amounts described in each successive Subsection are exhausted: (i) An amount equal to all or part of the Member's before-1987 Standard Contributions (i.e., after-tax contributions made by the ---- Member), but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (ii) An amount equal to all or part of the Member's after-1986 Standard Contributions and a pro rata portion of the earnings on all Standard Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (iii) An amount equal to all or part of the Member's Tax Deductible Contributions Account. 74 (iv) An amount equal to all or part of the Member's Rollover Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Rollover Contributions. (v) An amount equal to all or part of the Member's Sheltered Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Sheltered Contributions, provided: (A) the Member has attained age 59 1/2; (B) the Member demonstrates financial hardship in accordance with the rules provided under Section 8.02, and only to the extent required to meet the need created by the financial hardship (b) A Member who is no longer actively employed due to becoming disabled in accordance with Code Section 401(k)(2)(B)(i)(A) shall be permitted to make the following in-service withdrawals: (i) If the Member has not been determined by the Social Security Administration to be permanently and totally disabled, the Member shall be permitted to withdraw in cash a portion or all of his Sheltered Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Sheltered Contributions. (ii) If the Member has been determined by the Social Security Administration to be permanently and totally disabled, the Member shall be permitted to withdraw in cash a portion or all of his Standard Contributions Account, Tax Deductible Contributions Account, Rollover Account, Sheltered Account, Retirement Savings Matching Account and Stock Ownership Account, less the amount of any outstanding 75 loan, according to the order presented in Subsections (a)(i) through (v), and with the Retirement Savings Matching Account being withdrawn after his Sheltered Account but before his Stock Ownership Account, as the amounts described in each successive Subsection and his Retirement Savings Matching Account balance are exhausted. 8.02 Investment Fund to be Deducted for Withdrawal --------------------------------------------- The amount withdrawn under Section 8.01 shall be deducted from the Investment Fund or Funds in which the amounts withdrawn are invested in accordance with such uniform rules as the Committee shall adopt from time to time. 8.03 Loans to Eligible Borrowers --------------------------- Loans from the Plan may be made to any Member who is actively employed by a Participating Company, or any Member or Beneficiary who is a "party in interest" within the meaning of Section 3(14) of ERISA. Each such individual is referred to herein as an "Eligible Borrower." (a) An application for a loan by an Eligible Borrower shall be made to the Committee or its designee in the manner prescribed by the Committee (including telephonic applications), whose action in approving or disapproving such application shall be final. The decisions by the Committee or its designee on loan applications shall be made on a reasonably equivalent, uniform and nondiscriminatory basis and within a reasonable period after each loan application is received. In determining whether to make a loan pursuant to this Section 8.03, the Committee or its designee shall consider only those factors which would be considered in a normal commercial setting by an entity in the business of making loans which are similar to loans made hereunder. Notwithstanding the foregoing, the Committee or its designee may apply different terms 76 and conditions for loans to Eligible Borrowers who are not actively employed by an Employer, or for whom payroll deduction is not available, based on economic and other differences affecting the individuals' ability to repay any loan. In no event shall loans be made from a Member's Stock Ownership Account, amounts attributable to a Member's Tax Deductible Contributions or amounts attributable to the portion of a Member's Retirement Savings Matching Account that is not vested under Section 9.01. (b) The amount of the loan must be at least $1,000 and shall not exceed the lesser of: (i) $50,000, reduced by the highest outstanding balance of loans from the Plan and any other defined contribution plan maintained by the Company or an Affiliated Company during the one-year period ending on the day before the date on which the loan was made, and (ii) one-half of the value of his Member Account (other than his Tax Deductible Contributions) as of the Valuation Date coincident with or immediately following the date the Eligible Borrower applies to the Committee or its designee for a loan. (c) The interest rate to be charged on loans made during the Plan Year shall be a reasonable rate as determined by the Committee from time to time. For loans granted or renewed after October 18, 1989, and for changes in the interest rate under an existing loan after that date, the interest rate shall not be less than the commercial rate of interest charged by persons in the business of lending money on loans which are made under similar circumstances, as determined by the Committee from time to time. 77 (d) A loan may be subject to a loan initiation fee, as determined by the Committee from time to time, which fee shall be obtained from an Eligible Borrower's Retirement Savings Account at the time of such loan. The amount of the loan, reduced by such loan initiation fee, is to be transferred from the Eligible Borrower's Retirement Savings Account invested in the Investment Funds enumerated in Section 7.01, other than amounts attributable to Tax Deductible Contributions or amounts invested in the Company Stock Fund that are attributable to his Retirement Savings Matching Contributions, to a special "Loan Reserve" for such Eligible Borrower, invested solely in the loan made to the Eligible Borrower. Such amounts will be transferred from the Investment Funds in a uniform manner as determined by the Committee from time to time. Payments of principal on the loan will reduce the amount held in the Eligible Borrower's Loan Reserve. Such payments, together with the attendant interest payment, will be credited to the Eligible Borrower's Retirement Savings Account invested in the Investment Funds in accordance with the Eligible Borrower's election in effect under Sections 7.02 or 7.03 at the time of such payment. If an Eligible Borrower has no election in effect, payments will be credited to the Money Market Fund. (e) In addition to such rules and regulations as the Committee may adopt, all loans shall comply with the following terms and conditions: (i) To the extent required by the Committee, each loan shall be evidenced by a promissory note payable to the Plan. (ii) Loans will be adequately secured, as determined by the Committee as of the date the loan is originated. 78 (iii) Loans will be available to all Eligible Borrowers on a reasonably equivalent basis and will not be made available to Highly Compensated Employees in an amount greater than the amount made available to Members who are not Highly Compensated Employees. (iv) The period of repayment for any loan shall be arrived at by mutual agreement between the Committee and the Eligible Borrower, but such period shall not be less than twelve (12) months and greater than five years. In the event a loan is refinanced, the total cumulative period of repayment for the initial loan and the refinanced loan also shall not exceed five years. (v) Payments of principal and interest will be made by level payments by payroll deductions or in a manner agreed to by the Eligible Borrower and the Committee. In the case of an Eligible Borrower who is not employed by the Company or an Affiliated Company, or in the case of any other Eligible Borrower where at any time during the repayment period, it is not possible to repay the loan by payroll deduction, the Member and the Committee shall agree to another form of repayment. In any event, however, such payments will be in an amount sufficient to amortize the loan over the repayment period and shall be made at least quarterly. Notwithstanding the foregoing, Plan loan repayments may, in the sole discretion of the Committee, be suspended during periods that the Member is performing service in the uniformed service, whether or not qualified military service, in accordance with Section 414(u)(4) of the Code. (vi) A loan may be prepaid in full as of any date without penalty. (vii) Only one loan may be outstanding at any given time. 79 (viii) Outstanding loans may be subject to an annual loan administration fee, as determined by the Committee from time to time. Loan administration fees shall be obtained from an Eligible Borrower's Retirement Savings Account on a quarterly basis, in such manner as determined by the Committee. (ix) If a loan is outstanding when a Member terminates his employment with a Participating Company other than on account of (1) Involuntary Termination (as defined in the Retirement Income Plan for Employees of Armstrong World Industries, Inc., (2) the sale of substantially all of the assets of a trade or business, unit or location where the Member is employed, or (3) the sale by a Participating Company of its interest in a subsidiary where the Member is employed, the Member shall be considered in default with respect to the loan unless the Member continues to be a party in interest to the Plan (as defined in Section 3(14) of ERISA). Any other Eligible Borrower shall be considered in default on the loan if a required payment of principal or interest thereon is not paid within 60 days after it is due. If a loan is not repaid in accordance with the terms contained in the promissory note and a default occurs, the Plan may execute upon its security interest in the Eligible Borrower's Retirement Savings Account under the Plan to satisfy the debt. Alternatively, if the Eligible Borrower has not repaid the loan as of the date benefits are to commence, the Committee may reduce the Eligible Borrower's distribution by the amount of the outstanding principal and interest on the loan. However, the Plan shall not levy against any portion of the Loan Reserve attributable to amounts held in the Member's Sheltered Account until such time as a distribution of the Sheltered Account could otherwise be made under the Plan. An 80 Eligible Borrower must repay any loan prior to distribution of the Eligible Borrower's Retirement Savings Account. (f) Notwithstanding anything herein to the contrary, no loan shall be made to an Eligible Borrower during a period in which the Committee is making a determination of whether a domestic relations order affecting the Eligible Borrower's Account is a qualified domestic relations order, within the meaning of Section 414(p) of the Code. Further, if the Committee is in receipt of a qualified domestic relations order with respect to any Eligible Borrower's Retirement Savings Account, it may prohibit such Eligible Borrower from obtaining a loan until the alternate payee's rights under such order are satisfied. (g) Loan amounts shall be withdrawn from a Member's Retirement Savings Account in the following order: (i) Sheltered Contributions; (ii) Rollover Contributions; and (iii) Standard Contributions. Within each category (i) through (iii), the Investment Fund or Funds in which the Member is invested will be reduced to reflect the amount of the loan and any applicable set-up or maintenance charges in accordance with such uniform rules as the Committee shall adopt from time to time. Payroll deductions made to repay the loan will be invested in the various Investment Funds in accordance with the Member's investment election in effect at the time of such repayment. 