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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-2116
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Armstrong World Industries, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0366390
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
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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 registrant's common stock outstanding as of
October 24, 1997 - 40,566,360
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Part I - Financial Information
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Item 1. Financial Statements
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Earnings
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(amounts in millions except for per-share data)
Unaudited
<TABLE>
<CAPTION>
Three months Nine months
ended September 30 ended September 30
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 575.6 $ 563.4 $ 1,671.3 $ 1,627.8
Cost of goods sold 380.0 385.0 1,105.2 1,094.3
Selling, general and administrative expense 91.3 115.7 292.0 322.0
Equity (earnings) loss from affiliates 27.2 (5.4) 24.3 (11.5)
Restructuring charges -- -- -- 46.5
---- ---- ---- ----
Operating income (a)(b) 77.1 68.1 249.8 176.5
Interest expense 7.4 6.8 21.1 19.3
Other (income) expenses, net 0.6 (0.4) 0.7 (4.7)
--- ---- --- ----
Earnings before income taxes 69.1 61.7 228.0 161.9
Income taxes 35.3 17.5 89.8 50.8
--- ---- --- ----
EARNINGS BEFORE EXTRAORDINARY LOSS 33.8 44.2 138.2 111.1
Extraordinary loss, net of income taxes (c) -- (8.4) -- (8.4)
---- ---- ---- ----
NET EARNINGS $ 33.8 $ 35.8 $ 138.2 $ 102.7
========= ========= =========== ===========
Earnings before extraordinary loss per share of common stock: (a)(b)
Primary $ 0.82 $ 1.06 $ 3.35 $ 2.67
Fully diluted $ 0.82 $ 1.06 $ 3.35 $ 2.54
Net earnings per share of common stock: (c)
Primary $ 0.82 $ 0.86 $ 3.35 $ 2.47
Fully diluted $ 0.82 $ 0.86 $ 3.35 $ 2.34
Average number of common shares outstanding:
Primary 41.1 41.9 41.2 38.9
Fully diluted 41.1 41.9 41.2 42.4
Return on average common shareholders' equity 16.3% 18.4% 22.1% 17.5%
</TABLE>
(a) For the three months ended September 30, 1997, operating income was reduced
$24.2 million, or $0.59 per share, as a result of charges incurred by
Dal-Tile for uncollectible receivables, overstocked inventories and other
asset revaluations. For the nine months ended September 30, 1997, operating
income was reduced $29.7 million or $0.72 per share for the Dal-Tile
third-quarter charge plus a second-quarter charge from Dal-Tile of $5.5
million, or $0.13 per share.
(b) Operating income was reduced in 1996 as follows: For discoloration on a
limited portion of flooring products totaling $34.0 million before tax or
$0.53 per share for the three months and nine months ended September 30.
For restructuring charges totaling $46.5 million before tax, or $0.70 per
share for the nine months ended September 30.
(c) In the third quarter of 1996, Dal-Tile refinanced all of its existing debt
which resulted in an extraordinary loss. The company's share of the
extraordinary loss on an equity basis was $8.4 million after-tax, or $0.20
per share for the three months and nine months ended September 30, 1996.
See accompanying footnotes to the financial statements beginning on page 7.
2
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Balance Sheets
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(amounts in millions)
<TABLE>
<CAPTION>
Unaudited
Assets September 30, 1997 December 31, 1996
------ ------------------ -----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 70.3 $ 65.4
Accounts receivable less allowance 297.2 216.7
Inventories:
Finished goods $ 143.4 $ 143.7
Work in process 22.9 20.1
Raw materials and supplies 49.3 41.9
---- ----
Total inventories 215.6 205.7
Income tax benefits 28.2 49.4
Other current assets 38.6 27.3
---- ----
Total current assets 649.9 564.5
Property, plant and equipment 1,992.0 1,938.9
Less accumulated depreciation and amortization 1,031.4 974.9
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Net property, plant and equipment 960.6 964.0
Insurance for asbestos-related liabilities (a) 155.2 141.6
Investment in affiliates (b) 182.0 204.3
Other noncurrent assets 307.5 261.2
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Total assets $2,255.2 $2,135.6
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Short-term debt $ 55.8 $ 14.5
Current installments of long-term debt 27.2 13.7
Accounts payable and accrued expenses 267.3 273.3
Income taxes 43.7 19.5
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Total current liabilities 394.0 321.0
Long-term debt 227.4 219.4
ESOP loan guarantee 212.0 221.3
Postretirement and postemployment benefits 246.5 247.6
Asbestos-related liabilities (a) 133.4 141.6
Other long-term liabilities 162.9 151.9
Deferred income taxes 41.5 30.5
Minority interest in subsidiaries 17.6 12.3
---- ----
Total noncurrent liabilities 1,041.3 1,024.6
Shareholders' equity:
Common stock 51.9 51.9
Capital in excess of par value 162.9 162.1
Reduction for ESOP loan guarantee (209.8) (217.4)
Retained earnings 1,309.9 1,222.6
Foreign currency translation (c) (1.8) 17.3
Treasury stock (493.2) (446.5)
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Total shareholders' equity 819.9 790.0
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Total liabilities and shareholders' equity $2,255.2 $2,135.6
======== ========
</TABLE>
See page 4 for explanation of references (a), (b) and (c). Also see accompanying
footnotes to the financial statements beginning on page 7.
3
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(a) The asbestos-related liability in the amount of $133.4 million represents
the minimum liability and defense cost to resolve personal injury claims
pending against the Company as of the end of the third quarter 1997. The
insurance asset in the amount of $155.2 million reflects the Company's
belief in the availability of insurance in an amount covering the liability
and recovery of $21.8 million for payments of asbestos-related claims.
Excluding the $21.8 million payment, both the asset and liability are the
same estimates as existed at the second quarter 1997 which will change upon
the future assessment referenced in Note 2 beginning on page 7.
(b) Investment in affiliates is primarily comprised of the 34.4 percent
ownership of Dal-Tile as of September 30, 1997, and the 50.0 percent
interest in the WAVE joint venture.
(c) Foreign currency translation, reported as a separate component of
shareholders' equity, is detailed as follows:
Balance at beginning of year $17.3
Nine months' translation adjustments and
hedging of foreign investments (19.1)
Allocated income taxes --
------
Balance at September 30, 1997 $ (1.8)
======
4
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Armstrong World Industries, Inc., and Subsidiaries
Consolidated Statements of Cash Flows--Unaudited
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(amounts in millions)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 138.2 $ 102.7
Adjustments to reconcile net earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 98.2 91.3
Deferred income taxes 14.0 0.8
Equity change in affiliates 31.5 (1.2)
Loss from restructuring activities -- 46.5
Restructuring payments (17.0) (30.9)
Payments for asbestos-related claims (21.8) --
Changes in operating assets and liabilities net of effect of restructuring
and acquisitions:
(Increase) in receivables (81.6) (34.9)
(Increase) in inventories (7.3) (3.3)
Decrease (increase) in other current assets 8.9 (4.6)
(Increase) in other noncurrent assets (48.3) (43.7)
Increase in accounts payable and accrued expenses 14.1 11.4
Increase in income taxes payable 27.7 12.2
Increase in other long-term liabilities 16.6 13.1
Other, net (1.2) (2.8)
---- ----
Net cash provided by operating activities 172.0 156.6
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Cash flows from investing activities:
Purchases of property, plant and equipment (97.1) (157.2)
Investment in computer software (10.3) (5.0)
Acquisitions and investment in joint ventures (16.6) (10.0)
Proceeds from the sale of land and facilities/
divestitures 17.0 1.4
---- ---
Net cash (used for) investing activities (107.0) (170.8)
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Cash flows from financing activities:
Increase (decrease) in short-term debt, net 39.0 (13.2)
Issuance of long-term debt 7.2 26.3
Reduction of long-term debt -- (40.0)
Cash dividends paid (52.2) (53.5)
Preferred stock redemption -- (21.4)
Purchase of common stock for the treasury (53.4) (61.3)
Proceeds from exercised stock options 6.0 3.9
Other, net 0.2 (4.2)
--- ----
Net cash (used for) financing activities (53.2) (163.4)
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Effect of exchange rate changes on cash and cash
equivalents (6.9) (0.6)
---- ----
Net increase (decrease) in cash and cash equivalents $ 4.9 $ (178.2)
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Cash and cash equivalents at beginning of period $ 65.4 $ 256.9
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Cash and cash equivalents at end of period $ 70.3 $ 78.7
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Supplemental cash flow information:
Interest paid $ 12.6 $ 11.6
Income taxes paid $ 34.7 $ 56.7
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</TABLE>
Supplemental schedule of non-cash investing and financing activities: The
Company purchased 51 percent of the capital stock of Holmsund Golv AB in March
1997 for $0.8 million and 60 percent of the capital stock of the Parafon AB
ceilings joint venture in April 1997 for $3.4 million. In conjunction with the
acquisitions, assets acquired and liabilities assumed were as follows
(millions):
Fair value of assets acquired $32.6
Cash paid for the capital stock 4.2
Minority interest 2.8
Debt assumed 17.6
----
Other long-term liabilities assumed $ 8.0
=====
See accompanying notes to the financial statements beginning on page 7.
