<PAGE>
[LOGO OF ARMSTRONG APPEARS HERE]
Armstrong World Industries, Inc.
To all Armstrong Shareholders:
We cordially invite you to attend Armstrong's 1999 Annual Meeting of
Shareholders. This year's meeting is being held at Armstrong's new principal
offices, which are located at 2500 Columbia Avenue, Lancaster, Pennsylvania. The
meeting will commence at 10:00 a.m. on Monday, April 26, 1999.
At the meeting, shareholders will:
. elect four directors to the Board of Directors;
. vote on the 1999 Long-Term Incentive Plan, which replaces the 1993
Long-Term Stock Incentive Plan; and
. act on other business that may properly come before the meeting.
Please carefully review the enclosed proxy statement. Then, please complete,
sign and date your proxy card and return it promptly in the enclosed envelope.
Your vote is important. We appreciate your attention to this letter and the
accompanying proxy statement.
Sincerely yours,
/s/ George A. Lorch
George A. Lorch
Chairman and Chief Executive Officer
March 16, 1999
<PAGE>
ARMSTRONG WORLD INDUSTRIES, INC.
Lancaster, Pennsylvania
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Armstrong's 1999 Annual Meeting of Shareholders will be held as follows:
Date: Monday, April 26, 1999
Time: 10:00 a.m.
Place: Armstrong World Industries, Inc.
2500 Columbia Avenue
Lancaster, Pennsylvania
Purposes: . To elect one director for a term expiring in 2001, and
three directors for terms expiring in 2002;
. To vote on the 1999 Long-Term Incentive Plan; and
. To transact other business that may properly come before the
meeting.
The accompanying proxy statement discusses these items in detail. Record
holders of Armstrong's common stock at the close of business on February 19,
1999, may vote at the meeting.
Your vote is important. Please complete, sign and date your proxy card and
promptly mail it in the enclosed envelope. ChaseMellon Shareholder Services,
L.L.C. will act as independent judges of election and vote tabulators for the
meeting.
The enclosed proxy is being solicited on behalf of Armstrong's Board of
Directors. You can return it in the enclosed envelope. No postage is required if
it is mailed in the United States.
Deborah K. Owen
Senior Vice President, Secretary
and General Counsel
March 16, 1999
<PAGE>
ARMSTRONG WORLD INDUSTRIES, INC.
2500 Columbia Avenue
Lancaster, PA 17603
PROXY STATEMENT
Armstrong's Board of Directors is soliciting proxies for the 1999 Annual
Meeting of Shareholders, which will be held on Monday, April 26, 1999 at 10:00
a.m. Armstrong began mailing this proxy statement and the accompanying proxy
card to shareholders on or about March 16, 1999.
How to Vote
To vote by proxy, you must complete, sign, date and return the enclosed
proxy card. Alternatively, you may vote in person if you attend the meeting.
Who May Vote
Only holders of common stock, as recorded in Armstrong's stock register on
February 19, 1999, may vote at the meeting. On that date, Armstrong had
40,023,675 shares of common stock outstanding. Each of these shareholders may
vote in person or by proxy. The presence at the meeting (in person or by proxy)
of a majority of the shares of common stock outstanding constitutes a quorum for
the conduct of business at the meeting.
Proxy Cards
You may receive more than one proxy card depending on how you hold your
shares. If you hold shares under different names, you may receive multiple sets
of proxy materials. Also, if someone else holds shares for you in their name,
such as a stockbroker, you may get material from the stockbroker asking how you
want to vote those shares. Shares held through Armstrong's Automatic Dividend
Reinvestment Plan, including fractional shares, are included on the same proxy
card as shares registered in your name.
Revocation of a Proxy
Any shareholder who executes and returns a proxy card may revoke the proxy at
any time before it is voted. You can revoke a proxy by:
. filing a written notice of revocation with Armstrong's Secretary;
. executing a proxy card bearing a later date; or
. attending the meeting and voting in person.
Attendance at the meeting will not in and of itself revoke any proxy you
previously granted.
Voting Rights and Cumulative Voting
Shareholders are entitled to one vote for each share of common stock held on
February 19, 1999, other than in the election of directors. In the election of
directors, shareholders may cumulate their votes. Under cumulative voting, a
shareholder multiplies the number of shares he or she holds times the number of
directors being elected to determine the number of votes the shareholder may
cast in the election of directors. The shareholder may cast all of his or her
votes for one director or distribute the votes in any other manner the
shareholder chooses. The nominees receiving the greatest number of votes will be
elected directors.
1
<PAGE>
Abstentions and Broker Nonvotes
Abstentions and broker nonvotes have the effect of votes against any matter
submitted to the shareholders for approval (other than the election of
directors). A shareholder can abstain from voting by marking the "abstain" box
on the proxy card, or if the shareholder chooses to attend and vote at the
meeting, on the ballot at the meeting. Broker nonvotes occur when a broker
returns a proxy for the shares it holds for customers, but does not have the
authority to vote on a particular matter. Armstrong's Bylaws require matters
presented to shareholders to be approved by the affirmative vote of at least a
majority of the votes present (in person or by proxy) and entitled to vote at
the meeting. Therefore, abstentions and broker nonvotes will have the effect of
votes against any matter submitted to the shareholders for approval (because the
shares they represent are present at the meeting, but are not voted in favor of
the matter). Shares covered by abstentions and broker nonvotes are considered
present at the meeting for the purpose of a quorum even though no vote is cast.
ELECTION OF DIRECTORS
Board Nominees
The Board has nominated the persons identified below for election as
directors.
The persons named on the accompanying proxy card have advised Armstrong that
they intend to vote the proxies they receive for the election of the Board
nominees. If a nominee refuses or is unable to serve as a director, the persons
named on the accompanying proxy card intend to vote for the election of any
other persons who may be nominated by the Board. The persons listed on the proxy
card also intend to exercise cumulative voting rights to elect as many of the
Board nominees as possible.
NOMINEE FOR TERM TO EXPIRE IN 2001
- --------------------------------------------------------------------------------
[PHOTO OF JUDITH R. HABERKORN APPEARS HERE]
JUDITH R. HABERKORN
President - Consumer Sales and Service, Bell Atlantic
Member--Board Affairs and Governance Committee and Management Development and
Compensation Committee
Director since July 1998 Age 52
Ms. Haberkorn is a graduate of Briarcliff (N.Y.) College and completed the
Advanced Management Program at Harvard Business School. In 1998 she became
President - Consumer Sales & Service for Bell Atlantic (telecommunications). She
previously served as President - Public & Operator Services (1997-1998), also at
Bell Atlantic, and Vice President - Material Management (1990-1997) for NYNEX
Telesector Resources Group (telecommunications). Ms. Haberkorn is a director of
Enesco Corporation and serves on the advisory boards of CIGNA Corporation,
Horton International and Norfolk Southern. She is a member of the Committee of
200, The International Women's Forum and The Harvard Business School Network of
Women Alumnae. She is a Vice President of the Harvard Business School Alumni
Advisory Board, a director of the National Alliance of Breast Cancer
Organizations and a member of the advisory board of The Enterprise Foundation.
2
<PAGE>
NOMINEES FOR TERMS TO EXPIRE IN 2002
- --------------------------------------------------------------------------------
Mr. Arnelle is Of Counsel with the law firm of Womble, Carlyle, Sandridge & Rice
since October 1997 and former senior partner and co-founder of Arnelle, Hastie,
McGee, Willis & Greene, a San Francisco-based corporate law firm. He is a
graduate of Pennsylvania State University and the Dickinson School of Law.
Armstrong has retained Womble, Carlyle, Sandridge and Rice for many years,
including 1998 and 1999. Mr. Arnelle served as Vice-Chairman (1992-1995) and
Chairman (1996-1998) of the Board of Trustees of the Pennsylvania State
University. He serves on the Boards of Waste Management, Inc., FPL Group, Inc.,
Eastman Chemical Company, Textron, Inc., and Union Pacific Resources.
[PHOTO OF H. JESSE ARNELLE APPEARS HERE]
H. JESSE ARNELLE
Of Counsel
Womble, Carlyle, Sandridge & Rice
Member--Audit Committee and Finance Committee
Director since 1995 Age 65
Mr. Clark is a graduate of Clarkson University and Northwestern University where
he earned his MBA degree. He joined Household International, Inc. (consumer
financial services) in 1955 and, after holding a number of managerial and
executive positions, was elected Chief Executive Officer in 1982 and Chairman of
the Board in 1984. In 1994, he relinquished the title of Chief Executive Officer
and retired as a Director and Chairman of the Board in May 1996, as a result of
reaching Household's mandatory retirement age for employee directors. Mr. Clark
is a trustee of Northwestern University and Chairman of the Board of Trustees of
Clarkson University. He is also a Director of Warner-Lambert Company, Ameritech,
Scotsman Industries, Inc., and PMI Group, Inc.
[PHOTO OF DONALD C. CLARK APPEARS HERE]
DONALD C. CLARK
Former Chairman of the Board, Household International, Inc.
Member--Board Affairs and Governance Committee (Chairman) and Management
Development and Compensation Committee
Director since 1996 Age 67
Mr. Lorch is a graduate of Virginia Polytechnic Institute. He
began his Armstrong association in 1963. He has served as the Company's Chairman
of the Board since April 1994. Prior to his election as President and Chief
Executive Officer in September 1993, he served as Executive Vice President from
1988. After various assignments in marketing with Armstrong and an Armstrong
subsidiary (1963-1983), he served as Group Vice President for Carpet Operations
during the period 1983 to 1988. Mr. Lorch is also a Director of Household
International, Inc., R.R. Donnelley & Sons Company and Warner-Lambert Company.
He is a member of The Business Roundtable, serving on the policy committee. He
is also a member of the Conference Board and The Pennsylvania Business
Roundtable, serving on the policy committee.
[PHOTO OF GEORGE A. LORCH APPEARS HERE]
GEORGE A. LORCH
Chairman, President and Chief Executive Officer of Armstrong
Director since 1988 Age 57
3
<PAGE>
DIRECTORS WHOSE TERMS EXPIRE IN 2000
- --------------------------------------------------------------------------------
[PHOTO OF VAN C. CAMPBELL APPEARS HERE]
VAN C. CAMPBELL
Vice Chairman, Corning Incorporated
Member---Audit Committee and Finance Committee (Chairman)
Director since 1991 Age 60
Mr. Campbell graduated from Cornell University and holds an MBA degree from
Harvard University. He is Vice Chairman of Corning Incorporated (glass and
ceramic products) and is a member of its Board of Directors. He also serves on
the Boards of Dow Corning Corporation, Covance Inc., and Quest Diagnostics
Incorporated. Mr. Campbell is a Trustee of the Corning Foundation, the Rockwell
Museum and the Corning Museum of Glass.
[PHOTO OF JOHN A. KROL APPEARS HERE]
JOHN A. KROL
Former Chairman of the Board, E.I. du Pont de Nemours and Company
Member--Board Affairs and Governance Committee and Management Development and
Compensation Committee
Director since February 1998 Age 62
Mr. Krol is a graduate of Tufts University where he also received a master's
degree in chemistry. From 1997 until his retirement in 1998, he was Chairman of
the Board of DuPont (chemicals, fibers, petroleum, life sciences and diversified
businesses), which he joined in 1963, and where he also served as Chief
Executive Officer (1995-1998), President (1995-1997), Vice Chairman (1992-1995),
and Senior Vice President of DuPont Fibers (1990-1992). He is a director of Mead
Corporation, J. P. Morgan & Co., and Catalyst, and a director designee of
Milliken & Company. Mr. Krol also serves on the Boards of Trustees of the Tufts
University and the University of Delaware, and the corporate liaison board of
the American Chemical Society. He is a trustee of the Delaware Art Museum,
Hagley Museum and the U.S. Council for International Business. He is also
president of GEM: The National Consortium for Graduate Degrees for Minorities in
Engineering and Science, Inc.
[PHOTO OF DAVID W. RAISBECK APPEARS HERE]
DAVID W. RAISBECK
Executive Vice President, Cargill, Incorporated
Member--Audit Committee and Finance Committee
Director since 1997 Age 49
Mr. Raisbeck is a graduate of Iowa State University and the executive MBA
program at the University of Southern California. He joined Cargill,
Incorporated (agricultural trading and processing businesses), in 1971 and has
held a variety of merchandising and management positions focused primarily in
the commodity and the financial trading businesses. Mr. Raisbeck was elected
President of Cargill's Trading Sector in June 1993, a director of Cargill's
Board in August 1994 and Executive Vice President in August 1995. He is
executive supervisor of Cargill's Commodity Trading Sector, Human Resources and
Asia-Pacific Sector, and a member of the Executive Committee and Human Resources
Committee of the Cargill Board. Mr. Raisbeck is a member of the Chicago
Mercantile Exchange and Minneapolis Grain Exchange. He is a governor of the Iowa
State University Foundation and serves on the board of the Greater Minneapolis
YMCA and the administrative committee of the Minneapolis United Way.
4
<PAGE>
DIRECTORS WHOSE TERMS EXPIRE IN 2001
- --------------------------------------------------------------------------------
Mr. LeVan is a graduate of Gettysburg College and the Harvard University
Advanced Management Program. From May 1996 until his retirement in August 1998,
he served as Chairman, President and Chief Executive Officer of Conrail (rail
freight transportation), which he joined in 1978, and where he also served as
Chief Operating Officer (1994-1996), Executive Vice President (1993-1994), and
in various Senior Vice President positions (1990-1993). Mr. LeVan is a member of
the Board of Trustees of Gettysburg College. He is also a member of the Board of
the Philadelphia Fire Department Historical Corporation and the Board of
Education for the School District of Philadelphia.
[PHOTO OF DAVID M. LEVAN APPEARS HERE]
DAVID M. LEVAN
Former Chairman, President and Chief Executive Officer, Conrail, Inc.
Member--Board Affairs and Governance Committee and Management Development and
Compensation Committee
Director since February 1998 Age 53
Mr. Marley is a graduate of Pennsylvania State University and earned a master's
degree in mechanical engineering from Drexel University. From 1993 until his
retirement (August 1998), he served as Chairman of the Board of AMP Incorporated
(electrical/electronic connection devices), which he joined in 1963 and where
he served as President and Chief Operating Officer (1990-1992) and President
(1986-1990). He also serves on the Board of Harsco Corporation.
[PHOTO OF JAMES E. MARLEY APPEARS HERE]
JAMES E. MARLEY
Former Chairman of the Board, AMP Incorporated
Member--Audit Committee (Chairman) and Finance Committee
Director since 1988 Age 63
Mr. Stead is a graduate of the University of Iowa and was a participant in the
Advanced Management Program, Harvard Business School. On September 1, 1996, he
became Chairman and Chief Executive Officer of Ingram Micro, Inc. (technology
products and services). During 1995, he served as Chairman, President and Chief
Executive Officer of Legent Corporation (integrated product and service software
solutions) until its sale late in 1995. He was Executive Vice President,
American Telephone and Telegraph Company (telecommunications) and Chief
Executive Officer of AT&T Global Information Solutions (computers and
communicating), formerly NCR Corp. (1993-1994). He was President of AT&T Global
Business Communications Systems (communications) (1991-1993). He is a Director
of Thomas & Betts and Conexant Systems, Inc.
