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, 1998 ---------------------------------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to _______________________ Commission file number 1-2116 ------------------------------------------------------- RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. (Full title of the Plan) ARMSTRONG WORLD INDUSTRIES, 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) Page No. ------- Item 1. Statements of Net Assets 4 ------------------------ September 30, 1998 and 1997 Item 2. Statements of Changes in Plan Equity 7-10 ------------------------------------ (a) Year ended September 30, 1998 (b) Year ended September 30, 1997 (c) Year ended September 30, 1996 Notes to Financial Statements 11-16 - ----------------------------- Item 3. Independent Auditors' Report 19 ---------------------------- Exhibits - -------- 23. Consent of Independent Auditors 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 18, 1999 By: /s/ Douglas L. Boles --------------------------------------- Douglas L. Boles Vice - Chairman of the Retirement Committee THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Net Assets September 30, 1998 and 1997 1998 Retirement Savings Funds ---------------------------------------------------------------------------- Commingled Specialized Low-Priced Money Fixed Income Equity Fund Equity Fund Stock Fund Market Fund Fund ----------- ----------- ---------- ----------- ---- Assets: Investments at fair value (note 4) $ 54,298,768 $ 70,514,675 $ 974,094 $ 6,694,202 $133,791,698 ------------ ------------ ------------ ------------ ------------ Cash and short-term investments -- -- -- -- -- Employer contributions receivable -- -- -- -- -- Interest receivable -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total assets $ 54,298,768 $ 70,514,675 $ 974,094 $ 6,694,202 $133,791,698 ------------ ------------ ------------ ------------ ------------ Liabilities: Guaranteed ESOP notes (note 6) -- -- -- -- -- Due to/(from) other funds -- -- -- 3,530,318 -- Loans due plan sponsor (note 7) -- -- -- -- -- Accrued interest -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total liabilities -- -- -- 3,530,318 -- ------------ ------------ ------------ ------------ ------------ Plan equity $ 54,298,768 $ 70,514,675 $ 974,094 $ 3,163,884 $133,791,698 ============ ============ ============ ============ ============ -------------------------------------------------------------------------- Global Equity Armstrong Overseas "OTC" Asset Portfolio Fund Stock Fund Fund Portfolio Fd. Manager Fund -------------- ---------- ---- ------------- ------------ Assets: Investments at fair value (note 4) $ 1,030,265 $ 10,340,697 $ 342,931 $ 10,301,519 $ 5,863,649 ------------ ------------ ------------ ------------ ------------ Cash and short-term investments -- -- -- -- -- Employer contributions receivable -- -- -- -- -- Interest receivable -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total assets $ 1,030,265 $ 10,340,697 $ 342,931 $ 10,301,519 $ 5,863,649 ------------ ------------ ------------ ------------ ------------ Liabilities: Guaranteed ESOP notes (note 6) -- -- -- -- -- Due to/(from) other funds -- -- -- -- -- Loans due plan sponsor (note 7) -- -- -- -- -- Accrued interest -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total liabilities -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Plan equity $ 1,030,265 $ 10,340,697 $ 342,931 $ 10,301,519 $ 5,863,649 ============ ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements. (Continued) 4 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Net Assets 1998, cont. Retirement Savings Funds -------------------------------------------------------------------------------- Asset Mgr. Asset Mgr. Mid Cap Value Value Loan Income Fund Growth Fund Portfolio Fund Portfolio Fund Portfolio Fund ----------- ----------- -------------- -------------- -------------- Assets: Investments at fair value (note 4) $ 3,062,879 $ 9,250,957 $ 1,979,431 $ 494,143 $ 5,025,880 ------------- ------------- ------------- ------------- ------------- Cash and short-term investments -- -- -- -- -- Employer contributions receivable -- -- -- -- -- Interest receivable -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Total assets $ 3,062,879 $ 9,250,957 $ 1,979,431 $ 494,143 $ 5,025,880 ------------- ------------- ------------- ------------- ------------- Liabilities: Guaranteed ESOP notes (note 6) -- -- -- -- -- Due to/(from) other funds -- -- -- -- -- Loans due plan sponsor (note 7) -- -- -- -- -- Accrued interest -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Total liabilities -- -- -- -- -- ------------- ------------- ------------- ------------- ------------- Plan equity $ 3,062,879 $ 9,250,957 $ 1,979,431 $ 494,143 $ 5,025,880 ============= ============= ============= ============= ============= Stock Ownership Funds ------------------------------------- Allocated Unallocated Stock Retirement Armstrong Armstrong Ownership Savings Total Stock Fund Stock Fund Total Plan Total ------------- ---------- ---------- ----- ---------- Assets: Investments at fair value (note 4) $ 313,965,788 $ 97,351,544 $ 155,048,402 $ 252,399,946 $ 566,365,734 ------------- ------------- ------------- ------------- ------------- Cash and short-term investments -- 97,491 1,400,098 1,497,589 $ 1,497,589 Employer contributions receivable -- -- 3,766,886 3,766,886 3,766,886 Interest receivable -- 576 6,142 6,718 6,718 ------------- ------------- ------------- ------------- ------------- Total assets $ 313,965,788 $ 97,449,611 $ 160,221,528 $ 257,671,139 $ 571,636,927 ------------- ------------- ------------- ------------- ------------- Liabilities: Guaranteed ESOP notes (note 6) -- -- 190,538,204 190,538,204 190,538,204 Due to/(from) other funds 3,530,318 (878,427) (2,651,891) (3,530,318) -- Loans due plan sponsor (note 7) -- -- 14,971,603 14,971,603 14,971,603 Accrued interest -- -- 4,851,306 4,851,306 4,851,306 ------------- ------------- ------------- ------------- ------------- Total liabilities 3,530,318 (878,427) 207,709,222 206,830,795 210,361,113 ------------- ------------- ------------- ------------- ------------- Plan