5
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Armstrong World Industries, Inc., and Subsidiaries
Industry Segment Financial Data
-------------------------------
(amounts in millions)
Unaudited
<TABLE>
<CAPTION>
Three Months Nine months
ended September 30 ended September 30
------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Net trade sales:
- ----------------
<S> <C> <C> <C> <C>
Floor coverings (b) $ 300.0 $ 282.0 $ 855.5 $ 822.2
Building products 194.9 188.1 566.9 542.6
Industry products 80.7 93.3 248.9 263.0
---- ---- ----- -----
Total net sales $ 575.6 $ 563.4 $1,671.3 $1,627.8
======== ======== ======== ========
Operating income: (a)
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Floor coverings (b) $ 56.9 $ 26.6 $ 146.0 $ 101.3
Building products 33.4 28.9 93.5 73.4
Industry products (c) 16.4 15.2 41.6 30.2
Ceramic tile (d) (30.5) 3.2 (34.0) 5.2
Unallocated corporate (expense) (e) 0.9 (5.8) 2.7 (33.6)
--- ---- --- -----
Total operating income $ 77.1 $ 68.1 $ 249.8 $ 176.5
======= ======== ======== ========
(a) Restructuring charges
---------------------
included in operating income:
- -----------------------------
Floor coverings $ -- $ -- $ -- $ 14.5
Building products -- -- -- 8.3
Industry products -- -- -- 4.0
Unallocated corporate expense -- -- -- 19.7
---- ---- ---- ----
Total restructing and one-time
charges in operating income $ -- $ -- $ -- $ 46.5
====== ====== ====== ========
</TABLE>
(b) For the three months and nine months ended September 30, 1996, sales were
reduced by $14.1 million for customer returns, and operating income was
reduced by $34.0 million resulting from discoloration on a limited portion
of flooring products.
(c) For the three months and nine months ended September 30, 1996, operating
income includes a $2.3 million gain resulting from the sale of the
Braintree, Massachusetts, manufacturing facility.
(d) For the three months ended September 30, 1997, operating income was reduced
$24.2 million, or $0.59 per share, as a result of charges incurred by
Dal-Tile for uncollectible receivables, overstocked inventories and other
asset revaluations. For the nine months ended September 30, 1997, operating
income was reduced $29.7 million or $0.72 per share for the Dal-Tile
third-quarter charge plus a second-quarter charge from Dal-Tile of $5.5
million, or $0.13 per share.
(e) For the three months and nine months ended September 30, 1997, operating
income includes a $2.6 million gain resulting from the sale of a Lancaster,
Pa., office building.
6
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Note 1. Operating results for the third quarter and first nine months of 1997,
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compared with the corresponding periods of 1996 included in this report, are
unaudited. However, these results have been reviewed by the Company's
independent public accountants, KPMG Peat Marwick LLP, in accordance with the
established professional standards and procedures for a limited review.
The accounting policies used in preparing these statements are the same as those
used in preparing the Company's consolidated financial statements for the year
ended December 31, 1996. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report and Form 10-K for the
fiscal year ended December 31, 1996. 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. Three and nine
months' results are not necessarily indicative of annual earnings.
Note 2.
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OVERVIEW OF ASBESTOS-RELATED LEGAL PROCEEDINGS
Personal Injury Litigation
The Company is one of many defendants in approximately 69,000 pending claims as
of September 30, 1997, alleging personal injury from exposure to asbestos. The
increase in the number of claims during the third quarter is primarily due to
the inclusion of cases filed against the company that previously had been
subject to an injunction related to the Georgine Settlement Class Action
("Georgine"), described below.
The Company anticipates additional new claims as a result of the loss of the
Georgine injunction including those filed in the tort system against other
defendants (and not against the Center for Claims Resolution ("Center") members)
while Georgine was pending.
Nearly all the claims seek general and punitive damages arising from alleged
exposures, at various times, from World War II onward, to asbestos-containing
products. Claims against the Company generally involve allegations of
negligence, strict liability, breach of warranty and conspiracy with respect to
its involvement with asbestos-containing insulation products. The Company
discontinued the sale of all such products in 1969. The claims also allege that
injury may be determined many years (up to 40 years) after first exposure to
asbestos. Nearly all suits name many defendants, and over 100 different
companies are reportedly involved. The Company believes that many current
plaintiffs are unimpaired. Some courts have consolidated groups of cases for
trial, which the Company has generally opposed as unfair. A large number of
claims have been put on inactive lists, settled, dismissed or otherwise
resolved, and the Company is generally involved in all stages of claims
resolution and litigation, including trials and appeals. Neither the rate of
future dispositions nor the number of future potential unasserted claims can
reasonably be predicted at this time.
Attention has been given by various parties to securing a comprehensive
resolution of pending and future claims. In 1991, the Judicial Panel for
Multidistrict Litigation ordered the transfer of all pending federal cases to
the Eastern District of Pennsylvania in Philadelphia for pretrial purposes. The
Company supported this transfer. Some cases are periodically released for trial,
although the issue of punitive damages is retained by the transferee court. That
Court has been instrumental in having the parties resolve large numbers of cases
in various jurisdictions and has been receptive to different approaches to the
resolution of claims. Personal injury claims filed in state courts have not been
directly affected by the transfer, although most recent cases have been filed in
state courts.
Georgine Settlement Class Action
Georgine v. Amchem was a settlement class action that included essentially all
- ------------------
future personal injury claims against members of the Center, including the
Company. It was filed in the Eastern District of Pennsylvania, on January 15,
1993, along with a joint motion for conditional class certification. It was
designed to establish a non-litigation system for the resolution of such claims,
and offered a method for prompt compensation to claimants who were
occupationally exposed to asbestos if they met certain exposure and medical
criteria. Compensation amounts were derived from historical settlement data. No
punitive damages were to be paid under the proposed settlement. The settlement
was designed to, among other things,
7
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minimize transaction costs, including attorneys fees, expedite compensation to
claimants with qualifying claims, and relieve the courts of the burden of
handling future claims. Based on maximum mathematical projections covering a
ten-year period from 1994 to 2004, the estimated cost for the company in
Georgine reflected a reasonably possible additional liability of $245 million.
The District Court, after exhaustive discovery and testimony, approved the
settlement class action, but the U.S. Court of Appeals for the Third Circuit
reversed that decision, and the reversal was sustained by the U.S. Supreme Court
in a decision issued on June 25, 1997. The Supreme Court upheld the Court of
Appeals' ruling that the settlement class did not meet the requirements for
class certification under Federal Rule of Civil Procedure 23. The preliminary
injunction, which remained in place while the case was pending on appeal, was
vacated on July 21, 1997, resulting in immediate reinstatement of the filed and
enjoined cases and loss of the bar against filing of claims in the tort system
by formerly enjoined class members. In due course, the consequences from the
loss of the injunction will result in increasing liability and defense costs.
The Company believes that an alternative claims resolution mechanism will
eventually emerge.
The Company currently is assessing the impact of the recent Supreme Court ruling
on its projected asbestos liability and defense costs. In doing so, the Company
is reviewing, among other things, its historical resolution costs, the incidence
of past claims, the mix of the injuries alleged, the mix of the occupations of
the plaintiffs, the number of cases pending against it, and the Georgine
projection and experience. Future projections of asbestos liabilities and
related adjustments to the amounts reported in the Company's statement of
financial position will likely be based on this assessment which will likely be
completed in the fourth quarter 1997. Management believes these adjustments will
not have a material effect on the financial condition of the Company or its
liquidity, although the net after-tax effect of any future liabilities recorded
in excess of insurance assets could be material to earnings in a future period.
Insurance Coverage/Wellington Agreement
The Company's primary and excess insurance carriers have provided product hazard
defense and indemnity coverage for personal injury claims, and are providing
similar coverage for property damage claims.
Various insurance contracts also provide for non-products (general liability)
coverage for personal injury claims. Most products hazard coverage for personal
injury claims has been exhausted. The insurance carriers that currently provide
coverage or whose policies have provided or are believed to provide personal
injury products and non-products or property damage coverages are as follows:
Reliance Insurance Company; Aetna Casualty and Surety Company; Liberty Mutual
Insurance Companies; Travelers Insurance Company; Fireman's Fund Insurance
Company; Insurance Company of North America; Lloyds of London; various London
market companies; Fidelity and Casualty Insurance Company; First State Insurance
Company; U.S. Fire Insurance Company; Home Insurance Company; Great American
Insurance Company; American Home Assurance Company and National Union Fire
Insurance Company (known as the AIG Companies); Central National Insurance
Company; Interstate Insurance Company; Puritan Insurance Company; and Commercial
Union Insurance Company. Midland Insurance Company, an excess carrier that
provided $25 million of personal injury products hazard coverage, is insolvent.
Certain London companies and certain excess carriers for property damage claims
only are also insolvent. The Company is pursuing claims against insolvents in a
number of forums.
The Company and 52 other companies (defendants in the litigation and certain of
their insurers) signed the 1985 Agreement Concerning Asbestos-Related Claims
("Wellington Agreement"). This Agreement provided for a final settlement of
nearly all disputes concerning insurance for personal injury claims between the
Company and three primary and seven excess insurers. The other primary insurer
agreed to pay into the Wellington Asbestos Claims Facility ("Facility"). The
Wellington Agreement established broad coverage for claims that trigger policies
in the insurance coverage period and covered both defense and indemnity. The
Wellington Agreement addresses both products hazard and non-products (general
liability) coverages.
The Facility was established to evaluate, settle, pay and defend all personal
injury claims against member companies. Liability payments and defense costs
were allocated by formula to each member. The Facility was dissolved when
certain members raised concerns about their shares of liability payments and
defense costs and certain insurers raised concerns about defense costs and
Facility operating expenses.
8
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Center for Claims Resolution
Following dissolution of the Facility, the Center was created in October 1988 by
21 former members of the Facility, including the Company. Insurance carriers did
not become members, although a number signed an agreement to provide
approximately 70% of the Center's operational costs during its first year of
operation; they are represented ex officio on the Center's governing board. The
Center adopted many of the conceptual features of the Facility, and the insurers
generally provide coverage under the Wellington Agreement. The Center has
revised the formula for shares of liability payments and defense costs over time
and has defended the members' interests and addressed the claims in a manner
consistent with the prompt, fair resolution of meritorious claims. An increase
in the utilization of the Company's insurance occurred as a result of Georgine
and the commitment at the time to attempt to resolve pending claims within five
years. Share adjustments have resulted in some increased liability share for the
Company. The Center annually has reached agreement with the insurers relating to
the continuing operation of the Center and expects that the insurers will
provide funding for the Center's operating expenses for its tenth year of
operation.