[PHOTO OF JERRE L. STEAD APPEARS HERE]
JERRE L. STEAD
Chairman and Chief Executive Officer, Ingram Micro, Inc.
Member--Board Affairs and Governance Committee and Management Development and
Compensation Committee (Chairman)
Director since 1992 Age 56
5
<PAGE>
Director Attendance at Meetings
During 1998, the Board of Directors held 10 meetings. The Audit, Board Affairs
and Governance, Management Development and Compensation and Finance Committees
held a total of 22 meetings. Each director attended at least 85% of the
aggregate total meetings of the Board and Board committees.
DIRECTORS' COMPENSATION
- --------------------------------------------------------------------------------
Nonemployee Directors
Armstrong pays directors who are not employees a retainer of $20,000 per year.
In addition, nonemployee directors receive $1,000 for each Board and Committee
(other than Executive Committee) meeting attended. Nonemployee members of the
Executive Committee receive an annual fee of $3,000. Armstrong also pays $1,000
per day plus reasonable expenses to directors for special assignments in
connection with Board activity. Additionally, Armstrong pays an annual fee of
$3,000 to each Committee chairman.
Armstrong does not separately compensate directors who are officers or
employees of Armstrong for services rendered as a director.
Discontinuation of Directors' Retirement Benefits
In 1995, the Board discontinued the Directors' Retirement Income Plan for
directors who joined the Board after January 1, 1996. Under that plan, if a
director attains at least six years of Board service, the director qualifies for
retirement benefits after leaving the Board. The annual retirement benefit
equals the Board retainer in effect on the date of termination. The benefit is
payable for a period equal to the length of the director's Board service, but
ceases upon a director's death. Directors who elected to discontinue plan
participation and waive their right to any accrued benefits became eligible to
receive phantom shares of Armstrong common stock. Under such an election, a
director who had less than 12 years of Board service on January 1, 1996, became
eligible to receive an annual award of 200 phantom shares commencing January 1,
1996. The director will continue to receive 200 phantom shares each January 1
until the director attains 12 years of Board service. In addition, all directors
who elected to discontinue participation in the Directors' Retirement Income
Plan received a phantom share award to replace the value of the accrued benefit
the director elected to forfeit. This award was the greater of (i) 200 shares
times the number of full years of Board service as of January 1, 1996, or (ii)
the number of shares whose fair market value as of January 1, 1996, equalled the
present value of benefits accrued under the Directors' Retirement Income Plan.
Messrs. Arnelle, Campbell, Marley and Stead, each of whom joined the Board prior
to January 1, 1996, elected to discontinue their participation in the Directors'
Retirement Income Plan.
Directors who join the Board after January 1, 1996, are eligible to receive an
annual award of 200 phantom shares until the director attains 12 years of Board
service.
Restricted Stock Plan for Non-Employee Directors
All nonemployee directors participate in the Restricted Stock Plan for
Non-Employee Directors. Under the Restricted Stock Plan, each nonemployee
director receives an award of 200 shares of restricted common stock upon
becoming a director. Thereafter, the director receives annual awards of shares
of restricted common stock on July 1 of each year in accordance with the
following award schedule: 300 restricted shares on July 1, 1997 and 1998; 400
shares on July 1, 1999 and 2000; and 500 shares on July 1, 2001 and thereafter.
Armstrong's shareholders have approved this award schedule.
The plan restricts the transferability of the shares and imposes a forfeiture
of the shares under certain conditions, including if the director is not
nominated for re-election to the Board. Subject to these forfeiture provisions,
each nonemployee director has the right to receive dividends on, and has voting
power with respect to, the shares.
6
<PAGE>
Nonstatutory Stock Option Alternative
Beginning in 1998, each director could elect to receive nonstatutory stock
options in lieu of receiving other forms of compensation. Each year, a director
may separately elect to receive stock options in lieu of each of the following
year's: (i) scheduled cash payments; (ii) phantom share award; and (iii) award
of common stock under the Restricted Stock Plan for Non-Employee Directors. This
election will be made not later than December 1 in the year preceding the
payment year. (For 1998, directors were required to make elections prior to
April 1, 1998, with regard to payments and awards for the remainder of the
year.) The resulting stock options will: (i) be granted at fair market value;
(ii) have a ten-year option term; (iii) be immediately exercisable; and (iv) be
transferable by the director to an immediate family member or a trust
established for such family member.
For 1998, the following directors elected to receive the following stock
options in lieu of other compensation: Campbell (1,410 options), Clark (2,740
options), Krol (1,270 options), LeVan (2,620 options), Marley (1,410 options),
and Stead (1,390 options).
Stock Ownership Guidelines
The Board has adopted minimum stock ownership guidelines for nonemployee
directors. These guidelines require a nonemployee director to acquire Armstrong
shares (including phantom shares and deferred stock units) equal to five times
the annual Board retainer (currently $20,000), or $100,000 worth of common
stock. Directors must meet this guideline within five years of notification. As
of January 1, 1999, eight of the nine nonemployee directors have met this
minimum stock ownership guideline.
BOARD COMMITTEES
- --------------------------------------------------------------------------------
The Board of Directors has an Audit Committee, a Management Development and
Compensation Committee and a Board Affairs and Governance Committee. The
functions of these committees are described in the following paragraphs. All
committees receive their authority and assignments from the Board and report
directly to the Board.
Audit Committee
The Audit Committee oversees the accounting and internal financial control
matters of Armstrong. The committee recommends the employment of independent
public accountants to audit Armstrong's financial statements. The committee also
reviews: (i) the scope and results of the independent auditors' activities and
the fees proposed and charged by the independent auditors; (ii) the scope and
results of Armstrong's internal audit activities; (iii) the travel and
entertainment expenses of Armstrong's officers; and (iv) the financial
activities, financial position and related financial reports of Armstrong.
AUDIT COMMITTEE MEMBERS: James E. Marley (Chairman), H. Jesse Arnelle, Van C.
Campbell and David W. Raisbeck.
MEETINGS HELD LAST YEAR: 3.
Management Development and Compensation Committee
The Management Development and Compensation Committee reviews the annual
compensation of all directors who are officers of Armstrong. The committee also
oversees the compensation plans of Armstrong's senior officers. Additionally,
the committee periodically reviews the management development plans, the salary
and incentive compensation plans and the administration of those plans covering
Armstrong's salaried employees. The committee also reviews senior management
succession plans. Finally, the committee administers the Company's various
incentive plans, including the 1993 Long-Term Stock Incentive Plan, and, if
adopted by the shareholders at the annual meeting, the committee will be charged
with administering the 1999 Long-Term Incentive Plan.
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE MEMBERS: Jerre L. Stead
(Chairman), Donald C. Clark, Judith R. Haberkorn, John A. Krol and David M.
LeVan.
MEETINGS HELD LAST YEAR: 4.
7
<PAGE>
Board Affairs and Governance Committee
The Board Affairs and Governance Committee oversees the development,
performance and effective functioning of the Board. Specifically, the committee
reviews and recommends new director candidates for consideration by the entire
Board. The committee also recommends director nominees for election at the
annual shareholders' meeting and will consider candidates recommended by the
shareholders. To recommend a candidate, a shareholder should send the
candidate's name to Deborah K. Owen, Secretary of the Company, at the address
shown on the first page of this proxy statement. The committee supports the
Board in conducting its annual assessment of Board effectiveness and periodic
evaluations of individual directors. Additionally, the committee reviews matters
concerning nonemployee directors' compensation and administers the Restricted
Stock Plan for Non-Employee Directors. The committee also oversees Armstrong's
policies on environmental, health, safety, equal employment opportunity and
general diversity issues.
BOARD AFFAIRS AND GOVERNANCE COMMITTEE MEMBERS: Donald C. Clark (Chairman),
Judith R. Haberkorn, John A. Krol, David M. LeVan and Jerre L. Stead.
MEETINGS HELD LAST YEAR: 3.
DIRECTORS' AND EXECUTIVE OFFICERS' STOCK OWNERSHIP
- --------------------------------------------------------------------------------
The following table shows the amount of Armstrong stock that each director
(and nominee), each individual named in the Summary Compensation Table and all
directors and executive officers as a group owned on December 31, 1998. The
ownership rights in these shares consist of sole voting and investment power,
except where otherwise indicated.
COMMON STOCK AND STOCK-BASED HOLDINGS
<TABLE>
<CAPTION>
Stock Options Total Beneficial Deferred
Name Stock/1/ Exercisable Within 60 Days Ownership Stock Units/2/
- ---- -------- -------------------------- --------- --------------
<S> <C> <C> <C> <C>
H. Jesse Arnelle 1,349 0 1,349 935
Van C. Campbell 1,800 1,410 3,210 3,165
Donald C. Clark 3,938 2,740 6,678 1,495
Judith R. Haberkorn 301 0 301 355
John A. Krol 1,984 1,270 3,254 0
David M. LeVan 5,204 2,620 7,824 89
George A. Lorch 77,537 273,913 351,450 14,024
James E. Marley 2,113 1,410 3,523 3,483
Marc R. Olivie 3,578 30,766 34,344 5,976
David W. Raisbeck 1,011 0 1,011 999
Frank A. Riddick III 21,167 77,319 98,486 1,489
Floyd F. Sherman 5,000 0 5,000 0
Jerre L. Stead 3,740 1,390 5,130 1,280
Stephen E. Stockwell 8,355 25,349 33,704 1,548
Ulrich J. Weimer 17,739 5,200 22,939 0
Directors, nominees and executive
officers as a group (21 persons) 190,602 508,188 698,790 39,451
</TABLE>
/1/Includes the following shares held by each nonemployee director under the
Company's Restricted Stock Plan for Non-Employee Directors: H. Jesse Arnelle--
1,000; Van C. Campbell--1,600; Donald C. Clark--700; Judith R. Haberkorn--200;
John A. Krol--500; David M. LeVan--200; James E. Marley--1,700; David W.
Raisbeck--500; and Jerre L. Stead--1,500. Each director holds voting but not
investment power in these shares. The directors may also forfeit their rights to
these shares in certain events.
Includes the following shares which may be deemed to be owned by the employee
through the employee stock ownership accounts of Armstrong's Retirement Savings
and Stock Ownership Plan ("RSSOP"): George A. Lorch--
8
<PAGE>
1,868; Frank A. Riddick III--473; Marc R. Olivie--422; Stephen E. Stockwell--
1,119; and executive officers as a group--6,028. Each of the above individuals
and each member of the group holds shared voting power with Armstrong and no
investment power with respect to these shares.
Includes the following shares indirectly owned and held in the savings
accounts of the RSSOP accounts of the following individuals: George A.
Lorch--751; Frank A. Riddick III--1,049; and Stephen E. Stockwell--190. Mr.
Lorch also owns 65 shares with his wife. He holds shared voting and investment
power in these shares. Included also are 100 shares Jerre L. Stead owns jointly
with his wife, 500 shares David W. Raisbeck owns jointly with his wife, 960
shares Ulrich J. Weimer owns jointly with his wife and 3 shares Stephen E.
Stockwell owns jointly with his wife.
With respect to executive officers other than the named individuals, the
group amount includes 426 shares owned indirectly through the savings accounts
of the RSSOP.
/2/Includes phantom shares held in a stock subaccount under the Armstrong
Deferred Compensation Plan. The participants have no voting or investment power.
For each director, the shares listed under the "Total Beneficial Ownership"
column represent less than 1% ownership of the outstanding shares on December
31, 1998. All current directors and executive officers as a group beneficially
own 1.75% of the outstanding shares on December 31, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Securities and Exchange Commission ("SEC") regulations require the Company's
directors and executive officers, and any persons beneficially owning more than
ten percent of a registered class of the Company's equity securities to report
their ownership of such securities and any changes in that ownership to the SEC.
The SEC regulations also require these persons to furnish the Company with
copies of these reports. The proxy rules require the Company to report any
failure to timely file such reports in the previous fiscal year.
Based solely upon review of copies of such reports furnished to the Company
and written representations from the Company's directors and executive officers
that no other reports were required, the Company believes that all of these
filing requirements were satisfied by the Company's directors and executive
officers during 1998, except that a Form 4 for Mr. Krol was inadvertently not
filed in a timely manner to report a single transaction in Company common stock,
and a Form 4 for Mr. Raisbeck was inadvertently not filed in a timely manner to
report a single transaction in Company common stock. The transactions did not
give rise to any liability under Section 16, and the required Form 4s were filed
promptly after the mistakes were discovered.
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
- --------------------------------------------------------------------------------
The Management Development and Compensation Committee is responsible for
establishing the Company's overall philosophy and policies governing the
compensation programs for management personnel. The competitiveness of the
Armstrong executive compensation program is assessed by comparing the total
value of the program elements (base salary, annual incentive, long-term
incentives, employee benefits and perquisites) to that of a selected group of 20
other leading manufacturing companies with comparable sales revenue.
Executive Compensation Principles and Philosophy
The design of the executive compensation program is based on the principles
that: (i) the level and
9
<PAGE>
mixture of compensation opportunity should be sufficient to attract, retain and
motivate the caliber of executive talent vital to the Company's continued
success; (ii) incentive compensation should be at risk and conditional on the
attainment of performance goals that are directly related to increasing the
long-term value of the Company and achieving superior levels of total
shareholder return; and (iii) individual senior managers should be required to
own specified amounts of Armstrong common stock to ensure an ownership stake and
enhance the alignment of their personal interests with shareholder interests.
Annual Compensation
Base salaries are administered on a "pay for performance" philosophy. Each
year, the Chairman and Chief Executive Officer (CEO) prepares a salary plan for
selected Company officers that, among other things, takes into account their
performance and contributions. The proposed salary plan is reviewed by the
Committee and, subject to agreed-upon modification, approved for the officers of
the Company. The Committee recommends to the Board of Directors for approval the
annual base salary compensation of all officers who are directors of the
Company.
The Company's primary annual incentive plan is the Management Achievement
Plan. A participant can earn cash awards in relation to the attainment of
corporate and business unit goals. A specific weighting is assigned to each of
these achievement segments where such segments are applicable. Each participant
has a targeted annual incentive award which is expressed as a percentage of base
salary earnings and varies with the participant's level of responsibility.
Economic Value Added (EVA(R)) serves as the Company's principal financial
measure and is the basis for determining awards under the Management Achievement
Plan. EVA equals the dollar amount arrived at by taking net operating profit
after taxes and subtracting a charge for the use of the capital needed to
generate that profit. For the corporate and business unit achievement segments,
there are threshold levels of EVA performance below which no incentive awards
are paid. For the corporate and major business unit segments, there are no caps
or maximum award limits so there will be incremental awards for higher levels of
EVA achievement. For 1998, the incentive awards for the Chairman and CEO and the
Senior Vice President, Finance and Chief Financial Officer were based entirely
on corporate EVA achievement. The incentive awards for all other executive
officers, excluding Mr. Sherman, were based solely on corporate and/or business
unit EVA goal achievement. For 1998, Mr. Sherman's bonus was based on the
performance measures utilized under the Triangle Pacific Annual Cash Incentive
Bonus System. Under an agreement entered into with Mr. Sherman, he was
guaranteed a bonus of $310,660.