equity $ 310,435,470 $ 98,328,038 ($ 47,487,694) $ 50,840,344 $ 361,275,814 ============= ============= ============= ============= ============= The accompanying notes are an integral part of the financial statements. (Continued) 5 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Net Assets 1997 Retirement Savings Funds -------------------------------------------------------------------------------------------- Commingled Specialized Money Fixed Income Armstrong "OTC" Equity Fund Equity Fund Market Fund Fund Stock Fund Portfolio Fd. ----------- ----------- ----------- ---- ---------- ------------- Assets: Investments at fair value (note 4) $ 49,670,121 $ 67,994,282 $ 3,599,035 $131,000,677 $ 12,759,960 $ 11,271,195 ------------ ------------ ------------ ------------ ------------ ------------ Cash and short-term investments -- -- -- -- -- -- Employee contributions receivable -- -- -- -- -- -- Employer contributions receivable -- -- -- -- -- -- Dividends receivable -- -- -- -- -- -- Interest receivable -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 49,670,121 $ 67,994,282 $ 3,599,035 $131,000,677 $ 12,759,960 $ 11,271,195 ------------ ------------ ------------ ------------ ------------ ------------ Liabilities: Guaranteed ESOP notes (note 6) -- -- -- -- -- -- Loans due plan sponsor (note 7) -- -- -- -- -- -- Accrued interest -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Total liabilities -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Plan equity $ 49,670,121 $ 67,994,282 $ 3,599,035 $131,000,677 $ 12,759,960 $ 11,271,195 ============ ============ ============ ============ ============ ============ Retirement Savings Funds --------------------------------------------------------- Asset Asset Mgr. Asset Mgr. Loan Manager Fund Income Fund Growth Fund Portfolio Fund ------------ ----------- ----------- -------------- Assets: Investments at fair value (note 4) $ 5,482,241 $ 1,845,575 $ 8,693,409 $ 4,573,178 ------------ ------------ ------------ ------------ Cash and short-term investments -- -- -- -- Employee contributions receivable -- -- -- -- Employer contributions receivable -- -- -- -- Dividends receivable -- -- -- -- Interest receivable -- -- -- -- ------------ ------------ ------------ ------------ Total assets $ 5,482,241 $ 1,845,575 $ 8,693,409 $ 4,573,178 ------------ ------------ ------------ ------------ Liabilities: Guaranteed ESOP notes (note 6) -- -- -- -- Loans due plan sponsor (note 7) -- -- -- -- Accrued interest -- -- -- -- ------------ ------------ ------------ ------------ Total liabilities -- -- -- -- ------------ ------------ ------------ ------------ Plan equity $ 5,482,241 $ 1,845,575 $ 8,693,409 $ 4,573,178 ============ ============ ============ ============ Stock Ownership Funds ------------------------------------ Allocated Unallocated Stock Retirement Armstrong Armstrong Ownership Savings Total Stock Fund Stock Fund Total Plan Total ------------- ---------- ---------- ----- ---------- Assets: Investments at fair value (note 4) $296,889,673 $109,573,363 $215,901,751 $325,475,114 $622,364,787 ------------ ------------ ------------ ------------ ------------ Cash and short-term investments -- 92,240 1,426,130 1,518,370 $ 1,518,370 Employee contributions receivable -- -- 2,593,899 2,593,899 2,593,899 Employer contributions receivable -- -- 4,007,971 4,007,971 4,007,971 Dividends receivable -- 724,601 -- 724,601 724,601 Interest receivable -- 424 6,112 6,536 6,536 ------------ ------------ ------------ ------------ ------------ Total assets $296,889,673 110,390,628 223,935,863 334,326,491 $631,216,164 ------------ ------------ ------------ ------------ ------------ Liabilities: Guaranteed ESOP notes (note 6) -- -- 212,027,803 212,027,803 212,027,803 Loans due plan sponsor (note 7) -- -- 5,768,849 5,768,849 5,768,849 Accrued interest -- -- 5,413,818 5,413,818 5,413,818 ------------ ------------ ------------ ------------ ------------ Total liabilities -- -- 223,210,470 223,210,470 223,210,470 ------------ ------------ ------------ ------------ ------------ Plan equity $296,889,673 $110,390,628 $ 725,393 111,116,021 $408,005,694 ============ ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements. 6 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Changes in Plan Equity Years Ended September 30, 1998, 1997 and 1996 1998 Retirement Savings Funds --------------------------------------------------------------------------------- Commingled Specialized Low-Priced Money Fixed Income Equity Fund Equity Fund Stock Fund Market Fund Fund ----------- ----------- ---------- ----------- ---- Plan equity at October 1, 1997 $ 49,670,121 $ 67,994,282 $ -- $ 3,599,035 $ 131,000,677 ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions 1,781,261 2,876,825 34,741 151,728 4,691,190 Employer contributions (note 5) -- -- -- -- -- Dividends 1,512,438 4,917,540 69,227 160,014 -- Interest 53,332 113,382 1,161 11,092 8,387,160 Realized gain on investments (note 4) 2,348,060 2,099,843 (4,726) -- -- Loan activity, net (108,394) (225,496) 2,011 (59,585) (289,184) ------------- ------------- ------------- ------------- ------------- 5,586,697 9,782,094 102,414 263,249 12,789,166 ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments 506,298 (3,735,515) (252,360) -- -- Interest expense (note 6) -- -- -- -- -- Benefits paid (note 8) (1,979,685) (3,109,811) (38,706) (529,778) (9,405,402) Transfers (to) from other employee benefit plans (63,821) (78,298) -- 102,676 (88,920) Interfund transfers, net 579,158 (338,077) 1,162,746 (271,298) (503,823) ------------- ------------- ------------- ------------- ------------- (958,050) (7,261,701) 871,680 (698,400) (9,998,145) ------------- ------------- ------------- ------------- ------------- Plan equity at September 30,1998 $ 54,298,768 $ 70,514,675 $ 974,094 $ 3,163,884 $ 133,791,698 ============= ============= ============= ============= ============= Retirement Savings Funds ---------------------------------------------------------------------------------- Global Equity Armstrong Overseas "OTC" Asset Portfolio Fund Stock Fund Fund Portfolio Fd. Manager Fund -------------- ---------- ---- ------------- ------------ Plan equity at October 1, 1997 $ -- $ 12,759,960 $ -- $ 11,271,195 $ 5,482,241 ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions 59,023 301,195 54,590 798,973 356,571 Employer contributions (note 5) -- -- -- -- -- Dividends 9,986 336,481 -- 1,114,299 540,381 Interest 1,160 25,667 42 30,611 12,278 Realized gain on investments (note 4) (7,267) 896,302 (430) 429,228 161,338 Loan activity, net 7,315 (125,026) (1,998) 60,910 3,818 ------------- ------------- ------------- ------------- ------------- 70,217 1,434,619 52,204 2,434,021 1,074,386 ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments (186,389) (3,059,684) (67,266) (1,781,970) (385,777) Interest expense (note 6) -- -- -- -- -- Benefits paid (note 8) (32,902) (532,048) (32,806) (569,531) (375,092) Transfers (to) from other employee benefit plans -- 14,601 -- (4,183) 3,960 Interfund transfers, net 1,179,339 (276,751) 390,799 (1,048,013) 63,931 ------------- ------------- ------------- ------------- ------------- 960,048 (3,853,882) 290,727 (3,403,697) (692,978) ------------- ------------- ------------- ------------- ------------- Plan equity at September 30,1998 $ 1,030,265 $ 10,340,697 $ 342,931 $ 10,301,519 $ 5,863,649 ============= ============= ============= ============= ============= The accompanying notes are an integral part of the financial statements. (Conitnued) 7 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Changes in Plan Equity 1998, cont. Retirement Savings Funds ------------------------------------------------------------------------------------------------ Asset Mgr. Asset Mgr. Mid Cap Value Value Loan Retirement Income Fund Growth Fund Portfolio Fund Portfolio Fund Portfolio Fund Savings Total ----------- ----------- -------------- -------------- -------------- ------------- Plan equity at October 1, 1997 $ 1,845,575 $ 8,693,409 $-- $-- $ 4,573,178 $ 296,889,673 ------------- ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions 102,569 741,991 102,445 34,784 -- 12,087,886 Employer contributions (note 5) -- -- -- -- -- -- Dividends 157,492 948,499 -- 3,023 -- 9,769,380 Interest 2,140 16,402 3,086 600 -- 8,658,113 Realized gain on investments (note 4) 20,399 254,594 (9,309) (2,660) -- 6,185,372 Loan activity, net (3,455) 14,855 8,317 3,810 712,102 -- ------------- ------------- ------------- ------------- ------------- ------------- 279,145 1,976,341 104,539 39,557 712,102 36,700,751 ------------- ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments (1,976) (756,694) (369,575) (139,299) -- (10,230,207) Interest expense (note 6) -- -- -- -- -- -- Benefits paid (note 8) (158,100) (261,976) (58,230) (32,243) -- (17,116,310) Transfers (to) from other employee benefit plans -- (158,057) -- -- (259,400) (531,442) Interfund transfers, net 1,098,235 (242,066) 2,302,697 626,128 -- 4,723,005 ------------- ------------- ------------- ------------- ------------- ------------- 938,159 (1,418,793) 1,874,892 454,586 (259,400) (23,154,954) ------------- ------------- ------------- ------------- ------------- ------------- Plan equity at September 30,1998 $ 3,062,879 $ 9,250,957 $ 1,979,431 $ 494,143 $ 5,025,880 $ 310,435,470 ============= ============= ============= ============= ============= ============= Stock Ownership Funds ----------------------------- Allocated Unallocated Stock Armstrong Armstrong Ownership Stock Fund Stock Fund Total Plan Total ---------- ---------- ----- ---------- Plan equity at October 1, 1997 $ 110,390,628 $ 725,393 $ 111,116,021 $ 408,005,694 ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions -- 9,707,517 9,707,517 21,795,403 Employer contributions (note 5) -- 11,562,987 11,562,987 11,562,987 Dividends 3,326,468 5,617,353 8,943,821 18,713,201 Interest 5,290 129,561 134,851 8,792,964 Realized gain on investments (note 4) (62,604) -- (62,604) 6,122,768 Loan activity, net -- -- -- -- ------------- ------------- ------------- ------------- 3,269,154 27,017,418 30,286,572 66,987,323 ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments (24,615,461) (36,286,100) (60,901,561) (71,131,768) Interest expense (note 6) -- (17,398,000) (17,398,000) (17,398,000) Benefits paid (note 8) (7,539,683) -- (7,539,683) (24,655,993) Transfers (to) from other employee benefit plans -- -- -- (531,442) Interfund transfers, net 16,823,400 (21,546,405) (4,723,005) -- ------------- ------------- ------------- ------------- (15,331,744) (75,230,505) (90,562,249) (113,717,203) ------------- ------------- ------------- ------------- Plan equity at September 30,1998 $ 98,328,038 ($ 47,487,694) $ 50,840,344 $ 361,275,814 ============= ============= ============= ============= The accompanying notes are an integral part of the financial statements. (Continued) 8 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Changes in Plan Equity 1997 Retirement Savings Funds -------------------------------------------------------------------------------------------- Commingled Specialized Money Fixed Income Armstrong "OTC" Equity Fund Equity Fund Market Fund Fund Stock Fund Portfolio Fd. ----------- ----------- ----------- ---- ---------- ------------- Plan equity at October 1, 1996 $ 34,640,234 $ 55,239,099 $ 3,050,434 $ 126,067,031 $ 13,508,146 $ 6,856,784 ------------- ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Transfer of assets from merged plan (note 2) -- -- -- -- -- -- Employee contributions 1,448,633 2,422,402 185,041 4,839,630 309,034 830,339 Employer contributions (note 5) -- -- -- -- -- -- Dividends 1,099,609 1,906,723 174,661 -- 337,876 669,044 Interest 42,834 80,789 9,512 8,241,884 11,661 23,517 Realized gain on investments (note 4) 2,279,419 1,875,833 -- -- 1,001,249 294,692 Unrealized appreciation of investments 10,806,762 14,653,771 -- -- 75,036 1,676,576 Loan activity, net (320,312) (301,064) (10,006) (438,400) (79,611) (44,168) ------------- ------------- ------------- ------------- ------------- ------------- 15,356,945 20,638,454 359,208 12,643,114 1,655,245 3,450,000 ------------- ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Interest expense (note 6) -- -- -- -- -- -- Benefits paid (note 8) (3,254,255) (3,933,969) (948,749) (13,298,177) (837,570) (927,481) Transfers (to) from other employee benefit plans of Armstrong World Industries, Inc. 172,815 189,824 37,313 561,763 16,068 6,529 Interfund transfers, net 2,754,382 (4,139,126) 1,100,829 5,026,946 (1,581,929) 1,885,363 ------------- ------------- ------------- ------------- ------------- ------------- (327,058) (7,883,271) 189,393 (7,709,468) (2,403,431) 964,411 ------------- ------------- ------------- ------------- ------------- ------------- Plan equity at September 30,1997 $ 49,670,121 $ 67,994,282 $ 3,599,035 $ 131,000,677 $ 12,759,960 $ 11,271,195 ============= ============= ============= ============= ============= ============= ------------------------------------------------------------------------------- Asset Asset Mgr. Asset Mgr. Loan Retirement Manager Fund Income Fund Growth Fund Portfolio Fund Savings Total ------------ ----------- ----------- -------------- ------------- Plan equity at October 1, 1996 $ 4,441,622 $ 2,013,481 $ 6,417,103 $ 3,307,686 $ 255,541,620 ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Transfer of assets from merged plan (note 2) -- -- -- -- -- Employee contributions 354,321 75,979 550,098 -- 11,015,477 Employer contributions (note 5) -- -- -- -- -- Dividends 381,885 138,153 564,099 -- 5,272,050 Interest 8,241 1,758 12,728 -- 8,432,924 Realized gain on investments (note 4) 139,267 39,003 328,508 -- 5,957,971 Unrealized appreciation of investments 554,573 64,323 1,173,789 -- 29,004,830 Loan activity, net (60,049) (53,541) (49,297) 1,356,448 -- ------------- ------------- ------------- ------------- ------------- 1,378,238 265,675 2,579,925 1,356,448 59,683,252 ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Interest expense (note 6) -- -- -- -- -- Benefits paid (note 8) (609,366) (378,699) (671,143) -- (24,859,409) Transfers (to) from other employee benefit plans of Armstrong World Industries, Inc. 99,141 -- (29,795) (90,956) 962,702 Interfund transfers, net 172,606 (54,882) 397,319 -- 5,561,508 ------------- ------------- ------------- ------------- ------------- (337,619) (433,581) (303,619) (90,956) (18,335,199) ------------- ------------- ------------- ------------- ------------- Plan equity at September 30,1997 $ 5,482,241 $ 1,845,575 $ 8,693,409 $ 4,573,178 $ 296,889,673 ============= ============= ============= ============= ============= Stock Ownership Funds ----------------------------- Allocated Unallocated Stock Armstrong Armstrong Ownership Stock Fund Stock Fund Total Plan Total ---------- ---------- ----- ---------- Plan equity at October 1, 1996 $ -- $ -- $ -- $ 255,541,620 ------------- ------------- ------------- ------------- Increases in plan equity: Transfer of assets from merged plan (note 2) Employee contributions 95,463,444 (7,571,201) 87,892,243 87,892,243 Employer contributions (note 5) -- 10,658,241 10,658,241 21,673,718 Dividends -- 14,284,664 14,284,664 14,284,664 Interest 2,617,192 5,695,451 8,312,643 13,584,693 15,837 103,014 118,851 8,551,775 Realized gain on investments (note 4) Unrealized appreciation of -- -- -- 5,957,971 investments Loan activity, net 7,651,796 15,092,486 22,744,282 51,749,112 -- -- -- -- ------------- ------------- ------------- ------------- 105,748,269 38,262,655 144,010,924 203,694,176 ------------- ------------- ------------- ------------- Decreases in plan equity: Interest expense (note 6) Benefits paid (note 8) -- (19,099,238) (19,099,238) (19,099,238) Transfers (to) from other (7,165,115) -- (7,165,115) (32,024,524) employee benefit plans of Armstrong World Industries, Inc. Interfund transfers, net 20,615 (1,089,657) (1,069,042) (106,340) 11,786,859 (17,348,367) (5,561,508) -- ------------- ------------- ------------- ------------- 4,642,359 (37,537,262) (32,894,903) (51,230,102) ------------- ------------- ------------- ------------- Plan equity at September 30,1997 $ 110,390,628 $ 725,393 $ 111,116,021 $ 408,005,694 ============= ============= ============= ============= The accompanying notes are an integral part of the financial statements. (Continued) 9 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Statements of Changes in Plan Equity, Continued 1996 Commingled Specialized Money Fixed Income Armstrong "OTC" Equity Fund Equity Fund Market Fund Fund Stock Fund Portfolio Fd. ----------- ----------- ----------- ---- ---------- ------------- Plan equity at October 1, 1995 $ 26,008,895 $ 53,822,126 $ 2,863,787 $ 119,173,404 $ 9,957,012 $ 3,998,454 ------------- ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions 1,304,166 3,271,882 3,249,141 3,759,748 263,346 592,828 Dividends 824,216 10,899,654 150,409 -- 274,227 676,518 Interest 30,962 73,870 5,326 7,376,774 9,598 9,354 Realized gain on investments (note 4) 1,356,135 1,682,172 -- -- 598,743 173,665 Transfers (to) from other employee benefit plans (note 3) 917,764 (486,370) (2,722,959) 5,740,701 2,510,969 54,286 Loan activity, net (127,242) 9,945 (51,300) 199,025 30,537 30,924 ------------- ------------- ------------- ------------- ------------- ------------- 4,306,001 15,451,153 630,617 17,076,248 3,687,420 1,537,575 ------------- ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments 3,201,122 (10,982,140) -- -- 733,682 49,322 Benefits paid (note 8) (1,417,320) (2,135,340) (305,283) (7,011,691) (569,160) (178,186) Interfund transfers, net 2,541,536 (916,700) (138,687) (3,170,930) (300,808) 1,449,619 ------------- ------------- ------------- ------------- ------------- ------------- 4,325,338 (14,034,180) (443,970) (10,182,621) (136,286) 1,320,755 ------------- ------------- ------------- ------------- ------------- ------------- Plan equity at September 30, 1996 $ 34,640,234 $ 55,239,099 $ 3,050,434 $ 126,067,031 $ 13,508,146 $ 6,856,784 ============= ============= ============= ============= ============= ============= Asset Asset Mgr. Asset Mgr. Loan Manager Fund Income Fund Growth Fund Portfolio Fund Total ------------ ----------- ----------- -------------- ----- Plan equity at October 1, 1995 $ 4,171,934 $ 1,465,384 $ 5,380,158 $ 3,408,962 $ 230,250,116 ------------- ------------- ------------- ------------- ------------- Increases in plan equity: Employee contributions 294,053 69,892 517,010 -- 13,322,066 Dividends 149,553 92,269 77,215 -- 13,144,061 Interest 6,424 3,161 8,596 -- 7,524,065 Realized gain on investments (note 4) 84,274 17,013 141,202 -- 4,053,204 Transfers (to) from other employee benefit plans (note 3) 41,971 256,953 (272,357) (21,076) 6,019,882 Loan activity, net (4,895) 11,757 (18,551) (80,200) -- ------------- ------------- ------------- ------------- ------------- 571,380 451,045 453,115 (101,276) 44,063,278 ------------- ------------- ------------- ------------- ------------- Decreases in plan equity: Unrealized appreciation (depreciation) of investments 188,800 11,409 457,253 -- (6,340,552) Benefits paid (note 8) (464,192) (170,707) (179,343) -- (12,431,222) Interfund transfers, net (26,300) 256,350 305,920 -- -- ------------- ------------- ------------- ------------- ------------- (301,692) 97,052 583,830 -- (18,771,774) ------------- ------------- ------------- ------------- ------------- Plan equity at September 30, 1996 $ 4,441,622 $ 2,013,481 $ 6,417,103 $ 3,307,686 $ 255,541,620 ============= ============= ============= ============= ============= The accompanying notes are an integral part of the financial statements. 10 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements (1) 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 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 fair value of the commingled equity, specialized equity, low-priced stock, global equity portfolio, overseas, "OTC" portfolio, Asset Manager, Asset Manager income, Asset Manager growth, mid cap value portfolio and value portfolio is based on the underlying market value of the investments. The money market fund is stated at cost which approximates fair value. The fixed income fund is comprised of guaranteed interest rate contracts which are fully benefit responsive, and therefore are reflected at contract value plus credited interest in the financial statements. The value of the Armstrong stock fund is based on quoted market price. The value of the loan portfolio fund represents the unpaid principal of employee loans. 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. Realized gains and losses on investments are determined by the average cost method. Stock Ownership Funds --------------------- Investments in the Stock Ownership Funds represent shares of Armstrong common stock valued at quoted market price. (c) Expenses -------- All legal, accounting and administrative expenses associated with Plan operations are paid by Armstrong World Industries, Inc. (the Company) (2) Plan Redesign ------------- On May 29, 1996, the Board of Directors of the Company approved the restructuring of the Armstrong World Industries, Inc., Employee Stock Ownership Plan (ESOP). The ESOP was merged into the Retirement Savings Plan for Salaried Employees of Armstrong World Industries, Inc. (Salaried RSP). In addition, the Salaried RSP was renamed the Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. (the Plan). The effective date of the merger was October 1, 1996. In addition, a portion of the assets and liabilities of the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. were transferred to the Plan for hourly employees not represented by a collective bargaining agent and for Mobile Plant hourly employees represented by a collective bargaining agent, effective October 1, 1996. (3) Plan Description ---------------- The Plan is a defined-contribution plan established for the purpose of providing participants with a means for long-term savings intended for the accumulation of retirement income in addition to that provided under other retirement plans maintained for the benefit of employees. The Plan is comprised of two parts--Retirement Savings and Stock Ownership. Each part has its own set of participant accounts and investment funds. (a) Retirement Savings ------------------ The Retirement Savings Accounts allow participants to make contributions to the Plan in each of the following methods: 1. Up to 15% of their before-tax compensation, as deferred compensation as permitted under Section 401(k) of the Internal Revenue Code. 2. Up to 10% of their after-tax compensation. 11 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) Separate accounts are maintained for contributions made by or on behalf of a participant. The accounts reflect the participants' contributions together with dividends, interest, other income, and realized and unrealized gains and losses allocated thereon. Participants have an immediate 100 percent vested interest with respect to their contributions and are fully vested with regard to any previously made matching company contributions. Plan participants did include salaried employees of Thomasville Furniture Industries, Inc. On December 29, 1995, Armstrong World Industries, Inc., sold Thomasville Furniture to Interco Incorporated. The agreement of sale required Interco to establish a savings plan for Thomasville employees comparable to those it maintains for its other employees. Interco's successor plan became effective as of April 1, 1996. The salaried Thomasville participants of the Plan were allowed to make contributions to the Plan through March 31, 1996, at which time their account balances were transferred to the Interco plan. The following table presents the transfers made by investment type: Commingled equity $1,694,425 Specialized equity 4,219,230 Money market 2,944,518 Fixed income 6,658,481 OTC portfolio 455,336 Asset manager 308,114 Asset manager income 136,902 Asset manager growth 601,858 ------------- $17,018,864 ============= In 1996, there was also a transfer into the Plan in the amount of $19,621,290 from the Retirement Savings Plan for Hourly-Paid Employees of Armstrong World Industries, Inc. This transfer represents the inclusion in the Plan of participant account balances for all hourly employees eligible for participation in the Company's Employee Stock Ownership Plan. Finally in 1996, the Plan had funds transferred in from the American Olean Salaried Retirement Savings Plan of $3,417,456. (b) Stock Ownership --------------- The Plan has three Stock Ownership Accounts maintained for each member for contributions and allocations of shares of Company common stock from the Unallocated Armstrong Common Stock Fund. Participants who elect to reduce their before-tax compensation in amounts ranging from one percent to six percent have these contributions credited to an Exchange Account. Contributions to the Exchange Account are invested in Company common stock. The Plan matches a portion of the contributions made to the Exchange Account with additional shares of Company common stock. The matching amounts are recorded in participants' Match Accounts. The match percentage, either 50% or 75%, is determined by the closing stock price on the last day of the allocation period. For allocation periods ended in December of 1996, June of 1997, and December of 1997, a 75% fixed match was in place on employee Exchange Account contributions. For the allocation period ended in June of 1998, there was a 50% fixed match on employee Exchange Account contributions. Eligible participants also receive shares of Company common stock in their Equity Account. The Equity Account is 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. Participants have an immediate 100 percent vested interest in the full value of their Exchange Account. Interest in the Equity and Match Accounts vest after five years of service. 12 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) (4) Investments ----------- (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: a commingled equity mutual fund (Fidelity U.S. Equity Index Portfolio), a specialized equity mutual fund (Fidelity Magellan), a low-priced stock fund (Fidelity Low-Priced Stock Fund), a money market mutual fund (Fidelity Retirement Money Market Portfolio), a fixed income fund (Interest Income Fund), a global equity mutual fund (Morgan Stanley Institutional Fund, Inc. - Global Equity Portfolio), an Armstrong stock fund, an overseas fund (Fidelity Overseas Fund) , an "OTC" mutual fund (Over-the-counter Portfolio), three Asset Manager mutual funds (Fidelity Asset Manager Fund, Fidelity Asset Manager: Income Fund, and Fidelity Asset Manager: Growth Fund), and two value-oriented mutual funds (Miller, Anderson & Sherrard, LLP Value Portfolio and Miller, Anderson & Sherrard, LLP Mid Cap Value Portfolio). The Plan utilizes the Trustee and associated investment managers to direct investment activity. The Plan participates in all fourteen investment alternatives. The following is a description of the investment funds to which Plan participants can elect to allocate their contributions. Participants should refer to fund prospectuses for more complete information regarding the investment funds. 1. Commingled Equity 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. At September 30, 1998, there were 1,730 active participants in this investment fund. 2. Specialized Equity Fund - This fund invests in common stocks of companies having substantial growth prospects as determined by independent investment managers. At September 30, 1998, there were 2,314 active participants in this investment fund. 3. Low-Priced Stock Fund - This fund seeks capital appreciation through investments in mainly U.S. and foreign low-priced stocks that may be undervalued, overlooked or out of favor. At September 30, 1998, there were 126 active participants in this investment fund. 4. Money Market Fund - 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. At September 30, 1998, there were 6,033 active participants in this investment fund. 5. Fixed Income Fund - Contributions to this fund are invested in the general accounts of insurance companies and are credited at contracted interest rates. Invested principal and accumulated interest amounts are guaranteed against loss by the insurance company. Crediting interest rates are reset periodically during the plan year. At September 30, 1998, the interest rates ranged between 5.45% and 8.26%. At September 30, 1997, the interest rates ranged between 5.53% and 8.26%. The average yields for the plan years ended September 30, 1998 and September 30, 1997, were 6.22% and 6.20%, respectively. The fair value of the contracts approximate cost. At September 30, 1998, there were 3,783 active participants in this investment fund. 6. Global Equity Portfolio - This fund invests in a diversified selection of stocks throughout the world, after a detailed analysis by local country investment experts. It seeks to increase the value of the investment over the long term through growth of capital. At September 30, 1998, there were 145 active participants in this investment fund. 7. Armstrong Stock Fund - Amounts invested in this fund, along with dividend earnings thereon, are invested in Armstrong common stock. At September 30, 1998, there were 5,900 active participants in this investment fund. Common stock shares held by the fund at September 30, 1998 and 1997 were 193,284 and 190,268, respectively. 8. 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. At September 30, 1998, there were 52 active participants in this investment fund. 13 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) 9. OTC Portfolio Fund - 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. At September 30, 1998, there were 809 active participants in this investment fund. 10. Asset Manager Fund - 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. At September 30, 1998, there were 404 active participants in this investment fund. 11. Asset Manager - Income Fund - 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. At September 30, 1998, there were 163 active participants in this investment fund. 12. Asset Manager - Growth Fund - 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. At September 30, 1998, there were 648 active participants in this investment fund. 13. 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. At September 30, 1998, there were 223 active participants in this investment fund. 14. 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. At September 30, 1998, there were 78 active participants in this fund. The Loan Portfolio Fund represents the unpaid principal balances of loans made by Plan participants in accordance with established loan provision guidelines. At September 30, 1998, there were 789 loans outstanding. The following table presents the cost and estimated fair values of the investments in securities of the Master Trust at September 30, 1998 and 1997: September 30, 1998 September 30, 1997 ------------------ ------------------ Investment Cost Fair Value Cost Fair Value ---------- ---- ---------- ---- ---------- Commingled equity $30,965,142 $54,298,768 $26,842,793 $49,670,121 Specialized equity 53,733,116 70,514,675 47,477,208 67,994,282 Low-priced stock 1,226,454 974,094 - - Money market 6,694,202 6,694,202 3,599,035 3,599,035 Fixed income 133,791,698 133,791,698 131,000,677 131,000,677 Global equity portfolio 1,216,654 1,030,265 - - Armstrong stock 8,381,834 10,340,697 7,741,413 12,759,960 Overseas 410,197 342,931 - - OTC portfolio 9,668,586 10,301,519 8,856,292 11,271,195 Asset manager 5,385,573 5,863,649 4,618,388 5,482,241 Asset manager income 2,936,801 3,062,879 1,717,521 1,845,575 Asset manager growth 8,057,265 9,250,957 6,743,023 8,693,409 Mid cap value portfolio 2,349,006 1,979,431 - - Value portfolio 633,442 494,143 - - Loan portfolio 5,025,880 5,025,880 4,573,178 4,573,178 --------- --------- --------- --------- $270,475,850 $313,965,788 $243,169,528 $296,889,673 ============ ============ ============ ============ THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) The amounts of realized gain (loss) on investments in securities of the Master Trust for the years ended September 30, 1998, 1997, and 1996 are presented below: Aggregate Aggregate Realized --------- --------- -------- 1998 Proceeds Cost Gain (Loss) ---- -------- ---- ----------- Commingled equity 6,375,852 4,027,792 2,348,060 Specialized equity 8,249,869 6,150,026 2,099,843 Low-priced stock 79,015 83,741 (4,726) Global equity portfolio 116,139 123,406 (7,267) Armstrong stock 2,084,876 1,188,574 896,302 Overseas 40,318 40,748 (430) OTC portfolio 3,285,757 2,856,529 429,228 Asset manager 1,459,750 1,298,412 161,338 Asset manager income 726,059 705,660 20,399 Asset manager growth 1,965,174 1,710,580 254,594 Mid cap value portfolio 192,264 201,573 (9,309) Value portfolio 55,756 58,416 (2,660) ------ ------ ------- $24,630,829 $18,445,457 $6,185,372 =========== =========== ========== 1997 ---- Commingled equity $6,505,385 $4,225,966 $2,279,419 Specialized equity 11,158,875 9,283,042 1,875,833 Armstrong stock 2,710,271 1,709,022 1,001,249 OTC portfolio 2,909,644 2,614,952 294,692 Asset manager 1,711,591 1,572,324 139,267 Asset manager income 1,363,736 1,324,733 39,003 Asset manager growth 2,653,318 2,324,810 328,508 ------------ ------------ ----------- $29,012,820 $23,054,849 $5,957,971 =========== =========== ========== 1996 ---- Commingled equity $2,623,858 $1,267,723 $1,356,135 Specialized equity 7,504,239 5,822,067 1,682,172 Armstrong stock 1,651,243 1,052,500 598,743 OTC portfolio 1,498,007 1,324,342 173,665 Asset manager 1,784,344 1,700,070 84,274 Asset manager income 819,155 802,142 17,013 Asset manager growth 1,598,514 1,457,312 141,202 ------------ ------------ ----------- $17,479,360 $13,426,156 $4,053,204 =========== =========== ========== (b) Stock Ownership Funds --------------------- According to the terms of the trust agreement between Mellon Bank, N.A., the Trustee, 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 Company common stock as is necessary to administer the Plan in accordance with its terms. At September 30, 1998, the investment in Company common stock represents 4,717,756 shares, valued at a quoted market price of $53.50. There are 1,819,655 shares held in the Allocated Armstrong Stock Fund and 2,898,101 shares held in the Unallocated Armstrong Stock Fund. During 1998, aggregate proceeds were $2,257,893, aggregate costs were $2,320,497, and the realized loss was $62,604. No gains or losses were realized during 1996 and 1997. (5) Company Contributions --------------------- The Company is obligated to make semi-annual contributions in cash or Company 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, is at least equal to the amount necessary to enable the Trustee to pay currently maturing obligations under the Guaranteed ESOP notes. (Note 6) 14 RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) (6) Guaranteed ESOP Notes --------------------- The shares of Company common stock held in the Plan's Stock Ownership Accounts were purchased from the Company from the proceeds of the sale of Guaranteed ESOP notes in a total principal amount of $270,000,000 in 1989. The Company has guaranteed the payment of principal and interest on the notes. The notes must 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, 1998, the Guaranteed ESOP notes for Series A and Series B were $70,495,204 and $120,043,000, respectively. At September 30, 1997, the Guaranteed ESOP notes for Series A and Series B were $91,984,803 and $120,043,000, respectively. The scheduled amortization of the notes for the next five fiscal years is as follows: 1999 - $23,103,053; 2000 - $25,277,000; 2001 - $22,115,150; 2002 - $34,442,000; 2003 - $39,816,000. (7) Loans Due Plan Sponsor ---------------------- As part of the redesign of the Plan as discussed in note 2, the Company filed a Private Letter Ruling request with the Internal Revenue Service on May 20, 1996. The request sought IRS approval to allow for refinancing loans from the Company to the Plan to permit the extension of the share allocation time period. On October 31, 1996, the Company received a favorable ruling from the IRS. A refinancing loan is used to ensure that the number of shares allocated during a semi-annual allocation period is equal to the sum of participants' exchange, equity and match shares. At September 30, 1998, there were six loans outstanding totaling $14,971,603. (8) 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 his 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. An active employee may elect to withdraw all or any portion of his account balance in the Tax-Deductible (MIRA) and Rollover Accounts. A Tax-Deductible (MIRA) Account holds any contributions made to the Plan before January 1, 1987. No new contributions may be made to this account. Under the rules of the Plan, the active employee may borrow the lessor of 50% or his vested account balance or $50,000. The money borrowed must come from the Retirement Savings Sheltered, Rollover, and Standard Accounts. Before-tax contributions are made to the Sheltered Account and after-tax contributions are made to the Standard Account. 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 Savings Plan 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 the Company, participants 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, Company common stock. (9) Obligation for Benefits ----------------------- All the funds of the Plan are held by investing institutions appointed by the Company under a trust agreement or investment contract. Benefits under the Plan are payable only out of these funds. The Company 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 the Company nor any investing institution guarantees the funds of the Plan against any loss or depreciation or guarantees the payment of any benefit thereunder. Although the Company 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. 15 RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Notes to Financial Statements, (Continued) (10) Eligibility ----------- All regular full-time employees of the Company or of 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 the Company and are later reemployed, can resume participation in the Plan on the date of rehire. (11) Diversification --------------- Effective January 1, 1997, Plan participants who meet certain age and service requirements were granted the ability to diversify specified portions of their Stock Ownership Account balances in any combination the other investment funds available for Retirement Savings Account balances, except for the Fidelity Retirement Money Market Portfolio. (12) Federal Income Taxes -------------------- By a letter dated April 21, 1998, the Internal Revenue Service has determined and informed the Company that the Plan qualifies under the applicable provisions of the Internal Revenue Code and is therefore exempt from federal income taxes. (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. 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, 1998 and 1997: September 30, 1998 September 30, 1997 Cost Fair Value Cost Fair Value ---- ---------- ---- ---------- Money market fund 7,277,128 7,277,128 4,332,728 4,332,728 Armstrong common stock fund 15,494,806 18,779,265 13,793,357 22,471,238 Registered investment companies 137,463,217 184,878,481 111,940,786 167,806,037 Fixed income insurance contracts 180,069,533 180,069,533 176,728,629 176,728,629 Loan portfolio 7,298,722 7,298,722 6,869,084 6,869,084 --------- --------- --------- --------- Total investments in Master Trust 347,603,406 398,303,129 313,664,584 378,207,716 =========== =========== =========== =========== Plan's interest in Master Trust 270,475,850 313,965,788 243,169,528 296,889,673 Plan's percentage in Master Trust 77.8% 78.8% 77.5% 78.5% During 1998 and 1997, the Plan's investments (including investments bought, sold, and held during the year) appreciated in value as follows: 1998 1997 ---- ---- Net appreciation (depreciation) in fair value of investments in the Fidelity Management Trust Company Master Trust (6,524,510) 40,903,095 Allocated net appreciation (depreciation) in fair value of investments in the Master Trust (4,044,835) 34,962,801 During 1998 and 1997, interest and dividends were as follows: 1998 1997 ---- ---- Interest and dividends in Fidelity Management Trust Company Master Trust 23,337,613 17,683,902 Allocated interest and dividends from investment in Master Trust 18,427,493 13,704,974 All of the above information was certified by the trustee at September 30, 1998 and 1997 and for the years then ended. 16 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Line 27A - Schedule of Assets Held for Investment Purposes September 30, 1998 Description of Investment Cost Current Value - ------------------------------------------------------------------------------- Unallocated Armstrong Stock Fund $138,384,323 $155,048,402 Allocated Armstrong Stock Fund $80,838,060 $97,351,544 Investment in Master Trust $270,475,850 $313,965,788 17 THE RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN OF ARMSTRONG WORLD INDUSTRIES, INC. Line 27D - Schedule of Reportable Transactions September 30, 1998 (a) (b) (c) (d) (e) (f) (g) Identity of Description Purchase Selling Cost of Current Value of Net Gain Party Involved of Asset Price Price Asset Asset on Trans. Date or (Loss) - -------------- -------- ----- ----- ----- -------------------- --------- *No transactions are reportable for the plan year ended, September 30, 1998. 18 Independent Auditors' Report The Retirement Committee Armstrong World Industries, Inc.: We have audited the accompanying statements of net assets of The Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. as of September 30, 1998 and 1997 and the related statements of changes in plan equity for each of the years in the three-year period ended September 30, 1998. 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 generally accepted auditing standards. 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Retirement Savings and Stock Ownership Plan of Armstrong World Industries, Inc. as of September 30, 1998 and 1997 and the changes in plan equity for each of the years in the three-year period ended September 30, 1998, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are 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. These supplemental schedules are the responsibility of the plan's management. The fund information in the statements of net assets and the statements of changes in plan equity is presented for purposes of additional analysis rather than to present the net assets and changes in plan equity of each fund. The supplemental schedules and fund information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPMG LLP Philadelphia, PA March 11, 1999 19 EXHIBIT INDEX 23 Consent of Independent Auditors