California Insurance Coverage Lawsuit
The trial court issued final decisions in various phases in the insurance
lawsuit filed by the Company in California, including a decision that the
trigger of coverage for personal injury claims was continuous from exposure
through death or filing of a claim. The court also found that a triggered
insurance policy should respond with full indemnification up to policy limits.
The court concluded that any defense obligation ceases upon exhaustion of policy
limits. Although not as comprehensive, another decision established favorable
defense and indemnity coverage for property damage claims, providing coverage
during the period of installation and any subsequent period in which a release
of fibers occurred. The California appellate courts substantially upheld the
trial court, and that insurance coverage litigation is now concluded. The
Company has resolved personal injury products hazard coverage matters with all
of its solvent carriers except one small excess carrier, as well as all property
damage coverages.
After concluding the last phase of the trial, the Company and a carrier with
primary and excess coverages reached a settlement agreement in 1989. Under that
agreement, coverage was provided for personal injury and property damage claims.
The parties also agreed that a certain minimum and maximum percentage of
indemnity and defense costs for personal injury claims would be allocated to
non-products (general liability) coverage, with the percentage to be negotiated
or determined in an alternative dispute resolution ("ADR") process.
Non-Products Insurance Coverage
A substantial portion of the Company's insurance asset involves non-products
(general liability) insurance for personal injury claims which is included in
the Company's primary and a number of excess policies for certain types of
claims. The Wellington Agreement and the 1989 settlement agreement referred to
above include provisions for non-products claims, which include, among others,
those that involve exposure during installation of asbestos materials. An ADR
process under the Wellington Agreement is underway against certain carriers to
determine the percentage of resolved and unresolved claims that are non-products
claims and to establish the entitlement to such coverage. The additional
non-products coverage potentially available is substantial, and at the primary
level, includes defense costs in addition to limits. All the carriers raise
various defenses against coverage, including contractual defenses, waiver,
laches and statutes of limitations. One primary carrier alleges that it is no
longer bound by the Wellington Agreement, and another alleges that the Company
agreed to limit its claims for non-products coverage against that carrier when
the Wellington Agreement was signed. The ADR process is in the trial phase of
binding arbitration. Other proceedings against several non-Wellington carriers
may become necessary.
The Company is seeking resolution of key issues in the ADR process during 1997;
however, a shortfall has developed between available insurance and amounts
necessary to pay claims. This shortfall, which was $21.8 million at the end of
the third quarter, has been established as a receivable pending resolution of
the nonproducts insurance coverage issues. Insurance addressing such shortfall
is probable of recovery. The Company does not believe that the shortfall will be
material either
9
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to the financial condition of the Company or to its liquidity. No forecast can
be made for future years regarding the rate of utilization of insurance that may
be obtained through the ADR process.
ACandS, Inc., a former subsidiary of the Company, has coverage rights under some
of the Company's insurance policies and has accessed coverage on the same basis
as the Company. It was a subscriber to the Wellington Agreement, but is not a
member of the Center. The Company and ACandS, Inc., entered into an agreement
that reserved for ACandS, Inc.'s use a certain amount of insurance from the
joint policies.
Based upon the Company's experience in this litigation and the disputes with its
insurance carriers, a reserve was recorded in June 1983 to cover then-estimated
potential personal injury liability, legal and administrative costs that were
not covered under the then-existing insurance Interim Agreement, cost of
litigation against insurance carriers, and other factors involved in such
litigation. At the time of the Wellington Agreement, the reserve was reduced by
the portion associated with then pending claims. From the 1989 settlement
referred to above, the Company recorded $6.6 million as an increase to that
reserve. As of September 30, 1997, $4.7 million remained in this reserve.
Certain co-defendant companies have filed for reorganization under Chapter 11 of
the Federal Bankruptcy Code. As a consequence, litigation against them (with
some exceptions) has been stayed or restricted. Due to the uncertainties
involved, the long-term effect of these proceedings on the litigation cannot be
predicted.
Property Damage Litigation
The Company is also one of many defendants in 11 pending claims as of September
30, 1997, brought by public and private building owners. These claims include
allegations of damage to buildings caused by asbestos-containing products and
generally claim compensatory and punitive damages and equitable relief,
including reimbursement of expenditures, for removal and replacement of such
products. The claims appear to be aimed at friable (easily crumbled)
asbestos-containing products, although allegations encompass all
asbestos-containing products, including previously installed asbestos-containing
resilient flooring. Among the lawsuits that have been resolved are four class
actions, each involving a distinct class of building owner: public and private
schools; Michigan state public and private schools; colleges and universities;
and private property owners who leased facilities to the federal government. The
Company vigorously denies the validity of the allegations against it in these
claims. These suits and claims were not handled by the Facility or the Center.
Defense and indemnity coverage has been resolved in the California insurance
coverage lawsuit.
Conclusions
The Company does not know how many claims will be filed against it in the
future, or the details thereof or of pending suits not fully reviewed, or the
expense and any liability that may ultimately result therefrom, or whether an
alternative to the Georgine settlement vehicle may emerge, or the ultimate
liability if such alternative does not emerge, or the scope of its non-products
coverage ultimately deemed available.
The Company is currently assessing the impact of the recent Supreme Court ruling
on its projected asbestos liability and defense costs. Future projections of
asbestos liabilities and related adjustments to the amounts reported in the
Company's statement of financial position will likely be based on this
assessment which will likely be completed in the fourth quarter 1997. Management
believes these adjustments will not have a material effect on the financial
condition of the Company or its liquidity, although the net after-tax effect of
any future liabilities recorded in excess of insurance assets could be material
to earnings in a future period.
Subject to the uncertainties, limitations and other factors referred to in this
note and based upon its prior experience, the Company believes that a minimum of
$133.4 million in liability and defense costs recorded on the balance sheet will
be incurred to resolve the personal injury claims pending against the Company as
of September 30, 1997; the same amount as estimated in the second quarter 1997
which amount will change based on the aforementioned assessment.
An insurance asset in the amount of $155.2 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount.
(The same amount recorded in the second quarter 1997 plus the $21.8 million
insurance
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<PAGE>
shortfall described below.) Such insurance is probable of recovery through
negotiation, alternative dispute resolution or litigation. A substantial portion
of the insurance asset involves non-products insurance which is in ADR; the
Company believes it will not be resolved until 1998 or later. A shortfall has
developed between available insurance and amounts necessary to pay claims. This
shortfall was $21.8 million at the end of the third quarter. The Company does
not believe that the shortfall will be material either to the financial
condition of the Company or to its liquidity.
The Company also notes that, based on maximum mathematical projections covering
a ten-year period from 1994 to 2004, its estimated cost in Georgine reflected a
reasonably possible additional liability of $245 million. The Company believes
that a claims resolution mechanism alternative to the Georgine settlement will
eventually emerge, albeit at likely higher liability and defense costs than the
earlier maximum mathematical projection in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the expenses and any liability payments
associated with the property damage claims will be paid under an insurance
coverage settlement agreement and through coverage from the outcome of the
California insurance litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims and the liability resulting therefrom during the time period for which
reasonable projections can be made, and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the likelihood that an alternative to the Georgine
settlement will eventually emerge, and its experience, the Company believes the
asbestos-related claims against the Company would not be material either to the
financial condition of the Company or to its liquidity, although the net
after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in such future period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
- -------------
Financial Condition
- -------------------
As shown on the Consolidated Statements of Cash Flows (see page 5), the Company
had cash and cash equivalents of $70.3 million at September 30, 1997. Cash
provided by operating activities, supplemented by increases in short- and
long-term debt, proceeds from the sale of land and facilities and cash proceeds
from exercised stock options covered normal working capital requirements,
purchases of property, plant, and equipment, payment of cash dividends,
repurchase of shares, acquisitions and investments in joint ventures and
investments in computer software.
Cash provided by operating activities for the nine months ended September 30,
1997, was $172.0 million compared with $156.6 million for the comparable period
of 1996. The increase is primarily due to the higher level of earnings before
non-cash charges, partially offset by increased working capital requirements and
the payment of cash due to a shortfall between currently available insurance and
amounts necessary to pay asbestos-related claims. Working capital was $255.9
million as of September 30, 1997, $6.0 million higher than the $249.9 million
recorded at the end of the second quarter of 1997 and $12.4 million higher than
the $243.5 million recorded at year-end 1996. The ratio of current assets to
current liabilities was 1.65 to 1 as of September 30, 1997, compared with 1.66
to 1 as of June 30, 1997, and 1.76 to 1 as of December 31, 1996. The ratio
decrease from December 31, 1996, is primarily due to higher levels of short-term
debt used to finance increased working capital requirements. Contributing to the
increase in working capital requirements were higher seasonal levels of
inventories and receivables, and additional inventories and receivables from
this year's acquisitions of the Holmsund flooring and Parafon ceilings joint
ventures.
Net cash used for investing activities was $107.0 million for the nine months
ended September 30, 1997, compared with $170.8 million in 1996. This reduction
was primarily due to lower capital expenditures and the proceeds from the sale
of land and facilities which were partially offset by additional acquisitions
and investments in joint ventures.
11
<PAGE>
Net cash used for financing activities was $53.2 million for the nine months
ended September 30, 1997 as cash provided by higher levels of short-term debt
and issuance of long-term debt was more than offset by cash used for payment of
dividends and repurchases of stock. For the comparable period in 1996, net cash
used for financing activities was $163.4 million as cash was used to reduce debt
and redeem outstanding preferred stock in addition to the payment of dividends
and repurchase of common stock.
