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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______
ARMSTRONG HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 333-32530 23-3033414
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(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
- -------------------
Common Stock ($1 par value)
Preferred Stock Purchase Rights
ARMSTRONG WORLD INDUSTRIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 1-2116 23-0366390
- --------------------------------------------------------------------------------
(State or other jurisdiction of Commission file (I.R.S. Employer
incorporation or organization) number Identification No.)
P. O. Box 3001, Lancaster, Pennsylvania 17604
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 397-0611
-----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
- -------------------
9-3/4% Debentures Due 2008
7.45% Senior Quarterly Interest Bonds Due 2038
1
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----- -----
The aggregate market value of the Common Stock of Armstrong Holdings, Inc. held
by non-affiliates based on the closing price ($0.63 per share) on the
over-the-counter (OTC) Bulletin Board (trading symbol ACKHQ) on February 14,
2003, was approximately $20.2 million. As of February 14, 2003, the number of
shares outstanding of registrant's Common Stock was 40,677,584. This amount
includes the 1,911,533 shares of Common Stock as of December 31, 2002, held by
JPMorgan Chase Bank, as Trustee for the employee stock ownership accounts of the
Company's Retirement Savings and Stock Ownership Plan.
Documents Incorporated by Reference
None
2
TABLE OF CONTENTS
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SECTION PAGES
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Cautionary Factors ........................................................................ 4
PART I
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Item 1. Business .................................................................................. 6
Item 2. Properties ................................................................................ 19
Item 3. Legal Proceedings ......................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 25
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 26
Item 6. Selected Financial Data ................................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 28
Item 7a. Quantitative and Qualitative Disclosure about Market Risk ................................. 56
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Schedules ........................................ 58
Quarterly Financial Information .................................................... 59
Armstrong Holdings, Inc. and Subsidiaries .......................................... 61
Armstrong World Industries, Inc. and Subsidiaries .................................. 111
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 159
PART III
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Item 10. Directors and Executive Officers .......................................................... 160
Item 11. Executive Compensation .................................................................... 166
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 172
Item 13. Certain Relationships and Related Transactions ............................................ 173
Item 14. Controls and Procedures ................................................................... 173
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 174
Signatures ........................................................................................... 180
Certifications ....................................................................................... 182
3
Cautionary Factors That May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
The disclosures and analysis in this report contain some forward-looking
statements. This discussion about those statements is provided in accordance
with the Private Securities Litigation Reform Act of 1995.
Forward-looking statements give current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," and other words
and terms of similar meaning in connection with discussions of future operating
or financial performance. In particular, these include statements relating to
future actions, prospective products, future performance or results of current
and anticipated products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, and financial results. From time to time, we may also
provide oral or written forward-looking statements in other materials released
to the public.
Any or all of the forward-looking statements made in this report and in any
other public statements may turn out to be incorrect. They can be affected by
inaccurate assumptions we may make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially. We undertake no obligation to update
any forward-looking statements, whether as a result of new information, future
events or otherwise. However, you should consult any further disclosures we make
on related subjects in Forms 10-Q, 8-K, 10-K or other reports filed with the
SEC. Other factors besides those listed here could also adversely affect our
businesses.
These are some of the factors that could potentially cause actual results to
differ materially from expected and historical results:
Chapter 11 Filing
.. Factors relating to Armstrong World Industries, Inc.'s ("AWI") Chapter 11
Filing, such as: the possible disruption of relationships with creditors,
customers, suppliers and employees; the ultimate size of AWI's
asbestos-related and other liabilities; the ability to confirm and
implement a plan of reorganization; the availability of financing and
refinancing for both AWI and its subsidiaries that are not parties to its
Chapter 11 Filing; and AWI's ability to comply with covenants in its
debtor-in-possession credit facility (the "DIP Facility").
Legal Claims
.. Claims of undetermined merit and amount which have been asserted against us
for various legal matters, including AWI's asbestos related litigation. For
more information on these matters, see the discussion of Legal Proceedings
in Part I, Item 3 in this report.
Business Environment
.. Changes in demand for public and private commercial and residential
building construction and renovation, laws and regulations, foreign
currency and interest rates, inflation or other related factors affecting
our businesses. Despite our efforts to foresee and plan for the effects of
changes in these circumstances, we can not predict their impact with
certainty. For example, an economic downturn may lead our customers to
delay or cancel construction plans. For more information on these matters,
see the discussion of Market Risk in Item 7A of this report.
.. Business combinations among our competitors or suppliers, which could
affect our competitive position in any of our business units. Similarly,
combinations or alliances among our major customers could increase their
purchasing power in dealing with us. If we should enter into one or more
business combinations, our business, finances and capital structure could
be affected.
.. The level of success of our new product introductions and those of our
competitors.
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.. The extent to which we successfully achieve integration of and synergies
from acquisitions as well as the impact of divestitures, restructuring and
other unusual items that may result from evolving business strategies and
organizational restructuring.
Retail Environment
.. Business decisions and business conditions that affect our major customers
and distribution networks. For example, a significant portion of our
revenue in North America comes from sales to major home center retailers.
.. Increased retail trade consolidation, especially in markets such as the
United States, could make us more dependent upon key retailers whose
relative bargaining strength may increase.
.. Changes in the policies of our retail trade customers, such as inventory
shifts or fluctuations, limitations on access to shelf space and other
conditions. Many of our customers, particularly our high-volume retail
trade customers, have engaged with us in continuous efforts to reduce their
inventory levels and improve delivery fulfillment.
International
.. Various worldwide economic and political factors, changes in the
competitive structures of the markets, credit risks in emerging markets,
variations in residential and commercial construction rates, and economic
growth rates in various areas of the world in which we do business. These
factors could affect the end-use markets for our products in various parts
of the world.
.. Changes in intellectual property legal protections and remedies, trade
regulations, tariff classifications or duty rates, and procedures and
actions affecting production, pricing and marketing of products,
intergovernmental disputes, possible nationalization and unstable
governments and legal systems.
.. Changes in exchange rates can significantly affect our reported results
from one period to the next.
Raw Materials
.. Availability of raw materials, energy, water and sourced products due to
changes in business and legal conditions that impact our suppliers,
including environmental conditions, laws and regulations, litigation
involving our suppliers, transportation disruptions and/or business
decisions made by our suppliers.
.. Raw material price increases (for example price increases in hardwood
lumber, limestone or petroleum-based raw materials such as plasticizers or
PVCs), energy cost increases (for example price increases in natural gas),
and changes in distribution and product mix.
5
PART I
ITEM 1. BUSINESS
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells flooring products
(resilient, wood, carpeting and sports flooring) as well as ceiling systems,
around the world. Armstrong products are sold primarily for use in the
finishing, refurbishing and repair of residential, commercial and institutional
buildings. Armstrong also designs, manufactures and sells kitchen and bathroom
cabinets to single and multi family homebuilders and remodelers.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly held parent holding company of Armstrong.
Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000,
following AWI shareholder approval of a plan of exchange under which each share
of AWI was automatically exchanged for one share of Armstrong Holdings, Inc.
Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds
no other significant assets or operations apart from AWI and AWI's subsidiaries.
Stock certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of Armstrong
Holdings, Inc. The publicly held debt of AWI was not affected in the
transaction.
Proceedings under Chapter 11
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief (the "Filing") under Chapter 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing unless
specifically authorized by the Court. In addition, as a debtor-in-possession,
AWI has the right, subject to the Court's approval, to assume or reject any
executory contracts and unexpired leases in existence at the date of the Filing.
Parties having claims as a result of any such rejection may file claims with the
Court, which will be dealt with as part of the Chapter 11 Case.
Three creditors' committees, one representing asbestos personal injury claimants
(the "Asbestos Personal Injury Claimants' Committee"), one representing asbestos
property damage claimants (the "Asbestos Property Damage Committee"), and the
other representing other unsecured creditors (the "Unsecured Creditors'
Committee"), have been appointed in the Chapter 11 Case. In addition, an
individual has been appointed to represent the interests of future asbestos
personal injury claimants (the "Future Claimants' Representative"). In
accordance with the provisions of the Bankruptcy Code, these parties have the
right to be heard on matters that come before the Court in the Chapter 11 Case.
Plan of Reorganization
On November 4, 2002, AWI filed a Plan of Reorganization with the Court and on
March 14, 2003, AWI filed its First Amended Plan of Reorganization and selected
exhibits (as so amended, it is referred to in this report as the "POR"). The POR
has been endorsed by AHI's Board of Directors and is supported by the Asbestos
Personal Injury Claimants' Committee, the Unsecured Creditors' Committee and the
Future Claimants' Representative. At present, AWI has not yet reached agreement
with the Asbestos Property Damage Committee with respect to the terms and
provisions of the POR. The POR provides for, among other things, the treatment
and discharge of all prepetition claims, including all asbestos-related claims.
6
The POR excludes Armstrong's Nitram and Desseaux subsidiaries. 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, AWI filed projected financial
information with the Court as Exhibit C to the disclosure statement. On March
14, 2003, AWI filed an amended Disclosure Statement with the Court (as so
amended, it is referred to in this report as the "Disclosure Statement"). Prior
to soliciting acceptances to the POR, the Court must approve a disclosure
statement to be included as part of the solicitation materials and find that the
disclosure statement contains adequate information to enable those voting on the
POR to make an informed judgment to accept or reject the POR.
As indicated in the Disclosure Statement and its exhibits, the projected
financial information and various estimates of value therein discussed should
not be regarded as representations or warranties by AWI, AHI or any other person
as to the accuracy of such information or that any such projection or valuation
will be realized. The information in the Disclosure Statement, including the
projected financial information and estimates of value, has been prepared by AWI
and its financial advisors. This information has not been audited or reviewed by
independent accountants. The significant assumptions used in preparation of the
information and estimates of value are included in Exhibit C to the Disclosure
Statement. The Bankruptcy Court has scheduled the hearing to consider approval
of the Disclosure Statement for April 4, 2003.
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.
Objections to the Disclosure Statement
During February 2003, several parties involved in the Chapter 11 Case filed
objections to the initial Disclosure Statement with the Court. Objections were
filed by, among others, Liberty Mutual Insurance Company, the Center for Claims
Resolution, Travelers Indemnity Company and Travelers Casualty and Surety
Company, Wells Fargo Bank Minnesota, N.A., as Indenture Trustee, and the
Unofficial Committee of Select Asbestos Claimants. Additional objections may be
filed against the amended Disclosure Statement. The Court heard and addressed
many of these objections at the February 28, 2003 hearing. Any remaining
objections are expected to be addressed at the April 4, 2003 hearing.