81 Article 9. Vesting and Distributions ------------------------- 9.01 Vesting ------- (a) A Member shall always have a vested and nonforfeitable interest in his Sheltered Account, Standard Account, Exchange Contribution Account, and the portion of his Retirement Savings Matching Account attributable to any matching contributions made before December 1, 2000. (b) A Member shall have a vested and nonforfeitable interest in his Equity Account, Match Account, and the portion of his Retirement Savings Matching Account attributable to Retirement Savings Matching Contributions made on or after December 1, 2000, upon his completion of five (5) Years of Service. (c) Notwithstanding anything in the Plan to the contrary, a Member shall have a vested and nonforfeitable interest in his Equity Account, Match Account, and the portion of his Retirement Savings Matching Account attributable to Retirement Savings Matching Contributions made on or after December 1, 2000 upon (i) attaining age 65 provided he is actively employed by the Company or an Affiliated Company on that date; (ii) Retirement; (iii) death; (iv) total disability, provided that the Member is eligible to receive disability benefits under a long-term disability plan sponsored by the Affiliated Company for which he was employed, under the provisions of Article VI, Section (8) of the Retirement Income Plan for Employees of Armstrong World Industries, Inc., or under the Social Security Act; (v) a Change in Control; (vi) separation from Service from a Participating Company due to a reduction in the workforce at the office or manufacturing location at which the Member is employed which the Committee determines is a result of (1) adverse economic conditions, (2) a reorganization of the workforce or operating 82 procedures, (3) technological change, or (4) layoff; (vii) the sale of substantially all of the assets of a trade or business, unit or location where the Member is employed, or the sale by a Participating Company of its interest in a subsidiary where the Member is employed; or (viii) the Member's termination of employment with the Company or an Affiliated Company on account of the Member's transfer to employment with Worthington Armstrong Venture (WAVE), a Delaware general partnership. Further, notwithstanding anything in the Plan to the contrary, a Member who is employed by Interface Solutions, Inc. on the date the Plan ceases to be a multiple employer plan in which Interface Solutions, Inc. participates, shall have a vested and nonforfeitable interest in his Equity Account and Match Account as of such date. (d) Notwithstanding the preceding provisions of this Section 9.01, a Member shall have a vested and nonforfeitable interest in the subaccount established under his Retirement Savings Account with respect to any matching contributions made under Section 4.12(a) only upon (i) attaining age 65 provided he is actively employed by Armacell, LLC or an Affiliated Company of Armacell, LLC on that date; (ii) his death while in active employment with Armacell, LLC or an Affiliated Company of Armacell, LLC; or (iii) the completion of five (5) Years of Service. Further, notwithstanding the preceding provisions of this Section 9.01, a Member shall have a vested and nonforfeitable interest in the subaccount established under his Retirement Savings Account with respect to any matching contributions made under Section 4.12(b) only upon (i) attaining age 65 provided he is actively employed by Ardex Engineered Cements, Inc. ("Ardex") or an Affiliated Company of Ardex on that date; (ii) his death 83 while in active employment with Ardex or an Affiliated Company of Ardex; or (iii) the completion of five (5) Years of Service. 9.02 Distribution Upon Retirement or Other Termination of Employment --------------------------------------------------------------- If a Member terminates employment for any reason other than death, he may elect, in the manner prescribed by the Committee (including telephonically), at any time following his termination to receive an "eligible rollover distribution" (as defined in Code Section 402(c) and the regulations and other guidance issued thereunder) of the nonforfeitable portion of his Account. The amount of such eligible rollover distribution shall be determined as follows: for any request made by the fifteenth day of the month, the amount of such eligible rollover distribution shall be determined as soon as practicable after the fifteenth day of the month; for any request made after the fifteenth day of the month and by the last day of the month, the amount of such eligible rollover distribution shall be determined as soon as practicable after the last day of the month. For purposes of the preceding sentence, if the fifteenth or last day of a month falls on a Saturday, Sunday or holiday, the fifteenth or last day of such month shall be deemed to be the last business day preceding the fifteenth or last day, respectively. Such eligible rollover distribution shall be subject to Section 9.04(b) and the following: (a) Except as provided in Subsection (b), (c) or (d) below, the portion of the Member's Account attributable to his Retirement Savings Account that is not invested in the Company Stock Fund shall be distributed in cash, and the portion of the Member's Account attributable to his Retirement Savings Account that is invested in the Company Stock Fund and the nonforfeitable portion of the Member's Account attributable to his Stock Ownership Account shall be distributed in a single sum in either cash or Company 84 Stock (with cash for fractional shares), as elected by the Member. If the Member fails to elect to receive the distribution in Company Stock, such distributions shall be made in cash. (b) If the Member does not elect to receive an eligible rollover distribution of the nonforfeitable portion of his Account by a Valuation Date (specified by the Committee) by the February following the Member's termination of employment, and his Account (including the amount of any outstanding loan plus accrued interest, if any) equals $5,000 or less as of such Valuation Date, as soon as practicable thereafter the Committee or its designee will notify the Member of his right to elect to make an eligible rollover distribution and his right to receive all or a portion of such distribution in Company Stock in accordance with Subsection (a). (i) If the Member notifies the Committee or its designee of his elections within forty-five (45) calendar days following the above-described Valuation Date, the Committee or its designee shall make a distribution or direct rollover in cash or Company Stock (as elected by the Member) of the nonforfeitable portion of the Member's Account as soon as practicable following receipt by the Committee or its designee of the Member's election, in an amount determined as of the Valuation Date on which the Committee or its designee receives such election. (ii) If the Member fails to notify the Committee or its designee of his elections within such forty-five (45) day period, the Committee or its designee shall determine the value of the nonforfeitable portion of the Member's Account as of the Valuation Date that coincides with or immediately follows the end of such 45-day period, and if the Member's Account (including the amount of any outstanding loan plus accrued 85 interest, if any) equals $5,000 or less as of such Valuation Date, the Committee or its designee shall make a single lump sum cash distribution (less any mandatory withholding for federal income tax purposes) of the nonforfeitable portion of the Member's Account determined as of such Valuation Date. Notwithstanding the foregoing provisions of this Subsection (b), the Committee or its designee shall identify each former Member who as of a Valuation Date (specified by the Committee) in November, 1999 has not commenced receiving payments under the Plan and has an Account balance (including the amount of any outstanding loan plus accrued interest) of $5,000 or less. As soon as practicable after such Valuation Date, the Committee or its designee will notify each such Member of his right to make an eligible rollover distribution and to receive all or a portion of such distribution in Company Stock in accordance with Subsection (a) and will make either a distribution or a direct rollover in accordance with the procedures described above in paragraphs (i) and (ii), except that any reference to 45 calendar days shall be replaced with 30 calendar days. (c) A married Member whose Account (including the amount of any outstanding loan plus accrued interest, if any) exceeds $5,000 as of any Valuation Date following his termination of employment may elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase an annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life, with 50% of the amount payable to the Member continued after his death for the remainder of the life of the spouse to whom the Member is married on the date payments are due to commence. If such a married Member obtains 86 the consent of his spouse (which consent shall be in writing and notarized or witnessed by a member of the Committee or its designee), he may instead elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase a life annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life. (d) An unmarried Member whose Account (including the amount of any outstanding loan plus accrued interest, if any) exceeds $5,000 as of any Valuation Date following his termination of employment may elect (in the manner prescribed by the Committee) to have his Retirement Savings Account used to purchase a life annuity under which payments shall commence as soon as practicable following the Member's attainment of age 65 (unless the Member requests earlier commencement) and shall be made monthly for the Member's life. (e) A Member may revoke the election of an annuity form of benefit under Subsection (c) or (d) at any time prior to commencing the receipt of benefits. The Committee, or its designee, shall furnish to each Member who elects an annuity described in Subsection (c) or (d) above, a written explanation of the annuity, the circumstances in which it will be provided in that form, the availability of such an election, and the