Long-term debt, excluding the Company's guarantee of the ESOP loan, increased
slightly in the first nine months of 1997. At September 30, 1997, long-term debt
of $227.4 million, or 16.9 percent of total capital, compared with $219.4
million, or 17.4 percent of total capital, at the end of 1996. The September 30,
1997, and 1996 year-end ratios of total debt (including the Company's financing
of the ESOP loan) as a percent of total capital were 38.9 percent and 37.2
percent, respectively.
Under the board-approved 5.5 million common share repurchase plan, the Company
has repurchased approximately 3,157,500 shares through September 30, 1997,
including 777,500 repurchased in the first nine months of this year.
It is management's opinion that the Company has sufficient financial strength to
warrant the required support from lending institutions and financial markets.
The Company is involved in significant asbestos-related litigation which is
described more fully under "Litigation" on pages 7-11 and which should be read
in connection with this discussion and analysis. The Company does not know how
many claims will be filed against it in the future, or the details thereof or of
pending suits not fully reviewed, or the expense and any liability that may
ultimately result therefrom, or whether an alternative to the Georgine
settlement vehicle may emerge, or the ultimate liability if such alternative
does not emerge, or the scope of its non-products coverage ultimately deemed
available.
The Company is currently assessing the impact of the recent Supreme Court ruling
on its projected asbestos liability and defense costs. Future projections of
asbestos liabilities and related adjustments to the amounts reported in the
Company's statement of financial position will likely be based on this
assessment which will likely be completed in the fourth quarter 1997. Management
believes the adjustments resulting from this assessment will not have a material
effect on the financial condition of the Company or its liquidity, although the
net after-tax effect of any future liabilities recorded in excess of insurance
assets could be material to earnings in a future period.
Subject to the uncertainties, limitations and other factors referred to above
and based upon its prior experience, the Company believes that a minimum of
$133.4 million in liability and defense costs recorded on the balance sheet will
be incurred to resolve the personal injury claims pending against the Company as
of September 30, 1997; the same amount as estimated in the second quarter 1997
which will change based on the aforementioned assessment.
An insurance asset in the amount of $155.2 million recorded on the balance sheet
reflects the Company's belief in the availability of insurance in this amount;
the same amount as estimated in the second quarter 1997 plus the $21.8 million
insurance shortfall described below. Such insurance is probable of recovery
through negotiation, alternative dispute resolution or litigation. A substantial
portion of the insurance asset involves non-products insurance which is in
alternative dispute resolution. The Company is pursuing alternative dispute
resolution which it believes will not be resolved until 1998 or later. A
shortfall has developed between available insurance and amounts necessary to pay
claims. This shortfall was $21.8 million at the end of the third quarter. The
Company does not believe that the shortfall will be material either to the
financial condition of the Company or to its liquidity.
The Company also notes that, based on maximum mathematical projections covering
a ten-year period from 1994 to 2004, its estimated cost in Georgine reflected a
reasonably possible additional liability of $245 million. The Company believes
that a claims resolution mechanism alternative to the Georgine settlement will
eventually emerge, albeit at likely higher liability and defense costs than the
earlier maximum mathematical projection in Georgine.
Subject to the uncertainties, limitations and other factors referred to
elsewhere in this note and based upon its experience, the Company believes it is
probable that substantially all of the expenses and any liability payments
associated with the
12
<PAGE>
property damage claims will be paid under an insurance coverage settlement
agreement and through coverage from the outcome of the California insurance
litigation.
Even though uncertainties still remain as to the potential number of unasserted
claims, liability resulting therefrom during the time period for which
reasonable projections can be made and after consideration of the factors
involved, including the ultimate scope of its insurance coverage, the Wellington
Agreement and settlements with other insurance carriers, the results of the
California insurance coverage litigation, the remaining reserve, the
establishment of the Center, the likelihood that an alternative to the Georgine
settlement will eventually emerge, and its experience, the Company believes the
asbestos-related claims against the Company would not be material either to the
financial condition of the Company or to its liquidity, although as stated
above, the net after-tax effect of any future liabilities recorded in excess of
insurance assets could be material to earnings in such future period.
Tender Offer for Domco Inc.
On June 9, 1997, the Company announced its intention to commence an all cash
offer to purchase all the outstanding common shares of Domco Inc. ("Domco"), a
Canadian corporation approximately 57% owned by Sommer Allibert S. A.
("Sommer"), at CDN $23 per share for a total purchase price of CDN $488 million.
The offer includes an offer for Domco's convertible debentures, warrants and
other convertible securities on an equivalent basis. The offer was initially
conditioned upon a minimum of 66-2/3% of the outstanding common shares on a
fully-diluted basis being tendered in the offer by July 14, approval of the
appropriate regulatory authorities and other customary conditions. On July 2,
the Company lowered the minimum condition to 51% of the outstanding shares on a
fully diluted basis and extended the offer to August 15. On August 15, the
Company extended its cash offer through October 10; on October 10, extended the
offer through November 14; and on November 12, extended the offer through
December 5. In October, the United States Federal Trade Commission, after a
review of the offer, informed the Company that it would not challenge the
Company's proposed acquisition of Domco, or any part of it, and will close its
investigation.
On June 9, Armstrong filed suit in the United States District Court for the
Eastern District of Pennsylvania alleging that Sommer had used confidential
information provided by Armstrong, obtained during negotiations with the Company
regarding the purchase of Sommer's worldwide flooring assets, to structure a
proposed transaction with Tarkett AG ("Tarkett"). The Company subsequently filed
a motion for a preliminary injunction to enjoin the closing of the proposed
Sommer-Tarkett transaction. A hearing was held before the District Court and a
ruling is expected towards the end of November.
On June 23, 1997, the Company filed a claim, amended on August 11, in the
Ontario Court (General Division) alleging that members of Domco's board breached
their fiduciary duty to Domco and acted in a manner oppressive to Domco's
minority shareholders. Among other things in the Canadian legal proceedings, the
Company is seeking a court injunction to prevent the takeover of Domco by
Tarkett, the replacement of Domco's board with independent directors, and
instruction by the court to the new Domco board to consider afresh the Company's
proposal that Domco's board issue new shares to the Company to enable the
Company's offer to become a reality for Domco's minority shareholders. After a
hearing, the Ontario Court (General Division) dismissed the motion for a
preliminary injunction brought by the Company and a full opinion is expected by
November 14.
The Company intends to continue to pursue all available legal remedies in the
U.S. and Canada.
Consolidated Results
- --------------------
Third-quarter net sales of $575.6 million were 2.2 percent higher when compared
with net sales of $563.4 million in the third quarter of 1996. Removing the
currency translation impact of the stronger U.S. dollar, sales would have
increased 4.6 percent and all three geographic areas -- Americas, Europe and
Pacific -- would have shown sales growth. Added sales from the new European
Holmsund flooring and Parafon soft-fiber ceilings joint ventures, along with
sales growth in laminate flooring and the worldwide commercial and U.S. home
center businesses, offset the softness in the residential sheet flooring and
insulation products businesses. Third quarter 1996 net sales were reduced $14.1
million as a result of customer returns for discoloration on a limited portion
of flooring products.
The third-quarter 1997 net earnings of $33.8 million, or $0.82 per share,
included $30.5 million in losses from its ceramic tile segment, or $30.1 million
after tax, and compared with 1996's third-quarter net earnings of $35.8 million,
or $0.86 per share. The 1997 third-quarter ceramic tile segment loss included
$3.9 million for the Company's share of operating losses incurred by Dal-Tile
International Inc., in which the Company has a 34.4 percent equity interest;
$1.1 million, or $0.7 million after tax, for the amortization of Armstrong's
initial investment in Dal-Tile over the underlying equity in net assets of the
business combination; and an additional $25.5 million after-tax loss for the
Company's share of the charge incurred by Dal-Tile, primarily for uncollectible
receivables and overstocked inventories.
13
<PAGE>
Last year's third-quarter net earnings included an extraordinary loss of $8.4
million, or $0.20 per share, for the Company's share of an extraordinary loss
from Dal-Tile, and a floor discoloration charge of $22.0 million, or $0.53 per
share.
Cost of goods sold in the third quarter was 66.0 percent of sales, lower than
the 68.3 percent in the third quarter of 1996 which included $5.9 million for
charges associated with a floor discoloration issue. A positive factor affecting
cost of goods sold was continued productivity improvements. Cost of goods sold
was negatively affected by some promotional pricing actions and a less favorable
product mix. Third-quarter selling, general and administrative expenses were
15.9 percent of sales compared with 20.5 percent in 1996, reflecting lower
advertising, promotional and employee benefit costs in 1997 and the
non-recurring charge for floor discoloration in 1996.
The third-quarter 1997 effective tax rate was 51.2 percent and included the
negative impact of the company's equity share of the 1997 loss from Dal-Tile.
Last year's third-quarter effective tax rate was 28.4 percent as a result of
additional foreign tax plans implemented that quarter.
Severance payments charged against restructuring reserves were $17.2 million in
the first nine months of 1997 relating to the elimination of 363 positions of
which 231 terminations occurred since the beginning of 1997. As of September 30,
1997 $18.3 million remained in this reserve for restructuring actions.
Net sales through the first nine months of 1997 were $1.67 billion, an increase
of 2.7 percent over last year's nine months sales of $1.63 billion. Net earnings
for the first nine months were $138.2 million, or $3.35 per share, and included
the previously mentioned ceramic tile segment operating loss of $30.1 million
after tax. Last year's net earnings $102.7 million, or $2.34 per fully diluted
share, included after-tax restructuring charges of $29.6 million or $0.70 per
fully diluted share and the previously mentioned floor discoloration charge of
$22.0 million or $0.53 per share and extraordinary loss of $8.4 million, or
$0.20 per share.