Asbestos Personal Injury Trust
A principal feature of the POR is the creation of a trust (the "Asbestos PI
Trust"), pursuant to section 524(g) of the Bankruptcy Code, to which all present
and future asbestos-related personal injury claims, including contribution
claims of co-defendants, will be channeled. In accordance with the "524(g)
injunction" to be issued by the Court in connection with the confirmation of the
POR, various entities will be protected from suit on account of present and
future asbestos-related personal injury claims. These entities include, among
others, AWI, reorganized AWI, AHI, AWI's affiliates, and their respective
officers and directors. Claims resolution procedures to be utilized by the
Asbestos PI Trust have been developed. These procedures will govern the
allowance and payment by the Asbestos PI Trust of all present and future
asbestos-related personal injury claims. The Asbestos PI Trust will be funded
with AWI's rights to insurance providing coverage for asbestos-related personal
injury claims, as well as a share of cash, notes, and common stock to be issued
under the POR to creditors, as described below.
7
Consideration to Be Distributed under the POR
The Asbestos PI Trust and the holders of unsecured claims will share in the POR
consideration that is made up of the following components:
. Available Cash, which is comprised of:
. Cash available on the effective date of the POR after reserving
up to $100 million to fund ongoing operations and making
provisions for certain required payments under the POR,
. Any cash drawn, at AWI's sole discretion, under an exit finance
facility for the purpose of funding distributions under the POR,
and
. Certain insurance proceeds related to environmental matters
. Plan Notes of reorganized AWI with a term of 5 to 10 years and/or net
proceeds from any private offerings of debt securities, and
. Substantially all of the outstanding common stock of reorganized AWI
The total amount of Plan Notes will be the greater of (i) $1.125 billion less
Available Cash and (ii) $775 million. However, AWI will use reasonable efforts
to issue one or more private offerings of debt securities on, or as soon as
practicable after, the Effective Date that would yield net proceeds at least
equal to the amount of the Plan Notes prescribed by the Plan. If the private
offerings are successful, the Plan Notes would not be issued. If the offerings
yield proceeds less than the amount of the Plan Notes prescribed by the Plan,
AWI will issue Plan Notes equal to the difference. The private offerings, if
issued, will not be registered under the Securities Act of 1933 and may not be
offered or sold in the U.S. absent registration or an applicable exemption from
registration requirements.
The POR provides that unsecured creditors, other than convenience creditors
described below, will receive their pro rata share of:
. 34.43% of the new common stock,
. 34.43% of the first $1.05 billion of
. Up to $300 million of Available Cash and
. The principal amount of Plan Notes and/or net cash proceeds from
any private debt offerings of debt securities.
. 60% of the next $50 million of Available Cash and, if such Available
Cash is less than $50 million, then 60% of Plan Notes and/or net cash
proceeds from any private debt offerings of debt securities, in an
amount equal to the difference between $50 million and the amount of
such Available Cash, and
. 34.43% of the remaining amount of Available Cash and Plan Notes and/or
net cash proceeds from any private debt offerings of debt securities.
The remaining amount of new common stock, Available Cash and Plan Notes and/or
net cash proceeds from any private debt offerings of debt securities, will be
distributed to the Asbestos PI Trust.
Under the POR, unsecured creditors whose claims (other than debt securities) are
less than $10,000 or who elect to reduce their claims to $10,000 will be treated
as "convenience creditors" and will receive payment of 75% of their allowed
claim amount in cash.
Asbestos property damage claims that are still disputed as of the effective date
of the POR will be channeled to a separate trust ("Asbestos PD Trust") under the
POR. If the class of asbestos property damage claimants votes to accept the POR,
the Asbestos PD Trust will be funded with $0.5 million to $2.0 million in cash
based upon the number of disputed claims (which will be funded exclusively from
the proceeds of insurance). If the class of asbestos property damage claimants
rejects the POR, the Court will estimate the aggregate value of asbestos
property damage claims, and the Asbestos PD Trust will be funded exclusively
with rights to insurance in an amount sufficient to provide for payment in full
of asbestos property damage claims, up to the aggregate amount estimated by the
Court. However, if less than 25 disputed asbestos property damage claims remain
outstanding as of the effective date of the POR, AWI may elect, in its sole
discretion, to litigate the merits of each remaining asbestos property damage
claim before the Court and pay any allowed claim in full, in cash, from
insurance proceeds rather than channel the asbestos property damage claims to
the Asbestos PD Trust.
8
Under the POR, the existing equity interests in AWI will be cancelled. The POR
provides for the potential distribution, with respect to existing equity, of
warrants to purchase shares of reorganized AWI (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 AWI 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 AWI, as agreed among the financial advisers for
AWI, the Asbestos Personal Injury Claimants' Committee, the Unsecured
Creditors' Committee, and the Future Claimants' Representative, and
which will be set forth in the Court-approved disclosure statement for
the POR.
The Warrants are estimated to have a value on the effective date of the POR of
approximately $40 million to $50 million.
AHI's shareholders will have no actual vote on the POR. If the POR is
implemented, the only value that will be retained by AHI shareholders is the
potential to receive their ratable share of the Warrants if AHI's Plan of
Liquidation (see discussion below) is approved. If the shareholders and Board of
Directors of AHI do not approve AHI's Plan of Liquidation, AHI will not receive
any Warrants to distribute to its shareholders.
Consideration Value Defined by the Disclosure Statement
In the Disclosure Statement, assuming an Effective Date of the POR of July 1,
2003, and based on estimates of the fair value of reorganized AWI, the total
value of consideration to be distributed to the Asbestos PI Trust, other than
the asbestos product liability insurance policies, will be approximately $2.1
billion, and the total value of consideration to be distributed to holders of
allowed unsecured claims (other than convenience claims) will be approximately
$1.1 billion. Based upon the estimated value of the POR consideration and AWI's
estimate that unsecured claims allowed by the Court (other than convenience
claims) will total approximately $1.65 billion, AWI estimates that holders of
allowed unsecured claims (other than convenience claims) will receive a recovery
having a value equal to approximately 66.5% of their allowed claims. AWI's
estimates of the consideration and potential recoveries are based upon many
assumptions, including:
. The estimated reorganization value for AWI is between $2.7 billion and
$3.3 billion (with a midpoint of $3.0 billion)
. The estimated equity value of new common stock is between $25.60 and
$34.40 per share with a midpoint of $30.00 per share (assuming a
distribution of 67.5 million shares of new common stock to holders of
unsecured claims and the Asbestos PI Trust)
. The Plan Notes will be in the aggregate principal amount of $775
million and are worth their face value
. AWI expects to have Available Cash of approximately $350 million
. The estimated value of the Warrants is between $40 million and $50
million
AHI's Plan of Liquidation
In connection with the consummation of the POR, the existing equity interests in
AWI will be cancelled, and the common stock of reorganized AWI will be held
principally by AWI's unsecured creditors and the Asbestos PI Trust. The POR
contemplates that 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
AWI's existing equity interest will not receive the Warrants. The POR provides
that reorganized AWI 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.
9
Structure of Reorganized AWI
As disclosed within the 2002 third quarter Form 10-Q filing, AWI had planned to
effectuate a "division" under the Pennsylvania Business Corporation Law in
connection with the consummation of the POR. Under the planned division,
reorganized AWI was to separate into a holding company and separate wholly-owned
subsidiaries carrying out its major lines of business. After further analysis
and review, the previously contemplated division will no longer occur and AWI
will emerge from bankruptcy protection as the parent and primary operating
company.
Next Steps in the Chapter 11 Process
Following the Court's approval of a disclosure statement, the POR will be
submitted to the appropriate parties in interest in AWI's Chapter 11 Case for
voting. Implementation of the POR is subject to voting and its confirmation in
accordance with the provisions of the Bankruptcy Code. AWI believes that if the
Disclosure Statement is approved in April 2003, a hearing on the confirmation of
the POR will likely occur in the third quarter of 2003. If the POR is confirmed
by the Court at such time, AWI will likely emerge from Chapter 11 shortly
thereafter. Of course, there can be no certainty that all such events will
occur, or if they do, that they will occur in accordance with such timeframes.
Common Stock and Debt Securities
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 AHI (traded under the
ticker symbol "ACK") and two debt securities of AWI (traded under the ticker
symbols "AKK" and "ACK 08"). AHI's common stock has resumed trading in the
over-the-counter (OTC) Bulletin Board under the ticker symbol "ACKHQ" and one of
AWI's debt securities has resumed trading under the ticker symbol "AKKWQ".
Bar Date for Filing Claims
The Court established August 31, 2001 as the bar date for all claims against AWI
except for asbestos-related personal injury claims and certain other specified
claims. A bar date is the date by which claims against AWI must be filed if the
claimants wish to participate in any distribution in the Chapter 11 Case. The
Court has extended the bar date for claims from several environmental agencies
until the first quarter of 2003. On March 1, 2002, the Court allowed certain
holders of alleged asbestos property damage claims to file a class proof of
claim against AWI and extended the bar date for asbestos property damage claims
to March 20, 2002. In July 2002, the Court denied the certification of the
proposed class and held that the plaintiffs' proof of claim shall only be
effective as to the named claimants. A bar date for asbestos-related personal
injury claims (other than claims for contribution, indemnification, or
subrogation) has not been set.
Approximately 4,600 proofs of claim (including late-filed claims) totaling
approximately $6.2 billion alleging a right to payment from AWI were filed with
the Court in response to the August 31, 2001 bar date, which are discussed
below. AWI continues to investigate claims. The Court will ultimately determine
liability amounts that will be allowed as part of the Chapter 11 process.
In its ongoing review of the filed claims, AWI has identified and successfully
objected to approximately 1,300 claims totaling $1.6 billion. These claims were
primarily duplicate filings, claims that were subsequently amended or claims
that are not related to AWI. The Court disallowed these claims with prejudice.
Approximately 1,000 proofs of claim totaling approximately $1.9 billion are
pending with the Court that are associated with asbestos-related personal injury
litigation, including direct personal injury claims, claims by co-defendants for
contribution and indemnification, and claims relating to AWI's participation in
the Center for Claims Resolution (the "Center"). As stated above, the bar date
of August 31, 2001 did not apply to asbestos-related personal injury claims
other than claims for contribution, indemnification, or subrogation. The POR
contemplates that all asbestos-related personal injury claims, including claims
for contribution, indemnification, or subrogation, will be addressed in the
future pursuant to the procedures to be developed in connection with the POR.
