-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ImEi9OAq2/AkRXynNCWMGqkOFOocS6ag736UJ+SqvFuhDV82E6G49KI7aXVwWfMr QqzTehupZy+CtG/GUIv0yA== 0000950123-98-003133.txt : 19980401 0000950123-98-003133.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950123-98-003133 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN STANDARD INC CENTRAL INDEX KEY: 0000005850 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 250900465 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00470 FILM NUMBER: 98580009 BUSINESS ADDRESS: STREET 1: ONE CENTENNIAL AVE STREET 2: P O BOX 6820 CITY: PISCATAWAY STATE: NJ ZIP: 08855-6820 BUSINESS PHONE: 9089806000 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RADIATOR & STANDARD SANITARY CO DATE OF NAME CHANGE: 19670620 10-K405 1 AMERICAN STANDARD INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ---------------- ------------------- Commission File Number 33-64450 AMERICAN STANDARD INC. (Exact name of registrant as specified in its charter) DELAWARE 25-0900465 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE CENTENNIAL AVENUE, P.O. BOX 6820, PISCATAWAY, NEW JERSEY 08855-6820 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (732) 980-6000 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: None. 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 (or for such shorter period that the Registrant was required to file such reports), 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. (Not applicable; Registrant has outstanding no equity securities required to be registered under the Securities Exchange Act of 1934.) Aggregate market value of the voting stock (common stock) held by non-affiliates of the Registrant: Not applicable; all of the voting stock of the Registrant is owned by its parent, American Standard Companies Inc. Number of shares outstanding of each of the Registrant's classes of common stock, as of the close of business on March 12, 1998: Common Stock, $.01 par value 1,000 Shares Documents incorporated by reference: None THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (J) (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT. 2 TABLE OF CONTENTS (REDUCED DISCLOSURE FORMAT PAGE PART I Item 1. Business. 3 Item 2. Properties. 8 Item 3. Legal Proceedings. 9 Item 4. Not required under reduced disclosure format as contemplated by General Instruction J to Form 10-K. -- PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 10 Item 6. Not required under reduced disclosure format as contemplated by General Instruction J to Form 10-K. -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10 Item 8. Financial Statements and Supplementary Data. 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 36 PART III Items 10,11,12, and 13 are not required under reduced disclosure format as Contemplated by General Instruction J to Form 10-K -- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 36 2 3 ITEM 1. BUSINESS American Standard Inc. (the "Company") is a Delaware corporation formed in 1929. All of its outstanding common stock is owned by American Standard Companies Inc., a Delaware corporation that was formed in 1988 to acquire American Standard Inc. Hereinafter, "American Standard" or "the Company" will refer to American Standard Companies Inc. or to American Standard Inc., including its subsidiaries, as the context requires. American Standard is a globally-oriented manufacturer of high quality, brand-name products in three major product groups: air conditioning systems (60% of 1997 sales); bathroom and kitchen fixtures and fittings (24% of 1997 sales); and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles (16% of 1997 sales). These percentages exclude the new Medical Systems segment which had sales of $50 million in the last six months of 1997, after the acquisition of Sorin and INCSTAR (see below). American Standard is a market leader in each of its three major business segments in the principal geographic areas in which it competes. The Company's brand names include TRANE(R) and AMERICAN STANDARD(R) for air conditioning systems, AMERICAN STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and PORCHER(R) for plumbing products, WABCO(R) for braking and related systems and LARA(R), Copalis(R) and DiaSorin(TM) for Medical diagnostic systems. The Company emphasizes technologically advanced products such as air conditioning systems that utilize energy-efficient compressors and environmentally-preferred refrigerants, water-saving plumbing products and commercial vehicle braking and related systems (including antilock braking systems, "ABS") utilizing electronic controls. At December 31, 1997, American Standard had 108 manufacturing facilities in 35 countries. OVERVIEW OF BUSINESS SEGMENTS Through 1996 American Standard operated three business segments: Air Conditioning Products, Plumbing Products and Automotive Products. In January 1997 the Company announced formation of its Medical Systems segment. AIR CONDITIONING PRODUCTS. American Standard is a leading U.S. manufacturer of air conditioning systems for both domestic and export sales, and also manufactures air conditioning systems outside the United States. Air conditioning products are sold by the Trane Company ("Trane") primarily under the TRANE(R) and AMERICAN STANDARD(R) names. Sales to the commercial and