The Company's 1997 effective tax rate for the first nine months was 39.4 percent
compared with the 34.3 percent rate at six months. The tax rate increase was
primarily due to the negative impact of the Company's equity share of the 1997
loss from Dal-Tile.
Industry Segment Results:
- -------------------------
Worldwide third-quarter floor coverings sales of $300.0 million increased 6.4
percent from $282.0 million in the third quarter 1996 which included a $14.1
million reduction for product returns for the potential discoloration of a
limited portion of its product lines. The increase came primarily from the
addition of the laminate and Holmsund product lines and higher sales in U.S.
commercial products and through the home center distribution channel.
Residential sheet flooring sales declined, and continued to be adversely
affected by a general weakness in high-end professionally-installed flooring
sold through the retail channel, some shift toward alternative flooring products
and consolidation of the wholesaler distribution channel with resulting one-time
inventory reductions. Third-quarter operating income of $56.9 million compares
to last year's $26.6 million in the third quarter which included a $34.0 million
charge associated with the discoloration issue. These results reflect the
negative impact of promotional pricing, a shift in product mix to more
mid-priced residential sheet and other lower margin products in the U.S. area.
Third-quarter sales of $194.9 million in the building products segment increased
almost 4 percent; however, without the translation impact of the stronger U.S.
dollar, sales would have increased almost 7 percent. Sales growth was
experienced in all geographic areas but was especially strong in the U.S.
commercial segments. In Europe, sales increases from the new Parafon soft-fiber
ceilings business and Eastern Europe more than offset the impact of sluggish
Western European economies and continued lower selling prices. Third-quarter
operating income of $33.4 million increased almost 16 percent from last year.
The major factors in this increase were from higher sales volume, productivity
improvements, some lower raw material prices and the increase in profits
realized from the WAVE grid joint venture.
Worldwide industry products segment third-quarter sales of $80.7 million which
decreased more than 13 percent when compared with last year, would have
decreased 4 percent without the translation impact of the stronger U.S. dollar.
The sales decline came largely from price erosion in insulation products,
particularly in Europe. Operating income of $16.4 million increased $1.2 million
from last year's
14
<PAGE>
$15.2 million which included an $2.3 million gain from the sale of the
Braintree, Mass. Plant. The majority of the increase related to productivity
gains in Insulation Products.
The ceramic tile segment's third-quarter operating loss of $30.5 million
represents Armstrong's 34.4 percent share of the after-tax loss of Dal-Tile,
further second-quarter adjustments of $1.6 million and the amortization of
Armstrong's initial investment in Dal-Tile over the underlying equity in net
assets of the business combination. This quarter's loss reflects an operating
loss at Dal-Tile plus a one-time charge, primarily for uncollectible receivables
and overstocked inventories. Armstrong's share of this charge was $24.2 million.
The third-quarter unallocated corporate net income reflects the continuation of
higher pension credits, lower consulting costs and a $2.6 million before-tax
gain on the sale of a corporate office building.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128). This statement introduces new methods for calculating earnings per
share. The adoption of this standard will not impact results from operations,
financial condition, or long-term liquidity, but will require the Company to
restate earnings per share reported in prior periods to conform with this
statement. This Statement is not expected to have a material effect on the
Company's reported earnings per share amounts. The new standard is effective for
periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company plans to adopt this accounting standard on
January 1, 1998, as required. The adoption of this standard will not impact
results from operations, financial condition, or long-term liquidity, but will
require the Company to classify items of other comprehensive income in a
financial statement and display the accumulated balance of other comprehensive
income separately in the equity section of the balance sheet.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this accounting standard on January 1, 1998, as
required. The adoption of this standard will not impact consolidated results,
financial condition, or long-term liquidity.
This Quarterly Report on Form 10-Q contains certain "forward looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995).
Such forward-looking statements include statements using the words "believe,"
"expect," and "estimate" and similar expressions. Among other things, they
regard the Company's earnings, liquidity, financial condition, financial
resources, and the ultimate outcome of the Company's asbestos-related
litigation. Actual results may differ materially as a result of factors over
which the Company may or may not have any control. Such factors include: (a)
those factors identified in the Notes to the Consolidated Financial Statements
in connection with the Company's asbestos-related litigation and the
availability of insurance coverage therefor, and (b) the strength of domestic
and foreign economies, continued sales growth, continued product development,
competitive advantages, minimizing cost increases, changes from projected
effective tax rates and continued strengthening of the financial markets.
Certain other factors not specifically identified herein may also materially
affect the Company's results. Actual results may differ materially as a result
of the uncertainties identified or if the factors on which the Company's
conclusions are based do not conform to the Company's expectations.
15
<PAGE>
Independent Accountants' Report
-------------------------------
The Board of Directors and Shareholders
Armstrong World Industries, Inc.:
We have reviewed the condensed consolidated balance sheet of Armstrong World
Industries, Inc. and subsidiaries as of September 30, 1997, and the related
condensed consolidated statements of earnings for the three month and nine-month
periods ended September 30, 1997, and 1996, and the condensed consolidated
statements of cash flows for the nine-month periods then ended. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Armstrong World Industries, Inc.
and subsidiaries as of December 31, 1996, 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 14, 1997, 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, 1996, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 11, 1997
16
<PAGE>
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
- ------ -----------------
Information required by this item is presented in Note 2 of the notes to the
Company's consolidated financial statements included in Part I, Item 1 hereof,
and is incorporated herein by reference.
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. 10 Form of Agreement Between the Company and certain of its
officers replacing that form of Agreement which appeared as
Exhibit No. 10 to registrant's Form 10-Q for the quarter ending
June 30, 1996, together with a schedule identifying such
officers.
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter for
which this report is filed:
(1) On July 1, 1997, the registrant filed a current report on Form
8-K to report certain developments with respect to certain
litigation.
(2) On August 29, 1997, the registrant filed a current report on Form
8-K to report certain developments with respect to the tender offer
for Domco, Inc., as well as certain related litigation.
17
<PAGE>
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 World Industries, Inc.
By: /s/L. A. Pulkrabek
-------------------------------
L. A. Pulkrabek, Senior
Vice President, Secretary and
General Counsel
By: /s/B. A. Leech, Jr.
-------------------------------
B. A. Leech, Jr., Controller
(Principal Accounting Officer)
Date: November 12, 1997
18
<PAGE>
Exhibit Index
-------------
Exhibit No.
- -----------
No. 10 Form of Agreement Between Company and Certain Officers
No. 11(a) Computation for Primary Earnings Per Share
No. 11(b) Computation for Fully Diluted Earnings Per Share
No. 15 Letter re Unaudited Interim Financial Information
No. 27 Financial Data Schedule
19
<PAGE>
Exhibit No. 10
AGREEMENT
---------
THIS AGREEMENT, dated as of August , 1997, is made by and between Armstrong
----
World Industries, Inc., a Pennsylvania corporation (the "Company"), and
FirstName LastName (the "Executive").
WHEREAS, the Board considers it essential to the best interests of the
Company to foster the continued employment of key management personnel; and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in this
-------------
Agreement are provided in the last Section hereof.
2. Term of Agreement. This Agreement shall commence on the date
-----------------
hereof and shall continue in effect through December 31, 1999; provided,
--------
however, that commencing on January 1, 1999 and each January 1 thereafter, the
- -------
term of this Agreement shall automatically be extended for one additional year
unless, not later than September 30 of the preceding year, the Company or the
Executive shall have given notice not to extend this Agreement or a Change in
Control shall have occurred prior to such January 1; and further provided,
------- --------
however, that if a Change in Control shall have occurred during the term of this
- -------
Agreement, this Agreement shall continue in effect for a period of not less than
twenty-four (24) months beyond the month in which such Change in Control
occurred.
3. Company's Covenants Summarized. In order to induce the Executive
------------------------------
to remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 10.1
hereof, no amount or benefit shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the term of
this Agreement. This
<PAGE>
Agreement shall not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the Executive and
the Company, the Executive shall not have any right to be retained in the employ
of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to
-------------------------
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the term of this Agreement, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six (6) months
after the date of such Potential Change in Control, (ii) the date of a Change in
Control, (iii) the date of termination by the Executive of the Executive's
employment for Good Reason or by reason of death or Disability, or (iv) the
termination by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
------------------------------------------
5.1. Following a Change in Control and during the term of this
Agreement, during any period that the Executive fails to perform the Executive's
full-time duties with the Company as a result of incapacity due to physical or
mental illness, the Company shall pay the Executive's full salary to the
Executive at the rate in effect at the commencement of any such period, together
with all compensation and benefits payable to the Executive under the terms of
any compensation or benefit plan, program or arrangement maintained by the
Company during such period, until the Executive's employment is terminated by
the Company for Disability.
5.2. If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay the Executive's full salary to the Executive through the Date of
Termination at the rate in effect immediately prior to the Change in Control or
at the time the Notice of Termination is given, whichever is greater, together
with all compensation and benefits to which the Executive is entitled in respect
of all periods preceding the Date of Termination under the terms of the
Company's compensation and benefit plans, programs or arrangements.
5.3. If the Executive's employment shall be terminated for any reason
following a Change in Control and during the term of this Agreement, the Company
shall pay to the Executive the Executive's normal post-termination compensation
and benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and
arrangements as in effect immediately prior to the Change in Control or, if more
favorable to the Executive, as in effect immediately prior to the Date of
Termination.
2
<PAGE>
6. Severance Payments.
------------------
6.1. The Company shall pay the Executive the payments described in
this Section 6.1 (the "Severance Payments") upon the termination of the
Executive's employment following a Change in Control and during the term of this
Agreement, in addition to any payments and benefits to which the Executive is
entitled under Section 5 and 8 hereof, unless such termination is (i) by the
Company for Cause, (ii) by reason of death or Disability, or (iii) by the
Executive without Good Reason. For purposes of this Agreement, the Executive's
employment shall be deemed to have been terminated by the Company without Cause
or by the Executive with Good Reason following a Change in Control if (i) the
Executive's employment is terminated without Cause prior to a Change in Control
which actually occurs during the term of this Agreement and such termination was
at the request or direction of a Person who has entered into an agreement with
the Company the consummation of which would constitute a Change in Control, (ii)
the Executive terminates his employment with Good Reason prior to a Change in
Control which actually occurs during the term of this Agreement and the
circumstance or event which constitutes Good Reason occurs at the request or
direction of such Person, (iii) the Executive's employment is terminated without
Cause prior to a Change in Control and the Executive reasonably demonstrates
that such termination is otherwise in connection with or in anticipation of a
Change in Control which actually occurs during the term of this Agreement, or
(iv) the Executive's employment is terminated without Cause after a Potential
Change in Control of the type described in paragraphs (I) or (IV) of the
definition of "Potential Change in Control".
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any severance
benefit otherwise payable to the Executive, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to three (3) times
the sum of (i) the higher of the Executive's annual base salary in effect
immediately prior to the occurrence of the event or circumstance upon which
the Notice of Termination is based or the Executive's annual base salary in
effect immediately prior to the Change in Control (the "Change in Control
Salary"), and (ii) the higher of the annual bonus earned by the Executive
pursuant to any annual bonus or incentive plan maintained by the Company in
respect of the three (3) years immediately preceding that year in which the
Date of Termination occurs or the annual bonus so earned in respect of the
three (3) years immediately preceding that year in which the Change in
Control occurs (the "Change in Control Bonus").
(B) Notwithstanding any provision of any annual incentive plan to
the contrary, the Company shall pay to the Executive a lump sum amount, in
cash, equal to a pro rata portion to the Date of Termination of the value
of the target incentive award under such plan for the then uncompleted
period under such plan, calculated by multiplying the Executive's target
award by the fraction obtained by
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dividing the number of full months and any fractional portion of a
month during such performance award period through the Date of Termination
by the total number of months contained in such performance award period.
(C) The Company shall (i) establish an irrevocable grantor trust
holding an amount of assets sufficient to pay all such remaining premiums
owed by the Company (which trust shall be required to pay such premiums),
under any insurance policy insuring the life of the Executive under any
"split dollar" insurance arrangement in effect between the Executive and
the Company, and (ii) assign its interest in such policy or policies to the
grantor trust.
(D) In addition to the retirement benefits to which the Executive
is entitled under each Pension Plan or any successor plan thereto, the
Company shall pay the Executive a lump sum amount, in cash, equal to the
excess of (i) the actuarial equivalent of the aggregate retirement pension
(taking into account any early retirement subsidies associated therewith
and determined as a straight life annuity commencing at the date (but in no
event earlier than the third anniversary of the Date of Termination) as of
which the actuarial equivalent of such annuity is greatest) which the
Executive would have accrued under the terms of all Pension Plans (without
regard to any amendment to any Pension Plan made subsequent to the earlier
of a Potential Change in Control or a Change in Control and on or prior to
the Date of Termination, which amendment adversely affects in any manner
the computation of retirement benefits thereunder), determined as if the
Executive were fully vested thereunder and had accumulated (after the Date
of Termination) thirty-six (36) additional months of service credit
thereunder and had been credited under each Pension Plan during such period
with compensation at the higher of (1) the Executive's compensation (as
defined in such Pension Plan) during the twelve (12) months immediately
preceding the Date of Termination or (2) the Executive's compensation (as
defined in such Pension Plan) during the twelve (12) months immediately
preceding the Change in Control, over (ii) the actuarial equivalent of the
aggregate retirement pension (taking into account any early retirement
subsidies associated therewith and determined as a straight life annuity
commencing at the date (but in no event earlier than the Date of
Termination) as of which the actuarial equivalent of such annuity is
greatest) which the Executive had accrued pursuant to the provisions of the
Pension Plans as of the Date of Termination; provided, that the actuarial
equivalent of such payment shall reduce the amount of the benefit
enhancement to which the executive may be entitled under the Company's
Retirement Benefit Equity Plan due to enhanced Change in Control benefits
under Article I, Section (35), Article VI, Section (2), Article VI, Section
(7), and Article VII, Section (6) of the Company's Retirement Income Plan.
For purposes of this Section 6.1(D), "actuarial equivalent" shall be
determined using the same assumptions utilized under the Company's
Retirement Income Plan immediately prior to the Change in Control, to
determine lump sum present values under Article VII, Section (7) of the
Company's Retirement Income Plan.
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(E) For the thirty-six (36) month period immediately following
the Date of Termination, the Company shall arrange to provide the Executive
(which includes the Executive's eligible dependents for purposes of this
paragraph (E)) with life, disability, accident and health insurance
benefits substantially similar to those which the Executive was receiving
immediately prior to the Notice of Termination (without giving effect to
any amendment to such benefits made subsequent to the earlier of a
Potential Change in Control or a Change in Control which amendment
adversely affects in any manner the Executive's entitlement to or the
amount of such benefits); provided, however, that, unless the Executive
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consents to a different method, such health insurance benefits shall be
provided through a third-party insurer. Benefits otherwise receivable by
the Executive pursuant to this Section 6.1(E) shall be reduced to the
extent comparable benefits are actually received by or made available to
the Executive by a subsequent employer without cost during the thirty-six
(36) month period following the Executive's termination of employment (and
any such benefits actually received by or made available to the Executive
shall be reported to the Company by the Executive).
(F) If the Executive would have become entitled to benefits under
the Company's post-retirement health care or life insurance plans (as in
effect immediately prior to a Potential Change in Control, the Change in
Control or the Date of Termination, whichever is most favorable to the
Executive) had the Executive's employment terminated at any time during the
period of thirty-six (36) months after the Date of Termination, the Company
shall provide such post-retirement health care or life insurance benefits
to the Executive (subject to any employee contributions required under the
terms of such plans at the level in effect immediately prior to the Change
in Control or the Date of Termination, whichever is more favorable to the
Executive) commencing on the later of (i) the date that such coverage would
have first become available or (ii) the date that benefits described in
subsection (E) of this Section 6.1 terminate.
(G) The Company will pay the Executive, at a daily salary rate
calculated from the higher of the Executive's annual base salary in effect
immediately prior to the occurrence of the event or circumstance upon which
the Notice of Termination is based or the Executive's annual base salary in
effect immediately prior to the Change in Control, an amount equal to all
unused vacation days which would have been earned had the Executive
continued employment through December 31 of the year in which the Date of
Termination occurs.
(H) The Company shall pay the reasonable fees and expenses of a
full service nationally recognized executive outplacement firm until the
earlier of the date the Executive secures new employment or the date which
is thirty-six (36) months following the Executive's Date of Termination;
provided, that in no event shall the aggregate amount of such payment be
greater than 20% of the Executive's Change in Control Salary.
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6.2. (A) Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) (a "Payment") would be subject to the excise tax imposed by
section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to the excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred to
as the "Excise Tax"), then the Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after
payment by the Executive of all taxes (including any interest or penalties
imposed with respect to such taxes), including, without limitation, any
income taxes (and any interest and penalties imposed with respect thereto)
and Excise Tax imposed on the Gross-Up Payment, the Executive retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
(B) Subject to the provisions of Section 6.2(C), all
determinations required to be made under this Section 6.2, including
whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment, shall be made by a nationally recognized accounting firm
designated by the Company (the "Accounting Firm") which shall provide
detailed supporting calculations both to the Company and the Executive
within fifteen (15) business days after there has been a Payment, or such
earlier time as requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or
group effecting the Change in Control, the Company shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm
shall be borne solely by the Company. Any Gross-Up Payment, as determined
pursuant to this Section 6, shall be paid by the Company to the Executive
within five days of the receipt of the Accounting Firm's determination. Any
determination by the Accounting Firm shall be binding upon the Company and
the Executive. As a result of the uncertainty in the application of section
4999 of the Code at the time of the initial determination by the Accounting
Firm hereunder, it is possible that Gross-Up Payments which will not have
been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 6.2(C) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and
any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(C) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require
the payment by the Company of the Gross-Up Payment. Such notification shall
be given as soon as
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practicable but no later than ten (10)business days after the Executive is
informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the
Company (or such shorter period ending on the date any payment of taxes
with respect to such claim is due). If the Company notifies the Executive
in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim;
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order
effectively to contest such claim; and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 6.2(C), the Company
shall control all proceedings taken in connection with such contest and, at
its sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct the Executive to
pay the tax claimed and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to
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pay such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis, and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes for
the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the
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<PAGE>
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(D) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 6.2(C), the Executive
becomes entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the requirements
of Section 6.2(C)) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 6.2(C), a determination is made that the
Executive shall not be entitled to any refund with respect to such claim
and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
6.3. The payments provided for in subsections (A), (B), (C), (D) and
(G) of Section 6.1 hereof shall be made not later than the fifth (5th) day
following the Date of Termination; provided, however, that if the amounts of
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such payments cannot be finally determined on or before such day, the Company
shall pay to the Executive on such day an estimate, as determined in good faith
by the Executive of the minimum amount of such payments to which the Executive
is clearly entitled and shall pay the remainder of such payments (together with
interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code). In the event the Company should fail to pay when due the amounts
described in subsections (A), (B), (C), (D) and (G) of Section 6.1 hereof, the
Executive shall also be entitled to receive from the Company an amount
representing interest on any unpaid or untimely paid amounts from the due date,
as determined under this Section 6.3 (without regard to any extension of the
Date of Termination pursuant to Section 7.3 hereof), to the date of payment at a
rate equal to 120% of the rate provided in section 1274(b)(2)(B) of the Code.
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<PAGE>
6.4. The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
------------------------------------------------------
7.1. Notice of Termination. After a Potential Change in Control or, if
---------------------
there is no Potential Change in Control, after a Change in Control and during
the term of this Agreement, any purported termination of the Executive's
employment (other than by reason of death) shall be communicated by written
Notice of Termination from one party hereto to the other party hereto in
accordance with Section 11 hereof. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated. Further, a Notice of
Termination for Cause is required to include a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters (3/4) of the entire
membership of the Board at a meeting of the Board which was called and held for
the purpose of considering such termination (after reasonable notice to the
Executive and an opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board) finding that, in the good-faith opinion
of the Board, the Executive was guilty of conduct set forth in clause (i) or
(ii) of the definition of Cause herein, and specifying the particulars thereof
in detail.
7.2. Date of Termination. "Date of Termination," with respect to any
-------------------
purported termination of the Executive's employment after a Change in Control
and during the term of this Agreement, shall mean (i) if the Executive's
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that the Executive shall not have returned to the
full-time performance of the Executive's duties during such thirty (30) day
period), and (ii) if the Executive's employment is terminated for any other
reason, the date specified in the Notice of Termination (which, in the case of a
termination by the Company, shall not be less than thirty (30) days (except in
the case of a termination for Cause) and, in the case of a termination by the
Executive, shall not be less than fifteen (15) days nor more than sixty (60)
days, respectively, from the date such Notice of Termination is given).
7.3. Dispute Concerning Termination. If within fifteen (15) days after
------------------------------
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies
9
<PAGE>
the other party that a dispute exists concerning the termination, the Date of
Termination shall be extended until the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a final
judgment, order or decree of an arbitrator or a court of competent jurisdiction
(which is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); provided, however, that the Date
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of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
7.4. Compensation During Dispute. If a purported termination occurs
---------------------------
following a Change in Control and during the term of this Agreement and the Date
of Termination is extended in accordance with Section 7.3 hereof, the Company
shall continue to pay the Executive the full compensation in effect when the
notice giving rise to the dispute was given (including, but not limited to,
salary) and continue the Executive as a participant in all compensation, benefit
and insurance plans in which the Executive was participating when the notice
giving rise to the dispute was given, until the Date of Termination, as
determined in accordance with Section 7.3 hereof. Amounts paid under this
Section 7.4 are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
8. Acceleration of Certain Stock-Based Benefits.
--------------------------------------------
(A) Upon the occurrence of a Change in Control, all unvested options
with respect to the Company's stock held by the Executive shall vest and become
immediately exercisable and will be exercisable for a period ending on the later
of (i) the fifth anniversary of such Change in Control or (ii) the last date
that such option would otherwise be exercisable under the terms of the option
agreement or the plan pursuant to which such option was granted; provided, that
in no event shall any option be exercisable after the expiration of the original
term of the option.
(B) Upon the occurrence of a Change in Control, all unearned
performance restricted shares held by the Executive under the Company's Stock
Plan shall be deemed to have been earned to the maximum extent permitted under
the Stock Plan for any performance period not then completed and all earned but
unvested performance restricted shares, including those deemed to be earned
pursuant to this sentence, and all unvested restricted stock awards shall
immediately vest and the restrictions on all shares subject to restriction shall
lapse.
(C) For purposes of the Stock Plan and any stock option plan pursuant
to which any stock options, performance restricted shares or restricted stock
awards have been issued, this Agreement, which has been approved by the
Management Development and Compensation Committee of the Board, shall constitute
an amendment of the agreement or other instruments pursuant to which such stock
options, performance restricted shares and restricted stock awards were issued
in accordance with the terms of such plans.
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Notwithstanding the foregoing, in the event that this Section 8(C) is determined
for any reason to be inconsistent with the terms of any plan pursuant to which
such stock options, performance restricted shares and restricted stock awards
were issued, the terms of this Agreement shall supersede the terms of such plan.
9. No Mitigation. The Company agrees that, if the Executive's
-------------
employment with the Company terminates during the term of this Agreement, the
Executive is not required to seek other employment or to attempt in any way to
reduce any amounts payable to the Executive by the Company pursuant to Section 6
hereof or Section 7.4 hereof. Further, the amount of any payment or benefit
provided for in this Agreement (other than Section 6.1(E) hereof) shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer, by retirement benefits, by offset against any amount
claimed to be owed by the Executive to the Company, or otherwise.
10. Successors; Binding Agreement.
-----------------------------
10.1. In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
10.2. This Agreement shall inure to the benefit of and be enforceable
by the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
11. Notices. For the purpose of this Agreement, notices and all other
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communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address shown for the Executive in the personnel records of
the Company and, if to the Company, to the
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address set forth below, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon actual receipt:
To the Company:
Armstrong World Industries, Inc.
Liberty and Charlotte Streets
Lancaster, Pennsylvania 17603
Attention: General Counsel
12. Miscellaneous. No provision of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any other
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the Commonwealth of Pennsylvania. All references to
sections of the Exchange Act or the Code shall be deemed also to refer to any
successor provisions to such sections. Any payments provided for hereunder shall
be paid net of any applicable withholding required under federal, state or local
law and any additional withholding to which the Executive has agreed. The
obligations of the Company and the Executive under Sections 6 and 7 hereof shall
survive the expiration of the term of this Agreement. If the Executive elects
not to enter this Agreement, he will continue to be eligible for change in
control benefits provided under the Company's Employment Protection Plan,
Retirement Income Plan and long-term incentive plans. The Executive agrees that
this Agreement replaces the benefits to which he may otherwise be entitled to
under the Company's Employment Protection Plan for salaried employees.
13. Validity. The invalidity or unenforceability of any provision of
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this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
14. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Settlement of Disputes; Arbitration. All claims by the Executive
-----------------------------------
for benefits under this Agreement shall be directed in writing to and determined
by the Committee, which shall give full consideration to the evidentiary
standards set forth in this Agreement. Any denial by the Committee of a claim
for benefits under this Agreement
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shall be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Committee shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Committee a decision of the Committee within sixty (60) days after
notification by the Committee that the Executive's claim has been denied. Any
further dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Lancaster, Pennsylvania
in accordance with the rules of the American Arbitration Association then in
effect; provided, however, that the evidentiary standards set forth in this
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Agreement shall apply. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. Notwithstanding any provision of this Agreement to
the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
16. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the meanings indicated below:
(A) "Accounting Firm" shall have the meaning stated in Section
6.2(B) hereof.
(B) "Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
(C) "Board" shall mean the Board of Directors of the Company.
(D) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the deliberate and continued failure by the
Executive to devote substantially all the Executive's business time and
best efforts to the performance of the Executive's duties after a demand
for substantial performance is delivered to the Executive by the Board
which specifically identifies the manner in which the Executive has not
substantially performed such duties; or (ii) the deliberate engaging by
the Executive in gross misconduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise, including but not
limited to fraud or embezzlement by the Executive. For the purposes of
this Agreement, no act, or failure to act, on the part of the Executive
shall be considered "deliberate" unless done, or omitted to be done, by
the Executive not in good faith and without reasonable belief that such
action or omission was in the best interests of the Company. In the event
of a dispute concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company
establishes to the Committee by clear and convincing evidence that Cause
exists.
(E) A "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have
occurred:
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(I) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not
including in the securities beneficially owned by such Person any
securities acquired directly from the Company or its affiliates)
representing 20% or more of either the then outstanding shares of
common stock of the Company or the combined voting power of the
Company's then outstanding securities, excluding any Person who
becomes such a Beneficial Owner in connection with a transaction
described in clause (i) of paragraph (III) below; or
(II) the following individuals cease for any reason to
constitute a majority of the number of directors then serving:
individuals who, on the date hereof, constitute the Board and any
new director (other than a director whose initial assumption of
office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation,
relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election
by the Company's shareholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either
were directors on the date hereof or whose appointment, election
or nomination for election was previously so approved; or
(III) there is consummated a merger or consolidation of
the Company with any other corporation other than (i) a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least 66-2/3% of the
combined voting power of the voting securities of the Company or
such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (ii) a merger
or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no Person is or becomes
the Beneficial Owner, directly or indirectly, of securities of
the Company (not including in the securities Beneficially Owned
by such Person any securities acquired directly from the Company
or its subsidiaries) representing 20% or more of either the then
outstanding shares of common stock of the Company or the combined
voting power of the Company's then outstanding securities; or
(IV) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or there is
consummated an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets,
other than
14
<PAGE>
a sale or disposition by the Company of all or substantially all
of the Company's assets to an entity, at least 75% of the
combined voting power of the voting securities of which are owned
by shareholders of the Company in substantially the same
proportions as their ownership of the Company immediately prior
to such sale. Notwithstanding the foregoing, no "Change in
Control" shall be deemed to have occurred if there is consummated
any transaction or series of integrated transactions immediately
following which the record holders of the common stock of the
Company immediately prior to such transaction or series of
transactions continue to have substantially the same
proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately
following such transaction or series of transactions.
(F) "Change in Control Salary" shall have the meaning stated in
Section 6.1 hereof.
(G) "Change in Control Bonus" shall have the meaning stated in
Section 6.1 hereof.
(H) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than
three in number) who, on the date six (6) months before a Change in
Control, constitute the Management Development and Compensation Committee
of the Board, plus (ii) in the event that fewer than three individuals are
available from the group specified in clause (i) above for any reason,
such individuals as may be appointed by the individual or individuals so
available (including for this purpose any individual or individuals
previously so appointed under this clause (ii)).
(J) "Company" shall mean Armstrong World Industries, Inc. and,
except in determining under Section 16(E) hereof whether or not any Change
in Control of the Company has occurred, shall include its subsidiaries and
any successor to its business and/or assets which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(K) "Date of Termination" shall have the meaning stated in
Section 7.2 hereof.
(L) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive
shall have been absent from the full-time performance of the Executive's
duties with the Company for a
15
<PAGE>
period of six (6) consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within thirty (30)
days after such Notice of Termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.
(M) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(N) "Excise Tax" shall have the meaning stated in Section 6.2(A)
hereof.
(O) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(P) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change
in Control under the circumstances described in clause (ii) of the second
sentence of Section 6.1 hereof (treating all references in paragraphs (I)
through (VII) below to a "Change in Control" as references to a "Potential
Change in Control"), of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure
to act described in paragraph (I), (V) , (VI) or (VII) below, such act or
failure to act is corrected prior to the Date of Termination specified in
the Notice of Termination given in respect thereof:
(I) the assignment to the Executive of any duties
inconsistent with the Executive's status as an executive officer of
the Company or a substantial adverse alteration in the nature or
status of the Executive's responsibilities from those in effect
immediately prior to the Change in Control;
(II) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same
may be increased from time to time except for (i) across-the-board
salary reductions similarly affecting all salaried employees of the
Company or (ii) across-the-board salary reductions similarly
affecting all senior executive officers of the Company and all
senior executives of any Person in control of the Company;
(III) the relocation of the Executive's principal place
of employment to a location more than 50 miles from the Executive's
principal place of employment immediately prior to the Change in
Control (unless such relocation is closer to the Executive's
principal residence) or the Company's requiring the Executive to be
based anywhere other than such principal place of employment (or
permitted relocation thereof) except for required travel on the
Company's business to an extent substantially
16
<PAGE>
consistent with the Executive's present business travel
obligations;
(IV) the failure by the Company, to pay to the Executive
any portion of the Executive's current compensation or to pay to
the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the
Company, within seven (7) days of the date such compensation is
due;
(V) the failure by the Company to continue in effect
any compensation plan in which the Executive participates
immediately prior to the Change in Control which is material to the
Executive's total compensation, including but not limited to the
Company's Base Salary Plan, Management Achievement Plan, 1984 Long-
Term Stock Option Plan for Key Employees, 1993 Long-Term Stock
Incentive Plan, Armstrong Deferred Compensation Plan, Retirement
Income Plan and Retirement Benefit Equity Plan, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by the
Company to continue the Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount or timing of payment of
benefits provided and the level of the Executive's participation
relative to other participants, as existed immediately prior to the
Change in Control;
(VI) the failure by the Company to continue to provide
the Executive with benefits substantially similar to those enjoyed
by the Executive under any of the Company's pension, savings, life
insurance, medical, health and accident, or disability plans in
which the Executive was participating immediately prior to the
Change in Control, the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits
or deprive the Executive of any material fringe benefit enjoyed by
the Executive at the time of the Change in Control, or the failure
by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in
Control; or
17
<PAGE>
(VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of
Termination satisfying the requirements of Section 7.1 hereof; for
purposes of this Agreement, no such purported termination shall be
effective.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder. For purposes of any determination regarding
the existence of Good Reason, any claim by the Executive that Good Reason exists
shall be presumed to be correct unless the Company establishes to the Committee
by clear and convincing evidence that Good Reason does not exist.
(Q) "Gross-Up Payment" shall have the meaning stated in Section
6.2(A) hereof.
(R) "Notice of Termination" shall have the meaning stated in
Section 7.1 hereof.
(S) "Payment" shall have the meaning stated in Section 6.2(A)
hereof.
(T) "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other agreement
entered into between the Executive and the Company which is designed to provide
the Executive with supplemental retirement benefits.
(U) "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except
that such term shall not include (i) the Company or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, (iv) a
corporation owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
or (v) an entity or entities which are eligible to file and have filed a
Schedule 13G under Rule 13d-l-(b) of the Exchange Act, which Schedule indicates
beneficial ownership of 15% or more of the outstanding shares of common stock of
the Company or the combined voting power of the Company's then outstanding
securities.
(V) "Potential Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
18
<PAGE>
(I) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in
Control;
(II) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial Owner, directly
or indirectly, of securities of the Company representing 15% or
more of either the then outstanding shares of common stock of the
Company or the combined voting power of the Company's then
outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired directly
from the Company or its affiliates); or
(IV) the Board adopts a resolution to the effect that,
for purposes of this Agreement, a Potential Change in Control has
occurred.
(W) "Severance Payments" shall mean those payments described in
Section 6.1 hereof.
(X) "Stock Plan" shall mean the Company's Long-Term Stock Incentive
Plan, as the same may be amended from time to time, and any successor plan to
such plan.
(Y) "Underpayment" shall have the meaning stated in Section 6.2(B)
hereof.
ARMSTRONG WORLD INDUSTRIES, INC.
By:
-----------------------------
Name: (ByName)
Title: (ByTitle)
--------------------------------
19
<PAGE>
SCHEDULE TO EXHIBIT NO. 10
The Company has entered into substantially similar agreements with certain
officers including its Executive Officers who are employees of Armstrong World
Industries, Inc., other than Edward R. Case and Bruce A. Leech, Jr.
20
<PAGE>
Exhibit No. 11(a)
COMPUTATION FOR PRIMARY EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock
options 41.1 41.9 41.2 38.9
==== ==== ==== ====
Primary Earnings Per Share
- --------------------------
Earnings before extraordinary loss $33.8 $44.2 $138.2 $111.1
Less:
Dividend requirement on Series A
convertible preferred stock -- -- -- 8.8
Plus:
Tax benefit on dividends paid on
unallocated preferred shares -- -- -- 2.0
---- ---- ---- ----
Pro forma earnings available for common
- ---------------------------------------
shareholders:
- -------------
Before Extraordinary Loss $33.8 $44.2 $138.2 $104.3
Extraordinary Loss -- (8.4) -- (8.4)
---- ----- ----- ------
Net Earnings $33.8 $35.8 $138.2 $ 95.9
===== ===== ====== ======
Primary earnings per share of common
- ------------------------------------
stock
- -----
Before Extraordinary Loss $0.82 $1.06 $ 3.35 $ 2.67
Extraordinary Loss -- (0.20) -- (0.20)
---- ----- ---- ------
Net Earnings $0.82 $0.86 $ 3.35 $ 2.47
===== ===== ====== ======
</TABLE>
<PAGE>
Exhibit No. 11(b)
COMPUTATION FOR FULLY DILUTED EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(AMOUNTS IN MILLIONS EXCEPT FOR PER-SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common Stock and Common Stock Equivalents
- -----------------------------------------
Average number of common shares outstanding
including shares issuable under stock
options 41.1 41.9 41.2 38.9
Average number of common shares issuable
under the Employee Stock Ownership Plan -- -- -- 3.5
---- ---- ---- ----
Average number of common and common
equivalent shares outstanding 41.1 41.9 41.2 42.4
==== ==== ==== ====
Adjustments to Earnings
- -----------------------
Earnings before extraordinary loss $ 33.8 $44.2 $138.2 $111.1
Less:
Increased contribution to the Employee
Stock Ownership Plan assuming
conversion of preferred shares to
common -- -- -- 3.2
Net reduction in tax benefits assuming
conversion of the Employee Stock
Ownership Plan preferred shares to
common -- -- -- 0.6
---- ---- ---- ----
Pro forma earnings available for common
- ---------------------------------------
shareholders:
- -------------
Before Extraordinary Loss $ 33.8 $44.2 $138.2 $107.3
Extraordinary Loss -- (8.4) -- (8.4)
---- ----- ----- ----
Net Earnings $ 33.8 $35.8 $138.2 $ 98.9
====== ===== ====== ======
Fully diluted earnings per share of common stock
- ------------------------------------------------
Before Extraordinary Loss $ 0.82 $ 1.06 $ 3.35 $ 2.54
Extraordinary Loss -- (0.20) -- (0.20)
----- ----- ----- ------
Net Earnings $ 0.82 $ 0.86 $ 3.35 $ 2.34
====== ====== ====== ======
</TABLE>
22
<PAGE>
Exhibit No. 15
Armstrong World Industries, Inc.
Lancaster, Pennsylvania
Gentlemen:
RE: Registration Statement Nos. 2-50942; 2-77936; 2-91890; 33-18996;
33-18997; 33-18998; 33-29768; 33-38837; 33-60070; 333-6333
With respect to the subject Registration Statements, we acknowledge our
awareness of the incorporation by reference therein of our report dated November
11, 1997, related to our review of interim financial information.
Pursuant to the 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,
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
November 11, 1997
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR SEPTEMBER
30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 70
<SECURITIES> 0
<RECEIVABLES> 338
<ALLOWANCES> 41
<INVENTORY> 216
<CURRENT-ASSETS> 650
<PP&E> 1,992
<DEPRECIATION> 1,031
<TOTAL-ASSETS> 2,255
<CURRENT-LIABILITIES> 394
<BONDS> 227
0
0
<COMMON> 215
<OTHER-SE> 605
<TOTAL-LIABILITY-AND-EQUITY> 2,255
<SALES> 1,671
<TOTAL-REVENUES> 1,671
<CGS> 1,105
<TOTAL-COSTS> 1,105
<OTHER-EXPENSES> 317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> 228
<INCOME-TAX> 90
<INCOME-CONTINUING> 138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138
<EPS-PRIMARY> 3.35
<EPS-DILUTED> 3.35
</TABLE>