See further discussion regarding AWI's liability for asbestos-
10
related matters in Note 32 of the Consolidated Financial Statements.
Approximately 500 proofs of claim totaling approximately $0.8 billion alleging
asbestos-related property damage are pending with the Court. Most of these
claims were new to AWI and many were submitted with insufficient documentation
to assess their validity. As part of determining whether AWI asbestos containing
resilient floor covering products give rise to property damage liability, the
Court conducted an initial hearing on September 26-27, 2002 to decide the type
of scientific testing allowable under the Federal Rules of Evidence to prove or
disprove whether such products cause building contamination. On October 22,
2002, the Court granted AWI's requested relief and ruled that the methodology
offered by the Asbestos Property Damage Committee in support of its claims is
not a scientifically valid method of quantifying the level of asbestos
contamination in a building. On November 1, 2002, the Court directed that all
property damage claimants provide, in support of their claims, substantiation
that Armstrong flooring products were used in the claimants' buildings. The
Court's deadline for submission of such product identification documentation was
February 10, 2003. Prior to the Court's deadline, AWI reached an agreement in
principle to settle approximately 360 property damage claims, which alleged
damages of $0.2 billion, for approximately $2 million. Any amounts to be paid
are expected to be funded by insurance. This settlement is subject to the
Court's approval, which is scheduled to be heard by the Court on April 4, 2003.
Additionally, 130 property damage claims have been disallowed or withdrawn.
Approximately 100 property damage claims totaling $0.6 billion will remain
unresolved if the settlement is approved. Only 26 of these approximately 100
remaining property damage claims submitted product identification by the
February 10, 2003 deadline referred to above. AWI expects to continue vigorously
defending any asserted asbestos-related property damage claims in the Court. AWI
believes that it has a significant amount of existing insurance coverage
available for asbestos-related property damage liability, with the amount
ultimately available dependent upon, among other things, the profile of the
claims that may be allowed by the Court. AWI's history of property damage
litigation prior to the Chapter 11 filing is described in Note 32 of the
Consolidated Financial Statements.
Approximately 1,800 claims totaling approximately $1.9 billion alleging a right
to payment for financing, environmental, trade debt and other claims are pending
with the Court. For these categories of claims, AWI has previously recorded
approximately $1.6 billion in liabilities. AWI continues to investigate the
claims to determine their validity.
AWI continues to evaluate claims filed in the Chapter 11 Case. AWI has recorded
liability amounts for claims whose value can be reasonably estimated and which
it believes are probable of being allowed by the Court. During the fourth
quarter of 2002, AWI recorded a $2.5 billion charge to increase its estimate of
probable asbestos-related liability based on the developments in the Chapter 11
Case. See Note 32 of the Consolidated Financial Statements for further
discussion. At this time, it is impossible to reasonably estimate the value of
all the claims that will ultimately be allowed by the Court. However, it is
likely the value of the claims ultimately allowed by the Court will be different
than amounts presently recorded by AWI and could be material to AWI's financial
position and the results of its operations. Management will continue to review
the recorded liability in light of future developments in the Chapter 11 Case
and make changes to the recorded liability if and when it is appropriate.
Financing
On November 1, 2002, the Court announced it had approved AWI's motion to reduce
the amount of its debtor-in-possession credit facility (the "DIP Facility") from
$200 million to $75 million, eliminate the revolving credit borrowing feature,
retain the letter of credit issuance facility and extend the maturity date to
December 8, 2003. As of December 31, 2002, AWI had approximately $28.7 million
in letters of credit which were issued pursuant to the DIP Facility. As of
December 31, 2002, AWI had $76.4 million of cash and cash equivalents, excluding
cash held by its non-debtor subsidiaries. The decrease from the $205.9 million
of cash and cash equivalents at September 30, 2002 is primarily due to an
intercompany payment of $120 million from AWI to a wholly owned non-debtor
subsidiary under a license agreement for use of intangible assets and
intellectual property. This payment does not affect Armstrong's consolidated
cash balance. AWI believes that cash on hand and generated from operations and
dividends from its subsidiaries, together with lines of credit and the DIP
Facility, will be adequate to address its foreseeable
11
liquidity needs. Obligations under the DIP Facility, including reimbursement of
draws under the letters of credit, if any, constitute superpriority
administrative expense claims in the Chapter 11 Case.
Accounting Impact
AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7") provides financial
reporting guidance for entities that are reorganizing under the Bankruptcy Code.
This guidance is implemented in the accompanying consolidated financial
statements.
Pursuant to SOP 90-7, AWI is required to segregate prepetition liabilities that
are subject to compromise and report them separately on the balance sheet. See
Note 4 of the Consolidated Financial Statements for detail of the liabilities
subject to compromise at December 31, 2002 and 2001. Liabilities that may be
affected by a plan of reorganization are recorded at the expected amount of the
allowed claims, even if they may be settled for lesser amounts. Substantially
all of AWI's prepetition debt, now in default, is recorded at face value and is
classified within liabilities subject to compromise. Obligations of Armstrong
subsidiaries not covered by the Filing remain classified on the consolidated
balance sheet based upon maturity date. AWI's estimated liability for
asbestos-related personal injury claims is also recorded in liabilities subject
to compromise. See Note 32 of the Consolidated Financial Statements for further
discussion of AWI's asbestos liability.
Additional prepetition claims (liabilities subject to compromise) may arise due
to the rejection of executory contracts or unexpired leases, or as a result of
the allowance of contingent or disputed claims.
SOP 90-7 also requires separate reporting of all revenues, expenses, realized
gains and losses, and provision for losses related to the Filing as Chapter 11
reorganization costs, net. Accordingly, AWI recorded the following Chapter 11
reorganization activities during 2002, 2001 and 2000:
Year Ended December 31,
(amounts in millions) 2002 2001 2000
------------------- -------------------------------
Professional fees $ 27.8 $ 24.5 $ 2.6
Interest income, post petition (3.5) (5.1) (0.3)
Reductions to prepetition liabilities (1.1) (2.0) --
Termination of prepetition lease obligation -- (5.9) --
ESOP related costs -- -- 58.8
Adjustment of net debt and debt issue costs to expensed
amount of allowed claim -- -- 42.0
Other expense directly related to bankruptcy, net 0.3 1.0 0.2
------ ------- ------
Total Chapter 11 reorganization costs, net $ 23.5 $ 12.5 $103.3
====== ======= ======
Professional fees represent legal and financial advisory fees and expenses
directly related to the Filing.
Interest income is earned from short-term investments of cash by AWI subsequent
to the Filing.
Reductions to prepetition liabilities represent the difference between the
prepetition invoiced amount and the actual cash payment made to certain vendors
due to negotiated settlements. These payments of prepetition obligations were
made pursuant to authority granted by the Court.
Termination of prepetition lease obligation represents the reversal of an
accrual for future lease payments for office space in the U.S. that AWI will not
pay due to the termination of the lease contract. This amount was previously
accrued in the third quarter of 2000 as part of a restructuring charge when the
decision to vacate the premises was made.
12
ESOP related costs include a $43.3 million impairment charge related to amounts
borrowed by the ESOP from Armstrong, the trustee of the ESOP. After the Filing,
it was expected that the ESOP would no longer have the ability to repay
Armstrong money it previously borrowed. In addition, a $15.5 million expense was
recorded related to interest and tax penalty guarantees owed to ESOP bondholders
caused by the default on the ESOP bonds.
In order to record prepetition debt at the face value or the amount of the
expected allowed claims, AWI adjusted the amount of net debt and debt issue
costs and recorded a pretax expense of $42.0 million.
As a result of the Filing, realization of assets and liquidation of liabilities
are subject to uncertainty. While operating as a debtor-in-possession, AWI may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the consolidated financial statements.
Although a POR and Disclosure Statement have been filed with the Court,
implementation of the POR is subject to confirmation of the POR in accordance
with the provisions of the Bankruptcy Code. AWI is unable to predict when and if
the POR will be confirmed. Therefore, the timing and terms of a resolution of
the Chapter 11 Case remain uncertain. Further, a confirmed plan of
reorganization could materially change the amounts and classifications reported
in the consolidated financial statements.
Discontinued Operations
In February 2001, AHI determined to permanently exit the Textiles and Sports
Flooring segment and on February 20, 2001 entered into negotiations to sell
substantially all of the businesses comprising this segment to a private equity
investor based in Europe. Based on these events, the segment was classified as a
discontinued operation starting with the fourth quarter of 2000. On June 12,
2001, negotiations with this investor were terminated. During the third quarter
of 2001, AHI terminated its plans to permanently exit this segment. This
decision was based on the difficulty encountered in selling the business and a
new review of the business, industry and overall economy conducted by new senior
management. Accordingly, this segment is no longer classified as a discontinued
operation and amounts have been reclassified into operations as required by
Emerging Issues Task Force ("EITF") Issue No. 90-16 - "Accounting for
Discontinued Operations Subsequently Retained". All previous periods have been
reclassified to conform to the current presentation.
On May 31, 2000, Armstrong completed its sale of all of the entities, assets and
certain liabilities comprising its Insulation Products segment to Orion
Einundvierzigste Beteiligungsgesellschaft Mbh, a subsidiary of the Dutch
investment firm Gilde Investment Management N.V. for $264 million. The
transaction resulted in an after tax gain of $114.8 million, or $2.86 per share,
in 2000.
See Note 6 of the Consolidated Financial Statements for further discussion of
discontinued operations.
Industry Segments
Financial Information about Industry Segments
See Note 3 of the Consolidated Financial Statements for financial information on
Armstrong's reportable industry segments.
Narrative Description of Business
Armstrong conducts its business through the following business segments:
Resilient Flooring
Armstrong is a worldwide manufacturer of a broad range of floor coverings for
homes and commercial and institutional buildings, which are sold with adhesives,
installation and maintenance materials and accessories. Armstrong's Resilient
Flooring products include vinyl sheet and vinyl tile, linoleum and laminate
flooring. Various products offer ease of installation, reduced maintenance
(no-wax), and cushioning for greater underfoot comfort. The business mix is
approximately 55% residential and 45% commercial. The products are sold in a
wide variety of types, designs, and colors to commercial, residential and
institutional customers through wholesalers, retailers (including large home
centers and buying groups), contractors, and to the hotel/motel and manufactured
homes industries.