residential markets accounted for approximately 75% and 25%, respectively, of Trane's total sales in 1997. Approximately 65% of Trane's sales in 1997 were in the replacement, renovation and repair markets, which have been less cyclical than the new residential and commercial construction markets. Management believes that Trane is well positioned for growth because of its high quality, brand-name products; significant existing market shares; the introduction of new product features such as electronic controls; the expansion of its broad distribution network; conversion to products utilizing environmentally-preferable refrigerants; and expansion of operations in developing market areas throughout the world, principally the Asia-Pacific area (although expansion in the Asia-Pacific region outside China is expected to slow due to the unfavorable economic conditions existing in the region at the beginning of 1998) and Latin America. Air Conditioning Products began with the 1984 acquisition by the Company of the Trane Company, a manufacturer and distributor of air conditioning products since 1913. In 1997 Trane, with revenues of $3,567 million, accounted for approximately 60% of the Company's sales and 3 4 60% of its operating income (excluding Medical Systems). Trane derived 28% of its 1997 sales from outside the United States. Trane manufactures three general types of air conditioning systems. The first, called "unitary," is sold for residential and commercial applications, and is a factory-assembled central air conditioning system which generally encloses in one or two units all the components to cool or heat, clean, humidify or dehumidify, and move air. The second, called "applied," is typically custom-engineered for commercial use and involves on-site installation of several different components of the air conditioning system. Trane is a world leader in both unitary and applied air conditioning products. The third type, called "mini-split," is a small unitary air conditioning system, generally for residential use, which operates without air ducts. Trane manufactures and distributes mini-split units in the Far East, Europe, the Middle East and Latin America. Trane competes in all of its markets on the basis of service to customers, product quality and reliability, technological leadership and price. Product and marketing programs have been, and are being, developed to increase penetration in the growing replacement, repair, and servicing businesses, in which margins are generally higher than for sales of original equipment. Much of the equipment sold in the fast-growing air conditioning markets of the 1960's and 1970's is reaching the end of its useful life. Also, equipment sold in the 1980's is likely to be replaced earlier than originally expected with higher-efficiency products recently developed to meet required efficiency standards and to capitalize on the availability of environmentally-preferable refrigerants At December 31, 1997, Air Conditioning Products had 33 manufacturing plants in 10 countries employing approximately 22,600 people. PLUMBING PRODUCTS. American Standard is a leading manufacturer in Europe, the U.S. and a number of other countries of bathroom and kitchen fixtures and fittings for the residential and commercial construction markets and retail sales channels. Plumbing Products manufactures and distributes its products under the AMERICAN STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and PORCHER(R) names. Of Plumbing Products' 1997 sales, 72% was derived from operations outside the United States and 28% from within. Management believes that Plumbing Products is well positioned for growth due to the high quality associated with its brand-name products, significant existing market shares in a number of countries, lower-cost product sourcing from Mexico and Eastern Europe and the expansion of existing operations in developing market areas throughout the world, principally the Far East, Latin America and Eastern Europe. In 1997 Plumbing Products, with revenues of $1,439 million, accounted for 24 % of the Company's sales and 19 % of its operating income (excluding Medical Systems). Plumbing Products' sales consist 53% of chinaware fixtures, 23% of fittings (typically brass) and 9% of bathtubs, with the remainder consisting of related plumbing products. Throughout the world these products are generally sold through wholesalers and distributors and installed by plumbers and contractors. In total the residential market accounts for approximately 75% of Plumbing Products' sales, with the commercial and industrial markets providing the remainder. Plumbing Products operates through four primary geographic groups: European Plumbing Products, U.S. Plumbing Products, Americas International and the Asia-Pacific Group. Plumbing Products' fittings operations are organized as the Worldwide Fittings Group, which has primary responsibility for faucet technology, product development and manufacturing, with manufacturing 4 5 facilities in Germany, Bulgaria, the U.S., and Mexico. Worldwide Fittings' sales and operating results are reported in the four primary geographic groups within which it operates. European Plumbing Products, which sells products primarily under the brand names IDEAL STANDARD(R) and PORCHER(R), manufactures and distributes bathroom and kitchen fixtures and fittings through subsidiaries or joint ventures in Germany, Italy, France, England, Greece, the Czech Republic, Bulgaria, Egypt and Turkey and distributes products in Spain and Portugal. In November 1995 the Company acquired Porcher S.A. ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had a minority ownership interest. U.S. Plumbing Products manufactures bathroom and kitchen fixtures and fittings, selling under the brand names AMERICAN STANDARD(R) and STANDARD(R) in the United States. Americas International manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in Mexico, Canada, and Brazil and its joint ventures in Central America and the Dominican Republic. The Asia-Pacific Group manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in South Korea, its majority-owned operations in Thailand, the Philippines and Vietnam, and its manufacturing joint venture in Indonesia. This group is also developing a wholly-owned marketing operation in Japan. The Asia-Pacific Group also has operations in China, in which American Standard increased its ownership position to approximately 55% through the purchase of additional shares from other investors for $48 million in the fourth quarter of 1997. At December 31, 1997, Plumbing Products employed approximately 21,500 people and, including affiliated companies, had 57 manufacturing plants in 25 countries, including its Chinese businesses which were consolidated in October 1997. Plumbing Products competes in most of its markets on the basis of service to customers, product quality and design, reliability and price. AUTOMOTIVE PRODUCTS. Automotive Products ("WABCO") is a leading manufacturer, primarily in Europe and Brazil, of braking and related systems for the commercial and utility vehicle industry. Its most important products are pneumatic braking systems and related electronic and other control systems, including antilock braking systems ("ABS"), marketed under the WABCO(R) name for medium-size and heavy trucks, tractors, buses, trailers and utility vehicles. WABCO supplies vehicle manufacturers such as Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and Rover. Management believes that WABCO is well positioned to benefit from its strong market positions in Europe and Brazil and from increasing demand for ABS and other sophisticated electronic control systems in a number of markets (including the commercial vehicle market in the United States, where the mandated phase-in of ABS began in 1997), as well as from the technological advances embodied in the Company's products and its close relationships with a number of vehicle manufacturers. In 1997 WABCO, with sales of $952 million, accounted for 16 % of the Company's sales and 21% of its total operating income (excluding Medical Systems). The Company believes that WABCO is a worldwide technological leader in the heavy truck and bus braking industry. Electronic controls, first introduced in ABS in the early 1980's, are increasingly applied in other systems sold to the commercial vehicle industry. 5 6 WABCO's products are sold directly to vehicle and component manufacturers. Spare parts are sold through both original equipment manufacturers and an independent distribution network. Although the business is not dependent on a single or related group of customers, sales of truck braking systems are dependent on the demand for heavy trucks. Some of the Company's important customers are Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and Rover. Principal competitors are Knorr, Robert Bosch, and Allied Signal. WABCO competes primarily on the basis of customer service, quality and reliability of products, technological leadership and price. Through 1997 the WABCO(R) ABS system, which the Company believes leads the market, has been installed in approximately 1.6 million heavy trucks, buses, and trailers worldwide since 1981. Annual sales volume in Europe was approximately 168,000 units in 1997 (up from 146,000 units in 1996) and 195,000 units (67,000 units in 1996) in other markets, primarily the United States and Japan. The large increase in other markets was primarily in the United States, where the mandated phase-in of ABS began in March 1997. In addition, WABCO has developed an advanced electronic braking system, electronically controlled pneumatic gear shifting systems, electronically controlled air suspension systems, and automatic climate-control and door-control systems for the commercial vehicle industry. At December 31, 1997, WABCO and affiliated companies employed approximately 6,100 people and had 13 manufacturing facilities and 8 sales organizations operating in 17 countries. Principal manufacturing operations are in Germany, France, the United Kingdom, the Netherlands and Brazil. WABCO has joint ventures in the United States (Meritor WABCO and WABCO Compressor Manufacturing Co.), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group (Sundaram Clayton Ltd.) and in China. In January 1994 the Company acquired Perrot, a German brake manufacturer. Through this acquisition the Company is able to offer complete brake systems for trucks, buses and trailers, especially in the important and growing air-disc brake business. MEDICAL SYSTEMS. In anticipation of the acquisition of Sorin and INCSTAR described