relative financial effect on a Member's benefits of such an election. A Member may, at any time, after receipt of the aforementioned explanation, request a further written explanation of the terms and conditions of the annuity and the financial effect upon the particular Member's benefits of making an election not to receive his benefits in such form. Within 30 days of the date of the Member's request or as soon thereafter as practicable, the 87 Committee shall furnish to the Member a written explanation of the effect of such an election, given in terms of dollars per payment, calculated on the basis of the current value of the Member's Retirement Savings Account determined as of the Valuation Date on which the Committee receives the Member's written election to receive an annuity form of payment. (f) The Committee or its designee shall notify each Member, at such time and in such manner as required by Sections 402(f) and 411(a)(11) of the Code and the regulations and other guidance issued thereunder, of his right to make a "direct rollover distribution" in accordance with Section 9.06 below, and his right to receive an immediate distribution of the nonforfeitable portion of his Account. Distribution of the nonforfeitable portion of a Member's Account under the Plan may occur prior to 30 days after the Committee or its designee provides such notice, provided: (i) the Member is informed that he has a right to a period of at least 30 days after receiving the notice to consider the decision of whether to make a direct rollover distribution and whether to receive an immediate distribution; and (ii) the Member, after receiving the notice, requests to receive an immediate distribution, in the manner prescribed by the Committee (including telephonically). (g) In the event an allocation of Company Stock resulting from Stock Ownership Contributions or dividends is made to a Member's Stock Ownership Account following the date on which an initial distribution is made or begins under this Section 9.02, distribution of the nonforfeitable portion of such allocation shall be made to the Member in a single lump sum payment (in cash or Company Stock, as elected by the 88 Member with respect to the initial distribution) as soon as practicable following the allocation of such Company Stock and/or dividends in an amount determined as of the Valuation Date coinciding with or immediately following such allocation. Further, to the extent a Member is entitled to a distribution under this Section 9.02 and there are dividends on Company Stock which have not been allocated to the Member's Stock Ownership Account and have not been utilized to pay any amounts due under an Acquisition Loan, such dividends shall be paid to the Member in cash. (h) Notwithstanding any other provision in the Plan to the contrary, in the event a Member who terminates employment because of his Retirement has not requested a lump sum distribution of his entire Account under this Section 9.02 or the purchase of an annuity under Subsection (c) or (d), the Member may elect (in the manner prescribed by the Committee, including telephonically) to withdraw in cash a portion of his Account and investment income thereon, less the amount of any outstanding loan, according to the order in which the following Paragraphs are presented, as the amounts described in each successive Paragraphs are exhausted: (i) An amount equal to all or part of the Member's before-1987 Standard Contributions (i.e., after-tax contributions made by the ---- Member), but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. (ii) An amount equal to all or part of the Member's after-1986 Standard Contributions and a pro rata portion of the earnings on all Standard Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Standard Contributions. 89 (iii) An amount equal to all or part of the Member's Tax Deductible Contributions Account. (iv) An amount equal to all or part of the Member's Rollover Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Rollover Contributions. (v) An amount equal to all or part of the Member's Sheltered Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Sheltered Contributions. (vi) An amount equal to all or part of the current value of the Member's Retirement Savings Matching Account. (vii) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Equity Allocations. (viii) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Exchange Contributions, but no more than the current value thereof in the event such value is less than the net amount of such Exchange Contributions. (ix) An amount equal to all or part of the Member's Stock Ownership Account attributable to his Matching Allocations. Solely for the calendar quarter beginning October 1, 1996, a Member who terminates employment for any reason and who has not requested a lump sum distribution of his entire Account under this Section 9.02 or the purchase of an annuity under Subsection (c) or (d) shall have the right to withdraw in cash all or any portion of his Account described in Paragraphs (i) through (v). 90 (i) Notwithstanding any other provision in the Plan to the contrary, in no event shall any distribution or withdrawal of a Member's Stock Ownership Account be permitted between October 1, 1996 and December 31, 1996. 9.03 Distribution on Account of Death -------------------------------- (a) If a Member dies before the distribution of his entire Account under Section 9.02, the entire amount outstanding in his Account, determined as of the Valuation Date coinciding with or immediately following the Member's death or notification of the Member's death, if later, shall be paid to his Beneficiary in a single lump sum distribution as soon as practicable thereafter. The portion of the Member's Retirement Savings Account not invested in the Company Stock Fund shall be distributed to his Beneficiary in cash, and the portion of the Member's Retirement Savings Account invested in the Company Stock Fund and the Member's Stock Ownership Account shall be distributed in a single sum in either cash or Company Stock (with cash for fractional shares), as elected by the Beneficiary. (b) In the event an allocation of Company Stock resulting from Stock Ownership Contributions or dividends is made to the Member's Stock Ownership Account following the date on which a single lump sum distribution is made to the Member's Beneficiary under Section 9.03(a), distribution of such allocations shall be paid to the Member's Beneficiary in a single lump sum distribution (in cash or Company Stock, as elected by the Beneficiary with respect to the initial distribution) as soon as practicable following such allocation in an amount determined as of the Valuation Date coinciding with or immediately following the latest of the Member's death, the notification of the Member's death, or the allocation of such Company Stock or 91 dividends. Further, to the extent a Member's Beneficiary is entitled to a distribution under this Section 9.03 and there are dividends on Company Stock which have not been allocated to the Member's Stock Ownership Account and have not been utilized to pay any amounts due under an Acquisition Loan, such dividends shall be paid to the Beneficiary in cash. (c) Notwithstanding any other provision in the Plan to the contrary, in no event shall any distribution of a deceased Member's Stock Ownership Account be permitted under this Section 9.03 between October 1, 1996 and December 31, 1996. 9.04 Latest Commencement of Payments ------------------------------- (a) Notwithstanding the provisions of Section 9.02 or 9.03, unless the Member otherwise elects, the vested portion of a Member's Account shall be distributed not later than the 60th day following the end of the Plan Year in which the latest of the following occurs: (i) the Member's 65th birthday, (ii) the tenth anniversary of the date on which he became a Member, or (iii) the date he terminates service with the Company or an Affiliated Company. (b) Notwithstanding anything in the Plan to the contrary, effective with respect to with respect to any Member who turns age 70 1/2 after 1999, distribution of the Member's Account shall commence not later than the April 1 following the later of the calendar year in which the Member attains age 70 1/2 or retires; provided, however, if a Member is a 5% owner (as defined in Code Section 416(i)(1), distribution shall 92 commence not later than the April 1 following the calendar year in which the Member attains age 70 1/2. Prior to the required commencement of payments, the Member shall elect whether to receive the minimum amount required under Code Section 401(a)(9) and the regulations issued thereunder (based on the life expectancy of such Member), or his entire Account. If the Member is no longer actively employed, he shall be entitled to elect to receive his distribution in either the manner indicated in the preceding sentence or in accordance with the other provisions of this Article IX. If the Member elects to receive the minimum amount required under Code section 401(a)(9), unless otherwise elected by the Member by the time distributions are required to begin under this Subsection (b), the Member's life expectancy shall be recalculated annually. Also, any such election shall be irrevocable and shall apply to all subsequent years. Notwithstanding the foregoing provisions of this Subsection (b), effective with respect to distributions under the Plan made for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the regulations under Section 401(a)(9) that were proposed on January 17, 2001. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service. 9.05 Forfeitures ----------- (a) Termination of Employment ------------------------- If a Member terminates employment prior to the date on which he is fully vested in his Account, the non-vested portion of his Account shall be forfeited as of 93 the close of the Plan Year in which the earlier of the following occurs: (i) the terminated Member incurs five (5) consecutive Breaks in Service, or (ii) the terminated Member receives a distribution of the vested portion of his Account. If the non-vested portion of a Member's Stock Ownership Account is forfeited, Company Stock allocated pursuant to an Acquisition Loan shall be forfeited only after other assets. The cash equivalent of any forfeited Company Stock shall be based on the fair market value of the Company Stock as of the last Valuation Date in such Plan Year of forfeiture. If interests in more than one class of Company Stock have been allocated to the Member's Stock Ownership Account, such Member must be treated as having forfeited the same portion of each such class. Any forfeited amount under this Section 9.05(a) shall be used first to reduce any future Participating Company contributions, and then to pay administrative expenses under the Plan in accordance with Section 11.07 no later than as of the end of the Plan Year in which the forfeiture occurs. (b) Restoration of Account Balance ------------------------------ If the non-vested portion of a Member's Account has been forfeited in accordance with Section 9.05(a), that amount shall be subsequently restored to his Stock Ownership Account and/or his Retirement Savings Matching Account, as the case may be, provided (i) he is reemployed by a Participating Company before he has a period of five (5) consecutive Breaks in Service, and (ii) he repays to the Plan within five (5) years of his reemployment a cash lump sum payment equal to the full amount distributed to him from the Plan on account of his termination of employment. Any amounts to be restored to a Member's Stock Ownership Account and/or Retirement Savings Matching Account, as the case may be, shall be taken first from any forfeitures which have not been 94 used to reduce future Participating Company contributions or to pay administrative expenses. If any amounts remain to be restored, the Member's Participating Company shall make a special contribution in an amount necessary to restore such amounts. 9.06 Direct Rollover Distributions ----------------------------- (a) At the request of a Member, a surviving spouse of a Member, or a spouse or former spouse of a Member that is an alternate payee under a qualified domestic relations order as defined in Section 414(p) of the Code (referred to as the "distributee"), the Retirement Savings Trustee shall effectuate a direct rollover distribution of the amount requested by the distributee, in accordance with Section 401(a)(31) of the Code, to an eligible retirement plan (as defined in Section 402(c)(8)(B) of the Code). Such amount may constitute all or any whole percent of any distribution from the Plan otherwise to be made to the distributee, provided that such distribution constitutes an "eligible rollover distribution" as defined in Section 402(c) of the Code and the regulations and other guidance issued thereunder. All direct rollover distributions shall be made in accordance with the following Subsections (b) through (h). (b) A direct rollover shall only be made to one eligible retirement plan; a distributee may not elect to have a direct rollover distribution apportioned between or among more than one eligible retirement plan. (c) Direct rollover distributions shall be made, in accordance with such forms and procedures as may be established by the Committee or its designee and to the extent any such distribution is to be made in shares of Company stock otherwise distributable under the Plan to the distributee, such shares shall be registered in a manner necessary to effectuate a direct rollover under Section 401(a)(31) of the Code. 95 (d) No direct rollover distribution shall be made unless the distributee furnishes the Committee or its designee with such information as the Committee or its designee shall require and deems to be sufficient. (e) A distributee may elect to divide an eligible rollover distribution into two components, with one portion paid as a direct rollover distribution and the remainder paid to the distributee. (f) No direct rollover distribution may be made unless the distributee has received a written explanation of the consequences of such a distribution and such other information required by the Code at such time and in such manner as required by Sections 402(f) and 411(a)(11) of the Code and the regulations and other guidance issued thereunder, and in accordance with rules established by the Committee. (g) No direct rollover distribution shall be permitted unless the amount of the distribution exceeds $200. (h) Direct rollover distributions shall be treated as all other distributions under the Plan and shall not be treated as a direct trustee-to-trustee transfer of assets and liabilities. 9.07 Inability to Locate Payee ------------------------- If a Member or Beneficiary cannot be located by reasonable efforts of the Committee within a reasonable period of time after the latest date such benefits are otherwise payable under the Plan, the amount in such Member's Account shall be forfeited and used, not later than as of the last day of the Plan Year in which the forfeiture occurs to reduce future Participating Company contributions, to defray administrative expenses of the Plan, and to restore Members' Stock Ownership Accounts and/or 96 Retirement Savings Matching Accounts, as the case may be, in accordance with Section 9.05(b). Such forfeited amount shall be restored (without earnings) if, at any time, the Member or Beneficiary who was entitled to receive such benefit when it first became payable, after furnishing proof of their identity and right to make such claim to the Committee, files a written request for such benefit with the Committee. 97 Article 10. Management of Funds ------------------- 10.01 Trust Funds ----------- All contributions and all other cash, securities or other property received by the Retirement Savings Trustee from time to time and held by it shall constitute the Retirement Savings Trust Fund; all contributions and all other cash, securities or other property received by the Stock Ownership Trustee from time to time and held by it shall constitute the Stock Ownership Trust Fund. Each Trust Fund shall be held and invested upon such terms and in such manner as set forth in the Plan and its respective Trust Agreement. The Retirement Savings Trustee shall have exclusive authority and control to manage and control the assets of the Plan attributable to: (i) the profit sharing portion of the Plan, (ii) the initial investment of Exchange Contributions in a Money Market Fund, (iii) the initial investment of Transferred Exchange Contributions in the Investment Fund or Investment Funds (other than the Stock Ownership Fund), pursuant to Section 7.02, and (iv) the diversification by certain Members of a portion of their Stock Ownership Accounts pursuant to Section 7.08, subject to the terms of the Plan and the Retirement Savings Trust Agreement; the Stock Ownership Trustee shall have exclusive authority and control to manage and control the assets of the Plan attributable to the employee stock ownership portion of the Plan, excluding the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02, the investment of Transferred Exchange Contributions and the diversification by certain Members of a portion of their Stock Ownership Accounts pursuant to Section 7.08, subject to the terms of the Plan and the Stock Ownership Trust Agreement. All payments of benefits as provided in this Plan shall be made solely out of, and to the extent of, the 98 assets held in Trust, and no Participating Company shall be liable, directly or indirectly, for the payment of any benefits provided in this Plan, nor shall any Participating Company be liable for any deficiency existing at any time in the Trust. 10.02 Investment of Stock Ownership Contributions ------------------------------------------- The investment policy of the employee stock ownership portion of the Plan is to invest primarily in Company Stock and to that end, up to 100% of the assets in the Stock Ownership Trust Fund may be so invested, subject to the initial investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02, the investment of Transferred Exchange Contributions in the Investment Fund or Funds (other than the Stock Ownership Fund), and the rights of certain Members to transfer to other Investment Funds pursuant to Section 7.08. Such Company Stock shall be purchased by the Stock Ownership Trustee through an established securities market or from Armstrong Holdings, Inc., or any other person or entity, at a price not less than fair market value. Company Stock may be sold by the Stock Ownership Trustee through an established securities market or to Armstrong Holdings, Inc. or to any other person or entity, at a price not less than fair market value. To the extent funds are available, the Stock Ownership Trustee may invest assets temporarily in savings accounts, certificates of deposit, U.S. Government obligations, obligations of agencies of the U.S. Government or in other types of short-term investments including commercial paper, or other investments deemed desirable for the Stock Ownership Trust Fund, or the funds may be held in cash or cash equivalents. 99 10.03 Member Accounts --------------- (a) Retirement Savings Account -------------------------- The Committee shall authorize the establishment of the following subaccounts within each Member's Retirement Savings Account, to provide for the administration of the profit sharing portion of the Trust, in accordance with the provisions of this Plan: (i) Sheltered Account, to hold the Member's Sheltered Contributions, and earnings thereon. (ii) Standard Account, to hold the Member's Standard Contributions, and earnings thereon. (iii) Retirement Savings Matching Account, to hold any Retirement Savings Matching Contributions made on the Member's behalf under the Plan, and earnings thereon. (iv) Rollover Contributions Account, to hold any Rollover Contributions made by the Member, and earnings thereon. (v) Tax Deductible Contributions Account, to hold the Member's Tax Deductible Contributions made under the Plan, and earnings thereon. (b) Stock Ownership Account ----------------------- The Committee shall authorize the establishment of the following subaccounts within each Member's Stock Ownership Account, to provide for the administration of the employee stock ownership portion of the Trust in accordance with the provisions of this Plan as in effect immediately before December 1, 2000: (i) Exchange Contribution Account. 100 (ii) Match Account, which shall include the Bonus Account in existence under the Stock Ownership Plan prior to October 1, 1996. (iii) Equity Account. Each such subaccount shall include any cash dividends received by the Trustee on shares of Company Stock held in the Members' Stock Ownership Accounts or in the Stock Ownership Suspense Account (and earnings attributable thereto), and any proceeds of the sale of Released Leveraged Shares and Non-Leveraged Shares. Funds in this Account may be invested only in the Stock Ownership Fund, subject to the initial temporary investment of Exchange Contributions in a Money Market Fund pursuant to Section 7.02, the investment of Transferred Exchange Contributions pursuant to Section 7.02, and the rights of certain Members to transfer to other Investment Funds pursuant to Section 7.08. 10.04 Transfer of Trust Assets ------------------------ (a) The Committee may make a transfer of liabilities and corresponding assets from the Trust to trusts of other plans qualified under Code Section 401(a). The Committee may accept a transfer of liabilities and corresponding assets from the trusts of other plans qualified under Code Section 401(a). Any assets received under the provisions of this Section shall thereafter constitute part of the corpus of the Trust. All such transfers and allocations shall be made in accordance with the provisions of ERISA. (b) Effective as of September 30, 1996, all of the assets and liabilities under the Stock Ownership Plan were transferred to this Plan and the portion of the assets and liabilities under the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. attributable to Employees of the Company employed at 101 its Mobile Plant and Employees who are not subject to any collective bargaining agreement was transferred to this Plan. 10.05 Voting Rights for Company Stock ------------------------------- Each Member (or Beneficiary of a deceased Member) is, for purposes of this Section 10.05, hereby designated as a "named fiduciary" (within the meaning of ERISA) with respect to the shares of Company Stock allocated to his Retirement Savings Account, the shares of Company Stock allocated to his Stock Ownership Account and to a pro rata portion of the unallocated shares of Company Stock held in the Stock Ownership Suspense Account and shall have the right to direct the Retirement Savings Trustee and/or the Stock Ownership Trustee, as the case may be, with respect to the vote of the shares of Company Stock allocated to his Retirement Savings Account and/or his Stock Ownership Account, on each matter brought before any meeting of the stockholders of Armstrong Holdings, Inc. Before each such meeting of stockholders, Armstrong Holdings, Inc. shall cause to be furnished to each Member (or Beneficiary) a copy of the proxy solicitation material, together with a form requesting confidential directions to the Retirement Savings Trustee and/or the Stock Ownership Trustee on how such shares of Company Stock allocated to such Member's (or Beneficiary's) Account shall be voted on each such matter. Upon timely receipt of such directions the appropriate Trustee shall, on each such matter, vote as directed the number of shares (including fractional shares) of Company Stock allocated to such Member's (or Beneficiary's) Retirement Savings Account or Stock Ownership Account, and the appropriate Trustee shall have no discretion in such matter. The instructions received by the Retirement Savings Trustee and/or the Stock Ownership Trustee from Members (or 102 Beneficiaries) shall be held by them in confidence and shall not be divulged or released to any person, including the Committee, officers or employees of the Company or an Affiliated Company, including Armstrong Holdings, Inc. Each Trustee shall vote all Company Stock held by it, including Company Stock for which it has not received direction, as well as unallocated shares in the employee stock ownership portion of the Plan, in the same proportion as directed shares are voted determined by the votes of Members (or Beneficiaries) on all shares allocated to Members' (or Beneficiaries') Accounts, and the appropriate Trustee shall have no discretion in such matter. 10.06 Tender Offer Rights with Respect to Company Stock ------------------------------------------------- The provisions of this Section 10.06 shall apply in the event a tender or exchange offer, including, but not limited to, a tender offer or exchange offer within the meaning of the Securities Exchange Act of 1934, as from time to time amended and in effect (hereinafter, a "tender offer"), for Company Stock is commenced by a person or persons. In the event a tender offer for Company Stock is commenced, the Committee, promptly after receiving notice of the commencement of any such tender offer, shall transfer certain of the Committee's record-keeping functions under the Plan to an independent record-keeper (which if one of the Trustees consents in writing, may be such Trustee). The functions so transferred shall be those necessary to preserve the confidentiality of any directions given by the Members (or Beneficiaries) in connection with the tender offer. The Retirement Savings Trustee and the Stock Ownership Trustee shall have no discretion or authority to sell, exchange or transfer any of such shares pursuant to such tender offer except to the extent, and only to the extent, as provided in this Plan and the applicable Trust Agreement. Each Member (or Beneficiary) is, for 103 purposes of this Section 10.06, hereby designated as a "named fiduciary" (within the meaning of ERISA) with respect to the shares of Company Stock allocated to his Retirement Savings Account, the shares of Company Stock allocated to his Stock Ownership Account, and to a pro rata portion of the unallocated shares of Company Stock held in the Stock Ownership Suspense Account and shall have the right, to the extent of the number of whole shares of Company Stock allocated to his Retirement Savings Account and/or his Stock Ownership Account, to direct the Trustee in writing as to the manner in which to respond to a tender offer with respect to shares of Company Stock. Armstrong Holdings, Inc. shall use its best efforts to timely distribute or cause to be distributed to each Member (or Beneficiary) such information as will be distributed to stockholders of Armstrong Holdings, Inc. in connection with any such tender offer. Upon timely receipt of such instructions, the Retirement Savings Trustee and/or the Stock Ownership Trustee shall respond as instructed with respect to such shares of Company Stock. The instructions received by the appropriate Trustee from Members (or Beneficiaries) shall be held by such Trustee in confidence and shall not be divulged or released to any person, including the Committee, officers or employees of the Company or any Affiliated Company, including Armstrong Holdings, Inc. If the Retirement Savings Trustee and/or Stock Ownership Trustee shall not receive timely instructions from a Member (or Beneficiary) as to the manner in which to respond to such a tender offer, such Trustee shall not tender or exchange any shares of Company Stock with respect to which such Member (or Beneficiary) has the right of direction, and such Trustee shall have no discretion in such matter. Unallocated shares of Company Stock and fractional shares of Company Stock allocated to Members' (or Beneficiaries') 104 Accounts shall be tendered or exchanged by such Trustee in the same proportion it tenders or exchanges the shares with respect to which Members (or Beneficiaries) have the right of direction, and the Retirement Savings Trustee and/or Stock Ownership Trustee shall have no discretion in such matter. In determining such proportion, the Trustee shall under all circumstances include in its calculation the direction of Members (or Beneficiaries) on all shares of Company Stock allocated to Members' (or Beneficiaries') Accounts. The independent record-keeper shall solicit confidentially from each Member (or Beneficiary) the directions described in this Section 10.06 as to whether shares are to be tendered. The independent record-keeper, if different from one of the Trustees, shall instruct the Trustees as to the amount of shares to be tendered, in accordance with the above provisions. 105 Article 11. Administration of Plan ---------------------- 11.01 Appointment of Committee ------------------------ (a) The Committee shall be comprised of the members of the Retirement Committee of the Retirement Income Plan for Employees of Armstrong World Industries, Inc. The Chairman and Secretary of the Retirement Income Plan's Committee shall be the Chairman and Secretary of the Committee. (b) If no members of the Committee are in office, the Company shall be deemed the Committee. 11.02 Organization and Operation of the Committee ------------------------------------------- (a) The Committee shall endeavor to act, in carrying out its duties and responsibilities in the interest of the Members and Beneficiaries, with the care, skill, prudence and diligence under the prevailing circumstances that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct of an enterprise of like character and aims. (b) The Committee shall act by a majority of its members or by unanimous approval of its members if there are two or less members in office at the time, and any action may be taken either by a vote taken in a meeting or by action taken in writing without the formality of convening a meeting. In the event of a deadlock, the Committee shall determine the method for resolving such deadlock. If there are two or more Committee members, no member shall act upon any question pertaining solely to himself, and the other member or members shall alone make any determination required by the Plan in respect thereof. 106 (c) The Committee may authorize any one or more of its members, or members of a separate administrative subcommittee it may form, to execute any routine administrative document on behalf of the Committee. (d) The Committee may, in addition to the execution of routine administrative documents, delegate specific duties and powers to one or more of its members or to a separate administrative subcommittee it may form. Such delegation shall remain in effect until rescinded in writing by the Committee. The members or persons so designated shall be solely liable, jointly and severally, for their acts or omissions with respect to such delegated responsibilities. (e) The Committee shall endeavor not to engage directly or indirectly in any prohibited transaction, as set forth in ERISA. 11.03 Duties and Responsibilities of the Committee -------------------------------------------- The Committee, except for such investment and other responsibilities vested in one of the Trustees, a designated investment manager or the investment committee of the Board of Directors, shall have full authority and responsibility for administering the Plan in accordance with its provisions and under applicable law. The duties and responsibilities of the Committee shall include, but shall not be limited to, the following: (a) To appoint such accountants, consultants, administrators, counsel, or such other persons it deems necessary for the administration of the Plan. Members of the Committee shall not be precluded from serving the Committee in one or more of such individual capacities. (b) To determine, in its full and exclusive discretion, all benefits and to resolve all questions arising from the administration, interpretation, and application of 107 Plan provisions, either by general rules or by particular decisions, including determinations as to whether a claimant is eligible for benefits, the amount, form and timing of benefits, and any other matter (including any question of fact) raised by a claimant or identified by the Committee. (c) To advise each Trustee with respect to all benefits which become payable under the Plan and to direct each Trustee as to the manner in which such benefits are to be paid. (d) To adopt such forms and regulations it deems advisable for the administration of the Plan and the conduct of its affairs. (e) To take such steps as it considers necessary and appropriate to remedy any inequity resulting from incorrect information received or communicated or as a consequence of administrative error (f) To assure that its members, each Trustee and every other person who handles funds or other property of the Plan are bonded as required by law. (g) To settle or compromise any claims or debts arising from the operation of the Plan and to defend any claims in any legal or administrative proceeding. All duties and responsibilities of the Committee shall be carried out in its sole discretion, and its decisions shall be final and binding upon all affected persons, except for the right any such persons shall have to appeal such decisions pursuant to Section 11.06 or through any court proceeding. 11.04 Required Information -------------------- Each Participating Company and each Member and Beneficiary entitled to benefits shall furnish the Committee any information or proof requested by the 108 Committee and required for the proper administration of the Plan. Failure on the part of any Member or Beneficiary to comply with such request shall be sufficient grounds for the delay in payment of benefits under the Plan until the requested information or proof is received. 11.05 Indemnification --------------- The Company will indemnify and save harmless the members of the Committee and any person to whom fiduciary responsibilities are delegated under this Plan against any cost or expense (including attorney's fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act, except in the case of willful misconduct. 11.06 Claims and Appeal Procedure --------------------------- (a) Any request or claim for Plan benefits must be made in writing and shall be deemed to be filed by a Member or Beneficiary when a written request is made by the claimant or the claimant's authorized representative which is reasonably calculated to bring the claim to the attention of the Committee. (b) The Committee shall provide notice in writing to any Member or Beneficiary where a claim for benefits under the Plan has been denied in whole or in part. Such notice shall be made within 90 days of the receipt by the Committee of the Member's or Beneficiary's claim or, if special circumstances require, and the Member or Beneficiary is so notified in writing, within 180 days of the receipt by the Committee of the Member's or Beneficiary's claim. The notice shall be written in a manner calculated to be understood by the claimant and shall: (i) set forth the specific reasons for the denial of benefits; 109 (ii) contain specific references to Plan provisions relative to the denial; (iii) describe any material and information, if any, necessary for the claim for benefits to be allowed, which had been requested, but not received by the Committee; and (iv) advise the Member or Beneficiary that any appeal of the Committee's adverse determination must be made in writing to the Committee, within 60 days after receipt of the initial denial notification, setting forth the facts upon which the appeal is based. (c) If notice of the denial of a claim is not furnished within the time periods set forth above, the claim shall be deemed denied and the claimant shall be permitted to proceed to the review procedures set forth below. If the Member or Beneficiary fails to appeal the Committee's denial of benefits in writing and within 60 days after receipt by the claimant of written notification of denial of the claim (or within 60 days after a deemed denial of the claim), the Committee's determination shall become final and conclusive. (d) If the Member or Beneficiary appeals the Committee's denial of benefits in a timely fashion, the Committee shall re-examine all issues relevant to the original denial of benefits. Any such claimant, or his duly authorized representative may review any pertinent documents, as determined by the Committee, and submit in writing any issues or comments to be addressed on appeal. (e) The Committee shall advise the Member or Beneficiary and such individual's representative of its decision which shall be written in a manner calculated to 110 be understood by the claimant, and include specific references to the pertinent Plan provisions on which the decision is based. Such response shall be made within 60 days of receipt of the written appeal, unless special circumstances require an extension of such 60 day period for not more than an additional 60 days. Where such extension is necessary, the claimant shall be given written notice of the delay. If the decision on review is not furnished within the time set forth above, the claim shall be deemed denied on review. 11.07 Expenses of the Plan -------------------- All reasonable expenses of the Committee and of the Plan (other than expenses of the Company which relate to settlor functions), including the expenses of the Trustees, and other reasonable expenses related to the financial administration of the Plan, shall be approved by the Committee and shall be paid out of the Trust Fund to the extent they are not paid by the Company. 111 Article 12. General Provisions ------------------ 12.01 Exclusiveness of Benefits ------------------------- The Plan has been created for the exclusive benefit of the Members and their Beneficiaries. No part of the Trust shall ever revert to a Participating Company nor shall any part of such Trust ever be used other than for the exclusive benefit of the Members and their Beneficiaries, except as provided in accordance with Section 12.03(b). No Member or Beneficiary shall have any interest in or right to any part of the Trust, or any equitable right under the Trust Agreements except to the extent expressly provided in the Plan or Trust Agreements. 12.02 Limitation of Rights -------------------- The establishment of this Plan shall not be considered as giving to any Member or other employee of a Participating Company the right to be retained in the employ of a Participating Company, and all Members and other employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 12.03 Non-Assignability ----------------- (a) No benefit or interest under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any such action shall be void for purposes of the Plan. No benefit or interest shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such benefit or interest, nor shall it be subject to attachment or other legal process for or against any person, except to such extent as may be required by law or permitted by Treasury Regulation. If any payee or representative of a payee under the Plan becomes bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, 112 encumber, or charge any such benefit or interest, the Committee may hold or apply the benefit or interest or any part thereof to or for such person, his spouse, his children, or other dependents, or any of them in such manner and in such proportions as the Committee shall determine in its sole discretion. (b) Notwithstanding any other provisions of the Plan to the contrary, the Committee and the Trustees shall comply with a "qualified domestic relations order" as such term in defined in Section 414(p) of the Code and the benefits otherwise payable to the Member, and to any other person than the payee entitled to benefits under the order, shall be adjusted accordingly. Benefits payable under a qualified domestic relations order may be paid prior to the "earliest retirement age" as such term is defined in Code Section 414(p). The Committee shall establish reasonable procedures for determining the qualified status of any domestic relations order and for administering distributions under any such order. 12.04 Construction of Agreement ------------------------- The Plan shall be construed according to the laws of the Commonwealth of Pennsylvania and all provisions hereof shall be administered according to, and its validity shall be determined under, the laws of such Commonwealth, except where preempted by Federal law. 12.05 Severability ------------ (a) Should any provision of the Plan be deemed or held to be illegal or invalid for any reason, such invalidity shall not adversely affect any other Plan provision and in such case, the appropriate parties shall immediately adopt a new provision or regulation to take the place of the one deemed or held to be illegal or invalid. 113 (b) If the invalidity inhibits the proper operation of this Plan a new provision shall be adopted to take the place of the one deemed or held to be illegal or invalid. 12.06 Titles and Headings ------------------- The titles and headings of the Sections and any Subsections in this instrument are for convenience of reference only. In the event of any conflict between the text of this instrument and the titles or headings, the text rather than such titles or headings shall control. 12.07 Counterparts as Original ------------------------ The Plan may be prepared in counterparts, each of which so prepared shall be construed as an original. 12.08 Construction ------------ The singular, where appearing in the Plan shall include the plural and the plural shall include the singular; and the masculine pronoun, where appearing in the Plan shall include the feminine and the feminine shall include the masculine. 12.09 Source of Benefits ------------------ All benefits under the Plan shall be provided solely from the Trust Funds, and neither the Participating Companies nor their officers, directors or stockholders shall have any liability or responsibility therefor. Neither the Participating Companies nor the Trustees guarantee the funds of the Plan against any loss or depreciation or guarantee the payment of any benefit under the Plan. No person shall have any rights under the Plan with respect to the funds of the Plan, or against either Trustee, any Participating Company or any member of the Committee, except as specifically provided herein. 114 12.10 Top-Heavy Provisions -------------------- (a) General Rule ------------ The Plan shall meet the requirements of this Section 12.10 in the event that the Plan is or becomes a Top-Heavy Plan. (b) Top-Heavy Plan -------------- Subject to the aggregation rules set forth in Subsection (c), the Plan shall be considered a Top-Heavy Plan pursuant to Section 416(g) of the Code in any Plan Year if, as of the Determination Date, the value of the cumulative Accounts of all Key Employees exceeds sixty percent (60%) of the value of the cumulative Accounts of all of the Employees as of such Date, excluding former Key Employees, and excluding any Employee who has not performed services for the Company or any Affiliated Company during the five (5) consecutive Plan Year period ending on the Determination Date, but taking into account in computing the ratio any distributions made during the five (5) consecutive Plan Year period ending on the Determination Date. For purposes of the above ratio, the Account of a Key Employee shall be counted only once each Plan Year, notwithstanding the fact that an individual may be considered a Key Employee for more than one reason in any Plan Year. (c) Aggregation Rules ----------------- For purposes of determining whether the Plan is a Top-Heavy Plan and for purposes of meeting the requirements of this Section 12.10, the Plan shall be aggregated and coordinated with other qualified plans, including terminated plans, in a Required Aggregation Group and may be aggregated or coordinated with other qualified plans in a Permissive Aggregation Group. If such Required Aggregation Group is 115 Top-Heavy, this Plan shall be considered a Top-Heavy Plan. If such Permissive Aggregation Group is not Top-Heavy, this Plan shall not be a Top-Heavy Plan. (d) Definitions ----------- For the purpose of determining whether the Plan is Top-Heavy, the following definitions shall be applicable: (i) The term "Determination Date" shall mean, in the case of the first Plan Year, the last day of such Plan Year and in the case of any subsequent Plan Year, the last day of the preceding Plan Year. The value of an individual Member's Account shall be determined as of the Determination Date. (ii) An individual shall be considered a "Key Employee" if he is an Employee or former Employee who at any time during the current Plan Year or any of the four (4) preceding Plan Years: (1) was an officer of the Company who has annual compensation from the Company in the applicable Plan Year in excess of 50% of the dollar limitation under Section 415(b)(1)(A) of the Code; provided, however, that the number of individuals treated as Key Employees by reason of being officers hereunder shall not exceed the lesser of fifty (50) or ten percent (10%) of all Employees, and provided further, that if the number of Employees treated as officers is limited to fifty (50) hereunder, the individuals treated as Key Employees shall be those who, while officers, received the greatest annual Compensation in the applicable Plan Year and any of the four preceding Plan Years; or (2) was one of the ten (10) Employees owning or considered as owning the largest interests in the Company who has annual Compensation from the 116 Company in the applicable Plan Year in excess of the dollar limitation under Section 415(c)(1)(A) of the Code as increased under Section 415(d) of the Code; or (3) was a more than five percent (5%) owner of the Company; or (4) was a more than one percent (1%) owner of a Participating Company whose annual Compensation from the Company in the applicable Plan Year exceeded $150,000. For purposes of determining who is a Key Employee, ownership shall mean ownership of the outstanding stock of the Company or of the total combined voting power of all stock of the Company, taking into account the constructive ownership rules of Section 318 of the Code, as modified by Section 416(i)(1) of the Code. For purposes of Subparagraph (1) but not for purposes of Subparagraphs (2), (3) and (4) (except for purposes of determining Compensation under (4)), the term "Company" shall include any entity aggregated with the Company pursuant to Section 414(b), (c) or (m) of the Code. For purposes of Subparagraph (2), an Employee (or former Employee) who has some ownership interest is considered to be one of the top ten (10) owners unless at least ten (10) other Employees (or former Employees) own a greater interest than such Employee (or former Employee), provided that if an Employee has the same ownership interest as another Employee, the Employee having greater annual Compensation from the Company is considered to have the larger ownership interest. (iii) The term "Non-Key Employee" shall mean any Employee who is a Member and who is not a Key Employee. 117 (iv) Whenever the term "Key Employee," "former Key Employee," or "Non-Key Employee" is used herein, it includes the beneficiary or beneficiaries of such individual. If an individual is a Key Employee by reason of the foregoing sentence as well as a Key Employee in his own right, both the value of his inherited benefit and the value of his own Account will be considered his Account for purposes of determining whether the Plan is a Top-Heavy Plan. (v) For purposes of this Section 12.10, except as otherwise specifically provided, the term "Compensation" shall be determined in the same manner as "Compensation" for purposes of Section 6.04, increased by pre-tax amounts described in Sections 125 and 402(e)(3) of the Code under plans maintained by the Company or an Affiliated Company. (vi) The term "Required Aggregation Group" shall mean all other qualified defined benefit and defined contribution plans maintained by the Company in which a Key Employee participates, and each other plan of the Company which enables any plan in which a Key Employee participates to meet the requirements of Sections 401(a)(4) and 410 of the Code. (vii) The term "Permissive Aggregation Group" shall mean all other qualified defined benefit and defined contribution plans maintained by the Company that meet the requirements of Sections 401(a)(4) and 410 of the Code when considered with a Required Aggregation Group. 118 (e) Requirements Applicable If Plan Is Top-Heavy -------------------------------------------- In the event the Plan is determined to be Top-Heavy for any Plan Year, the following requirements shall be applicable: (i) Minimum Allocations shall be as follows: (1) In the case of a Non-Key Employee who is covered under this Plan but does not participate in any qualified defined benefit plan maintained by the Company, the minimum allocation of contributions plus forfeitures allocated to the account of each Non-Key Employee who has not separated from service at the end of a Plan Year in which the Plan is Top-Heavy shall equal the lesser of three percent (3%) of Compensation for such Plan Year or the largest percentage of Compensation (including Sheltered Contributions and Exchange Contributions) provided on behalf of any Key Employee for such Plan Year. Sheltered Contributions and Exchange Contributions may not be used to satisfy this minimum allocation requirement. The minimum allocation provided hereunder may not be suspended or forfeited under Section 411(a)(3)(B) or (D) of the Code. (2) A Non-Key Employee who is covered under this Plan and under a qualified defined benefit plan maintained by the Company shall not be entitled to the minimum allocation under this Plan but shall receive the minimum benefit provided under the terms of the qualified defined benefit plan. If a Non-Key Employee is covered under one or more qualified defined contribution plans in addition to this Plan, the minimum allocation requirements may be satisfied through contributions and forfeitures allocated to his accounts under such other plans. 119 (ii) Effective for Plan Years beginning before January 1, 2000, for purposes of computing the defined benefit plan fraction and defined contribution plan fraction as set forth in Section 415(e)(2)(B) and (e)(3)(B) of the Code, the dollar limitations on benefits and Annual Additions applicable to a limitation year shall be multiplied by 1.0 rather than by 1.25. (iii) The Member's nonforfeitable right to a percentage of his Account shall be determined in accordance with the following table: Nonforfeitable Years of Service Percentage ---------------- ---------- 2 20 3 40 4 60 5 80 6 or more 100 Notwithstanding the foregoing, in no event will a Member's nonforfeitable right to a percentage of his Account be less than his nonforfeitable right determined prior to the Plan's becoming a Top-Heavy Plan. 120 Article 13. Amendment, Merger And Termination --------------------------------- 13.01 Amendment --------- The Company, by written resolution of the Board of Directors, reserves the right at any time and from time to time to modify or amend, in whole or in part, any or all of the provisions of the Plan, provided that: (a) no modification or amendment shall be made that makes it possible for any portion of the assets of the Trust to revert to or become the property of any Participating Company, and (b) no modification or amendment shall have any retroactive effect so as to cause any reduction in the Member's Account as of the date of such amendment or shall deprive any Member or Beneficiary of any benefit accrued hereunder. Notwithstanding the foregoing, the Board of Directors has delegated the authority to amend the Plan to the Committee; provided, however, that the Board of Directors reserves the right to rescind or modify such delegation at any time and for any reason and retains the right to amend the Plan itself at any time. Further notwithstanding the foregoing, any modification or amendment of the Plan may be made, retroactively if necessary, which the Board of Directors or its delegate deems necessary or proper to bring the Plan into conformity with any law or governmental regulation relating to plans or trusts of this character, including the qualification of any trust or other fund created under the Plan as exempt from income taxes under the Code. 13.02 Termination, Sale of Assets or Sale of Subsidiary ------------------------------------------------- While the Plan and Trust are intended to be permanent, they may be terminated at any time at the discretion of the Board of Directors or its delegate by written resolution, 121 solely as to all or any one Participating Company. Written notification of such action shall be given to each Participating Company and the Trustees setting forth the date of termination and such date of termination shall be deemed a Valuation Date. Thereafter, no further contributions shall be made to any Trust Fund by a Participating Company involved in the termination. Upon the complete or partial termination of the Plan or the employee stock ownership portion of the Plan, or upon the complete discontinuance of all contributions by all Participating Companies, the rights of all affected Members in their Accounts shall be fully vested. Any unallocated Leveraged Shares shall be sold to the Company or on the open market. The proceeds of such sale shall be used to satisfy any outstanding Acquisition Loan and the balance of any funds remaining shall be allocated to each Member's Account based on the proportion that the balance of each such Member's Account bears to the total of the balances of all Accounts. Upon termination, a Member's Account shall not be distributed until such time as otherwise provided under Article 9 hereof. Upon the sale of substantially all of the assets of a Participating Company in a trade or business or the sale by a Participating Company of its interest in a subsidiary, a Member who is employed by such Participating Company shall be considered to have separated from service for purposes of determining a Member's entitlement to a distribution pursuant to the provisions of Section 9.02, to the extent permitted under Sections 401(k)(10) and 409(d) of the Code. Upon such event, the Members may no longer actively participate in the Plan. 122 13.03 Merger of Plans --------------- Upon the merger or consolidation of this Plan with any other plan or the transfer of assets or liabilities from the Trust to another trust, all Members shall be entitled to a benefit at least equal to the benefit they would have been entitled to receive had the Plan been terminated in accordance with Section 13.02 immediately prior to such merger, consolidation or transfer of assets or liabilities. 13.04 Additional Participating Companies, Locations, or Divisions ----------------------------------------------------------- Any domestic corporation or other business entity which is now or becomes an Affiliated Company of the Company shall become a Participating Company upon appropriate action by the board of directors of such corporation or other entity necessary to adopt the Plan with respect to its employees. In order for a domestic corporation or other business entity to become a Participating Company the Board, the Executive Committee of the Board, or the Committee must consent to such action. The Board, the Executive Committee of the Board, or the Committee also may approve the inclusion of employees of any newly established or acquired location or division as Employees eligible for membership under the Plan. Notwithstanding anything to the contrary, Armacell, LLC shall become a Participating Company separate from the Company and its Affiliated Companies effective for the period beginning June 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee). In addition, Ardex Engineered Cements, Inc. shall become a Participating Company separate from the Company and its Affiliated Companies effective for the period beginning August 1, 2000 and ending December 31, 2000 (or such earlier date as determined by the Committee). The Committee shall determine to what extent, if any, credit for eligibility and vesting 123 purposes shall be granted for previous service with the corporation or other entity, location or division, but subject to the continued qualification of the Trust for the Plan as tax-exempt under the Code. 124 EX-10 4 dex10.txt EMPLOYMENT AGREEMENT Exhibit 10 EMPLOYMENT AGREEMENT THIS AGREEMENT is made effective as of May 2, 2001 (the "Agreement") by and among Armstrong World Industries, Inc., a Pennsylvania corporation (the "Company"), and Chan W. Galbato (the "Executive"). WITNESSETH: WHEREAS, the Company desires to employ Executive as President and Chief Executive Officer of its Armstrong Floor Products Operations 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. EMPLOYMENT. ---------- The Company agrees to employ the Executive, and the Executive agrees to serve the Company on the terms and conditions set forth herein. 2. POSITION AND DUTIES. ------------------- The Executive shall be the chief executive of the Company's floor products operations and shall have such duties and responsibilities as are customary for this position and such other duties not inconsistent therewith as the Company's Chairman may reasonably assign from time to time. As long has he is employed by the Company, excluding any periods of vacation and sick leave to which the Executive may be entitled under the Company's policies and practices (as the same may be modified 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. Nothing herein shall be deemed to constitute an implied term of employment, and the Executive will be an employee-at-will. 3. COMPENSATION AND RELATED MATTERS. -------------------------------- 3.1 HIRING AND RETENTION COMPENSATION. --------------------------------- (a) Within two weeks of hire, the Company shall provide the Executive a cash payment of $200,000. If the Executive voluntarily terminates his employment within one (1) year of his start date, he must reimburse the Company the entire amount of this bonus. (b) In addition to Base Salary and incentive compensation provided herein, Executive will be eligible to participate in the Court-approved cash retention program of the Company at the maximum payment level approved by the Court. 1 3.2 BASE SALARY. ----------- The Company shall pay, or cause to be paid, to the Executive an annual base salary ("Base Salary") at an initial rate of $450,000 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. 3.3 BENEFIT PLANS. ------------- During the term of employment, 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, Bonus Replacement Retirement Plan (for bonus payable March 2003), and retirement plans, practices, policies and programs; (ii) Executive Personal Financial Planning/Income Tax Preparation Program, Executive Annual Physical, Employment Protection Plan (with sixteen (16) years of service credit but subject to the application of a separate Change in Control Agreement); and (iii) 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. The Executive's participation in such employee benefit plans, practices, policies and programs shall be at a level appropriate for his position. For the purposes of participation in the Company's defined benefit pension plan, Executive shall be credited with eleven (11) years prior service credit for pension determination. Executive's benefits under the defined benefit pension plan will be reduced by the actuarial value of any defined benefit pension already paid to him or payable in the future by General Electric. 3.4 INCENTIVE COMPENSATION. ---------------------- (a) Executive is eligible to participate in the Company's Management Achievement Plan (the "Plan") and will have a target bonus of sixty percent (60%) of his actual Base Salary earnings. Executive's bonus payment in 2001 will be based thirty percent (30%) on the Company's parent corporation's "corporate" operating income results and seventy percent (70%) on Armstrong Floor Products operating income results (both measures will be adjusted by the Company or its parent, as applicable, for working capital variance against the budget). For plan year 2001, Executive's target bonus will be pro-rated for the length of his employment. Executive is guaranteed for 2001 a minimum bonus of $270,000, which is payable in March 2002. Executive must be actively employed on the day of the bonus distribution in order to be eligible for this payment. (b) Executive is eligible to receive an annual long-term incentive award with a target present value of two hundred percent (200%) of annualized Base Salary, based on 2 authorized Plan terms and provisions for the current year, and based on Company-authorized terms applicable to executives in future years. 3.5 EXECUTIVE SEVERANCE BENEFITS/ CHANGE IN CONTROL AGREEMENT. --------------------------- In its Chapter 11 proceedings, the Company received authorization that covers Executive's participation in (i) an enhanced severance benefit program, in which Executive shall participate at the maximum level, and which will apply during the period of Chapter 11 reorganization, and (ii) an individual change in control agreement (the "Change in Control Agreement"). Benefits provided to Executive pursuant to this enhanced severance benefit program shall be offset by severance payments made under the Change in Control Agreement. Following emergence from the Chapter 11 reorganization, the Company will provide severance pay at one and one-half times (1 1/2) the sum of Base Salary and target bonus. In the event Executive is not selected to succeed Michael D. Lockhart as Chief Executive Officer of the Company's parent corporation, Executive may elect within sixty days (60) of such non-selection to terminate employment and receive severance pay at one and one-half times (1 1/2) the sum of Base Salary and target bonus. 3.6 FRINGE BENEFITS AND RELOCATION. ------------------------------ During the term of employment, the Executive shall be entitled to receive all perquisites and fringe benefits, including relocation reimbursement and/or 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. 4. SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. ----------------------------------------- In addition to any obligations imposed by law upon any successor to the Company, the Company will assign to and require any successor (whether direct or indirect, by purchase, merger, consolidation, bankruptcy or otherwise) to all or substantially all of the business and/or assets of the Company, or all or substantially all of the assets of the Company's line of business in which the Executive is then employed, 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. The Executive consents to any such assignment. This Agreement shall inure to the benefit of and be enforceable by the Company's successors (whether direct or indirect, by purchase, merger, consolidation, bankruptcy or otherwise) to all or substantially all of the business and/or assets of the Company, or all or substantially all of the assets of the Company's line of business in which the Executive is employed, as the case may be. Executive expressly agrees to such assignment of this Agreement by the Company in favor of its successors in interest, if any. 3 5. 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 World Industries, Inc. 2500 Columbia Avenue Lancaster, PA 17603 Attention: Vice President, Compensation and Benefits 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. 6. MISCELLANEOUS. ------------- If the Executive, in his capacity as an officer effects or approves, or if the Executive is elected as a director, votes for, any action that will adversely affect the Executive's rights under this Agreement, such action 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 the Company. 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. This Agreement, plus the Company's standard employee confidentiality agreement, set 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 shall affect the Executive's rights under a Change in Control Agreement and an Indemnification Agreement to be executed 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. 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. 4 7. VALIDITY. -------- This Agreement is subject to approval of the Court in the Company's Chapter 11 case. The Company will pursue such an approval expeditiously, and Executive will cooperate as may be necessary in this regard. 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. 8. 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. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. ARMSTRONG WORLD INDUSTRIES, INC. By: --------------------------------- Title: Chairman EXECUTIVE ------------------------------------ Chan W. Galbato 5 EX-15 5 dex15.txt LETTER RE: UNAUDITED INTERM FIN'L INFO Exhibit No. 15 Armstrong Holdings, Inc. Lancaster, Pennsylvania Ladies and Gentlemen: Re: Registration Statement Nos. 333-74501; 33-91890; 33-18996; 33-29768; 33-18997; 33-65768; 333-74633; 333-79093; 333-43872. With respect to the subject registration statements, we acknowledge our awareness of the incorporation by reference therein of our report dated August 3, 2001, related to our review of interim financial information of Armstrong Holdings, Inc. Our review report dated August 3, 2001, contains a paragraph that states three of the Company's domestic subsidiaries, including Armstrong World Industries, Inc., filed separate voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code on December 6, 2000 and Armstrong World Industries, Inc. has also defaulted on certain debt obligations. Our review report also states that the filing under Chapter 11 and the resulting increased uncertainty regarding the Company's potential asbestos liabilities raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 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. Very truly yours, /s/ KPMG LLP Philadelphia, Pennsylvania August 3, 2001 -----END PRIVACY-ENHANCED MESSAGE-----