13
Wood Flooring
The Wood Flooring segment manufactures and distributes wood and other flooring
products. These products are used primarily in residential new construction and
remodeling, with some commercial applications in stores, restaurants and
high-end offices. The business mix is approximately 95% residential, and 5%
commercial. Wood Flooring sales are generally made through independent wholesale
flooring distributors and retailers (including large home centers and buying
groups) under the brand names Bruce(R), Hartco(R) and Robbins(R).
Textiles & Sports Flooring
The Textiles and Sports Flooring business segment manufactures carpeting and
sports flooring products that are mainly sold in Europe. The carpeting products
consist principally of carpet tiles and broadloom used in commercial
applications as well as the leisure and travel industry. Sports flooring
products include artificial turf surfaces. The business mix is approximately 26%
residential and 74% commercial. Both product groups are sold through
wholesalers, retailers and contractors.
Building Products
The Building Products segment includes commercial and residential ceiling
systems. Commercial suspended ceiling systems, designed for use in shopping
centers, offices, schools, hospitals, and other commercial and institutional
settings, are available in numerous colors, performance characteristics and
designs and offer characteristics such as acoustical control, accessibility to
the plenum (the area above the ceiling), rated fire protection, and aesthetic
appeal. The business mix is approximately 90% commercial, with approximately
two-thirds in improvement projects and the balance in new construction.
Armstrong sells commercial ceiling materials and accessories to ceiling systems
contractors and to resale distributors. Ceiling materials for the home provide
noise reduction and incorporate features affording ease of installation. These
residential ceiling products are sold through wholesalers and retailers
(including large home centers). Framework (grid) products for Armstrong
suspension ceiling systems products are manufactured through a joint venture
with Worthington Industries (WAVE) and are sold by both Armstrong and the WAVE
joint venture.
Cabinets
The Cabinets segment manufactures kitchen and bathroom cabinetry and related
products, which are used primarily in residential new construction and
remodeling. The business mix is mostly residential, with approximately 70% in
new construction and 30% in home improvement projects. Through its nationwide
system of company-owned and independent distribution centers, the Cabinets
segment provides design, fabrication and installation services to single-family
builders, multi-family builders and remodelers under the brand names IXL(R),
Bruce(R) and Armstrong(TM).
Major Customers
Armstrong businesses principally sell products through building products
distributors, who re-sell our products to retailers, builders, contractors,
installers and others. Armstrong also sells a significant portion of our
products to home center chains and industry buying groups. For example, in 2002,
Armstrong net sales to The Home Depot, Inc. totaled approximately $380.3 million
compared to approximately $340.8 million and $373.2 million in 2001 and 2000,
respectively. No other customer accounted for more than 10% of Armstrong's
revenue.
14
Raw Materials
Raw materials essential to Armstrong businesses are purchased worldwide in the
ordinary course of business from numerous suppliers. The principal raw materials
used in each business include the following:
Business Principal Raw Materials
- --------------------- ---------------------------------------------------------
Resilient Flooring Synthetic resins, plasticizers, PVC, latex, linseed oil,
limestone, films, pigments and inks
Wood Flooring Lumber, veneer, acrylics, coatings, and plywood
Textiles and Yarn, latex, bitumen and wool
Sports Flooring
Building Products Mineral fibers and fillers, clays, starches, newspaper,
and perlite, as well as steel used in the production of
metal ceilings and manufacturing of ceiling grids
Cabinets Lumber, veneer, plywood, particleboard, fiberboard and
components, such as doors
Armstrong's laminate flooring products are sourced from third parties under
long-term supply contracts.
Armstrong also purchases significant amounts of packaging materials for all
products and uses substantial amounts of energy, such as electricity and natural
gas, and water in our manufacturing operations. In general, adequate supplies of
raw materials were available to all of Armstrong's businesses. Armstrong cannot
guarantee that a significant shortage of one raw material or another will not
occur, however.
Customers' orders for Armstrong products are typically for immediate shipment.
Thus, in each business group, Armstrong keeps sufficient inventory on hand to
satisfy orders, or manufactures product to meet delivery dates specified in
orders. As a result, there historically has been no material backlog in any
industry segment.
Patent and Intellectual Property Rights
Patent protection is important to Armstrong's business in the United States and
other markets. Armstrong's competitive position has been enhanced by U.S. and
foreign patents on products and processes developed or perfected within
Armstrong or obtained through acquisition or license. In addition, Armstrong
also benefits from our trade secrets for certain products and processes.
Patent protection extends for varying periods according to the date of patent
filing or grant and the legal term of a patent in the various countries where
patent protection is obtained. The actual protection afforded by a patent, which
can vary from country to country, depends upon the type of patent, the scope of
its coverage, and the availability of legal remedies in the country. Although
Armstrong considers that, in the aggregate, our patents and trade secrets
constitute a valuable asset of material importance to its business, Armstrong
does not regard any of its businesses as being materially dependent upon any
single patent or trade secret, or any group of related patents or trade secrets.
Armstrong products are sold around the world under numerous brand-name
trademarks that are considered in the aggregate to be of material importance.
Certain of Armstrong trademarks, including without limitation, house marks
Armstrong(TM), Bruce(R), Hartco(R), Robbins(R), and DLW(TM), and product line
marks Allwood(TM), Cirrus(R), Corlon(R), Cortega(R), Designer Solarian(R),
Excelon(R), Fundamentals(R), i-ceilings(R), IXL(R), Medintech(R), Natural
Inspirations(TM), Nature's Gallery(TM), Second Look(R), Solarian(R),
SuperLock(TM), SwiftLock(TM), ToughGuard(R) and Ultima(TM) are important to
Armstrong's business because of their significant brand name recognition.
Trademark protection continues in some countries as long as the mark is used, in
other countries, as long as it is registered. Registrations are generally for
fixed, but renewable, terms.
15
Competition
There is strong competition in all of the industry segments in which Armstrong
does business. Competition in each industry segment and each geographic area
where Armstrong does business includes numerous companies. Principal methods of
competition include product performance, product styling, service and price.
Increasing competition in the U.S. from international producers is apparent in
Armstrong's businesses. Over recent years, there has continued to be excess
industry capacity in many geographic markets, which tends to increase price
competition.
Research & Development
Research and development ("R&D") activities are important and necessary in
helping Armstrong improve its products. Principal R&D functions include the
development and improvement of products and manufacturing processes.
Armstrong spent $55.9 million in 2002, $56.3 million in 2001 and $60.3 million
in 2000 on R&D activities worldwide.
Environmental Matters
Most of Armstrong's manufacturing and certain of Armstrong's research facilities
are affected by various federal, state and local environmental requirements
relating to the discharge of materials or the protection of the environment.
Armstrong has made, and intends to continue to make, necessary expenditures for
compliance with applicable environmental requirements at its operating
facilities. Armstrong incurred capital expenditures of approximately $4.5
million in 2002, $6.8 million in 2001 and $6.2 million in 2000 associated with
environmental compliance and control facilities. Armstrong anticipates that
annual expenditures for those purposes will not change materially from recent
experience. However, applicable environmental laws continue to change. As a
result of continuous changes in regulatory requirements, Armstrong cannot
predict with certainty future capital expenditures associated with compliance
with environmental requirements.
Armstrong is involved in proceedings under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund"), and similar state laws
at approximately 22 sites. In most cases, Armstrong is one of many potentially
responsible parties ("PRPs") which have potential liability for the required
investigation and remediation of each site, and which in some cases, have agreed
to jointly fund that required investigation and remediation. With regard to some
sites, however, Armstrong disputes the liability, the proposed remedy or the
proposed cost allocation among the PRPs. Armstrong may have rights of
contribution or reimbursement from other parties or coverage under applicable
insurance policies.
Armstrong has been remediating environmental contamination resulting from past
industrial activity at certain of its former plant sites. AWI's payments and
remediation work on such sites for which AWI is the potentially responsible
party is under review in light of the Chapter 11 Filing. The bar date for claims
from several environmental agencies has been extended into the first quarter of
2003.
Estimates of Armstrong's future environmental liability at the Superfund sites
and current or former plant sites are based on evaluations of currently
available facts regarding each individual site and consider factors such as
Armstrong's activities in conjunction with the site, existing technology,
presently enacted laws and regulations and prior company experience in
remediating contaminated sites. Although current law imposes joint and several
liability on all parties at Superfund sites, Armstrong's contribution to the
remediation of these sites is expected to be limited by the number of other
companies also identified as potentially liable for site remediation. As a
result, Armstrong's estimated liability reflects only Armstrong's expected
share. In determining the probability of contribution, Armstrong considers the
solvency of the parties, whether liability is being disputed, the terms of any
existing agreements and experience with similar matters. The Chapter 11 Case
also may affect the ultimate amount of such contributions.
AWI is subject to a unilateral order by the Oregon Department of Environmental
Quality ("DEQ") to conduct a remedial investigation and feasibility study and
any necessary remedial design and action at its
16
St. Helens, Oregon facility, as well as the adjacent Scappoose Bay. AWI has
denied liability for the Scappoose Bay, but has cooperated with the DEQ
regarding its owned property. Other potentially responsible parties who are not
yet subject to orders by the DEQ include former site owners Owens Corning ("OC")
and Kaiser Gypsum Company, Inc. OC has entered into a settlement with the DEQ.
Pursuant to the settlement, OC will make a lump sum payment to the DEQ in
exchange for contribution protection (including protection against common law
and statutory contribution claims by AWI against OC) and a covenant not to sue.
AWI has negotiated with the DEQ how these funds will be made available for the
investigation and remedial action for the site. AWI has recorded an
environmental liability with respect to the St. Helens remedial investigations
and feasibility study at its facility, but not for Scappoose Bay because AWI
continues to dispute responsibility for any contamination in Scappoose Bay.
Liabilities of $21.2 million at December 31, 2002 and $16.6 million at December
31, 2001 were for potential environmental liabilities that Armstrong considers
probable and for which a reasonable estimate of the probable liability could be
made. Where existing data is sufficient to estimate the liability, that estimate
has been used; where only a range of probable liability is available and no
amount within that range is more likely than any other, the lower end of the
range has been used. As assessments and remediation activities progress at each
site, these liabilities are reviewed to reflect additional information as it
becomes available. Due to the Chapter 11 Filing, $11.4 million of the December
31, 2002 and $6.4 million of the December 31, 2001 environmental liabilities are
classified as prepetition liabilities subject to compromise. As a general rule,
the Chapter 11 process does not preserve company assets for such prepetition
liabilities.
The estimated liabilities above do not take into account any claims for
recoveries from insurance or third parties. Such recoveries, where probable,
have been recorded as an asset in the consolidated financial statements and are
either available through settlement or anticipated to be recovered through
negotiation or litigation. The amount of the recorded asset for estimated
recoveries was $3.3 million and $3.8 million at December 31, 2002 and 2001,
respectively.
Actual costs to be incurred at identified sites may vary from the estimates,
given the inherent uncertainties in evaluating environmental liabilities.
Subject to the imprecision in estimating environmental remediation costs,
Armstrong believes that any sum it may have to pay in connection with
environmental matters in excess of the amounts noted above would not have a
material adverse effect on its financial condition, or liquidity, although the
recording of future costs may be material to earnings in such future period.
Armstrong recorded expense of $4.5 million, $2.1 million and $1.5 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
Employees
As of December 31, 2002, AHI had approximately 16,500 full-time and part-time
employees around the world, of whom approximately 5,100 are located outside of
the United States. About 68% of the approximately 8,000 hourly or salaried
production and maintenance employees in the United States are represented by
labor unions. This percentage includes all hourly production employees at
company plants and warehouses where labor unions exist, regardless of whether or
not the employees actually pay union dues.
Armstrong employee and labor relations remained good in 2002. During 2002,
Armstrong concluded negotiations for all collective bargaining agreements
expiring during the year without a work stoppage. Throughout 2003, collective
bargaining agreements covering certain employees at eight plants and one
warehouse will expire. Armstrong has already successfully renegotiated one of
these agreements in the Wood Flooring segment. Excluding the successfully
renegotiated agreement, approximately 3,000 employees are covered under
agreements expiring during 2003, which includes approximately 50% of production
employees at both the Wood Flooring and Cabinets segments. Currently,
approximately 800 Wood Flooring employees, who work at two manufacturing
facilities but are covered under one union agreement, are working under expired
contracts. The timing of resolutions is not determinable and work stoppages are
possible. The actual effects could have a material adverse impact on the
operations of the businesses.
17
Geographic Areas
See Note 3 of the Consolidated Financial Statements for financial information by
geographic areas.
Armstrong's non-U.S. operations are subject to local government laws concerning
restrictions on and transfers of investments, tariffs, personnel administration,
and other matters. In addition, consolidated earnings that originate outside the
U.S. are subject to both U.S. and non-U.S. tax laws, to certain exchange and
currency controls, and to the effects of currency fluctuations.
Financial Information Filed With the Court
Armstrong reports its operating results and financial statements on a
consolidated basis. These public reports are available through the U.S.
Securities and Exchange Commission and other sources, and are also provided free
of charge to investors who contact Armstrong. However, under applicable
bankruptcy law, AWI is also required to file periodically with the Court various
documents, including certain financial information on an unconsolidated basis.
This information includes statements, schedules, and monthly operating reports
in forms prescribed by Federal Bankruptcy Law.
Armstrong cautions that such materials are prepared according to requirements
under Federal Bankruptcy Law. While they accurately provide then-current
information required under Bankruptcy Law, they are nonetheless unconsolidated,
unaudited, and are prepared in a format different from that used in Armstrong's
consolidated financial statements filed under the securities laws. Accordingly,
Armstrong believes the substance and format do not allow meaningful comparison
with Armstrong's regular publicly disclosed consolidated financial statements.
The materials filed with the Court are not prepared for the purpose of providing
a basis for an investment decision relating to the stock of AHI or the debt
securities of AWI, or for comparison with other financial information filed with
the SEC.
Notwithstanding, most of the Debtors' filings with the Court are available to
the public at the office of the Clerk of the Bankruptcy Court. Those filings may
also be obtained through private document retrieval services. Armstrong
undertakes no obligation to make any further public announcement with respect to
the documents filed with the Court or any matters referred to in them.
As previously disclosed, on December 6, 2000, AWI and two of its subsidiaries
(collectively, the "Debtors") filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware ("the Court"). On November 4, 2002, AWI filed its
Plan of Reorganization ("POR") with the Court. The POR provides for, among other
things, the treatment and discharge of all prepetition claims, including all
asbestos-related claims and future asbestos-related claims. The POR excludes
Armstrong's Nitram and Desseaux subsidiaries. On December 20, 2002, AWI filed
its Disclosure Statement with the Court and on December 26, 2002, AWI filed
Exhibit "C" entitled "Projected Financial Information," pertaining to the
Disclosure Statement. On March 14, 2003, AWI filed its First Amended Plan of
Reorganization and selected exhibits and an amended Disclosure Statement. The
POR and Disclosure Statement, including amendments, are available on the
following website: www.armstrongplan.com.
18
ITEM 2. PROPERTIES
Armstrong and AHI world headquarters are in Lancaster, Pennsylvania. Armstrong
owns a 100-acre, multi-building campus comprising the site of our corporate
headquarters, most operational headquarters, and our U.S. R&D operations and
marketing and service headquarters. Altogether, our headquarters operations
occupy over 986,000 square feet of floor space.
We produce and market Armstrong products and services throughout the world,
owning and operating 50 manufacturing plants in 15 countries. Twenty-nine of
these facilities are located throughout the United States. In addition,
Armstrong has an interest through joint ventures in 9 additional plants in 5
countries.
Business Number
Segment of Plants Location of Principal Facilities
- -------------------- ---------- ---------------------------------------------
Resilient Flooring 14 California, Illinois, Mississippi, Oklahoma,
Pennsylvania, Australia, Canada, Germany,
Sweden and the U.K.
Wood Flooring 13 Arkansas, Kentucky, Mississippi, Tennessee,
Texas and West Virginia
Textiles and 5 Belgium, Germany and The Netherlands
Sports Flooring
Building Products 15 Alabama, Florida, Georgia, Oregon,
Pennsylvania, China, France, Germany, The
Netherlands and the U.K.
Cabinets 3 Nebraska, Pennsylvania and Tennessee
Sales offices are leased and owned worldwide, and leased facilities are utilized
to supplement Armstrong's owned warehousing facilities.
Productive capacity and the extent of utilization of Armstrong facilities are
difficult to quantify with certainty because in any one facility, maximum
capacity and utilization vary periodically depending upon the product that is
being manufactured, and individual facilities manufacture multiple products.
Armstrong believes its facilities have sufficient productive capacity to meet
its anticipated needs for the current period and for the next two to three
years. Armstrong believes that its various facilities are adequate and suitable.
Additional incremental investments in plant facilities are made as appropriate
to balance capacity with anticipated demand, improve quality and service, and
reduce costs.
19
ITEM 3. LEGAL PROCEEDINGS
ASBESTOS-RELATED LITIGATION
AWI is a defendant in personal injury cases and property damage cases related to
asbestos containing products. On December 6, 2000, AWI filed a voluntary
petition for relief ("the Filing") under Chapter 11 of the U.S. Bankruptcy Code
to use the court supervised reorganization process to achieve a final resolution
of its asbestos liability.
Asbestos-Related Personal Injury Claims
Prior to filing for relief under the Bankruptcy Code, AWI was a member of the
Center for Claims Resolution (the "Center") which handled the defense and
settlement of asbestos-related personal injury claims on behalf of its members.
The Center pursued broad-based settlements of asbestos-related personal injury
claims under the Strategic Settlement Program ("SSP") and had reached agreements
with law firms that covered approximately 130,000 claims that named AWI as a
defendant.
Due to the Filing, holders of asbestos-related personal injury claims are stayed
from continuing to prosecute pending litigation and from commencing new lawsuits
against AWI. In addition, AWI ceased making payments to the Center with respect
to asbestos-related personal injury claims, including payments pursuant to the
outstanding SSP agreements. AWI's obligations with respect to payments called
for under these settlements will be determined in its Chapter 11 Case.
A creditors' committee representing the interests of asbestos personal injury
claimants and an individual has been appointed to represent the interests of
future personal injury claimants in the Chapter 11 Case. AWI's present and
future asbestos liability will be addressed in its Chapter 11 Case rather than
through the Center and a multitude of lawsuits in different jurisdictions
throughout the U.S. It is anticipated that all of AWI's current and future
asbestos-related personal injury claims will be resolved in the Chapter 11 Case.
Asbestos-Related Personal Injury Liability
In evaluating its potential asbestos-related personal injury liability prior to
the Filing, AWI reviewed information provided by the Center including, among
other things, recent and historical settlement amounts, the incidence of past
and recent claims, the mix of the injuries of the plaintiffs, the number of
cases pending against it and the status and results of broad-based settlement
discussions. Based on this review, AWI developed an estimated range for its cost
to defend and resolve asbestos-related personal injury claims for six years,
through 2006. This estimated range was large due to the limitations of the
available data and the difficulty of forecasting with any certainty the numerous
variables that could have affected AWI's actual liability for this period. AWI
concluded that no amount within the range was more likely than any other, and
therefore reflected the low end of the range as the liability in the
consolidated financial statements, in accordance with generally accepted
accounting principles.
It is expected that the Chapter 11 process will deal with all current and future
asbestos-related personal injury claims against AWI. There are significant
differences between the way the asbestos-related personal injury claims may be
addressed under the bankruptcy process and the historical way AWI's claims were
resolved. See Note 1 of the Consolidated Financial Statements for further
discussion on how the Chapter 11 process may address AWI's asbestos-related
personal injury claims.
As of September 30, 2000, AWI had recorded a liability of $758.8 million for its
asbestos-related personal injury liability that it determined was probable and
estimable through 2006. Due to the increased uncertainty created as a result of
the Filing, the only change made to the previously recorded liability through
the third quarter of 2002 was to record October and November 2000 payments of
$68.2 million against the accrual. The asbestos-related personal injury
liability balance recorded at December 31, 2001 was $690.6 million, which was
recorded in liabilities subject to compromise.
As discussed previously, AWI filed an initial POR and disclosure statement with
respect to the POR during the fourth quarter of 2002. In March 2003, AWI filed
an amended POR and disclosure statement. The POR represents the product of
negotiations with and is supported by the Asbestos Personal Injury Claimants'
Committee, the Unsecured Creditors' Committee and the Future Claimants'
Representative. Based upon the foregoing, the discussions AWI has had with
representatives of such entities within the last several months
20
and the hearings held before the Court in the last several months, management
now believes that it is reasonably likely that the claims addressed in the POR
will be satisfied substantially in the manner set forth in the POR. As a result,
AWI has concluded that it can reasonably estimate its probable liability for
asbestos-related current and future personal injury claims. Accordingly, in the
fourth quarter of 2002, AWI recorded a $2.5 billion charge to increase the
liability. The asbestos-related liability of approximately $3.2 billion at
December 31, 2002, which was treated as subject to compromise, represents the
estimated amount of liability that is implied based upon the negotiated
resolution reflected in the POR, the total consideration expected to be paid to
the Asbestos PI Trust pursuant to the POR and a recovery value percentage for
the allowed claims of the Asbestos PI Trust that is equal to the estimated
recovery value percentage for the allowed non-asbestos unsecured claims.
Pursuant to the POR, all current and future asbestos-related personal injury
claims will be channeled to the Asbestos PI Trust for resolution and, upon
emergence from Chapter 11, reorganized AWI will not have any responsibility for
the claims or participate in their resolution.
AWI is unable to predict when and if this POR will be confirmed. Therefore, the
timing and terms of resolution of the Chapter 11 Case remain uncertain. As long
as this uncertainty exists, future changes to the recorded liability are
possible and could be material to AWI's financial position and the results of
its operations. Management will continue to review the recorded liability in
light of future developments in the Chapter 11 Case and make changes to the
recorded liability if and when it is appropriate.
The $2.5 billion, fourth quarter 2002, charge to increase the asbestos-related
personal injury liability is before recognition of gains from the settlement of
liabilities subject to compromise, which will arise at a later date as a
consequence of the Chapter 11 process.
Collateral Requirements
During 2000, AWI had secured a bond for $56.2 million to meet minimum collateral
requirements established by the Center with respect to asbestos-related personal
injury claims asserted against AWI. On October 27, 2000, the insurance company
that underwrote the surety bond informed AWI and the Center of its intention not
to renew the surety bond effective February 28, 2001. On February 6, 2001, the
Center advised the surety of the Center's demand for payment of the face value
of the bond. The surety filed a motion with the Court seeking to restrain the
Center from drawing on the bond. The motion was not granted. On March 28, 2001,
the surety filed an amended complaint in the Court seeking similar relief. The
Center has filed a motion to dismiss the amended complaint. The Court has not
yet ruled on the Center's motion or the complaint. In addition, on April 27,
2001, AWI filed a complaint and a motion with the Court seeking an order, among
other things, enjoining the Center from drawing on the bond or, in the event the
Center is permitted to draw on the bond, requiring that the proceeds of any such
draw be deposited into a Court-approved account subject to further order of the
Court. Judge Alfred M. Wolin of the Federal District Court for the District of
New Jersey, who is also presiding over AWI's Chapter 11 Case, indicated he would
determine these matters. Judge Wolin has not yet ruled on these matters.
Asbestos-Related property Damage Litigation
Over the years, AWI was one of many defendants in asbestos-related property
damage claims that were filed by public and private building owners, with six
claims pending as of June 30, 2001. The claims that were resolved prior to the
Filing resulted in aggregate indemnity obligations of less than $10 million. To
date, all payments of these obligations have been entirely covered by insurance.
The pending cases present allegations of damage to the plaintiffs' buildings
caused by asbestos-containing products and generally seek compensatory and
punitive damages and equitable relief, including reimbursement of expenditures
for removal and replacement of such products. In the second quarter of 2000, AWI
was served with a lawsuit seeking class certification of Texas residents who own
property with asbestos-containing products. This case includes allegations that
AWI asbestos-containing products caused damage to buildings and generally seeks
compensatory damages and equitable relief, including testing, reimbursement for
removal and diminution of property value. AWI vigorously denies the validity of
the allegations against it in these actions and, in any event, believes that any
costs will be covered by insurance.
Continued prosecution of these actions and the commencement of any new asbestos
property damage actions are stayed due to the Filing. In March 2002, the Court
allowed certain alleged holders of asbestos property damage claims to file a
class proof of claim against AWI. In July 2002, the Court denied the
21
certification of the proposed class and held that the plaintiffs' proof of claim
shall only be effective as to the named claimants. The plaintiffs' motion for
leave to appeal to the U.S. District Court was denied by Judge Wolin on October
3, 2002. As part of determining whether AWI asbestos containing resilient floor
covering products give rise to property damage liability, the Court conducted an
initial hearing on September 26 - 27, 2002 to decide the type of scientific
testing allowable under the Federal Rules of Evidence to prove or disprove
whether such products cause building contamination. On October 22, 2002, the
Court granted AWI's requested relief and ruled that the methodology offered by
the Asbestos Property Damage Committee in support of its claims is not a
scientifically valid method of quantifying the level of asbestos contamination
in a building. On November 1, 2002, the Court directed that all property damage
claimants provide, in support of their claims, substantiation that Armstrong
flooring products were used in the claimants' buildings. The Court's deadline
for submission of such product identification documentation was February 10,
2003. Prior to the Court's deadline, AWI reached an agreement in principle to
settle approximately 360 property damage claims, which alleged damages of $0.2
billion, for $2 million. Any amounts to be paid are expected to be funded by
insurance. This settlement is subject to the Court's approval, which is
scheduled to be heard by the Court on April 4, 2003. Additionally, 130 property
damage claims have been disallowed or withdrawn. Approximately 100 property
damage claims totaling $0.6 billion will remain unresolved if the settlement is
approved. Only 26 of these 100 remaining property damage claims submitted
product identification by the February 10, 2003 deadline referred to above.
Consistent with prior periods and due to increased uncertainty, AWI has not
recorded any liability related to asbestos-related property damage claims as of
December 31, 2002. See Note 1 of the Consolidated Financial Statements for
further discussion of property damage claims in the Chapter 11 Case. A separate
creditors' committee representing the interests of property damage asbestos
claimants has been appointed in the Chapter 11 Case.
Insurance Recovery Proceedings
A substantial portion of AWI's primary and excess remaining insurance asset is
nonproducts (general liability) insurance for personal injury claims, including
among others, those that involve alleged exposure during AWI's installation of
asbestos insulation materials. AWI has entered into settlements with a number of
the carriers resolving its coverage issues. However, an alternative dispute
resolution ("ADR") procedure was commenced against certain carriers to determine
the percentage of resolved and unresolved claims that are nonproducts claims, to
establish the entitlement to such coverage and to determine whether and how much
reinstatement of prematurely exhausted products hazard insurance is warranted.
The nonproducts coverage potentially available is substantial and includes
defense costs in addition to limits.
During 1999, AWI received preliminary decisions in the initial phases of the
trial proceeding of the ADR, which were generally favorable to AWI on a number
of issues related to insurance coverage. However, during the first quarter of
2001, a new trial judge was selected for the ADR. The new trial judge conducted
hearings in 2001 and determined not to rehear matters decided by the previous
judge. In the first quarter of 2002, the new trial judge concluded the ADR trial
proceeding with findings in favor of AWI on substantially all key issues.
Liberty Mutual, the only insurer that is still a party to the ADR, has appealed
that final judgment. Appellate argument originally scheduled for October 2002
was adjourned and was held on March 11, 2003. In July 2002, AWI filed a lawsuit
against Liberty Mutual in the Federal District Court for the Eastern District of
Pennsylvania seeking, among other things, a declaratory judgment with respect to
certain policy issues not subject to binding ADR.
One of the insurance carriers, Reliance Insurance Company, was placed under an
order of liquidation by the Pennsylvania Insurance Department during October
2001 due to financial difficulties. The order of liquidation prohibits Reliance
from making any claim payments under the insurance policies until the
liquidation occurs. AWI intends to file a proof of claim against Reliance by the
December 2003 deadline. It is uncertain when AWI will receive proceeds from
Reliance under these insurance policies.
Another insurer, Century Indemnity Company, who previously settled its coverage
issues with AWI, has made some of its required payments under the settlement to
a trust of which AWI is a beneficiary. During January 2002, this insurer filed
an adversary action in AWI's Chapter 11 Case. Among other things, the action
requests the Court to (1) declare that the settlement agreement is an executory
contract and to
22
compel assumption or rejection of the agreement; (2) declare that the insurer
need not make its present and future scheduled payments unless AWI assumes the
agreement; (3) declare that the insurer is entitled to indemnification from AWI
against any liabilities that the insurer may incur in certain unrelated
litigation in which the insurer is involved; and (4) enjoin the disposition of
funds previously paid by the insurer to the trust pending an adjudication of the
insurer's rights. These issues are before the Court for determination and AWI
believes it is highly unlikely the insurer will prevail in this matter.
On March 5, 2003, the New Hampshire Insurance Department placed The Home
Insurance Company ("Home") under an order of rehabilitation. Less than $10
million of AWI's recorded insurance asset is based on policies with Home, which
management believes is still probable of recovery.
Insurance Asset
An insurance asset in respect of asbestos personal injury claims in the amount
of $198.1 million is recorded as of December 31, 2002 compared to $214.1 million
as of December 31, 2001. Of the total recorded asset at December 31, 2002,
approximately $35.7 million represents partial settlement for previous claims
that will be paid in a fixed and determinable flow and is reported at its net
present value discounted at 6.50%. The total amount recorded reflects AWI's
belief in the availability of insurance in this amount, based upon AWI's success
in insurance recoveries, settlement agreements that provide such coverage, the
nonproducts recoveries by other companies and the opinion of outside counsel.
Such insurance is either available through settlement or probable of recovery
through negotiation, litigation or resolution of the ADR process. Depending on
further progress of the ADR, activities such as settlement discussions with
insurance carriers party to the ADR and those not party to the ADR, the final
determination of coverage shared with ACandS (the former AWI insulation
contracting subsidiary that was sold in August 1969 and which filed for relief
under Chapter 11 of the Bankruptcy Code in September 2002) and the financial
condition of the insurers, AWI may revise its estimate of probable insurance
recoveries. Approximately $80 million of the $198.1 million asset is determined
from agreed coverage in place and is therefore directly related to the amount of
the liability. Of the $198.1 million asset, $24.0 million has been recorded as a
current asset as of December 31, 2002 reflecting management's estimate of the
minimum insurance payments to be received in the next 12 months. As of February
2003, approximately $8.0 million of the $24.0 million current asset is past due
based on a previous settlement agreement. AWI believes collection of the full
amount is still probable and therefore has not established a reserve against
these receivables.
A significant part of the recorded asset relates to insurance that AWI believes
is probable and will be obtained through settlements with the various carriers.
Although AWI revised its recorded asbestos liability by $2.5 billion in the
fourth quarter of 2002, there was no increase recorded in the estimated
insurance recovery asset. While AWI believes that the process of resolving
disputed insurance coverage may result in higher settlement amounts than
recorded, there has been no increase in the recorded amounts due to the
uncertainties remaining in the process. Accordingly, this asset could change
significantly based upon resolution of the issues. Management estimates that the
timing of future cash payments for the recorded asset may extend beyond 10
years.
Cash Flow Impact
As a result of the Chapter 11 Filing, AWI did not make any payments for
asbestos-related claims in 2002 or 2001. AWI received $16.0 million and $32.2
million in asbestos-related insurance recoveries during 2002 and 2001,
respectively. During the pendency of the Chapter 11 Case, AWI does not expect to
make any further cash payments for asbestos-related claims, but AWI expects to
continue to receive insurance proceeds under the terms of various settlement
agreements.
Conclusion
Based upon the events described above, management came to a belief that AWI's
asbestos-related liability will be settled substantially in the manner set forth
in the POR. As a result, AWI recorded a $2.5 billion charge to increase its
estimate of probable asbestos-related liability to approximately $3.2 billion at
December 31, 2002, which was treated as subject to compromise. The fourth
quarter charge was determined by calculating an implied liability based upon the
provisions of the POR and Disclosure Statement. However no change was made to
the estimated asbestos-related insurance recovery asset. Many uncertainties
continue to exist about the matters impacting AWI's asbestos-related liability
and
23
insurance asset. These uncertainties include the impact of the Filing and the
Chapter 11 process, the number of future claims to be filed, the ultimate value
of the asbestos liability, the impact of any potential legislation, the impact
of the ADR proceedings on the insurance asset and the financial condition of
AWI's insurance carriers. Additionally, although a POR and Disclosure Statement
have been filed with the Court, implementation of the POR is subject to
confirmation of the POR in accordance with the provisions of the Bankruptcy
Code. AWI is unable to predict when and if the POR will be confirmed. Therefore,
the timing and terms of resolution of the Chapter 11 Case remain uncertain. As
long as this uncertainty exists, future changes to the recorded liability and
insurance asset are possible and could be material to AWI's financial position
and the results of its operations. Management will continue to review the
recorded liability and insurance asset in light of future developments in the
Chapter 11 Case and make changes to the recorded amounts if and when it is
appropriate.
Environmental Matters
See discussion of Environmental Matters under Item 1 of this report.
Patent Infringement Claims
Armstrong is a defendant in two related lawsuits claiming patent infringement
related to some of Armstrong's laminate products. The plaintiffs have claimed
unspecified monetary damages. Armstrong is being defended and indemnified by its
supplier for all costs and potential damages related to the litigation.
Former Employees Claim
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 AWI, certain current and former members of the
Retirement Committee, the Retirement Savings and Stock Ownership Plan (RSSOP),
AHI and the trustee bank of the RSSOP. The cases are pending in the United
States District Court (Eastern District of PA). Similar proofs of claim have
been filed against AWI 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 RSSOP accounts, which were
invested in Armstrong common stock. While AHI believes there are substantive
defenses to the allegations and while denying liability, AWI 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.
Department of Labor Discussions
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 Armstrong Employee
Stock Ownership Plan ("ESOP"), as provided for by that 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, and therefore has not recorded any liability
related to this matter.
Inquiries Concerning World Trade Center Collapse
Armstrong has received inquiries from parties (including the National Institute
of Standards and Technology or NIST) investigating the fire and collapse at the
World Trade Center in New York City on September 11, 2001 concerning the types
and amounts of the company's products that were placed into the World Trade
Center towers over time. The products manufactured by the company that are
believed to have been placed in the World Trade Center site including the Tower
buildings in significant amounts included ceiling tile, floor tile (some
containing encapsulated asbestos fibers) and low temperature (non-asbestos) pipe
insulation. The company has not been made aware of any claim or litigation
relating to its products which were in place as of September 11, 2001.
Other Claims
Additionally, AHI, through AWI and AWI's subsidiaries, is involved in various
other claims and legal actions involving product liability, patent infringement,
distributor termination, employment law issues and other actions arising in the
ordinary course of business. While complete assurance cannot be given to the
outcome of these claims, AHI does not expect that any sum that may have to be
paid in connection with these matters will have a materially adverse effect on
its consolidated financial position or liquidity, however it could be material
to the results of operations in the particular period in which a matter is
resolved.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 AHI (traded under the
ticker symbol "ACK"). As of November 14, 2002, Armstrong Holding's Common Stock
trades on the over-the-counter (OTC) Bulletin Board under the ticker symbol
(ACKHQ). As of February 14, 2003, there were approximately 7,067 holders of
record of Armstrong Holding's Common Stock.
2002 First Second Third Fourth Total Year
---- ----------- ---------- ----------- ---------- -----------
Price range of common stock--high $4.10 $3.82 $1.98 $1.85 $4.10
Price range of common stock--low $2.70 $1.79 $1.28 $0.24 $0.24
2001
----
Price range of common stock--high $5.69 $4.05 $3.74 $3.80 $5.69
Price range of common stock--low $2.06 $3.20 $2.20 $2.34 $2.06
There were no dividends declared or paid during 2002 or 2001. The DIP Facility
stipulates that AWI will not declare or pay any dividends either directly or
indirectly.
During 2001, Armstrong issued a total of 2,472 shares of restricted Common Stock
to nonemployee directors of Armstrong pursuant to Armstrong's Restricted Stock
Plan for Nonemployee Directors. Given the small number of persons to whom these
shares were issued, applicable restrictions on transfer and the information
regarding Armstrong possessed by the directors, these shares were issued without
registration in reliance on Section 4(2) of the Securities Act of 1933, as
amended. This plan was terminated in February 2001.
The following table provides information on securities that were authorized for
issuance under equity compensation plans as of December 31, 2002:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
(a) (b) (c)
- ------------------------------- ------------------------ ---------------------------- ------------------------
Equity compensation
plans approved by
security holders 2,000,886 $34.07 4,285,597
Equity compensation
plans not approved by
security holders 108,622 N/A/(1)/ 504,081
--------- ------ ---------
Total 2,109,508 $32.37 4,789,678
========= ====== =========
/(1)/ These restricted stock awards have not yet been earned, which is when the
exercise price will be determined.
The Stock Award Plan was adopted by the AHI Board of Directors effective July
24, 2000. The original purpose of the plan was to promote the long-term success
of AHI by providing a portion of the compensation for officers, directors and
key employees in shares of common stock pursuant to the terms of the plan. The
plan is administered by the Management Development and Compensation Committee
and provides for the grant of Restricted Stock Awards and Stock Awards which may
be subject to certain terms and conditions established by the Committee. The
awards were to be used for the purposes of recruitment, recognition and
retention of eligible participants.
26
ITEM 6. SELECTED FINANCIAL DATA
The following data is presented for continuing operations.
(Dollars in millions except for per-share data)
For Year 2002 2001 2000 1999 1998
-------- -------- --------- --------- --------- ---------
Income statement data
- ---------------------
Net sales $ 3,172.3 $ 3,138.7 $ 3,248.9 $ 3,322.0 $ 2,592.4
Cost of goods sold 2,404.5 2,364.7 2,386.2 2,291.5 1,807.1
Selling, general and administrative expenses 624.9 596.6 595.3 605.9 445.9
Charge for asbestos liability, net 2,500.0 22.0 236.0 335.4 274.2
Restructuring and reorganization charges (reversals), net 1.9 9.0 18.8 (1.4) 74.4
Goodwill amortization -- 22.8 23.9 25.5 10.7
Equity (earnings) from affiliates, net (21.7) (16.5) (18.0) (16.8) (13.8)
-------- --------- --------- --------- ---------
Operating income (loss) (2,337.3) 140.1 6.7 81.9 (6.1)
Interest expense 13.8 13.1 102.9 105.2 62.2
Other non-operating expense 8.2 11.8 3.7 10.4 15.9
Other non-operating income (6.0) (13.0) (80.4) (17.0) (17.6)
Chapter 11 reorganization costs, net 23.5 12.5 103.3 -- --
Income tax expense (benefit) (827.8) 42.5 (37.7) (0.5) (23.6)
-------- --------- --------- --------- ---------
Earnings (loss) from continuing operations before
cumulative change in accounting principle (1,549.0) 73.2 (85.1) (16.2) (43.0)
Per common share - basic (a) (38.25) 1.81 (2.12) (0.41) (1.08)
Per common share - diluted (a) (38.25) 1.79 (2.12) (0.41) (1.08)
Cumulative effect of a change in accounting principle,
Net of tax of $2.2 (593.8) -- -- -- --
-------- --------- --------- --------- ---------
Net earnings (loss) (2,142.8) 92.8 12.2 14.3 (9.3)
Per common share - basic (a) (52.91) 2.29 0.30 0.36 (0.23)
Per common share - diluted (a) (52.91) 2.27 0.30 0.36 (0.23)
Average number of common shares outstanding (millions) 40.5 40.5 40.2 39.9 39.8
Dividends declared per share of common stock -- -- $ 1.44 $ 1.92 $ 1.88
Average number of employees 16,700 16,800 16,500 16,900 13,900
Balance sheet data (December 31)
- -------------------------------
Working capital $ 851.6 $ 740.1 $ 610.4 $ 314.6 $ 445.4
Total assets 4,504.8 4,038.1 4,005.2 4,081.6 4,183.9
Liabilities subject to compromise 4,861.1 2,357.6 2,385.2 -- --
Net long-term debt (b) 39.9 50.3 56.9 1,412.9 1,562.8
Shareholders' equity (1,346.7) 760.4 665.1 679.2 709.7
Notes:
(a) See definition of basic and diluted earnings per share in Note 2 of the
Consolidated Financial Statements.
(b) 2002, 2001 and 2000 net long-term debt excludes debt subject to compromise.
Certain prior year amounts have been reclassified to conform to the current year
presentation. See Note 2 of the Consolidated Financial Statements.
Beginning in 1998, consolidated results include Armstrong's acquisitions of
Triangle Pacific (now reported as Wood Flooring and Cabinets) and DLW (included
in Resilient Flooring). The net purchase price of the acquisitions was $1,175.7
million.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Armstrong World Industries, Inc. ("AWI") is a Pennsylvania corporation
incorporated in 1891, which together with its subsidiaries is referred to here
as "Armstrong". Through its U.S. operations and U.S. and international
subsidiaries, Armstrong designs, manufactures and sells flooring products
(resilient, wood, carpeting and sports flooring) as well as ceiling systems,
around the world. Armstrong products are sold primarily for use in the
finishing, refurbishing and repair of residential, commercial and institutional
buildings. Armstrong also designs, manufactures and sells kitchen and bathroom
cabinets to single and multi family homebuilders and remodelers.
Armstrong Holdings, Inc. (which together with its subsidiaries is referred to
here as "AHI") is the publicly held parent holding company of Armstrong.
Armstrong Holdings, Inc. became the parent company of Armstrong on May 1, 2000,
following AWI shareholder approval of a plan of exchange under which each share
of AWI was automatically exchanged for one share of Armstrong Holdings, Inc.
Armstrong Holdings, Inc. was formed for purposes of the share exchange and holds
no other significant assets or operations apart from AWI and AWI's subsidiaries.
Stock certificates that formerly represented shares of AWI were automatically
converted into certificates representing the same number of shares of Armstrong
Holdings, Inc. The publicly held debt of AWI was not affected in the
transaction.
Armstrong conducts its business through the following business segments:
Resilient Flooring, Wood Flooring, Textiles and Sports Flooring, Building
Products and Cabinets. There are two additional segments. The All Other segment,
which relates to a corporate equity investment, and Unallocated Corporate.
The following discussion and analysis corresponds to AHI financial statements,
which includes all of AHI's subsidiaries. Since there are no material
differences between the financial statements of AHI and Armstrong, the following
discussion and analysis pertains to both AHI and Armstrong.
PROCEEDINGS UNDER CHAPTER 11
On December 6, 2000, AWI, the major operating subsidiary of AHI, filed a
voluntary petition for relief (the "Filing") under Chapter 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Court") in order to use the court-supervised
reorganization process to achieve a resolution of its asbestos liability. Also
filing under Chapter 11 were two of Armstrong's wholly-owned subsidiaries,
Nitram Liquidators, Inc. ("Nitram") and Desseaux Corporation of North America,
Inc. ("Desseaux," and together with AWI and Nitram, the "Debtors"). The Chapter
11 cases are being jointly administered under case numbers 00-4469, 00-4470, and
00-4471 (the "Chapter 11 Case").
AWI is operating its business and managing its properties as a
debtor-in-possession subject to the provisions of the Bankruptcy Code. Pursuant
to the provisions of the Bankruptcy Code, AWI is not permitted to pay any claims
or obligations which arose prior to the Filing date (prepetition claims) unless
specifically authorized by the Court. Similarly, claimants may not enforce any
claims against AWI that arose prior to the date of the Filing unless
specifically authorized by the Court. In addition, as a debtor-in-possession,
AWI has the right, subject to the Court's approval, to assume or reject any
executory contracts and unexpired leases in existence at the date of the Filing.
Parties having claims as a result of any such rejection may file claims with the
Court, which will be dealt with as part of the Chapter 11 Case.
Three creditors' committees, one representing asbestos personal injury claimants
(the "Asbestos Personal Injury Claimants' Committee"), one representing asbestos
property damage claimants (the "Asbestos Property Damage Committee"), and the
other representing other unsecured creditors (the "Unsecured Creditors'
Committee"), have been appointed in the Chapter 11 Case. In addition, an
individual has been appointed to represent the interests of future asbestos
personal injury claimants (the
28
"Future Claimants' Representative"). In accordance with the provisions of the
Bankruptcy Code, these parties have the right to be heard on matters that come
before the Court in the Chapter 11 Case.
Plan of Reorganization
On November 4, 2002, AWI filed a Plan of Reorganization with the Court and on
March 14, 2003, AWI filed its First Amended Plan of Reorganization and selected
exhibits (as so amended, it is referred to in this report as the "POR"). The POR
has been endorsed by AHI's Board of Directors and is supported by the Asbestos
Personal Injury Claimants' Committee, the Unsecured Creditors' Committee and the
Future Claimants' Representative. At present, AWI has not yet reached agreement
with the Asbestos Property Damage Committee with respect to the terms and
provisions of the POR. The POR provides for, among other things, the treatment
and discharge of all prepetition claims, including all asbestos-related claims.
The POR excludes Armstrong's Nitram and Desseaux subsidiaries. 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, AWI filed projected financial
information with the Court as Exhibit C to the disclosure statement. On March
14, 2003, AWI filed an amended Disclosure Statement with the Court (as so
amended, it is referred to in this report as the "Disclosure Statement"). Prior
to soliciting acceptances to the POR, the Court must approve a disclosure
statement to be included as part of the solicitation materials and find that the
disclosure statement contains adequate information to enable those voting on the
POR to make an informed judgment to accept or reject the POR.
As indicated in the Disclosure Statement and its exhibits, the projected
financial information and various estimates of value therein discussed should
not be regarded as representations or warranties by AWI, AHI or any other person
as to the accuracy of such information or that any such projection or valuation
will be realized. The information in the Disclosure Statement, including the
projected financial information and estimates of value, has been prepared by AWI
and its financial advisors. This information has not been audited or reviewed by
independent accountants. The significant assumptions used in preparation of the
information and estimates of value are included in Exhibit C to the Disclosure
Statement. The Bankruptcy Court has scheduled the hearing to consider approval
of the Disclosure Statement for April 4, 2003.
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.
Objections to the Disclosure Statement
During February 2003, several parties involved in the Chapter 11 Case filed
objections to the initial Disclosure Statement with the Court. Objections were
filed by, among others, Liberty Mutual Insurance Company, the Center for Claims
Resolution, Travelers Indemnity Company and Travelers Casualty and Surety
Company, Wells Fargo Bank Minnesota, N.A., as Indenture Trustee, and the
Unofficial Committee of Select Asbestos Claimants. Additional objections may be
filed against the amended Disclosure Statement. The Court heard and addressed
many of these objections at the February 28, 2003 hearing. Any remaining
objections are expected to be addressed at the April 4, 2003 hearing.
Asbestos Personal Injury Trust
A principal feature of the POR is the creation of a trust (the "Asbestos PI
Trust"), pursuant to section 524(g) of the Bankruptcy Code, to which all present
and future asbestos-related personal injury claims, including contribution
claims of co-defendants, will be channeled. In accordance with the "524(g)
injunction" to be issued by the Court in connection with the confirmation of the
POR, various entities will be protected from suit on account of present and
future asbestos-related personal injury claims. These entities include, among
others, AWI, reorganized AWI, AHI, AWI's affiliates, and their respective
officers
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and directors. Claims resolution procedures to be utilized by the Asbestos PI
Trust have been developed. These procedures will govern the allowance and
payment by the Asbestos PI Trust of all present and future asbestos-related
personal injury claims. The Asbestos PI Trust will be funded with AWI's rights
to insurance providing coverage for asbestos-related personal injury claims, as
well as a share of cash, notes, and common stock to be issued under the POR to
creditors, as described below.
Consideration to Be Distributed under the POR
The Asbestos PI Trust and the holders of unsecured claims will share in the POR
consideration that is made up of the following components:
. Available Cash, which is comprised of:
. Cash available on the effective date of the POR after reserving
up to $100 million to fund ongoing operations and making
provisions for certain required payments under the POR,
. Any cash drawn, at AWI's sole discretion, under an exit finance
facility for the purpose of funding distributions under the POR, and
. Certain insurance proceeds related to environmental matters
. Plan Notes of reorganized AWI with a term of 5 to 10 years and/or net
proceeds from any private offerings of debt securities, and
. Substantially all of the outstanding common stock of reorganized AWI
The total amount of Plan Notes will be the greater of (i) $1.125 billion less
Available Cash and (ii) $775 million. However, AWI will use reasonable efforts
to issue one or more private offerings of debt securities on, or as soon as
practicable after, the Effective Date that would yield net proceeds at least
equal to the amount of the Plan Notes prescribed by the Plan. If the private
offerings are successful, the Plan Notes would not be issued. If the offerings
yield proceeds less than the amount of the Plan Notes prescribed by the Plan,
AWI will issue Plan Notes equal to the difference. The private offerings, if
issued, will not be registered under the Securities Act of 1933 and may not be
offered or sold in the U.S. absent registration or an applicable exemption from
registration requirements.
The POR provides that unsecured creditors, other than convenience creditors
described below, will receive their pro rata share of:
. 34.43% of the new common stock,
. 34.43% of the first $1.05 billion of
. Up to $300 million of Available Cash and
. The principal amount of Plan Notes and/or net cash proceeds from
any private debt offerings of debt securities.
. 60% of the next $50 million of Available Cash and, if such Available Cash
is less than $50 million, then 60% of Plan Notes and/or net cash proceeds
from any private debt offerings of debt securities, in an amount equal to
the difference between $50 million and the amount of such Available Cash,
and
. 34.43% of the remaining amount of Available Cash and Plan Notes and/or
net cash proceeds from any private debt offerings of debt securities.
The remaining amount of new common stock, Available Cash and Plan Notes and/or
net cash proceeds from any private debt offerings of debt securities, will be
distributed to the Asbestos PI Trust.
Under the POR, unsecured creditors whose claims (other than debt securities) are
less than $10,000 or who elect to reduce their claims to $10,000 will be treated
as "convenience creditors" and will receive payment of 75% of their allowed
claim amount in cash.
Asbestos property damage claims that are still disputed as of the effective date
of the POR will be channeled to a separate trust ("Asbestos PD Trust") under the
POR. If the class of asbestos property damage claimants votes to accept the POR,
the Asbestos PD Trust will be funded with $0.5 million to $2.0 million in cash
based upon the number of disputed claims (which will be funded exclusively from
the proceeds of insurance). If the class of asbestos property damage claimants
rejects the POR, the Court will estimate the aggregate value of asbestos
property damage claims, and the Asbestos PD Trust will be
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funded exclusively with rights to insurance in an amount sufficient to provide
for payment in full of asbestos property damage claims, up to the aggregate
amount estimated by the Court. However, if less than 25 disputed asbestos
property damage claims remain outstanding as of the effective date of the POR,
AWI may elect, in its sole discretion, to litigate the merits of each remaining
asbestos property damage claim before