below, the Company announced in January 1997, the formation of its Medical Systems segment to pursue initiatives in the medical diagnostics field. For several years prior thereto, the Company had been supporting the development of two small medical diagnostic product companies, Sienna Biotech, Inc. (Sienna") and Alimenterics, Inc. ("Alimenterics"). Sienna and Alimenterics have developed medical diagnostic technologies that use lasers for sample analysis. The Company had invested approximately $40 million in these businesses through December 31, 1996. Based upon the progress and prospects of Sienna and Alimenterics, the Company decided to explore acquisition opportunities to accelerate the commercialization of its technology and expand the number of diagnostic tests covered by its products. On June 30, 1997, the Company acquired the European medical diagnostic business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and INCSTAR Corporation, a U.S. company, for $212 million, including fees and expenses. Sorin, INCSTAR and Sienna have been combined into a single operating group, DiaSorin. DiaSorin has an extensive menu of diagnostic tests as well as a variety of technologies and platforms. Its products focus on diagnostic tests for autoimmunity and infectious diseases, obstetrical/gynecological and gastrointestinal disorders, endocrinology and bone and mineral metabolism. It develops, manufactures and markets individual test reagents, test kits and related products used by major hospitals, clinical reference laboratories and researchers involved in 6 7 diagnosing and treating immunological conditions. DiaSorin also produces and markets histochemical antisera and natural and synthetic peptides used in clinical diagnostic and medical research. One of the new core technologies, which received U.S. Food and Drug Administration ("FDA") clearance in 1997, is Copalis(R) (for Coupled Particle Light Scattering), a device which enables multiple tests on a single sample. Development is ongoing to accelerate an expanded menu of tests using DiaSorin reagents specifically adapted for use with Copalis. Alimenterics has developed the Laser Assisted Ratio Analyzer ("LARA(R)") system, an analyzer which allows a gastroenterologist to diagnose patient disease via the breath rather than by more invasive procedures such as endoscopy or x-ray. It's first application, the Pylori-Chek(TM), tests for the presence of Helicobacter pylori bacterium associated with 80% of stomach ulcers. The analyzer and reagent have received a Positive Opinion from the European agency for the Evaluation of Medicinal Products. FDA clearance for the LARA instrument and clearance for the Pylori-Chek k test is expected later in 1998. In March 1998, the Company entered into an agreement with Astra Pharma inc. of Canada to market exclusively the LARA System. DiaSorin has manufacturing facilities in Saluggia, Italy, and Stillwater, Minnesota, and Alimenterics has a manufacturing facility in Morris Plains, New Jersey. The principal markets for its products are Western Europe, the United States and Canada. The Company believes that the new Medical Systems Segment is well positioned to develop quickly and effectively its new medical products. The Company may build this group further through acquisitions of businesses that are complementary and would permit further acceleration of development and distribution of its products as well as through further research and development investments. Medical Systems had sales of $50 million in the last six months of 1997, after the acquisition of Sorin and INCSTAR, and an operating loss of $20 million (before write-off of purchased research and development). At December 31, 1997, Medical Systems employed approximately 800 people. 7 8 ITEM 2. PROPERTIES At December 31, 1997 the Company conducted its manufacturing activities through 108 plants in 35 countries, of which the principal facilities are as follows:
BUSINESS SEGMENT LOCATION MAJOR PRODUCTS MANUFACTURED AT LOCATION Air Conditioning Clarksville, TN Commercial unitary air conditioning Products Fort Smith, AK Commercial unitary air conditioning La Crosse, WI Applied air conditioning systems Lexington, KY Air handling products Macon, GA Commercial air conditioning systems Pueblo, CO Applied air conditioning systems Rushville, IN Air handling products Trenton, NJ Residential gas furnaces and air handlers Tyler, TX Residential air conditioning Waco, TX Water source heat pumps and air handling Products Charmes, France Applied air conditioning systems Epinal, France Unitary air conditioning systems and mini-splits Ligang, China Applied air conditioning systems Taicang, China Unitary air conditioning systems and mini-splits Taipei, Taiwan Unitary air conditioning systems Sao Paulo, Brazil Unitary air conditioning systems Plumbing Products Salem, OH Enameled-steel fixtures and acrylic bathtubs Tiffin, OH Vitreous china Trenton, NJ Vitreous china Toronto, Canada Vitreous china and enameled-steel fixtures Sevlievo, Bulgalria Vitreous china and brass plumbing fittings Teplice, Czech Republic Vitreous china Hull, England Vitreous china and acrylic bathtubs Middlewich, England Vitreous china Dole, France Vitreous china and acrylic bathtubs Neuss, Germany Vitreous china Wittlich, Germany Brass plumbing fittings Orcenico, