FORM 11-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______ to _________
Commission file numbers 1-2116 and 333-32530
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
(Full title of the Plan)
ARMSTRONG WORLD INDUSTRIES, INC.
ARMSTRONG HOLDINGS, INC.
2500 Columbia Avenue Lancaster, Pennsylvania 17604
(Name of issuer of the securities held pursuant to the Plan
and the address of its principal executive office)
1
Page No.
--------
Item 1. Independent Auditors' Report 4
Item 2. Statements of Net Assets Available for Benefits 5
September 30, 2002 and 2001
Item 3. Statements of Changes in Net Assets Available for Benefits 6
Years ended September 30, 2002 and 2001
Notes to Financial Statements 7-16
Schedule H, line 4i - Schedule of Assets (Held at End of Year) 17
Exhibits
Consent of Independent Auditors 18
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the members
of the committee constituting the administrator which administers the plan have
duly caused this annual report to be signed by the undersigned hereunto duly
authorized.
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
March 24, 2003 By: /s/: Matthew J. Angello
----------------------------
Matthew J. Angello Chairman of the Retirement Committee
3
Item 1
Independent Auditors' Report
The Retirement Committee
Armstrong World Industries, Inc.:
We have audited the accompanying statements of net assets available for benefits
of the Retirement Savings and Stock Ownership Plan of Armstrong World
Industries, Inc. as of September 30, 2002 and 2001 and the related statements of
changes in net assets available for benefits for the years then ended. These
financial statements are the responsibility of the plan's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on December 6, 2000,
Armstrong World Industries, Inc., the Plan's sponsor, filed a voluntary petition
for relief under Chapter 11 of the U.S. Bankruptcy Code in order to use the
court-supervised reorganization process to achieve a resolution of its asbestos
liability.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Retirement
Savings and Stock Ownership Plan of Armstrong World Industries, Inc. as of
September 30, 2002 and 2001 and the changes in net assets available for benefits
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule is presented
for the purpose of additional analysis and is not a required part of the basic
financial statements but is supplementary information required by the Department
of Labor's Rules and Regulations for Reporting and Disclosure under the Employee
Retirement Income Security Act of 1974. This supplemental schedule is the
responsibility of the Plan's management. The supplemental schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/s/ KPMG LLP
March 14, 2003
Philadelphia, Pennsylvania
4
Item 2
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Statements of Net Assets Available for Benefits
September 30, 2002 and 2001
September 30,
------------------------------------
2002 2001
------------- -------------
Assets:
Investments in master trust:
Cash equivalents:
Fidelity Retirement Money Market Portfolio $ 5,556,960 $ 4,879,049
Shares of registered investment companies:
Fidelity Magellan Fund 51,003,508 66,064,766
Fidelity Low-Priced Stock Fund 4,123,067 2,245,552
Fidelity OTC Portfolio 11,362,627 11,979,688
Fidelity Asset Manager Fund 5,215,695 6,103,802
Fidelity Asset Manager: Income Fund 2,045,481 2,175,824
Fidelity Asset Manager: Growth Fund 7,063,524 7,937,297
Fidelity Overseas Fund 981,827 1,151,667
MSIF Trust Value Portfolio 1,357,675 1,335,228
MSIF Trust Mid Cap Value Portfolio 3,806,859 4,073,290
Spartan US Equity Index Fund 32,293,863 42,225,508
MSIF Global Value Equity Portfolio 1,531,596 1,607,319
Fixed income investment contracts:
Fidelity Interest Income Fund 129,426,624 122,306,844
Armstrong Common Stock 1,315,270 2,824,550
Participant loans 3,340,927 3,245,942
------------- -------------
Total investments in master trust 260,425,503 280,156,326
Investments in employee stock ownership funds:
Cash equivalents 115,529 118,445
Allocated Armstrong Common Stock 3,556,219 7,772,629
Unallocated Armstrong Common Stock 2,580,593 5,218,532
------------- -------------
Total investments in employee stock ownership funds 6,252,341 13,109,606
Interest and other receivables 1,441 351
------------- -------------
Total assets 266,679,285 293,266,283
------------- -------------
Liabilities:
Guaranteed ESOP notes 142,158,150 142,158,150
Interest and tax penalty 15,458,029 15,458,029
Accrued interest 47,360,229 23,428,090
------------- -------------
Total liabilities 204,976,408 181,044,269
------------- -------------
Net assets available for benefits $ 61,702,877 $ 112,222,014
============= =============
See accompanying notes to the financial statements.