The Management Achievement Plan has been structured so that the level of cash
compensation (base salary plus annual bonus) will exceed the median level of
cash compensation for the selected group of companies when high levels of
corporate, business unit and individual performance are achieved. Conversely,
when the Company and business units fall short of established targets, the level
of cash compensation will fall below the median level of cash compensation for
the selected group.
Long-Term Incentive Compensation
The Company's 1993 Long-Term Stock Incentive Plan provides for the grant of
stock options, performance restricted shares, and restricted stock awards. Each
year, the Committee reviews and, where appropriate, authorizes long-term
incentive grants under the Plan. Restricted stock awards are made to key
employees for purposes of special recognition and employment retention.
In 1998, stock options were granted at the fair market value of the stock on
the date of the grant. In determining the number of stock options granted to
management, the Committee took into account: position levels, the targeted
amounts of the long-term incentive award for selected participants, and other
factors determined to be relevant such as individual performance, employment
retention and the number of shares available for issuance under the Plan. If the
stock price increases significantly, participants stand to realize commensurate
rewards and the opportunity to increase their stock ownership positions by
exercising their options. None of the executive officers named in the Summary
Compensation Table received performance restricted share grants in 1998.
10
<PAGE>
Stock Ownership Guidelines
Early in 1995, the Company adopted stock ownership guidelines which now apply
to approximately 80 senior executives. These guidelines establish minimum levels
of Armstrong stock ownership (including deferred stock units) that executives
are expected to meet within five years of notification, ranging from a value
equal to one times base salary for lower level executives to four times base
salary for the CEO. These ownership guidelines are intended to ensure that
senior executives will have a significant ownership stake in the Company while
providing an added incentive for the executives to focus on long-term
shareholder value creation. Messrs. Lorch, Riddick and Weimer have satisfied
their respective minimum levels of stock ownership.
Tax Deductibility Under Section 162(m)
The Committee's intention is that all performance-based compensation be
deductible for federal income tax purposes. It is the opinion of the Company
that annual incentive payments under the Management Achievement Plan and all
outstanding stock option grants and grants of performance restricted shares will
qualify as performance-based compensation under Internal Revenue Code Section
162(m).
CEO Compensation
Under Mr. Lorch's leadership, the Armstrong organization achieved the
following during 1998:
. Acquired Triangle Pacific Corp. and DLW Aktiengesellschaft making Armstrong
the world's leading manufacturer of hard surface flooring.
. Sold the Company's investment in Dal-Tile International Inc.
. Posted record earnings from operations.
. Earned in excess of the Company's cost of capital for the fifth straight year,
an outstanding achievement by a manufacturing company.
. Increased the annual dividend by 9% from $1.76 to $1.92 per share.
. Initiated actions to strengthen the management team and expanded the
implementation of the Dialogue Process for the assessment, development and
succession planning of management talent.
. Implemented structural changes to the Company's organization design that will
improve decision-making, increase operating effectiveness, reduce costs and
leverage new technology.
. Completed the installation of the SAP-based corporate enterprise information
system.
. Was recognized as a "Partner of the Year" by The Home Depot.
These business and financial achievements were among the factors that caused the
Committee to approve the 1998 compensation as displayed in the Summary
Compensation Table on page 12.
The Chairman and CEO's total direct compensation opportunity at target has
been established such that less than 30% of the total direct compensation
opportunity will be fixed and represented by base salary earnings. The remainder
will be performance-based, comprised of an annual cash incentive opportunity
under the Management Achievement Plan and a stock-based long-term incentive
opportunity under the 1993 Long-Term Stock Incentive Plan.
Management Development and Compensation Committee
-------------------------------------------------
Jerre L. Stead, Chairman
Donald C. Clark
Judith R. Haberkorn
John A. Krol
David M. LeVan
11
<PAGE>
EXECUTIVE OFFICERS' COMPENSATION
- --------------------------------------------------------------------------------
The following table shows the compensation received by Armstrong's Chief
Executive Officer and the five other highest paid individuals who served as
executive officers during 1998. The data reflects compensation for services
rendered to Armstrong and its subsidiaries in each of the last three fiscal
years.
<TABLE>
<CAPTION>
TABLE 1: SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------------------------------
Awards Payouts
-------------------------------------
Other Securities All
Annual Restricted Underlying Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Awards SARs Payouts sation
Principal Position Year ($) ($) ($)2 ($)3 (#) ($)4 ($)5
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G. A. Lorch 1998 752,500 1,007,339 -- 0 93,000 0 64,247
Chairman and 1997 682,500 1,161,956 -- 0 18,000 183,437 66,892
Chief Executive Officer 1996 622,500 1,154,738 -- 0 70,880 0 63,004
- -----------------------------------------------------------------------------------------------------------------------------------
F. A. Riddick III 1998 354,000 364,448 -- 0 75,600 0 11,249
Senior Vice President, Finance 1997 330,000 449,460 -- 0 6,000 49,634 14,613
and Chief Financial Officer 1996 291,000 462,690 -- 598,750 68,120 0 6,279
- -----------------------------------------------------------------------------------------------------------------------------------
F. F. Sherman 1998 360,772/1/ 310,660 -- 0 50,000 0 29,074
President, Wood Flooring
and Cabinet Operations
- -----------------------------------------------------------------------------------------------------------------------------------
M. R. Olivie 1998 327,750 237,236 -- 0 20,300 0 15,433
President, Worldwide 1997 309,000 406,011 70,411 0 6,000 0 17,490
Building Products Operations 1996 64,231/1/ 200,000 59,316 393,000 50,000 0 587
- -----------------------------------------------------------------------------------------------------------------------------------
S. E. Stockwell 1998 231,800 325,814 -- 109,687 22,500 0 17,917
Vice President 1997 208,500 253,705 -- 69,875 11,000 23,845 19,744
1996 180,300 204,220 -- 89,812 10,000 0 17,792
- -----------------------------------------------------------------------------------------------------------------------------------
U. J. Weimer 1998 336,738 195,022 299,112 0 9,600 0 75,341
President, Armstrong 1997 309,125 273,900 322,058 0 0 408,210 81,676
Insulation Products 1996 339,669 173,944 381,230 0 0 0 75,049
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1Mr. Olivie's employment with the company commenced October 15, 1996. Mr.
Sherman's employment with the company commenced July 24, 1998.
2Except for income related to Mr. Olivie, the aggregate value of personal
benefits does not exceed the lesser of $50,000 or 10% of combined salary and
bonus. Mr. Olivie received relocation income of $59,131 in 1996, and $62,500 for
1997. In addition, Mr. Olivie received a $400,000 interest-free bridge loan from
Armstrong pursuant to Armstrong's household relocation policy. The loan remained
outstanding for a six-month period during 1997 and has been repaid. The amounts
shown for Mr. Weimer represent tax equalization payments related to his
expatriate assignment.
3The restricted stock held by these executive officers includes performance
restricted shares earned under the 1993 and 1995 grants. The number and value of
shares of restricted stock held by each as of December 31, 1998, is as follows:
George A. Lorch--51,990 ($3,135,647); Frank A. Riddick III--13,622 ($821,577);
Marc R. Olivie--3,178 ($191,673); Stephen E. Stockwell--6,279 ($378,702); and
Ulrich J. Weimer--9,425 ($568,445). All restrictions lapse upon a change in
control of Armstrong. Mr. Stockwell received a restricted stock award of 1,500
shares of Armstrong common stock in recognition of his contributions and to
serve to retain his employment. These shares vest and become free of
restrictions three years from the award date.
12
<PAGE>
4Performance restricted shares earned pursuant to the 1995 grant. The shares are
restricted for three years. George A. Lorch earned 2,454 shares; Frank A.
Riddick III earned 664 shares; Stephen E. Stockwell earned 319 shares; and
Ulrich J. Weimer earned 5,461 shares.
5The amounts include the following above-market interest credited to each
individual's Armstrong Deferred Compensation Plan account: George A.
Lorch--$27,986; Frank A. Riddick III--$735; and Stephen E. Stockwell--$3,646.
Includes the following vested amounts in the RSSOP for members' Equity and
Match Accounts: George A. Lorch--$5,876; Frank A. Riddick III--$5,913; Marc R.
Olivie--$6,033; and Stephen E. Stockwell--$5,754.
Includes the following present value costs of Armstrong's portion of 1998
premiums for split-dollar life insurance: George A. Lorch--$30,385; Frank A.
Riddick III--$4,601; Marc R. Olivie--$9,400; and Stephen E. Stockwell--$8,517.
The executives waived future participation in the Company-paid group term life
insurance program as a condition to participate in the split-dollar life
insurance program.
For Mr. Weimer, the amounts represent customary payments made to him under
the Company's expatriate assignment policy.
The amount shown for Mr. Sherman includes contributions of $9,898 made by
Triangle Pacific Corp. on his behalf to the Triangle Pacific Corp. Salaried
Employees Profit Sharing Plan and the Triangle Pacific Corp. Supplemental Profit
Sharing and Deferred Compensation Plan. Mr. Sherman also had taxable income of
$19,176 related to life insurance benefits provided by Triangle Pacific Corp.
Change in Control Agreements
Armstrong has entered into change in control agreements with a small group
of senior officers, including the executive officers named in the Summary
Compensation Table, except for Messrs. Sherman and Weimer. These agreements
provide severance benefits in the event of a change in control of Armstrong. The
severance benefits are payable if the officer is involuntarily terminated or
terminates employment for good reason within two years following a change in
control. Involuntary termination does not include termination for cause, death
or disability. Good reason exists if there are certain significant changes in
the nature of employment following the change in control, including a reduction
in compensation, a change in responsibility or a relocation of the place of
employment.
The purpose of the agreements is to foster the continued employment of key
officers in the face of a possible change in control of Armstrong. The agreement
has an automatic renewal feature, meaning that the agreements will continue in
effect unless either Armstrong or the officer elects not to extend the
agreement.
For purposes of these agreements, change in control includes the following:
(i) acquisition by a person (excluding certain qualified owners) of beneficial
ownership of 20% or more of Armstrong's common stock; (ii) change in the
composition of the Board, such that existing Board members and their approved
successors do not constitute a majority of the Board; (iii) consummation of a
merger or consolidation of Armstrong, unless shareholders of voting securities
immediately prior to such merger or consolidation continue to hold 66-2/3% or
more of the voting securities of the resulting entity; and (iv) shareholder
approval of a liquidation or dissolution of Armstrong or sale of all or
substantially all of Armstrong's assets.
Severance benefits under the agreements include: (i) a lump sum severance
payment equal to three times the sum of (a) the officer's annual base salary,
and (b) the officer's highest annual bonus earned in the three years prior to
termination or prior to a change in control; (ii) continuation of life,
disability, accident and health insurance benefits for three years following
termination; (iii) payment of remaining premium payments for split-dollar life
insurance policies; (iv) enhanced retirement benefits payable as a lump sum; (v)
full reimbursement for the payment of excise taxes; and (vi) payment of legal
fees in connection with a good faith dispute involving the agreement.
13
<PAGE>
Severance Pay Plan for Salaried Employees
Armstrong adopted The Severance Pay Plan for Salaried Employees in 1990.
This plan is designed to cushion the effects of unemployment for certain
salaried employees. The benefits are payable if a covered employee is terminated
by Armstrong under certain circumstances. All salaried employees of the
Armstrong parent company, including the executive officers named in the Summary
Compensation Table, except for Messrs. Sherman and Weimer, are eligible to
participate in the plan. A participant will be entitled to severance pay if
Armstrong terminates them and an exclusion does not apply. The employee is not
entitled to severance pay if the reason for the termination is the following:
(i) voluntary separation; (ii) the employee accepts employment with the
successor organization in connection with the sale of a plant, unit, division or
subsidiary; or (iii) the employee rejects the offer of a similar position with
comparable compensation in the same geographic area made by Armstrong or its
successor organization.
Under the plan, the amount of the payment is based on the employee's length
of service, reason for termination and cash compensation level. The amount of
the payment ranges from a minimum of two weeks' pay to a present maximum of 52
weeks' pay. Subject to certain limitations, benefits may be paid by salary
continuation or lump-sum payments. A participant may also choose a combination
of periodic and lump-sum payments. The Severance Pay Committee retains the right
to depart from the severance pay schedule where factors justify an upward or
downward adjustment in the level of benefits. In no event may the severance
benefit exceed 104 weeks' pay.
TABLE 2: OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the grant of stock
options during 1998 under the Company's 1993 Long-Term Stock Incentive Plan to
each of the named executives:
- --------------------------------------------------------------------------------
Individual Grants
- --------------------------------------------------------------------------------
Securities Percent Of
Underlying Total Options/ Grant Date
Options/SARs SARs Granted Exercise Or Present
Granted1 To Employees Base Price Expiration Value2
Name (#) In Fiscal Year ($/share) Date ($)
- --------------------------------------------------------------------------------
G. A. Lorch 93,000 10.3 73.125 2/22/08 1,403,816
- --------------------------------------------------------------------------------
F. A. Riddick III 25,600 2.8 73.125 2/22/08 386,427
50,000 5.5 64.750 7/27/08 668,220
- --------------------------------------------------------------------------------
F. F. Sherman 50,000 5.5 64.750 7/27/08 668,220
- --------------------------------------------------------------------------------
M. R. Olivie 20,300 2.2 73.125 2/22/08 306,424
- --------------------------------------------------------------------------------
S. E. Stockwell 12,500 1.4 73.125 2/22/08 188,685
10,000 1.1 64.750 7/27/08 133,644
- --------------------------------------------------------------------------------
U. J. Weimer 9,600 1.1 73.125 2/22/08 144,910
- --------------------------------------------------------------------------------
1These options become exercisable in equal installments at one, two and three
years from the date of grant. The exceptions are in the case of death or
disability and a defined change in control event. All stock options become
exercisable immediately upon a change in control of Armstrong.
2In accordance with Securities and Exchange Commission rules, the numbers in the
column titled "Grant Date Present Value" were determined using the Black-Scholes
model. These are not Armstrong's predictions. However, the following material
assumptions and adjustments were necessary: (i) an option term of five years;
(ii) a volatility of 28%; (iii) a dividend yield of 3.03%; (iv) a risk-free
interest rate of 5.14%; and (v) a reduction of 16% to reflect the probability
that the above stock options will be forfeited prior to the expiration date.
The ultimate value of the options will depend on the future market price of
Armstrong's stock. Armstrong cannot forecast this value with reasonable
accuracy.
14
<PAGE>
TABLE 3: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table sets forth information regarding the exercise of stock
options during 1998 and the unexercised options held as of the end of 1998 by
each of the named executives:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Value Securities
Shares Realized Underlying Unexercised Value Of Unexercised,
Acquired (market price Options/SARs In-The-Money Options/
On at exercise less At Fiscal Year-End SARs At Fiscal Year-End
Exercise exercise price) (#) ($)
--------------------------------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
G. A. Lorch 3,500 165,375 236,913 271,667 1,524,116 0
F. A. Riddick III 0 0 50,120 129,600 422,303 21,875
F. F. Sherman 0 0 0 50,000 0 0
M. R. Olivie 0 0 22,000 54,300 0 0
S. E. Stockwell 90 4,118 20,016 32,334 172,684 0
U. J. Weimer 0 0 2,000 9,600 11,375 0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE GRAPH
Comparison of Five-Year Cumulative Total Return1
Among Armstrong Common Stock, the S&P 500 Index and a Peer Group Index
The following graph compares the cumulative total return, including reinvestment
of dividends, among Armstrong's common stock, a broad equity market index and a
peer group index:
[LINE GRAPH APPEARS HERE]
Year Armsrong World Industries Peer Group Index/2/ S&P 500
1993 $100 $100 $100
1994 $ 74 $ 86 $101
1995 $123 $110 $139
1996 $141 $130 $171
1997 $156 $157 $229
1998 $129 $169 $294
1Assumes a $100 investment on December 31, 1993, a reinvestment of dividends and
a fiscal year ending on December 31.
15
<PAGE>
2Composed of the following companies which as a group reflect Armstrong's mix of
residential, nonresidential and international end-use markets: American Standard
Cos., Inc., Black & Decker Corp., Masco Corp., Newell Co., Owens Corning, PPG
Industries, Inc., Premark International, Inc., Shaw Industries, Inc.,
Sherwin-Williams Co., Stanley Works, USG Corp. and Whirlpool Corp.
RETIREMENT INCOME PLAN BENEFITS
- --------------------------------------------------------------------------------
The following table shows the estimated pension benefits payable to a
participant at normal retirement age under Armstrong's Retirement Income Plan
and Armstrong's Retirement Benefit Equity Plan. The Retirement Income Plan is a
qualified defined benefit pension plan. The Retirement Benefit Equity Plan is a
partially funded, nonqualified supplemental pension plan. It provides
participants with benefits that would otherwise be denied by reason of certain
Internal Revenue Code limitations on qualified plan benefits. The amounts shown
in Table 4 are based on compensation that is covered under the plans and years
of service with Armstrong and its subsidiaries. Messrs. Sherman and Weimer do
not participate in the Retirement Income Plan. Mr. Sherman participates in the
Triangle Pacific Corp. Salaried Employees Profit Sharing Plan and the Triangle
Pacific Corp. Supplemental Profit Sharing and Deferred Compensation Plan. Mr.
Weimer participates in the Armstrong Insulation Products GmbH Pension and Life
Insurance Plan.
<TABLE>
<CAPTION>
TABLE 4: ANNUAL RETIREMENT BENEFIT BASED ON SERVICE1
Average Final
Compensation/2/ 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years
------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 400,000 $ 91,000 $121,000 $151,000 $ 181,000 $ 211,000 $ 235,000
600,000 137,000 183,000 228,000 274,000 319,000 355,000
800,000 184,000 245,000 306,000 367,000 428,000 476,000
1,000,000 230,000 307,000 383,000 460,000 536,000 596,000
1,200,000 277,000 369,000 461,000 553,000 645,000 717,000
1,400,000 323,000 431,000 538,000 646,000 753,000 837,000
1,600,000 370,000 493,000 616,000 739,000 862,000 958,000
1,800,000 416,000 555,000 693,000 832,000 970,000 1,078,000
2,000,000 463,000 617,000 771,000 925,000 1,079,000 1,199,000
2,200,000 509,000 679,000 848,000 1,018,000 1,187,000 1,319,000
2,400,000 556,000 741,000 926,000 1,111,000 1,296,000 1,440,000
</TABLE>
1Benefits shown assume retirement in 1998. The benefits are computed as a
straight life annuity beginning at age 65 and are not subject to deduction for
Social Security or other offsets.
2Calculated as the average annual compensation in the three best-paid years
during the 10 years prior to retirement. Annual compensation equals the total of
the amounts reported under the columns captioned "Salary" and "Bonus" in the
Summary Compensation Table.
The 1998 annual compensation and estimated years of service for plan
purposes for each of the executives named in the Summary Compensation Table were
as follows: George A. Lorch--$1,914,456 (35.5 years); Frank A. Riddick
III--$803,460 (18.8 years); Marc R. Olivie--$733,761 (22.2 years); and Stephen
E. Stockwell--$485,505 (26.9 years). Messrs. Riddick's and Olivie's estimated
years of service include 15 and 20 years, respectively, of credit for prior
service awarded to them upon their employment with Armstrong. The Armstrong
retirement benefit will be reduced by the value of any defined benefit pension
payable by previous employers for the respective period of the prior service
credit. As of December 31, 1998, Mr. Weimer's accrued annual pension benefit
payable at age 65 was $136,534 based on a currency conversion from German Marks
to U.S. Dollars.
16
<PAGE>
Special provisions apply if the Retirement Income Plan is terminated within
five years following a change in control of Armstrong. In that event, plan
liabilities will first be satisfied; then, remaining plan assets will be applied
to increase retirement income to employees. The amount of the increase is based
on the assumption that the employee would have continued employment with
Armstrong until retirement. The executives named in the Summary Compensation
Table, except for Messrs. Sherman and Weimer, would be entitled to this benefit.
Special provisions also apply in the event that a salaried member is
terminated other than for cause or resigns for good reason, as those terms are
defined in the plan, within two years following a change in control of
Armstrong. If those members have at least 10 years of service and are at least
50 years in age, they would be eligible for early retirement without certain
normal reductions applying. Those members would also receive certain Social
Security replacement benefits. Members with 15 or more years of service would
also receive credit under the plan for an additional five years of service.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
- --------------------------------------------------------------------------------
The following table sets forth each person or entity that may be deemed to
have beneficial ownership of more than 5% of the outstanding common stock of
Armstrong. This table shows ownership as of December 31, 1998, and is based upon
information furnished to Armstrong.
Amount and Nature of Percent of Class
Name and Address of Beneficial Owner Beneficial Ownership Outstanding1
- ------------------------------------ -------------------- ------------
Mellon Bank Corporation 3,211,982/2/ 8.03%
One Mellon Bank Center
Pittsburgh, PA 15258
T. Rowe Price Associates, Inc. 2,450,417/3/ 6.12%
100 E. Pratt Street
Baltimore, MD 21202
1In accordance with applicable rules of the Securities and Exchange Commission,
this percentage is based upon the total 40,022,189 shares of Armstrong common
stock that were outstanding on December 31, 1998.
2Mellon Bank, N.A., a subsidiary of Mellon Bank Corporation, serves as the
trustee of the employee stock ownership portion of Armstrong's Retirement
Savings and Stock Ownership Plan (the "RSSOP"). In that capacity, Mellon Bank,
N.A., may be deemed to be the beneficial owner of 2,898,100 shares, or 7.24% of
Armstrong's outstanding shares. Mellon Bank, N.A. also holds shared voting power
and sole investment power with respect to these shares. Mellon Bank, N.A., votes
the shares in accordance with the participant's direction. Shares which are
unallocated under the RSSOP and allocated shares for which the trustee does not
receive directions are voted by the trustee in the same proportion as the
directed shares are voted. In the event of a tender offer for the stock in the
RSSOP, the trustee is required to tender unallocated shares in the same
proportion that allocated shares are tendered. Mellon Bank, N.A. disclaims
beneficial ownership of all shares that have been allocated to the individual
accounts of employee participants in the RSSOP for which directions are
received.
Mellon Bank Corporation and its affiliates, Boston Safe Deposit and Trust
Company, Mellon Trust of California, Mellon Bank, N.A., Mellon Capital
Management Corporation, Mellon Equity Associates, The Dreyfus Corporation,
Boston Group Holdings, Inc., The Boston Company, Inc., and MBC Investment
Corporation, may be deemed to beneficially own an additional 313,882 shares, or
0.78% of Armstrong's outstanding common stock. These shares are held in various
fiduciary capacities. With respect to these shares, Mellon Bank Corporation and
its affiliates
17
<PAGE>
exercise sole voting power with respect to 238,788 shares and shared voting
power with respect to 37,094 shares. Mellon Bank Corporation and its affiliates
exercise sole investment power with respect to 205,748 shares and shared
investment power with respect to 49,826 shares.
3These shares are held in various fiduciary capacities. T. Rowe Price
Associates, Inc. holds sole voting power with respect to 390,329 shares and
shared voting power with respect to zero shares. It holds sole investment power
with respect to 2,450,417 shares and shared investment power with respect to
zero shares.
PROPOSAL TO APPROVE THE 1999 LONG-TERM INCENTIVE PLAN
- --------------------------------------------------------------------------------
On February 22, 1999, the Board of Directors of Armstrong approved
submission of the 1999 Long-Term Incentive Plan (the "1999 Incentive Plan" or
"Plan"), to the shareholders for approval. The shareholders last approved a
long-term incentive plan in 1993. The 1999 Incentive Plan is designed to replace
the 1993 plan. The 1999 Incentive Plan is expected to enable Armstrong to
continue to make long-term incentive awards through 2002 without having to
request shareholder approval of additional long-term stock incentive awards. The
1999 Incentive Plan is similar to the 1993 plan in that it provides for the
granting of incentive stock options, nonqualified stock options, stock
appreciation rights ("SARs"), performance restricted shares and restricted stock
awards. The Plan also incorporates new features providing for stock awards and
cash incentive awards.
The purposes of the 1999 Incentive Plan are to: (i) better align the
interests of shareholders with the interests of officers and key employees by
creating a direct linkage between participants' rewards and the performance of
Armstrong and its subsidiaries; (ii) encourage employees to own and hold shares
of Armstrong stock; and (iii) assist Armstrong in attracting and retaining key
employees vital to its success.
Executive officers and directors are eligible to receive awards under the
Plan and therefore have a personal interest in the adoption of the Plan.
SUMMARY OF THE 1999 INCENTIVE PLAN
The following general description is a summary of the 1999 Incentive Plan.
The complete text appears as Exhibit A to the Proxy Statement.
Term
The Plan will become effective once it is approved by the shareholders.
Although the Plan has no fixed expiration date, new awards will not be granted
after April 25, 2009.
Administration
The Plan is administered by the Management Development and Compensation
Committee of the Board. That Committee has the exclusive authority to make
awards under the Plan and to make interpretations and determinations involving
the Plan.
Participation and Award Estimates
Officers, directors and other key employees of Armstrong and its
subsidiaries who are selected by the Committee are eligible for participation in
the Plan. Participants in the Plan are also eligible to participate in other
incentive plans of Armstrong. Awards under the Plan are made at the discretion
of the Committee or, in the case of nonemployee directors, at the discretion of
the full Board. As a result, it is not possible to identify who will receive
awards or the amount of those awards.
Types of Awards
Awards under the Plan may be in the form of stock options (including
incentive stock options that meet the requirements of Section 422 of the
Internal Revenue Code ("ISOs")), stock appreciation rights, performance
restricted shares, restricted stock awards, stock awards and cash incentive
awards.
Shares Available for Awards and Closing Quotation
3,250,000 shares of common stock may be issued under the Plan (subject to
adjustment for a stock split, stock dividend, recapitalization, merger and the
like, as described below). Not more than 300,000 of the shares may be awarded in
the form of performance restricted shares, restricted stock awards or stock
awards. In addition, the following shares are available for issuance
18
<PAGE>
under the Plan: (i) any shares of common stock that are forfeited or otherwise
not payable under the Plan or the Company's prior long-term incentive plan, the
1993 Long-Term Stock Incentive Plan (the "1993 Plan"); and (ii) any shares of
common stock tendered in satisfaction of tax withholding or other obligations
relating to proposed awards under the Plan or the 1993 Plan. If the Plan is
approved by the shareholders, no further awards will be made under the 1993
Plan.
As of February 26, 1999, the closing price of Armstrong's common stock, as
reported on the New York Stock Exchange Composite Transactions, was $49.1875.
Stock Options
The term of options granted under the Plan is determined by the Committee,
but the term of an option may not exceed ten years. The per share option price
for any shares which may be purchased under any option will be determined by the
Committee, but it will not be less than 100% of the fair market value of the
shares on the date the option is granted. Each option will become exercisable at
the time determined by the Committee. Each option will be exercisable, in full
or in part, by payment of the option price in cash, shares of common stock, or
any combination of cash and stock. Shares of common stock delivered in payment
of the exercise price must have been owned by the participant for at least six
months.
Stock Appreciation Rights
SARs may be granted by the Committee to a participant in tandem with stock
options. When an SAR is exercised, the participant is entitled to receive
Armstrong common stock. The value of that stock equals the difference between
the SAR exercise price and the fair market value of a share of common stock on
the exercise date, multiplied by the number of shares of common stock involved.
The number of shares of common stock covered by the SAR's related stock option
are correspondingly reduced. In other words, a participant may exercise either a
stock option or a SAR, but not both, with respect to a share of common stock
covered by both the stock option and SAR.
SARs are generally governed by the same terms and conditions that govern
the related stock option and may only be exercised to the extent that the
related stock option may be exercised.
Performance Restricted Shares
The Committee may make performance restricted share grants on any terms and
conditions it may determine. A performance restricted share entitles a
participant to receive a target number of shares of common stock based upon
Armstrong's attainment of predetermined performance goals over a specified
performance period. At the time that a performance restricted share grant is
made, the Committee may, in its discretion, establish a vesting period for those
shares that will begin at the end of the performance period. During the vesting
period, the performance restricted shares, or a portion of those shares, may be
subject to forfeiture. The Committee may also establish a restriction period
applicable to any performance restricted shares. During that period, the earned
shares may not be assigned, transferred, pledged or sold.
The number of performance restricted shares actually payable to a
participant at the end of a performance period will be determined by the
Committee based upon Armstrong's attaining the predetermined performance goals.
If the minimum performance goals established by the Committee are not met, no
performance restricted shares will be earned by the participant. If the
performance goals are fully achieved, 100% of the performance restricted shares
will be earned by the participant. The Committee may also provide for payment of
up to 300% of the performance restricted shares for Armstrong performance that
exceeds the performance goals. During the performance period, each performance
restricted share will be considered equal to one share of common stock and the
participant shall be entitled to dividend equivalents.
At the end of the performance period, any performance restricted shares
that have been earned will be converted to shares of common stock. The
participant will generally have the rights and privileges of a shareholder as to
the shares of common stock earned under a performance restricted share grant,
including the right to vote. However, the shares will remain in the custody of
Armstrong and may be subject to forfeiture until all restrictions have lapsed.
The participant will have the right to receive a distribution of any
performance restricted shares of common
19
<PAGE>
stock after any restrictions imposed on them lapse and the applicable vesting
period expires.
If, during a performance period, a participant terminates employment for
any reason other than death, disability or retirement, the participant will
forfeit all rights to the payment of any performance restricted shares, unless
otherwise provided by the Committee. If, during a performance period, a
participant's termination is due to death or disability, the participant or
beneficiary will be entitled to receive a payment of the performance restricted
shares after the end of the performance period to the extent the participant had
completed a minimum of one year of employment during the performance period.
If, following a performance period, a participant terminates employment for
any reason other than death, disability or retirement, the participant will
forfeit all unvested performance restricted shares, unless otherwise provided by
the Committee. If, following a performance period, a participant terminates
employment by reason of death or disability, all performance restricted shares
earned will be payable to the participant or beneficiary and any restrictions
applicable to such shares shall lapse.
If, during or following a performance period, a participant retires having
completed a minimum of one year of employment during the performance period, the
participant will be entitled to payment of his or her performance restricted
shares when the applicable restriction period expires. This restriction period
will be no more than three years from the participant's retirement date, or may
be an earlier time specified by the Committee in connection with the award,
unless otherwise provided by the Committee.
Stock Awards and Restricted Stock Awards
The Committee may make stock awards and restricted stock awards on the
terms and conditions it determines. A stock award entitles a participant to
shares of common stock without a restriction or vesting period.
A restricted stock award entitles a participant to shares of common stock
subject to a restriction period. In determining whether to make stock awards and
restricted stock awards, the Committee may consider circumstances such as a
participant's termination of employment, or the failure of Armstrong or a
participant to attain specified performance goals. None of the shares subject to
a restricted stock award or stock award may be assigned, transferred, pledged or
sold until they are delivered to the holder of the restricted stock award or
stock award.
When a participant is granted a restricted stock award, Armstrong shall
register a stock certificate in the participant's name representing the number
of shares of common stock designated by the Committee. This certificate shall be
held in custody by Armstrong for the participant's account. The participant
shall generally have the rights and privileges of a stockholder as to the shares
awarded pursuant to a restricted stock award, including the right to vote,
except that the shares will remain in the custody of Armstrong until all
restrictions have lapsed.
If, during a restriction period, a participant terminates employment for
any reason other than death, disability or retirement, the participant will
forfeit all rights to the payment of any restricted stock award, unless
otherwise provided by the Committee. If, during a restriction period, a
participant's termination is due to death or disability, the participant or
beneficiary will be entitled to receive the restricted stock award. If a
participant retires during a restriction period, the participant will be
entitled to a pro-rata payment of the restricted stock upon expiration of the
restriction period applicable to such shares. This period will be no more than
three years from the participant's retirement date, or an earlier period
specified by the Committee in connection with the award, unless otherwise
provided by the Committee.
Stock Adjustments
In the event of any stock dividend or split, recapitalization,
reorganization, merger, or other change in the capitalization of Armstrong, or
similar event affecting Armstrong's common stock, the Committee will, as it
deems equitable, adjust the number of shares that may be available under the
1999 Incentive Plan or the terms or number of shares pertaining to any
outstanding award.
Cash Incentive Awards
The Committee may grant cash incentive awards to participants. Each cash
incentive award will be conditioned upon Armstrong's achievement of one or more
performance goals with respect to the performance
20
<PAGE>
measure(s) covering the applicable performance period and set forth in the award
agreement evidencing the cash incentive award. In making a cash incentive award,
the Committee will establish a performance level below which the cash incentive
award will not be payable. The Committee may also establish additional
performance conditions that must be satisfied by Armstrong, a business unit or
the participant as a condition precedent to the payment of all or a portion of
any cash incentive awards.
The maximum amount payable to any one participant pursuant to a cash
incentive award with respect to any one year shall be $3,000,000.
Change in Control
In the event of a change in control: (i) all outstanding options and SARs
become immediately exercisable; (ii) all restrictions imposed on restricted
shares will immediately lapse; (iii) all outstanding performance restricted
shares will immediately be deemed to have been earned to the maximum extent
permitted; and (iv) all performance restricted shares earned will immediately
vest and all restrictions will immediately lapse. A change in control is defined
to have occurred if: (a) any person acquires beneficial ownership of 28 percent
or more of the then outstanding voting stock of Armstrong, and within five years
of that event, disinterested directors no longer constitute at least a majority
of the Board; or (b) a business combination with an interested shareholder
occurs that has not been approved by a majority of disinterested directors. The
terms person, beneficial ownership, voting stock, disinterested director,
business combination, and interested shareholder are defined in Article 7 of
Armstrong's Articles of Incorporation.
Amendment and Termination
The Board of Directors may modify, amend, or terminate the Plan at any time
except that, to the extent then required by law, approval of the holders of a
majority of shares of common stock represented in person or by proxy at a
meeting of the shareholders will be required to increase the maximum number of
shares of common stock available for distribution under the Plan (other than
increases due to adjustments in accordance with the Plan). No modification,
amendment, or termination of the Plan can adversely affect the rights of a
participant under a grant previously made without the participant's consent.
Other Provisions
The Committee may also offer participants the right to defer the receipt of
all or any portion of their performance restricted shares, restricted stock or
stock award. However, awards may be forfeited if: (i) a participant is
terminated for deliberate or gross misconduct, or (ii) within three years
following a participant's termination of employment, the participant engages in
conduct that, in the Committee's discretion, is directly or indirectly
competitive with Armstrong.
Federal Income Tax Consequences
Nonqualified Options
Under the current applicable provisions of the Internal Revenue Code, the
recipient of an option will not pay any tax at the time of grant. When a
nonqualified option is exercised, any excess of the fair market value of the
affected shares over the total option price of those shares will be treated for
federal tax purposes as ordinary income. Any profit or loss realized on the sale
or exchange of any share actually received will be treated as a capital gain or
loss. If the fair market value on the date of exercise of the shares with
respect to which the option was exercised exceeds the exercise price, Armstrong
is entitled to deduct that amount.
Incentive Stock Options
With respect to an Incentive Stock Option ("ISO"), no taxable gain or loss
generally will be recognized when the option is granted or exercised. ISOs
exercised more than three months after termination of employment will be taxed
in the same manner as nonqualified options described above. Generally, when an
ISO is exercised, the spread between the fair market value and the exercise
price will be an item of tax preference for purposes of the alternative minimum
tax.
If the shares acquired when an ISO is exercised are held for at least two
years from the grant of the options and one year from the exercise of the
options, any gain or loss realized upon their sale will be treated as long-term
capital gain or loss. In such a case, Armstrong will not be entitled to a
deduction. If the shares are not held for the two-year and one-year periods,
ordinary income will be recognized in an amount equal to the difference
21
<PAGE>
between the exercise price and the fair market value of the common stock on the
date the option was exercised. Armstrong will be entitled to a deduction equal
to the amount of any ordinary income recognized in this manner. If the shares
are not held for the one-year period and the amount realized upon sale is less
than the grant price, the difference will be a capital loss.
Stock Appreciation Rights
If there is a grant of an option with a tandem stock appreciation right, no
taxable income is realized by the holder and no deduction is available to
Armstrong at the time of grant. If a participant exercises an option through a
stock appreciation rights election, the tax consequences to the holder and
Armstrong are the same as for exercise of a nonqualified stock option.
Performance Restricted Shares, Stock Awards and Restricted Stock Awards
With respect to performance restricted shares, stock awards and restricted
stock awards granted under the Plan, the participant will generally recognize
ordinary income equal to the excess of the fair market value of the shares
received (determined as of the date on which the shares become transferable or
not subject to a substantial risk of forfeiture, whichever occurs first) over
the amount, if any, paid for the shares. Armstrong will be entitled to a tax
deduction in the same amount. A participant may elect to accelerate the
recognition of ordinary income with respect to restricted stock awards to when
the shares are granted. A participant may also elect to accelerate the
recognition of ordinary income with respect to performance restricted shares to
when the shares are earned at the end of the performance period. If an election
is made to accelerate the recognition of ordinary income, the amount of ordinary
income will be determined as of the accelerated tax date rather than as of the
date when the applicable restriction expires. In such a case, Armstrong's tax
deduction will be determined at the same time. Any subsequent gain or loss
resulting from the sale or other disposition of such shares will be capital gain
or loss.
Cash Incentive Awards
A participant will recognize ordinary income in an amount equal to the
value of a cash incentive award as of the date of payment of the award.
The Board of Directors recommends a vote FOR approval of the 1999 Long-Term
Incentive Plan.
The affirmative vote of a majority of the shares voting at the meeting is
required for approval of this item.
CONFIDENTIAL VOTING POLICY
- --------------------------------------------------------------------------------
Under Armstrong's confidential voting policy, all proxies, ballots and
voting tabulations that identify how shareholders voted will be kept
confidential. To implement this policy, Armstrong will engage independent vote
tabulators and independent judges of election. Employees of Armstrong will not
serve as vote tabulators or judges. This policy does not apply: (i) when
disclosure is mandated by law; (ii) when disclosure is necessary in connection
with a claim involving Armstrong; (iii) when a shareholder expressly requests or
permits disclosure; or (iv) during the course of a contested proxy solicitation.
Shareholders' comments on proxy cards and ballots will be conveyed to
Armstrong in a manner that protects the confidentiality of the vote.
INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors, upon the recommendation of the Audit Committee,
appointed KPMG LLP as auditors of Armstrong's financial statements for 1998.
KPMG LLP is a firm of independent certified public accountants. The Board, at
its February 22, 1999, meeting, selected KPMG LLP as auditors for 1999.
A representative of KPMG LLP will be present at the 1999 Annual Meeting to
respond to appropriate questions and to make a statement if that representative
so desires.
22
<PAGE>
SHAREHOLDER PROPOSALS IN
2000 AND NOMINATING PROCEDURES
- --------------------------------------------------------------------------------
The deadline for shareholder proposals to be included in Armstrong's proxy
statement for the 2000 Annual Meeting is November 17, 1999. All proposals must
be received at Armstrong's Principal Executive Offices, as shown on the first
page of this proxy statement. Please address any proposals to the attention of
Deborah K. Owen, Secretary. Any such proposal must comply with Rule 14a-8 of
Regulation 14A of the proxy rules of the Securities and Exchange Commission.
Under Armstrong's Bylaws, shareholder nominations of directors for the 2000
annual meeting must be submitted to Armstrong's Secretary by January 27, 2000.
That notice must also contain certain information regarding the nominee and the
nominating shareholder. Any shareholder may obtain a copy of the applicable
Bylaw from Armstrong's Secretary upon written request.
OTHER MATTERS
- --------------------------------------------------------------------------------
The Board is not aware of any matter that will be presented for action at
the 1999 Annual Meeting of Shareholders, other than those listed in the notice
of meeting. If other business is properly raised or any of the Board's nominees
is unavailable for election as a director, your proxy card authorizes the
persons named as proxies to vote in their best judgment.
Solicitation of Proxies
Armstrong will pay the expense of soliciting proxies for the 1999 Annual
Meeting, including the expense in printing, assembling and mailing the proxy
materials. In addition to the use of mails, proxies may be solicited by
directors, officers and other employees of Armstrong, personally or by
telephone, telefax, or e-mail. Armstrong may also ask brokers to send proxy
materials to you and obtain proxies from you. Armstrong will reimburse those
persons for their related expenses. Armstrong has retained the services of
Morrow & Co., a professional soliciting organization, to assist in soliciting
proxies from brokerage houses, custodians, nominees and other fiduciaries. The
fees and expenses of that firm in connection with this solicitation are not
expected to exceed $17,000.
Armstrong will provide a copy of its 1998 annual report on Form 10-K upon
written request of any shareholder to Deborah K. Owen, Senior Vice President,
Secretary and General Counsel, Armstrong World Industries, Inc., P.O. Box 3001,
Lancaster, PA 17604-3001.
March 16, 1999
EVA(R) is a trademark of Stern Stewart & Co.
23
<PAGE>
EXHIBIT A
1999 LONG-TERM INCENTIVE PLAN
ARTICLE I - GENERAL PROVISIONS
1.1 Purposes
The purposes of the 1999 Long-Term Incentive Plan (the "Plan") are to
advance the long-term success of Armstrong World Industries, Inc. (the
"Company"), and to increase shareholder value by providing long-term incentive
awards to officers, directors and key employees. The Plan is designed to: (i)
encourage stock ownership by Participants to further align their interest in
increasing the value of the Company; and (ii) to assist in the attraction and
retention of key employees vital to the Company's success.
1.2 Definitions
For the purpose of the Plan, the following terms shall have the meanings
indicated:
(a) "Board" means the Board of Directors of the Company.
(b) "Cash Incentive Awards" means a right to receive a cash payment pursuant to
any award made pursuant to Article VI hereof.
(c) "Change in Control" means a situation where: (i) any person acquires
beneficial ownership of 28 percent or more of the then outstanding voting
stock of the Company and within five years thereafter disinterested
directors no longer constitute at least a majority of the Board; or (ii) a
business combination with an interested shareholder occurs which has not
been approved by a majority of disinterested directors. The terms person,
beneficial ownership, voting stock, disinterested director, business
combination, and interested shareholder are defined in Article 7 of the
Company's Articles of Incorporation.
(d) "Code" means the Internal Revenue Code of 1986, as amended, including any
successor law thereto.
(e) "Committee" means the Management Development and Compensation Committee of
the Board or the full Board, as the case may be.
(f) "Common Stock" means the Common Stock of the Company, par value $1.00 per
share.
(g) "Company" means Armstrong World Industries, Inc., and solely for purposes
of determining (i) eligibility for participation in the Plan; (ii)
employment; and (iii) the establishment of performance goals, shall include
any corporation, partnership, or other organization of which Armstrong owns
or controls, directly or indirectly, not less than 50 percent of the total
combined voting power of all classes of stock or other equity interests.
For purposes of this Plan, the terms "Armstrong" and "Company" shall
include any successor to Armstrong World Industries, Inc.
(h) "Disability" means total and permanent disability within the meaning of
Section 22(e)(3) of the Code.
(i) "Dividend Equivalent" means an amount equal to the cash dividend paid on
one share of Common Stock for each Performance Restricted Share granted
during the Performance Period. All Dividend Equivalents will be reinvested
in Performance Restricted Shares at a purchase price equal to the Fair
Market Value on the dividend date.
(j) "Employee or employment" means with respect to any nonemployee director (as
defined herein) service on the Board.
(k) "Fair Market Value" means the closing price of the Common Stock as reported
on the New York Stock Exchange Composite Transactions reporting system on
the applicable date or, if no sales were made on such date, on the next
preceding date on which sales of the Common Stock were made.
24
<PAGE>
(l) "Incentive Stock Option" means a Stock Option which meets the definition
under Section 422 of the Code.
(m) "Nonstatutory Stock Option" means a Stock Option which does not meet the
definition of an Incentive Stock Option.
(n) "Participant" means any officer, director or key employee who has met the
eligibility requirements set forth in Section 1.6 hereof and to whom a
grant has been made and is outstanding under the Plan.
(o) "Performance Measures" shall mean the Performance Measures described in
Section 4.4 of the Plan.
(p) "Performance Period" means, in relation to Performance Restricted Shares or
Cash Incentive Awards, any period for which performance goals have been
established.
(q) "Performance Restricted Share" means a right granted to a Participant
pursuant to Article IV.
(r) "Restricted Stock Award" means an award of Common Stock granted to a
Participant pursuant to Article V which is subject to a Restriction Period.
(s) "Restriction Period" means (i) in relation to Performance Restricted
Shares, the period of time, beginning at the end of the Performance Period,
during which the Participant shall not be permitted to sell, assign,
transfer, pledge, or otherwise dispose of such shares; and (ii) in relation
to Restricted Stock Awards, the period of time during which such shares are
subject to forfeiture pursuant to the Plan and such shares are subject to
the restrictions on transferability described in (i) of this paragraph.
(t) "Retirement" means termination from employment with the Company after the
Participant has attained age 55 and has completed five years of service
with the Company or termination of employment under circumstances which the
Committee deems equivalent to retirement.
(u) "Stock Appreciation Right" means a right granted to a Participant pursuant
to Article III to surrender to the Company all or any portion of the
related Stock Option and to receive in shares of Common Stock an amount
equal to the excess of the Fair Market Value over the option price on the
date of such exercise.
(v) "Stock Award" means an award of Common Stock granted to a Participant
pursuant to Article V which is not subject to a Restriction Period or a
Vesting Period.
(w) "Stock Option" means a right granted to a Participant pursuant to Article
II, to purchase, before a specified date and at a specified price, a
specified number of shares of Common Stock.
(x) "Vesting Period" means the period of time, beginning at the end of the
Performance Period, during which Performance Restricted Shares are subject
to forfeiture pursuant to the Plan.
1.3 Administration
The Plan shall be administered by the Committee; provided, however, that
the Board shall administer the Plan as it relates to the terms, conditions and
grant of awards to nonemployee directors. A majority of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a majority
of the Committee, shall be deemed the acts of the Committee. Subject to the
provisions of the Plan and to directions by the Board, the Committee is
authorized to interpret the Plan, to adopt administrative rules, regulations,
and guidelines for the Plan, and to impose such terms, conditions, and
restrictions on grants as it deems appropriate. The Committee, in its
discretion, may allow certain optionees holding unexercised Incentive Stock
Options to convert such options to Nonstatutory Stock Options. The Committee
may, with respect to Participants who are not subject to Section 16 (b) of the
Exchange Act or "covered employees" within the meaning of Section 162(m) of the
Code ("Section 162(m)"), delegate such of its powers and authority under the
Plan as it deems appropriate to designated officers or employees of the Company.
All determinations by the Committee shall be final and binding.
25
<PAGE>
1.4 Types of Grants Under the Plan
Grants under the Plan may be in the form of any one or more of the following:
(a) Nonstatutory Stock Options;
(b) Incentive Stock Options;
(c) Stock Appreciation Rights;
(d) Performance Restricted Shares;
(e) Restricted Stock Awards;
(f) Stock Awards;
(g) Cash Incentive Awards.
1.5 Shares Subject to the Plan and Individual Award Limitation
(a) A maximum of 3,250,000 shares of Common Stock may be issued under the Plan
provided, however, that no more than 300,000 shares may be granted in the
form of Performance Restricted Shares, Restricted Stock Awards and Stock
Awards. The total number of shares authorized is subject to adjustment as
provided in Section 8.1 hereof. Shares of Common Stock issued under the
Plan may be treasury shares or authorized but unissued shares. No
fractional shares shall be issued under the Plan.
(b) If any Stock Option granted under the Plan expires or terminates, the
underlying shares of Common Stock may again be made available for the
purposes of the Plan. Any shares of Common Stock that have been granted as
Restricted Stock Awards, or that have been reserved for distribution in
payment for Performance Restricted Shares but are later forfeited or for
any other reason are not payable under the Plan, may again be made
available for the purposes of the Plan. Furthermore, shares of Common Stock
that are tendered in payment of the exercise price of any Stock Option or
tendered or withheld in satisfaction of tax withholding obligations arising
from any award shall be available for issuance under the Plan.
(c) In addition to the shares of Common Stock authorized under Sections 1.5(a)
and 1.5(b), shares of Common Stock that are (i) forfeited under the
Company's 1993 Long-Term Stock Incentive Plan (the "Prior Plan") or for any
other reason not paid under the Prior Plan; or (ii) tendered in payment of
the exercise price of a stock option granted under the Prior Plan or
tendered or withheld in satisfaction of tax withholding obligations arising
from awards under the Prior Plan, shall be available for issuance under the
Plan.
(d) The aggregate maximum number of shares of Common Stock that may be granted
to any Participant in the form of Stock Options, Stock Appreciation Rights,
Performance Restricted Shares, Restricted Stock Awards and Stock Awards in
any one calendar year is 400,000.
1.6 Eligibility and Participation
Participation in the Plan shall be limited to officers, who may also be
members of the Board, other key employees of the Company and directors who are
not employees of the Company ("nonemployee directors").
ARTICLE II - STOCK OPTIONS
2.1 Grant of Stock Options
The Committee may from time to time, subject to the provisions of the Plan,
grant Stock Options to such Participants. The Committee shall determine the
number of shares of Common Stock to be covered by each Stock Option and shall
have the authority to grant Incentive Stock Options, Nonstatutory Stock Options
or a combination thereof. Furthermore, the Committee may grant a Stock
Appreciation Right in connection with a Stock Option, as provided in Article
III.
26
<PAGE>
2.2 Incentive Stock Option Exercise Limitations
The aggregate Fair Market Value (determined at the time an Incentive Stock
Option is granted) of the shares of Common Stock with respect to which an
Incentive Stock Option is exercisable for the first time by a Participant during
any calendar year (under all plans of the Company) shall not exceed $100,000 or
such other limit as may be established from time to time under the Code.
2.3 Option Documentation
Each Stock Option shall be evidenced by a written Stock Option agreement
between the Company and the Participant to whom such option is granted,
specifying the number of shares of Common Stock that may be acquired by its
exercise and containing such terms and conditions consistent with the Plan as
the Committee shall determine.
2.4 Exercise Price
The price at which each share covered by a Stock Option may be acquired
shall be determined by the Committee at the time the option is granted and shall
not be less than the Fair Market Value of the underlying shares of Common Stock
on the day the Stock Option is granted. The exercise price will be subject to
adjustment in accordance with the provisions of Section 8.1 of the Plan.
2.5 Exercise of Stock Options
(a) Exercisability. Stock Options shall become exercisable at such times and
upon the satisfaction of such conditions and in such installments as the
Committee may provide at the time of grant.
(b) Option Period. For each Stock Option granted, the Committee shall specify
the period during which the Stock Option may be exercised, provided that no
Stock Option shall be exercisable after the expiration of ten years from
the date the option was granted.
(c) Exercise in the Event of Termination of Employment.
(i) Death: Unless otherwise provided by the Committee at the time of
grant, in the event of death of the Participant, the option must be
exercised by the Participant's estate or beneficiaries prior to its
expiration. Each option may be exercised as to all or any portion
thereof regardless of whether or not fully exercisable under the
terms of the grant.
(ii) Disability: Unless otherwise provided by the Committee at the time of
grant, in the event of the Disability of the Participant, the option
must be exercised prior to its expiration. An unexercised Incentive
Stock Option will cease to be treated as such and will become a
Nonstatutory Stock Option twelve months following the date of
termination due to Disability. Each option may be exercised as to all
or any portion thereof regardless of whether or not fully exercisable
under the terms of the grant.
(iii) Retirement: Unless otherwise provided by the Committee at the time of
grant, in the event of the Retirement of the Participant, the option
must be exercised prior to its expiration. An unexercised Incentive
Stock Option will cease to be treated as such and will become a
Nonstatutory Stock Option three months following the date of
Retirement.
(iv) Other Terminations: Unless otherwise provided by the Committee at the
time of grant, in the event a Participant ceases to be an employee of
the Company for any reason other than death, Disability, or
Retirement, options which are exercisable on the date of termination
must be exercised within three months after termination. All options
which are not exercisable on the date of termination shall be
canceled.
(v) Extension of Exercise Period: Notwithstanding all other provisions
under Section 2.5(c) in the event a Participant's employment is
terminated, the Committee may, in its sole discretion, extend the
post termina-
27
<PAGE>
tion period during which the option may be exercised, provided however
that such period may not extend beyond the original option period.
(d) Exercise in the Event of Change in Control. In the event of any Change
in Control, all Stock Options shall immediately become exercisable
without regard to the exercise period set forth in 2.5(a).
2.6 Method of Exercise
The option may be exercised, in whole or in part, from time to time by
written request received by the Treasurer of the Company. The option price of
each share acquired pursuant to an option shall be paid in full at the time of
each exercise of the option either (i) in cash; (ii) by delivering to the
Company a notice of exercise with an irrevocable direction to a broker-dealer
registered under the Securities Exchange Act of 1934 to sell a sufficient
portion of the shares of Common Stock underlying such option having an aggregate
Fair Market Value equal to the option price of the shares being acquired; or
(iii) by delivering to the Company shares of Common Stock or any combination of
shares and cash having an aggregate Fair Market Value equal to the option price
of the shares being acquired. However, shares of Common Stock previously
acquired by the Participant under the Plan or any other incentive plan of the
Company shall not be utilized for purposes of payment upon the exercise of an
option unless those shares have been owned by the Participant for a six-month
period or such longer period as the Committee may determine.
ARTICLE III - STOCK APPRECIATION RIGHTS
3.1 Grant of Stock Appreciation Rights
The Committee may, in its discretion, grant Stock Appreciation Rights in
connection with all or any part of an option granted under the Plan. Any Stock
Appreciation Right granted in connection with an option shall be governed by the
terms of the Stock Option agreement and the Plan.
3.2 Exercise of Stock Appreciation Rights
Stock Appreciation Rights shall become exercisable under the Stock Option
terms set forth in Section 2.5 but shall be exercisable only when the Fair
Market Value of the shares subject thereto exceeds the option price of the
related option.
3.3 Method of Exercise
(a) Stock Appreciation Rights shall permit the Participant, upon exercise of
such rights, to surrender the related option, or any portion thereof, and
to receive, without payment to the Company (except for applicable
withholding taxes), an amount equal to the excess of the Fair Market Value
over the option price. Such amount shall be paid in shares of Common Stock
valued at Fair Market Value on the date of exercise.
(b) Upon the exercise of a Stock Appreciation Right and surrender of the
related option, or any portion thereof, such option, to the extent
surrendered, shall be terminated, and the shares covered by the option so
surrendered shall no longer be available for purposes of the Plan.
ARTICLE IV - PERFORMANCE RESTRICTED SHARES
4.1 Grant of Performance Restricted Shares
The Committee may from time to time grant Performance Restricted Shares to
Participants under which payment may be made in shares of Common Stock if the
performance of the Company meets certain goals established by the Committee.
Such Performance Restricted Shares shall be subject to the provisions of the
Plan terms and conditions, and, if earned, a Vesting Period and a Restriction
Period as the Committee shall determine.
28
<PAGE>
4.2 Performance Restricted Share Agreement
Each grant of Performance Restricted Shares shall be evidenced by a written
agreement between the Company and Participant to whom such shares are granted.
The agreement shall specify the number of Performance Restricted Shares granted,
the terms and conditions of the grant, the duration of the Performance Period,
the performance goals to be achieved, and the Vesting Period and the Restriction
Period applicable to shares of Common Stock earned.
4.3 Common Stock Equivalent
Each Performance Restricted Share shall be credited to an account to be
maintained for each such Participant during the Performance Period and shall be
deemed to be the equivalent of one share of Common Stock. At the conclusion of
the Performance Period, Performance Restricted Shares earned, if any, shall be
converted to shares of Common Stock subject to a Vesting Period and a
Restriction Period.
4.4 Performance Measures
Performance Restricted Share awards shall be conditioned upon the Company's
attainment of a specified goal with respect to one or more of the following
performance measures: (i) total shareholder return; (ii) EVA as defined below;
(iii) return on shareholders' equity; (iv) return on capital; (v) earnings per
share; (vi) sales; (vii) earnings; (viii) cash flow; and (ix) operating income.
EVA equals the dollar amount arrived at by taking net operating profit after
taxes and subtracting a charge for the use of the capital needed to generate
that profit. The Committee shall determine a minimum performance level below
which no Performance Restricted Shares shall be payable and a performance
schedule under which the number of shares earned may be less than, equal to, or
greater than the number of Performance Restricted Shares granted based upon the
Company's performance. The Committee may adjust the performance goals and
measurements to reflect significant unforeseen events; provided, however, that
the Committee may not make any such adjustment with respect to any award of
Performance Restricted Shares to an individual who is then a "covered employee"
as such term is defined in Regulation 1.162-27(c)(2) promulgated under Section
162(m), if such adjustment would cause compensation pursuant to such Performance
Restricted Share award to cease to be performance-based compensation under
Section 162(m).
4.5 Performance Period
The Committee shall establish a Performance Period applicable to each grant
of Performance Restricted Shares. Each such Performance Period shall commence on
January 1 of the calendar year in which grants are made. There shall be no
limitation on the number of Performance Periods established by the Committee,
and more than one Performance Period may encompass the same calendar year. The
Committee may shorten any Performance Period if it determines that unusual or
unforeseen events so warrant.
4.6 Dividend Equivalents During Performance Period
Unless otherwise provided by the Committee, a Participant shall be entitled
to receive Dividend Equivalents during the Performance Period which shall be
deemed to have been reinvested in additional Performance Restricted Shares at
the same time as such underlying Common Stock cash dividend is paid. Performance
Restricted Shares granted through such reinvestment shall be credited to the
Participant's account and shall be payable to the Participant in the same manner
and at the same time as the Performance Restricted Shares with respect to which
such Dividend Equivalents were issued.
4.7 Right to Payment of Performance Restricted Shares
(a) At the conclusion of the Performance Period, the Committee shall
determine the number of Performance Restricted Shares, if any, which have been
earned on the basis of Company performance in relation to the established
performance goals. In no event shall such number exceed 300% of the shares
contingently granted.
29
<PAGE>
(b) Performance Restricted Shares earned shall be converted to shares of Common
Stock and shall be represented by book entry or by a stock certificate
registered in the name of the Participant. Certificates evidencing such
shares shall be held in custody by the Company until the restrictions
thereon are no longer in effect. After the lapse or waiver of the
restrictions imposed, the Company shall deliver in the Participant's name
one or more stock certificates, free of restrictions, evidencing the shares
of Common Stock to which the restrictions have lapsed or been waived.
4.8 Vesting Period
At the time a Performance Restricted Share grant is made, the Committee
shall establish a period of time (the "Vesting Period") applicable to such
shares earned, if any, which shall begin at the end of the Performance Period.
During the Vesting Period, Performance Restricted Shares shall be subject to the
risk of forfeiture. The Committee may provide for the lapse of such restrictions
in installments and may accelerate or waive such restrictions, in whole or in
part, based on service and such other factors as the Committee may determine.
4.9 Restriction Period
At the time a Performance Restricted Share grant is made, the Committee
shall establish a period of time (the "Restriction Period") applicable to such
shares earned, if any, which shall begin at the end of the Performance Period.
During the Restriction Period, the Participant shall not be permitted to sell,
assign, transfer, pledge or otherwise dispose of Performance Restricted Shares
that have been earned. The Committee may provide for the lapse of such
restrictions in installments, in whole or in part, based on service and such
other factors as the Committee may determine.
4.10 Other Terms and Conditions
Performance Restricted Shares earned and restricted shares received with
respect to such shares shall be subject to the following terms and conditions:
(a) Except as otherwise provided in the Plan or in the Performance Restricted
Share agreement, the Participant shall have all the rights of a shareholder
of the Company, including the right to vote the shares.
(b) Cash dividends paid with respect to Performance Restricted Shares shall be
reinvested to purchase additional shares of Common Stock that shall be
subject to the same terms, conditions, and restrictions that apply to the
Performance Restricted Shares with respect to which such dividends were
issued.
(c) Except as otherwise provided in the Plan or in the Performance Restricted
Share agreement, upon termination of a Participant's employment, all
unvested shares subject to restriction shall be forfeited by the
Participant.
4.11 Termination of Employment Provisions During a Performance Period
(a) In the event a Participant terminates employment during a Performance
Period by reason of death, Disability, or Retirement, the Participant shall
be entitled to the full number of shares earned, if any, as long as the
Participant had completed a minimum of one year of employment during the
Performance Period. If the termination of employment is by reason of death
or Disability, all other restrictions shall lapse and shares of Common
Stock shall be issued to the Participant or the Participant's designated
beneficiary following the Performance Period. If the termination of
employment is by reason of Retirement, any applicable Restriction Period
shall continue in effect, but in no event beyond the end of the three-year
period following the Participant's Retirement. Following the expiration of
such Restriction Period, shares of Common Stock shall be issued to the
Participant. In the event the Participant had not completed one year of
employment during the Performance Period, the Participant shall forfeit all
rights to earn such Performance Restricted Shares.
30
<PAGE>
(b) If a Participant terminates employment for any reason other than death,
Disability, or Retirement, the Participant shall forfeit all rights to earn
such Performance Restricted Shares.
(c) Notwithstanding Sections 4.11(a) and 4.11(b), in the event a Participant's
employment is terminated under special circumstances, the Committee may, in
its sole discretion, continue a Participant's rights to earn any or all
Performance Restricted Shares and waive, in whole or in part, any or all
remaining restrictions.
4.12 Termination of Employment Provisions Following a Performance Period
(a) In the event a Participant terminates employment following a Performance
Period by reason of death, Disability, or Retirement, all Performance
Restricted Shares earned shall immediately vest. If the termination of
employment is by reason of death or Disability, all other restrictions
shall lapse and shares of Common Stock shall be issued to the Participant
or the Participant's designated beneficiary. If the termination of
employment is by reason of Retirement, any applicable Restriction Period
shall continue in effect, but in no event beyond the end of the three-year
period following the Participant's Retirement. Following the expiration of
such Restriction Period, shares of Common Stock shall be issued to the
Participant.
(b) If a Participant terminates employment for any reason other than death,
Disability, or Retirement, the Participant shall forfeit all Performance
Restricted Shares subject to the Vesting Period. Any applicable Restriction
Period shall continue in effect, but in no event beyond the end of the
three-year period following the Participant's date of termination of
employment. Following the expiration of such Restriction Period, shares of
Common Stock shall be issued to the Participant.
(c) Notwithstanding Sections 4.12 (a) and 4.12 (b), in the event a
Participant's employment is terminated under special circumstances, the
Committee may, in its sole discretion, waive in whole or in part any or all
remaining restrictions.
4.13 Change in Control Provisions
In the event of any Change in Control, all Performance Restricted Shares
earned shall immediately vest and restrictions shall lapse on all shares subject
to restrictions as of the date of such Change in Control. Further, all
Performance Restricted Shares granted, including those granted pursuant to
Dividend Equivalents, shall be deemed to have been earned to the maximum extent
permitted pursuant to Section 4.4 for any Performance Period not yet completed
as of the effective date of such Change in Control.
ARTICLE V - RESTRICTED STOCK AWARDS AND STOCK AWARDS
5.1 Award of Restricted Stock and Stock Awards
The Committee may grant Restricted Stock Awards to officers and key
employees of the Company subject to such terms and conditions as the Committee
shall determine, provided that each Restricted Stock Award shall be subject to a
Restriction Period. The Committee may also grant Stock Awards. Restricted Stock
Awards and Stock Awards shall be used for the purposes of recruitment,
recognition, and retention of key employees vital to the Company's success and
may be issued independent of or in lieu of other compensation payable to a
Participant. The Committee may, in its sole discretion, require a Participant to
deliver consideration in form of services or cash as a condition to the grant of
a Restricted Stock Award or Stock Award.
5.2 Restricted Stock Award and Stock Award Agreements
Each Restricted Stock Award shall be evidenced by a written agreement
between the Company and the Participant to whom such award is granted and a
Stock Award will be evidenced by a written agreement in the event that the
Committee determines that an agreement is appropriate. The agreement shall
specify the number of shares awarded,
31
<PAGE>
the terms and conditions of the award and, in the case of a Restricted Stock
Award, the Restriction Period and the consequences of forfeiture.
5.3 Awards and Certificates
Shares of Common Stock awarded pursuant to a Restricted Stock Award or a
Stock Award shall be registered in the name of the Participant. Certificates
evidencing Restricted Stock Awards shall be held in custody by the Company until
the restrictions thereon are no longer in effect. After the lapse or waiver of
the restrictions imposed upon the Restricted Stock Award, the Company shall
deliver in the Participant's name one or more stock certificates, free of
restrictions, evidencing the shares of Common Stock subject to the Restricted
Stock Award to which the restrictions have lapsed or been waived.
5.4 Restriction Period
At the time a Restricted Stock Award is made, the Committee shall establish
a period of time (the "Restriction Period") applicable to such award during
which the shares of restricted stock are subject to the risk of forfeiture and
the Participant shall not be permitted to sell, assign, transfer, pledge, or
otherwise dispose of such shares. The Committee may provide for the lapse of
such restrictions in installments and may accelerate or waive such restrictions,
in whole or in part, based on service and such other factors as the Committee
may determine.
5.5 Other Terms and Conditions of Restricted Stock Awards
Shares of Common Stock subject to Restricted Stock Awards shall be subject
to the following terms and conditions:
(a) Except as otherwise provided in the Plan or in the Restricted Stock Award
agreement, the Participant shall have all the rights of a shareholder of
the Company, including the right to vote the shares.
(b) Cash dividends paid with respect to Common Stock subject to a Restricted
Stock Award shall be reinvested to purchase additional shares of Common
Stock that shall be subject to the same terms, conditions, and restrictions
that apply to the Restricted Stock Award with respect to which such
dividends were issued.
(c) Except as otherwise provided in the Plan or in the Restricted Stock Award
agreement, upon termination of a Participant's employment, all shares
subject to restriction shall be forfeited by the Participant.
5.6 Termination of Employment
(a) In the event a Participant terminates employment during the Restriction
Period by reason of death or Disability, restrictions shall lapse on all
shares subject to restriction at the time of such termination.
(b) In the event a Participant terminates employment during the Restriction
Period by reason of Retirement, restrictions shall lapse on a proportion of
any shares subject to restriction at the time of such Retirement. Any
applicable Restriction Period shall continue in effect, but in no event
beyond the end of the three-year period following the Participant's
Retirement. The number of shares upon which the restrictions shall lapse
shall be prorated for the number of months of employment during the
Restriction Period prior to the Participant's termination of employment.
(c) If a Participant terminates employment for any reason other than death,
Disability, or Retirement, the Participant shall forfeit all shares subject
to restriction.
(d) Notwithstanding Sections 5.6 (a), 5.6 (b) and 5.6 (c), in the event a
Participant's employment is terminated under special circumstances, the
Committee may, in its sole discretion, waive in whole or in part any or all
remaining restrictions.
32
<PAGE>
5.7 Change in Control Provisions
In the event of any Change in Control, all restrictions applicable to any
outstanding Restricted Stock Award shall lapse as of the date of such Change in
Control.
ARTICLE VI - CASH INCENTIVE AWARDS
6.1 Granting of Awards
The Committee, in its discretion, may grant Cash Incentive Awards to
Participants. Each Cash Incentive Award shall be conditioned upon the Company's
attainment of a specified goal with respect to one or more Performance Measures
during the applicable Performance Period. The Committee shall determine a
minimum performance level below which the Cash Incentive Award shall not be
payable. The Committee may adjust the performance goals and measurements to
reflect significant unforeseen events; provided, however, that the Committee may
not make any such adjustment with respect to any Cash Incentive Award to an
individual who is then a "covered employee" as such term is defined under
Section 162(m), if such adjustment would cause compensation pursuant to such
Cash Incentive Award to cease to be performance-based compensation under Section
162(m).
6.2 Other Award Terms
The Committee may, in its sole discretion, establish certain additional
performance-based conditions that must be satisfied by the Company, a business
unit or the Participant as a condition precedent to the payment of all or a
portion of any Cash Incentive Awards. Such conditions precedent may include,
among other things, the receipt by a Participant of a specified annual
performance rating and the achievement of specified performance goals by the
Company, business unit or Participant.
6.3 Maximum Amount Available for Awards
The maximum amount payable to any one Participant pursuant to a Cash
Incentive Award with respect to any one year shall be $3,000,000.
ARTICLE VII - TAX WITHHOLDING AND DEFERRAL OF PAYMENT
7.1 Tax Withholding
(a) The Company may withhold from any payment of cash or Common Stock to a
Participant or other person pursuant to the Plan an amount sufficient to
satisfy any required withholding taxes, including the Participant's Social
Security and Medicare taxes ("FICA") and federal, state and local income
tax with respect to income arising from the payment of the award. The
Company shall have the right to require the payment of any such taxes
before delivering payment or issuing Common Stock pursuant to the award.
(b) At the discretion of the Committee, share tax withholding may be included
as a term of any grant of Stock Options, Stock Appreciation Rights,
Performance Restricted Shares, Restricted Stock Award and Stock Award.
(c) Share tax withholding shall entitle the Participant to elect to satisfy, in
whole or in part, any tax withholding obligations in connection with the
issuance of shares of Common Stock earned under the Plan by requesting that
the Company either:
(i) withhold shares of Common Stock otherwise issuable to the Participant;
or
(ii) accept delivery of shares of Common Stock previously owned by the
Participant.
33
<PAGE>
In either case, the Fair Market Value of such shares of Common Stock will
generally be determined on the date of exercise for Stock Options and Stock
Appreciation Rights, the date following the Restriction Period for
Performance Restricted Shares and Restricted Stock Awards and on the grant
date for Stock Awards.
(d) Notwithstanding any other provision hereof to the contrary, the Committee,
in its sole discretion may at any time suspend, terminate, or disallow any
or all entitlements to share tax withholding previously granted or extended
to any Participant.
7.2 Deferral of Payment
At the discretion of the Committee, a Participant may be offered the right
to defer the receipt of all or any portion of the Common Stock distributable to
such Participant with respect to Performance Restricted Shares, Restricted Stock
Awards or Stock Awards. Such right shall be exercised by execution of a written
agreement by the Participant: (i) with respect to Restricted Stock Awards, prior
to the expiration of the applicable Restriction Period; (ii) with respect to
Performance Restricted Shares, prior to the expiration of the applicable Vesting
Period; and (iii) with respect to Stock Awards, prior to the deadline
established by the Committee for such award. Upon any such deferral, the number
of shares of Common Stock subject to the deferral shall be converted to stock
units and a stock unit account shall be maintained by the Company on behalf of
the Participant. Such stock units shall represent only a contractual right and
shall not represent any interest in or title to Common Stock. Such units shall
be entitled to earn dividend equivalents. All other terms and conditions of
deferred payments shall be as contained in said written agreement.
ARTICLE VIII - OTHER PROVISIONS
8.1 Adjustment in Number of Shares and Option Prices
Grants of Stock Options, Stock Appreciation Rights, Performance Restricted
Shares, Restricted Stock Awards and Stock Awards shall be subject to adjustment
by the Committee as to the number and price of shares of Common Stock or other
considerations subject to such grants in the event of changes in the outstanding
shares by reason of stock dividends, stock splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges, or other
relevant changes in capitalization occurring after the date of grant. In the
event of any such change in the outstanding shares, the aggregate number of
shares available under the Plan may be appropriately adjusted by the Committee.
8.2 No Right to Employment
Nothing contained in the Plan, nor in any grant pursuant to the Plan, shall
confer upon any Participant any right with respect to continuance of employment
by the Company or its subsidiaries, nor interfere in any way with the right of
the Company or its subsidiaries to terminate the employment or change the
compensation of any employee at any time.
8.3 Nontransferability
A Participant's rights under the Plan, including the right to any shares or
amounts payable may not be assigned, pledged, or otherwise transferred except,
in the event of a Participant's death, to the Participant's designated
beneficiary or, in the absence of such a designation, by will or by the laws of
descent and distribution; provided, however, that the Committee may, in its
discretion, at the time of grant of a Nonstatutory Stock Option or by amendment
of an option agreement for an Incentive Stock Option or a Nonstatutory Stock
Option, provide that Stock Options granted to or held by a Participant may be
transferred, in whole or in part, to one or more transferees and exercised by
any such transferee, provided further that (i) any such transfer must be without
consideration; (ii) each transferee must be a member of such Participant's
"immediate family" or a trust, family limited partnership or other estate
planning vehicle established for the exclusive benefit of one or more members of
the Participant's immediate family; and (iii) such transfer is specifically
approved by the Committee following the receipt of a written request for
approval of the
34
<PAGE>
transfer; and provided further that any Incentive Stock Option which is amended
to permit transfers during the lifetime of the Participant shall, upon the
effectiveness of such amendment, be treated thereafter as a Nonstatutory Stock
Option. In the event a Stock Option is transferred as contemplated in this
Section, such transfer shall become effective when approved by the Committee and
such Stock Option may not be subsequently transferred by the transferee other
than by will or the laws of descent and distribution. Any transferred Stock
Option shall continue to be governed by and subject to the terms and conditions
of this Plan and the relevant option agreement, and the transferee shall be
entitled to the same rights as the Participant as if no transfer had taken
place. As used in this Section, "immediate family" shall mean, with respect to
any Participant, any spouse, child, stepchild or grandchild, and shall include
relationships arising from legal adoption.
8.4 Compliance with Government Regulations
(a) The Company shall not be required to issue or deliver shares or make
payment upon any right granted under the Plan prior to complying with the
requirements of any governmental authority in connection with the
authorization, issuance, or sale of such shares.
(b) The Plan shall be construed and its provisions enforced and administered in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
contracts entered into and performed entirely in such State.
8.5 Rights as a Shareholder
The recipient of any grant under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for shares of
Common Stock are issued to such recipient or such shares are represented by book
entry in the name of such recipient.
8.6 Unfunded Plan
Unless otherwise determined by the Committee, the Plan shall be unfunded
and shall not create (or be construed to create) a trust or separate funds. With
respect to any payment not yet made to a Participant, nothing contained herein
shall give any Participant any rights that are greater than those of a general
creditor of the Company.
8.7 Foreign Jurisdiction
The Committee shall have the authority to adopt, amend, or terminate such
arrangements, not inconsistent with the intent of the Plan, as it may deem
necessary or desirable to make available tax or other benefits of the laws of
foreign countries in order to promote achievement of the purposes of the Plan.
8.8 Other Compensation Plans
Nothing contained in this Plan shall prevent the Company from adopting
other or additional compensation arrangements, subject to shareholder approval
if such approval is required.
8.9 Termination of Employment - Certain Forfeitures
Notwithstanding any other provision of the Plan (other than provisions
regarding Change in Control, including without limitation Sections 2.5(d), 4.13
and 5.7 which shall apply in all events) and except for Performance Restricted
Shares, Restricted Stock Awards or Stock Awards which would otherwise be free of
restrictions and the receipt of which has been deferred pursuant to Section 7.2,
a Participant shall have no right to exercise any Stock Option or Stock
Appreciation Right or receive payment of any Performance Restricted Share or
Restricted Stock Award if: (i) the Participant is discharged for willful,
deliberate, or gross misconduct as determined by the Committee in its sole
discretion; or (ii) if following the Participant's termination of employment
with the Company and, within a period of three
35
<PAGE>
years thereafter, the Participant engages in any business or enters into any
employment which the Committee in its sole discretion determines to be either
directly or indirectly competitive with the business of the Company or
substantially injurious to the Company's financial interest (the occurrence of
an event described above in (i) or (ii) of this Section 8.9 shall be referred to
herein as "Injurious Conduct"). Furthermore, notwithstanding any other provision
of the Plan to the contrary, in the event that a Participant receives or is
entitled to cash or the delivery or vesting of Common Stock pursuant to an award
during the 12 month period prior to the Participant's termination of employment
with the Company or during the 24 months following the Participant's termination
of employment, then the Committee, in its sole discretion, may require the
Participant to return or forfeit the cash and/or Common Stock received with
respect to such award (or its economic value as of (i) the date of the exercise
of Stock Options or Stock Appreciation Rights; (ii) the date immediately
following the end of the Restricted Period for Performance Restricted Shares or
for Restricted Stock Awards; and (iii) the date of grant or payment with respect
to Stock Awards or Cash Incentive Awards, as the case may be) in the event that
the Participant engages in Injurious Conduct. A Participant may request the
Committee in writing to determine whether any proposed business or employment
activity would constitute Injurious Conduct. Such a request shall fully describe
the proposed activity and the Committee's determination shall be limited to the
specific activity so described. The Committee's right to require forfeiture
under this Section 8.9 must be exercised within 90 days after the discovery of
an occurrence triggering the Committee's right to require forfeiture but in no
event later than 24 months after the Participant's termination of employment
with the Company.
ARTICLE IX - AMENDMENT AND TERMINATION
9.1 Amendment and Termination
The Board of Directors may modify, amend, or terminate the Plan at any time
except that, to the extent then required by applicable law, rule, or regulation,
approval of the holders of a majority of shares of Common Stock represented in
person or by proxy at a meeting of the shareholders will be required to increase
the maximum number of shares of Common Stock available for distribution under
the Plan (other than increases due to adjustments in accordance with the Plan).
No modification, amendment, or termination of the Plan shall adversely affect
the rights of a Participant under a grant previously made to him without the
consent of such Participant.
ARTICLE X - EFFECTIVE DATE, DURATION OF PLAN AND TERMINATION OF PRIOR PLAN
10.1 Effective Date and Duration of Plan
The Plan shall become effective immediately upon the approval and adoption
thereof at the Annual Meeting of the shareholders on April 26, 1999. All rights
granted under the Plan must be granted within ten years from its adoption date
by the shareholders of the Company. Any rights outstanding ten years after the
adoption of the Plan may be exercised within the periods prescribed under or
pursuant to the Plan.
10.2 Termination of Grants Under the Prior Plan
Upon the effective date of this Plan, no further grants or awards are
permitted under the Prior Plan. All grants and awards under the Prior Plan that
remain outstanding shall be administered and paid in accordance with the
provisions of the Prior Plan.
36
<PAGE>
[MAP APPEARS HERE]
[LOGO OF ARMSTRONG APPEARS HERE] Printed in the United States of America
<PAGE>
[LOGO]
MARCH 1999
PLEASE HELP US
"RECYCLE THE READERSHIP"
OF THE ANNUAL REPORT
Dear Armstrong Employee Shareholder:
We'd like your help again this year.
By limiting the quantity of annual reports we print, we can hold the line
on costs, but we also want to ensure an adequate supply for the thousands
of requests we get each year.
If it's your custom to read through Armstrong's annual report, then discard
it, you can help us keep our inventory at a safe level by returning it to
us in good condition when you're through with it. (In fact, you may be
among those employees who receive more than one copy because of unavoidable
duplicate mailings by the trustees of our employee shareholder accounts.)
If you're located outside Lancaster, we suggest that you return them to the
employee relations/personnel manager for your location for bulk collection.
If you're in the Lancaster area, you may send your copies directly in the
company mail to:
Corporate Relations
Building 701
Innovation Center
Lancaster, PA 17604
Many thanks!
Corporate Relations
. Please fold and detach card at perforation before mailing .
THE SHARES OVER WHICH THE UNDERSIGNED HAS VOTING CONTROL WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED PARTICIPANT: IF NO DIRECTION IS MADE,
IF THIS CARD IS NOT SIGNED, OR IF THE CARD IS NOT RECEIVED BY APRIL 20, 1999,
THE SHARES OVER WHICH YOU HAVE VOTING CONTROL WILL BE VOTED IN THE SAME
PROPORTION AS THOSE SHARES FOR WHICH THE TRUSTEE RECEIVES DIRECTION.
<TABLE>
<CAPTION>
Please vote by filling in the appropriate boxes below.
If you plan to attend the Annual Meeting, please mark the Will Attend block.
An admission ticket will be mailed to you. WILL ATTEND [_]
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTION OF DIRECTOR FOR TERM TO EXPIRE IN 2001. FOR the WITHHOLD
NOMINEE: JUDITH R. HABERKORN nominee listed [_] AUTHORITY [_]
to vote for the
nominee
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTION OF THREE DIRECTORS FOR TERMS TO EXPIRE IN 2002. FOR all nominees WITHHOLD
NOMINEES: H. Jesse Arnelle, Donald C. Clark and George A. Lorch listed (except as AUTHORITY
To withhold authority to vote for any individual nominee, write the marked to the [_] to vote for all [_]
nominee's name below. contrary below) nominees
__________________________ ___________________________
- ------------------------------------------------------------------------------------------------------------------------------------
APPROVAL OF THE 1999 LONG-TERM INCENTIVE PLAN. FOR [_] AGAINST[_] ABSTAIN [_]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In its discretion, the trustee is authorized to vote upon such other business as
may properly come before the meeting or any postponement or adjournment thereof.
If necessary, cumulative voting rights will be exercised to secure the election
of as many as possible of the Board of Directors' nominees.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>
FIDELITY INSTITUTIONAL RETIREMENT SERVICES CO.
P.O. BOX 9107 [STAMP]
HINGHAM, MA 02043-9107
. Please fold and detach card at perforation before mailing. .
ARMSTRONG RETIREMENT SAVINGS PLAN [LOGO OF ARMSTRONG] PARTICIPANT'S DIRECTION
To: FIDELITY MANAGEMENT TRUST CO., TRUSTEE UNDER THE RETIREMENT SAVINGS PLANS OF
ARMSTRONG WORLD INDUSTRIES, INC.
In connection with the proxy materials I received relating to the Annual Meeting
of Shareholders of Armstrong World Industries, Inc., to be held on Monday, April
26, 1999, I direct that you execute a proxy in the form solicited by the Board
of Directors of Armstrong World Industries, Inc., with respect to all shares of
Common Stock as to which I have the right to give voting directions under the
Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries,
Inc., and the Retirement Savings Armstrong Stock Fund of the Retirement Savings
and Stock Ownership Plan of Armstrong World Industries, Inc., as indicated on
the reverse side. I understand you will hold these directions strictly
confidential.
Date________________, 1999
PLEASE MARK, SIGN (EXACTLY AS NAME APPEARS AT
LEFT), DATE AND MAIL THIS CARD PROMPTLY IN THE
POSTAGE PREPAID RETURN ENVELOPE PROVIDED.
---------------------------------------------------
--------------------Signature----------------------
THIS PARTICIPANT'S DIRECTION IS CONTINUED ON THE
REVERSE SIDE.
<PAGE>
[LOGO OF ARMSTRONG]
STOCK OWNERSHIP/ARMSTRONG STOCK FUND PARTICIPANT'S DIRECTION
TO: MELLON BANK, N.A., TRUSTEE FOR THE STOCK OWNERSHIP ARMSTRONG STOCK FUND OF
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD
INDUSTRIES, INC.
In connection with the proxy materials I received relating to the Annual Meeting
of Shareholders of Armstrong World Industries, Inc. to be held on Monday, April
26, 1999, I direct that you execute a proxy in the form solicited by the Board
of Directors of Armstrong World Industries, Inc. with respect to all shares of
Common Stock to which I have the right to give voting directions under the Stock
Ownership Armstrong Stock Fund of the Retirement Savings and Stock Ownership
Plan of Armstrong World Industries, Inc., as indicated below. I understand you
will hold these directions strictly confidential.
THE SHARES OVER WHICH THE UNDERSIGNED HAS VOTING CONTROL WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER: IF NO DIRECTION IS MADE,
THE SHARES OVER WHICH THE UNDERSIGNED HAS VOTING CONTROL WILL BE VOTED FOR THE
LISTED NOMINEES IN THE ELECTION OF DIRECTORS AND FOR APPROVAL OF THE 1999
LONG-TERM INCENTIVE PLAN. IF THIS CARD IS NOT RECEIVED BY THE TRUSTEE BY THE
CLOSE OF BUSINESS ON APRIL 20, 1999, THE SHARES OVER WHICH YOU HAVE VOTING
CONTROL WILL BE VOTED IN THE SAME PROPORTION AS THOSE SHARES FOR WHICH THE
TRUSTEE RECEIVES DIRECTION.
THIS PARTICIPANT'S DIRECTION IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
<PAGE>
PLEASE MARK
YOUR VOTES AS [X]
INDICATED IN
THIS EXAMPLE
The Board of Directors recommends a vote FOR
<TABLE>
<S> <C> <C> <C> <C>
ELECTION OF ONE DIRECTOR FOR A TERM TO EXPIRE IN 2001. NOMINEE: Judith R. Haberkorn APPROVAL OF THE 1999 LONG-TERM
INCENTIVE PLAN.
FOR WITHHOLD
the nominee AUTHORITY
listed to vote for nominee FOR AGAINST ABSTAIN
[_] [_] [_] [_] [_]
ELECTION OF THREE DIRECTORS FOR TERMS TO EXPIRE IN 2002. NOMINEES: H. Jesse Arnelle,
Donald C. Clark and George A. Lorch
FOR all WITHHOLD To withhold authority to vote
nominees listed AUTHORITY for any individual nominee,
(except as marked to vote for write the nominee's name below.
to the contrary) all nominees _______________________________
[_] [_]
WILL
ATTEND
If you plan to attend the Annual Meeting,
please mark the Will Attend block. An [_]
admission ticket will be mailed to you.
In their discretion, the trustee is authorized to
vote upon such other business as may properly come
before the meeting or any postponement or
adjournment thereof. If necessary, cumulative voting
rights will be exercised to secure the election of
as many as possible of the Board of Director's
nominees.
Please mark, sign (exactly as name(s) appears to the
left), date and mail this card promptly in the
postage prepaid return envelope provided.
</TABLE>
Signature ___________________________________ Date ______________________, 1999
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
[LOGO OF ARMSTRONG APPEARS HERE]
March 1999
PLEASE HELP US
"RECYCLE THE READERSHIP"
OF THE ANNUAL REPORT
Dear Armstrong Employee Shareholder:
We'd like your help again this year.
By limiting the quantity of annual reports we print, we can hold the line on
costs, but we also want to ensure an adequate supply for the thousands of
requests we get each year.
If it's your custom to read through Armstrong's annual report, then discard it,
you can help us keep our inventory at a safe level by returning it to us in good
condition when you're through with it. (In fact, you may be among those
employees who receive more than one copy because of unavoidable duplicate
mailings by the trustees of our employee shareholder accounts.)
If you're located outside Lancaster, we suggest you return them to the employee
relations/personnel manager for your location for bulk collection. If you're in
the Lancaster area, you may send your copies directly in the company mail to:
CORPORATE RELATIONS
BUILDING 701
INNOVATION CENTER
LANCASTER, PA 17604
Many thanks!
Corporate Relations
<PAGE>
[LOGO]
ARMSTRONG WORLD INDUSTRIES, INC. PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
George A. Lorch and Frank A. Riddick III and Deborah K. Owen, or any one or more
of them, with power of substitution in each, are hereby authorized to represent
the undersigned at the Annual Meeting of the Shareholders of Armstrong World
Industries, Inc., to be held at the principal office of the Company, 2500
Columbia Avenue, in Lancaster, Pennsylvania, on Monday, April 26, 1999, at 10:00
a.m. local time, and at any postponement or adjournment thereof, and thereat to
vote, as indicated below, the same number of shares as the undersigned would be
entitled to vote if then personally present including shares, if any, credited
to the undersigned's account under the Company's shareholder dividend
reinvestment plan.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER; IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE LISTED NOMINEES IN THE ELECTION OF DIRECTORS, AND FOR APPROVAL OF THE
1999 LONG-TERM INCENTIVE PLAN.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
<PAGE>
Please mark
your votes as [X]
indicated in
this example
The Board of Directors recommends a vote FOR
<TABLE>
<S> <C> <C>
ELECTION OF ONE DIRECTOR FOR A TERM TO EXPIRE IN 2001. NOMINEE: Judith R. Haberkorn APPROVAL OF THE 1999 LONG-TERM
INCENTIVE PLAN.
FOR WITHHOLD
The nominee AUTHORITY
listed to vote for nominee FOR AGAINST ABSTAIN
[_] [_] [_] [_] [_]
ELECTION OF THREE DIRECTORS FOR TERMS TO EXPIRE IN 2002. NOMINEES: H. Jesse Arnelle, Donald C.
Clark and George A. Lorch
FOR all WITHHOLD
nominees listed AUTHORITY To withhold authority to vote for any individual
(except as marked to vote for nominee, write the nominee's name below.
to the contrary) all nominees
[_] [_] -----------------------------------
WILL
If you plan to attend the Annual Meeting, ATTEND
please mark the Will Attend block. An [_]
admission ticket will be mailed to you.
In their discretion, the Proxies are authorized
to vote upon such other business as may properly
come before the meeting or any postponement or
adjournment thereof. If necessary, cumulative
voting rights will be exercised to secure the
election of as many as possible of the Board of
Directors' nominees.
Please mark, sign (exactly as name(s) appears to
the left), date and mail this card promptly in
the postage prepaid return envelope provided.
Signature________________________Signature______________________Date_______,1999
________________________________________________________________________________
FOLD AND DETACH HERE
</TABLE>