5
Item 3
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Statements of Changes in Net Assets Available for Benefits
Years Ended September 30, 2002 and 2001
Year Ended September 30,
--------------------------------
2002 2001
------------ -------------
Additions to net assets attributed to:
Employee contributions $ 16,014,947 $ 14,030,407
Employer contributions, match 4,581,065 2,721,561
Employer contributions, loan forgiveness -- 39,864,575
------------ -------------
20,596,012 56,616,543
Dividends 1,671,532 7,014,324
Interest on fixed income investments and cash equivalents 7,023,448 7,496,864
Interest on loans 234,551 269,887
Transfers from other employee benefit plans 617,509 --
------------ -------------
9,547,040 14,781,075
------------ -------------
Total additions 30,143,052 71,397,618
------------ -------------
Reduction in net assets attributed to:
Benefits paid to participants 20,216,869 34,567,234
Deemed distributions of participant loans 20,087 --
Interest expense 23,932,139 19,757,800
Interest and tax penalty -- 15,458,029
Net depreciation in fair value of investments 36,493,094 117,695,176
Transfers to other employee benefit plans -- 9,440,618
------------ -------------
Total reductions 80,662,189 196,918,857
------------ -------------
Net decrease (50,519,137) (125,521,239)
Net assets available for benefits:
Beginning of year 112,222,014 237,743,253
------------ -------------
End of year $ 61,702,877 $ 112,222,014
============ =============
See accompanying notes to the financial statements.
6
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements
(1) Plan Description
The Retirement Savings and Stock Ownership Plan of Armstrong World
Industries, Inc. ("the Plan") is a defined contribution plan established
for the purpose of providing participants a means for long-term savings
intended for the accumulation of retirement income. The Plan is comprised
of two parts--Retirement Savings Plan and Employee Stock Ownership Plan
(ESOP). Each part has its own set of participant accounts and investment
funds. On December 6, 2000 Armstrong World Industries, Inc. ("Armstrong")
filed a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code in Wilmington, DE in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability.
On December 6, 2000 Armstrong filed a motion with the bankruptcy court to
allow Armstrong to continue making contributions to the Plan. The motion
was approved by the bankruptcy court. Management does not anticipate that
Armstrong's bankruptcy filing will have an adverse impact on the operations
of the Plan. See Note 14 for further discussion of Chapter 11 events.
(a) Retirement Savings
Separate balances are maintained for contributions made by or on
behalf of a participant. The balances in each fund reflect the
participants' contributions together with dividends, interest, other
income, and realized and unrealized gains and losses allocated
thereon.
Each participant may have up to five accounts that make up the
participant's total balance:
Sheltered account - On February 19, 2002, the Plan was amended
effective April 1, 2002 to allow participants to contribute from
1% to 40% of pretax compensation as deferred compensation, as
permitted under Section 401(k) of the Internal Revenue Code.
Prior to April 1, 2002, participants could contribute from 1% to
15% of pretax compensation. On June 25, 2002, the Plan was
amended effective January 1, 2003 to allow participants who are
age 50 or older to make "catch-up" contributions, subject to the
annual limits on catch-up contributions specified in the Internal
Revenue Code.
Standard account - Participants may contribute from 1% to 10% of
after-tax compensation.
Rollover account - Participants may invest any untaxed amounts
rolled over from another tax-qualified, employer-sponsored plan.
On June 25, 2002, the Plan was amended to expand the permissible
sources of rollover contributions beginning January 1, 2003 to
include qualified annuity contracts, tax-deferred annuity plans,
governmental deferred compensation plans, and individual
retirement arrangements.
Retirement savings match account - This account holds any cash
match amount contributed by Armstrong beginning in December 2000.
Armstrong contributed an amount equal to 50% of the exchange
contributions made by each participant during the stock ownership
allocation period ending December 13, 2000. Effective for pay
periods ending on or after March 1, 2001, Armstrong contributes
an amount equal to 50% of the first 6% of each participant's
sheltered account contributions. This account also holds any
amount contributed by Armstrong before cash matching
contributions were discontinued in 1990 (formerly referred to as
the Old Match account).
Tax-deductible account (MIRA) - This account holds any
contributions made to the Plan before January 1, 1987. No new
contributions can be made to this account.
Participants have an immediate 100% vested interest with respect to
their contributions and are fully vested with regard to any Armstrong
contributions in the retirement savings match account attributable to
matching contributions made before December 1, 2000. Participants have
a 100% vested interest in Armstrong amounts contributed to their
retirement savings match account made on or after December 1, 2000
upon completion of five years of service. On June 25, 2002, the Plan
was amended such that all participants actively employed on or after
October 1, 2002 will become 100% vested in Armstrong amounts
contributed to their retirement savings match account upon completion
of three years of service.
7
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
(b) Stock Ownership
The ESOP portion of the Plan has three accounts maintained for each
member for contributions and allocations of shares of Armstrong common
stock from the Unallocated Armstrong Common Stock Fund:
Exchange account -Participants who elected to reduce their pretax
compensation in amounts ranging from 1% to 6% had these
contributions credited to an Exchange Account. Contributions to
the Exchange Account were invested in Armstrong common stock.
Effective December 1, 2000, all contributions and allocations to
the Exchange Account ceased.
Match account - The Plan matched a portion of the contributions
made to the Exchange Account with additional shares of Armstrong
common stock. The matching amounts were recorded in participants'
Match Accounts. The match percentage, either 50% or 75%, was
determined by the closing stock price on the last day of the
allocation period. Effective December 1, 2000, all contributions
and allocations to the Match Account ceased.
Equity account - Eligible participants also received shares of
Armstrong common stock in their Equity Account. The Equity
Account was intended to provide a source of funds to replace
certain retiree medical benefits which were phased out in
conjunction with the adoption of the ESOP. Effective December 1,
2000, all allocations to the Equity Account ceased.
Participants have an immediate 100% vested interest in the full value
of their Exchange Account. Interest in the Equity and Match Accounts
vests after five years of service. On June 25, 2002, the Plan was
amended such that all participants actively employed on or after
October 1, 2002 will become 100% vested in their Equity and Match
Accounts upon completion of three years of service.
Amounts forfeited by participants are first used to reduce future
Armstrong contributions, and then to pay administrative expenses under
the Plan.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying financial statements have been prepared on the
accrual basis.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from estimates
recorded.
(b) Investments in Master Trust
The money market portfolio is stated at cost, which approximates fair
value. The interest income fund is partially comprised of guaranteed
interest rate contracts within the Master Trust which are fully
benefit responsive; and therefore are reflected at contract value plus
credited interest in the financial statements (which approximates fair
value). The value of the participant loans represents the unpaid
principal of employee loans. The value of all other investments is
based on quoted market price.
Securities transactions are recognized on the settlement date (the
date on which payment for a buy or sell order is made or received),
since adjustment to a trade-date basis would not be material. Dividend
income is recorded on the ex-dividend date. Interest income on
participant loans is recorded when paid.
Deemed distributions occur when active participants default on their
loans. Their loans are in default due to failure to make the required
repayments or their loans mature and have not been repaid in full.
8
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
Employee Stock Ownership Funds
Investments in the Employee Stock Ownership Funds represent shares of
Armstrong Holdings, Inc. common stock valued at quoted market price.
Cash equivalents are stated at cost, which approximates fair value.
(c) Expenses
All legal, accounting and administrative expenses associated with Plan
operations are paid by Armstrong.
(3) Investments in Master Trust
(a) Retirement Savings Funds
Assets are held in a Master Trust administered by Fidelity Management
Trust Co., as Trustee, and are segregated into fourteen investment
options.
The following is a brief description of the investment funds to which
Plan participants may elect to allocate their contributions.
Participants should refer to fund prospectuses for more complete
information regarding the investment funds.
1. Spartan US Equity Index Fund - This fund is principally a
portfolio of common stocks constructed and maintained with
the objective of providing investment results which
approximate the overall performance of the common stocks
included in the Standard & Poor's Composite Index of 500
stocks.
2. Fidelity Magellan Fund - This fund invests in common stocks
of companies having substantial growth prospects as
determined by independent investment managers.
3. Fidelity Low-Priced Stock Fund - This fund seeks capital
appreciation through investments primarily in U.S. and
foreign low-priced stocks that may be undervalued,
overlooked or out of favor.
4. Fidelity Retirement Money Market Portfolio - This fund
invests in short-term (less than one year maturity) fixed
income instruments such as U.S. Treasury Bills, bank
certificates of deposit, and high grade commercial paper.
5. Fidelity Interest Income Fund - Prior to May 15, 2001,
contributions to this fund were invested in the general
accounts of insurance companies and were credited at
contracted interest rates. Invested principal and
accumulated interest amounts were guaranteed against loss by
the insurance company. Crediting interest rates were reset
periodically during the plan year. At September 30, 2002,
the interest rates ranged between 3.25% and 6.82%. At
September 30, 2001, the interest rates ranged between 4.22%
and 10.62%. The average yields at September 30, 2002 and
September 30, 2001, were 4.98% and 7.31%, respectively.
Beginning May 15, 2001, contributions to this fund are
invested in the Fidelity Managed Income Portfolio II (MIPII)
fund. Fidelity is transferring all existing participant
monies in the Interest Income Fund to the MIPII fund as
contracts mature or are liquidated. This action was
completed on January 2, 2003, and the name of the fund
changed to Fidelity MIPII. MIPII is a commingled pool of the
Fidelity Group Trust for 401(k) plans which is comprised of
high-quality fixed income investment contracts.
6. MSIF Global Value Equity Portfolio - This fund invests in a
diversified selection of stocks throughout the world. It
seeks to increase the value of the investment over the long
term through growth of capital.
9
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
7. Armstrong Common Stock - Amounts invested in this fund,
along with dividend earnings thereon, are invested in
Armstrong common stock. Common stock shares held by the fund
at September 30, 2002 and 2001 were 974,274 and 1,034,634,
respectively. On May 1, 2000, Armstrong Holdings, Inc.
acquired the stock of Armstrong World Industries, Inc. An
indirect holding in Armstrong World Industries, Inc. makes
up substantially all of the assets of Armstrong Holdings,
Inc. As of December 19, 2000, the Plan was amended to
eliminate this investment option effective with
contributions made on or after December 27, 2000 and
transfers processed on or after January 1, 2001.
8. Fidelity Overseas Fund - This fund invests in securities of
issuers whose principal business activities are outside the
U.S. Investments may include common stock and securities
convertible into common stock, as well as debt instruments.
9. Fidelity OTC Portfolio - This fund invests in securities
traded in the over-the-counter securities market with the
objective of maximizing capital appreciation.
Over-the-counter securities include common and preferred
stocks, securities convertible into common stock, warrants,
and debt instruments.
10. Fidelity Asset Manager Fund - This is an asset allocation
fund which invests in a portfolio of stocks, bonds, and
short-term instruments. The fund has a balanced investment
strategy with a goal of high total return with reduced risk
over the long term.
11. Fidelity Asset Manager: Income Fund - This is an asset
allocation fund which invests in a diversified portfolio of
stocks, bonds, and short-term instruments. The fund has an
investment strategy focusing on bonds and short-term
instruments to achieve a high level of current income and
capital preservation.
12. Fidelity Asset Manager: Growth Fund - This is an asset
allocation fund invested in a diversified mix of stocks,
bonds, and short-term instruments. The fund's investment
strategy is an aggressive one emphasizing stocks with the
goal of maximum total return over the long term.
13. MSIF Trust Mid Cap Value Portfolio - This fund invests in
undervalued common stocks of mid-sized companies with a
strong potential for increase in share price. It seeks to
provide above-average long-term returns.
14. MSIF Trust Value Portfolio - This fund seeks to provide
above average long-term returns by investing mostly in
common stocks of large companies that are considered
undervalued.
Participant loans represent the unpaid principal balances of loans to
Plan participants in accordance with established loan provision
guidelines. At September 30, 2002, the interest rates ranged between
4.75% and 11.96%. At September 30, 2001, the interest rates ranged
between 6.50% and 11.96%.
On June 25, 2002, the Plan was amended to add the Fidelity Equity
Income Fund, the Fidelity Intermediate Bond Fund, and the Fidelity
Freedom Funds as investment options effective January 1, 2003. In
addition, the Asset Manager Funds will no longer be offered with
respect to contributions made or transfers requested on or after
January 1, 2003. Any election on January 1, 2003 to invest in one of
the Asset Manager Funds and any balances in the Asset Manager Funds as
of December 31, 2003 will be transferred to a corresponding Fidelity
Freedom Fund.
10
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
The following table presents the estimated fair values of the investments
in securities of the Master Trust at September 30, 2002 and 2001:
Investment September 30, 2002 September 30, 2001
---------- ------------------ ------------------
Spartan US Equity Index Fund $ 32,293,863 $ 42,225,508
Fidelity Magellan Fund 51,003,508 66,064,766
Fidelity Low-Priced Stock Fund 4,123,067 2,245,552
Fidelity Retirement Money Market Portfolio 5,556,960 4,879,049
Fidelity Interest Income Fund 129,426,624 122,306,844
MSIF Global Value Equity Portfolio 1,531,596 1,607,319
Armstrong Common Stock 1,315,270 2,824,550
Fidelity Overseas Fund 981,827 1,151,667
Fidelity OTC Portfolio 11,362,627 11,979,688
Fidelity Asset Manager Fund 5,215,695 6,103,802
Fidelity Asset Manager: Income Fund 2,045,481 2,175,824
Fidelity Asset Manager: Growth Fund 7,063,524 7,937,297
MSIF Trust Mid Cap Value Portfolio 3,806,859 4,073,290
MSIF Trust Value Portfolio 1,357,675 1,335,228
Participant loans 3,340,927 3,245,942
------------------ ------------------
$260,425,503 $280,156,326
================== ==================
The amounts of net depreciation in fair value of investments in securities
of the Master Trust for the years ended September 30, 2002 and 2001 are
presented below:
Investment 2002 2001
---------- ------------ ------------
Spartan US Equity Index Fund $ (8,995,610) $(17,003,115)
Fidelity Magellan Fund (14,033,234) (28,922,350)
Fidelity Low-Priced Stock Fund (314,962) (15,880)
MSIF Global Value Equity Portfolio (324,665) (260,792)
Armstrong Common Stock (1,459,578) (3,144,599)
Fidelity Overseas Fund (172,507) (783,316)
Fidelity OTC Portfolio (1,180,609) (17,301,740)
Fidelity Asset Manager Fund (692,306) (1,768,364)
Fidelity Asset Manager: Income Fund (92,950) (216,195)
Fidelity Asset Manager: Growth Fund (1,431,149) (3,688,821)
MSIF Trust Mid Cap Value Portfolio (1,040,335) (1,628,833)
MSIF Trust Value Portfolio (448,749) (31,029)
------------ ------------
$(30,186,654) $(74,765,034)
============ ============
(b) Stock Ownership Funds
According to the terms of the trust agreement between Mellon Bank, N.A.
through January 31, 2000 and JPMorgan Chase Bank, formerly Chase Manhattan
Bank, ("the Trustee"), beginning February 1, 2000, and Armstrong World
Industries, Inc., the Trustee manages a trust fund that has been created
under the Plan and has been granted authority to purchase and sell
Armstrong common stock as is necessary to administer the Plan in accordance
with its terms.
11
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
At September 30, 2002, the investment in Armstrong common stock
represents 4,545,786 shares, valued at a quoted market price of $1.35.
There are 2,634,236 shares held in the Allocated Armstrong Stock Fund
and 1,911,550 shares held in the Unallocated Armstrong Stock Fund. The
net depreciation in fair value of these investments for 2002 was
$6,306,440. At September 30, 2001, the investment in Armstrong common
stock represented 4,758,667 shares, valued at a quoted market price of
$2.73. There were 2,847,117 shares held in the Allocated Armstrong
Stock Fund and 1,911,550 shares held in the Unallocated Armstrong
Stock Fund. The net depreciation in fair value of these investments
for 2001 was $42,930,142.
(4) Armstrong Contributions
Armstrong was obligated to make semi-annual contributions in cash or,
through November 30, 2000, Armstrong stock to the Stock Ownership Funds, on
June 15 and December 15 of each year, which when aggregated with all
exchange contributions, dividends received by the Trustee on the common
stock held by the Trust, and trust earnings, was at least equal to the
amount necessary to enable the Trustee to pay currently maturing
obligations under the Guaranteed ESOP notes (Note 6). The December 15, 2000
match was made in cash instead of in Armstrong stock. Beginning in March
2001, Armstrong matches in cash, 50% of the first 6% of each employee's
before-tax contribution into the Sheltered Account. In 2001 Armstrong also
made a non-cash contribution of $39,864,575 by forgiving loans which were
due from the ESOP to Armstrong. See Note 6 for further discussion.
(5) Employee ESOP Contributions and Dividends
Employee ESOP contributions made during the year and dividends paid on
Allocated Armstrong Stock were initially deposited into the Fidelity
Retirement Money Market Portfolio until the next semi-annual allocation
date, at which time they were contributed to the ESOP. During the time in
the Fidelity Retirement Money Market Portfolio, these funds earned
interest. At September 30, 2002 and 2001, there were no amounts in the
Fidelity Retirement Money Market Portfolio to be contributed to the ESOP.
(6) Guaranteed ESOP Notes and Loans Due Plan Sponsor
The shares of Armstrong common stock held in the Plan's Stock Ownership
Accounts were purchased from Armstrong from the proceeds of the sale of
Guaranteed ESOP notes in a total principal amount of $270,000,000 in 1989.
Armstrong guaranteed the payment of principal and interest on the notes.
The notes were scheduled to be repaid in semi-annual installments with
interest per annum at 8.35% on the Series A Guaranteed Serial ESOP Notes
due 1989-2001 and 8.92% on the Series B Guaranteed Serial ESOP notes due
2001-2004. At September 30, 2000, the principal amounts of the Guaranteed
ESOP notes for Series A and Series B were $22,115,150 and $120,043,000,
respectively. On November 22, 2000, Armstrong failed to repay $50,000,000
in commercial paper that was due. As a result, the Plan's remaining
principal balance of $142,158,150 and unpaid interest became immediately
payable along with a $15,458,029 interest and tax penalty. As discussed in
Note 1, Armstrong filed a voluntary petition for relief under Chapter 11 of
the U.S. Bankruptcy Code on December 6, 2000. On December 15, 2000, the
Plan failed to make the scheduled principal and interest payment and, in
light of Armstrong's Chapter 11 filing, Armstrong was not permitted to
comply with its guarantee to pay such amounts. Subsequent to December 15,
2000, no debt service payments have been made and interest on unpaid
principal, interest, and penalty accrues at contractual gross-up interest
rates, 10.61% for the Series A notes and 11.32% for the Series B notes,
plus 2% as stipulated in the ESOP notes. After Armstrong's Chapter 11
filing, such interest amounts are not recorded on Armstrong's financial
statements. None of the Plan's assets have been pledged as collateral for
the Guaranteed ESOP notes.
Refinancing loans from Armstrong were used to ensure that the number of
shares allocated during a semi-annual allocation period was equal to the
sum of participants' exchange, equity and match shares. At September 30,
2000, there were 11 loans outstanding totaling $39,864,575. In July 2001,
Armstrong forgave these outstanding loans, resulting in a non-cash employer
contribution to the Plan of $39,864,575.
The sources of cash used to repay the Plan's debt were employee
contributions, employer contributions, and dividends on unallocated shares.
Currently, there are no employee or employer contributions being made to
the ESOP portion of the Plan. In addition, Armstrong has not declared any
dividends since July 2000.
12
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
(7) Benefits
(a) Retirement Savings Accounts
Under terms of the Plan, a participant (or a beneficiary) is eligible
for benefits upon retirement, termination of employment, or death
before retirement. Disbursement of the total amount credited to a
participant's account is payable (i) in a lump sum or (ii) in the case
of retirement, in such other manner as requested by the participant
and approved by the Plan Administrator.
In addition, an active employee may elect to withdraw all or any part
of his account attributable to after-tax contributions. Before
reaching age 59 1/2, an active employee may withdraw his pretax
contributions from the Sheltered Account, provided he can demonstrate
financial hardship. Such employee shall be ineligible to make
contributions for a 12-month period. On June 25, 2002, the Plan was
amended with respect to hardship withdrawals made after December 31,
2002 to reduce the contribution suspension period to a 6-month period.
An active employee may elect to withdraw all or any portion of his
account balance in the Tax-Deductible (MIRA) and Rollover Accounts.
Under the rules of the Plan, the participant may borrow up to the
lessor of 50% of his balance or $50,000. The money borrowed must come
from the Sheltered, Rollover, Standard, or Retirement Savings Match
Accounts. The amount of the loan is transferred to a Loan Reserve
pledged as security for the loan and is evidenced by a promissory note
payable to the Plan. Interest rates are determined periodically by the
Retirement Committee in accordance with prevailing interest rates. The
loans are reflected in the Loan Portfolio investment fund. Loan
repayments are made by payroll deductions or in a manner agreed to by
the employee and the Plan Administrator.
(b) Stock Ownership Accounts
Upon death or any other separation from service from Armstrong,
participants or their beneficiaries are entitled to receive a
distribution of their vested account balances. Distributions are in
the form of a lump sum cash payment or, upon request, Armstrong common
stock.
(8) Obligation for Benefits
All the funds of the Plan are held by investing institutions appointed by
Armstrong under a trust agreement or investment contract. Benefits under
the Plan are payable only out of these funds. Armstrong has no legal
obligation to make any direct payment of benefits accrued under the Plan.
Except as may be provided in an investment contract, neither Armstrong nor
any investing institution guarantees the funds of the Plan against any loss
or depreciation or guarantees the payment of any benefit thereunder.
Although Armstrong has not expressed any intent to terminate the Plan, it
may do so at any time. In case of termination or partial termination, the
total amount in each employee's account will be distributed as the Plan
Administrator directs.
(9) Eligibility
All employees of Armstrong or any participating affiliated company are
eligible to participate in the Plan except for foreign nationals, leased
employees, and those employees in a collective bargaining unit unless the
collective bargaining agent for that unit agrees to coverage under the
Plan. Eligible participants who leave Armstrong and are later reemployed
can resume participation in the Plan on the date of rehire.
(10) Diversification
Effective January 1, 1997, Plan participants who meet certain age and
service requirements were granted the ability to diversify specified
portions of their ESOP account balances in any combination of the other
investment funds available for Retirement Savings Account balances, except
for the Fidelity Retirement Money Market Portfolio. As of December 19,
2000, the Plan was further amended to allow all participants, regardless of
age and vested status, to fully diversify their ESOP accounts. Certain
participants are precluded from diversifying because of Armstrong's ongoing
Chapter 11 proceedings.
13
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
(11) Litigation
About 370 former Armstrong employees that were separated in two business
divestitures in 2000 have brought two purported class actions against the
Retirement Committee of Armstrong, certain current and former members of
the Retirement Committee, the Plan, Armstrong Holdings, Inc. and the
trustee bank of the Plan. The cases are pending in the United States
District Court (Eastern District of PA). Similar proofs of claim have been
filed against Armstrong in the Chapter 11 Case. Plaintiffs allege breach of
Employee Retirement Income Security Act (ERISA) fiduciary duties and other
violations of ERISA pertaining to losses in their Plan accounts, which were
invested in Armstrong common stock. While Armstrong believes there are
substantive defenses to the allegations and while denying liability,
Armstrong has reached an agreement to settle this matter for $1.0 million,
which will be allocated among the approximate 370 former employees and
treated as convenience claims in the Chapter 11 Case. The settlement
requires approval of the Bankruptcy Court.
Subsequent to an audit by the United States Department of Labor ("DOL"),
Armstrong has been informed that the DOL is challenging the validity of the
use of certain contributions to fund debt payments made by the ESOP, as
provided for by the Plan. Armstrong is cooperating with the DOL to address
its questions and concerns about those transactions. Armstrong believes
that it fully complied with all applicable laws and regulations governing
the plan.
(12) Federal Income Taxes
The Internal Revenue Service issued its latest determination letter on
April 21, 1998, which stated that the Plan and its underlying trust qualify
under the applicable provisions of the Internal Revenue Code and therefore
are exempt from federal income taxes. The Plan has been amended since
receiving the determination letter. The Company filed for a new
determination letter with the Internal Revenue Service on August 28, 2002,
but has not yet received a response. In the opinion of the Plan
administrator and the Plan's qualified tax adviser, the Plan is currently
designed and being operated in compliance with the applicable requirements
of the Internal Revenue Code. Therefore, they believe that the Plan is
qualified and the related trust is tax-exempt.
(13) Master Trust Agreement
Effective October 1, 1990, the Plan established a Master Trust Agreement
with Fidelity Management Trust Company. Under the Master Trust Agreement,
the Plan assets held by Fidelity Management Trust Company are commingled
and invested with the assets of the Retirement Savings Plan for Hourly-Paid
Employees of Armstrong World Industries, Inc., the Bonus Replacement
Retirement Plan of Armstrong World Industries, Inc., the Armstrong Wood
Products Salaried Employees' Profit Sharing Plan, the Armstrong Wood
Products Non-union Hourly 401(k) Plan, the Robbins Hardwood Flooring Inc.
Employees' Retirement Savings Plan, the Hartco Flooring Co. Bargaining
Employees Retirement Savings Plan, and the Hartco Flooring Co. Retirement
Savings Plan. Separate accounting for each plan under the Master Trust
Agreement is provided by Fidelity Management Trust Company. The Plan has an
undivided interest in the assets of this trust, and ownership is
represented by proportionate dollar interest. The following summarizes the
financial information of the Master Trust at September 30, 2002 and 2001:
September 30, 2002 September 30, 2001
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
Cash equivalents $ 16,510,231 $ 16,510,231 $ 14,645,669 $ 14,645,669
Armstrong Common Stock 25,269,658 2,905,155 26,915,537 6,368,209
Registered investment companies 204,702,712 164,805,422 202,308,085 199,406,910
Fixed income investment contracts 176,543,179 176,543,179 167,338,355 167,338,355
Participant loans 6,163,258 6,163,258 5,692,396 5,692,396
------------ ------------ ------------ ------------
Total investments in Master Trust $429,189,038 $366,927,245 $416,900,042 $393,451,539
============ ============ ============ ============
Plan's interest in Master Trust $298,508,049 $260,425,503 $289,006,422 $280,156,326
Plan's percentage in Master Trust 69.6% 71.0% 69.3% 71.2%
14
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
During 2002 and 2001, the Master Trust's investments (including investments
bought, sold, and held during the year) depreciated in value as follows:
2002 2001
------------- -------------
Net (depreciation) in Master Trust ($41,014,128) ($98,225,088)
Allocated net (depreciation) in Master Trust (30,186,654) (74,765,034)
During 2002 and 2001, interest and dividends in the Master Trust were as
follows:
2002 2001
----------- -----------
Interest and dividends in Master Trust $12,841,359 $21,020,196
Allocated interest and dividends from
investment in Master Trust 8,927,296 16,079,551
All of the above information was certified as complete and accurate by the
trustee at September 30, 2002 and 2001 and for the years then ended.
(14) Chapter 11 Reorganization of Armstrong
Plan of Reorganization
On November 4, 2002, Armstrong filed a Plan of Reorganization with the
United States Bankruptcy Court for the District of Delaware ("the Court")
and on March 14, 2003, Armstrong filed its First Amended Plan of
Reorganization and selected exhibits (as so amended, it is referred to in
this report as the "POR"). Implementation of the POR and the treatment of
claims and interests as provided therein is subject to confirmation of the
POR in accordance with the provisions of the Bankruptcy Code. Therefore,
the timing and terms of resolution of the Chapter 11 Case remain uncertain.
Disclosure Statement
On December 20, 2002, a proposed disclosure statement with respect to the
POR was filed with the Court. On December 26, 2002, Armstrong filed
projected financial information with the Court as Exhibit C to the
disclosure statement. On March 14, 2003, Armstrong filed an amended
Disclosure Statement with the Court (as so amended, it is referred to in
this report as the "Disclosure Statement"). The discussions of the POR and
Disclosure Statement in this report are qualified by reference to the full
text of those documents as filed with the Court and filed for reference
purposes with the Securities and Exchange Commission. The POR and
Disclosure Statement are available at www.armstrongplan.com, where
additional information will be posted as it becomes available.
Consideration to be Distributed under the POR (unaudited)
Under the POR, the existing equity interests in Armstrong will be
cancelled. The POR provides for the potential distribution, with respect to
existing equity, of warrants to purchase shares of reorganized Armstrong
(the "Warrants"). The terms of the Warrants would all be measured from the
effective date of the POR. The Warrants would constitute 5% of the common
stock of reorganized Armstrong on a fully diluted basis, would have a
7-year exercisable term, and would contain an exercise price equal to 125%
of the per share equity value of reorganized Armstrong. The Warrants are
estimated to have a value on the effective date of the POR of approximately
$40 million to $50 million. Armstrong's shareholders will have no actual
vote on the POR. If the POR is implemented, the only value that will be
retained by Armstrong shareholders is the potential to receive their
ratable share of the Warrants if Armstrong's Plan of Liquidation (see
discussion below) is approved. If the shareholders and Board of Directors
of Armstrong do not approve Armstrong's Plan of Liquidation, Armstrong will
not receive any Warrants to distribute to its shareholders.
15
RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Notes to Financial Statements, (Continued)
Armstrong Holdings, Inc's Plan of Liquidation
In connection with the consummation of the POR, the existing equity
interests in Armstrong will be cancelled, and the common stock of
reorganized Armstrong will be held principally by Armstrong's unsecured
creditors and the Asbestos Personal Injury Trust. The POR contemplates that
Armstrong Holdings, Inc. ("AHI") will propose to its shareholders that it
adopt a plan for winding up and dissolving itself. The POR provides that, in
order for AHI to receive the Warrants, the shareholders and Board of
Directors of AHI must approve AHI's Plan of Liquidation within one year
after the occurrence of the effective date under the POR. If such approval
is not obtained, the holder of Armstrong's existing equity interest will not
receive the Warrants. The POR provides that reorganized Armstrong will pay
any costs and expenses incurred in connection with AHI's Plan of
Liquidation. More information regarding the contemplated dissolution and
winding up of AHI will be made available to AHI shareholders in the future.
(15) Subsequent Events
As a result of filing the POR on November 4, 2002, the New York Stock
Exchange stopped trading on the Exchange of the common stock of Armstrong
(traded under the ticker symbol "ACK"). Armstrong's common stock has resumed
trading in the over-the-counter (OTC) Bulletin Board under the ticker symbol
"ACKHQ."
Effective November 22, 2002, Armstrong officers are restricted from
receiving loans through the Plan.
Effective December 20, 2002, the Armstrong Wood Products Salaried Employees'
Profit Sharing Plan was merged into the Plan. Portions of the Hartco
Flooring Co. Retirement Savings Plan and the Robbins Hardwood Flooring, Inc.
Employees' Retirement Savings Plan were also merged into the Plan.
16
THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
OF ARMSTRONG WORLD INDUSTRIES, INC.
Schedule H, line 4i - Schedule of Assets (Held at End of Year)
September 30, 2002
Description of Investment Cost Fair Value
- ------------------------- ----------- ------------
Unallocated Armstrong Common Stock $91,276,513 $2,580,593
Allocated Armstrong Common Stock 112,530,569 3,556,219
Investments in Master Trust 298,508,049 260,425,503
17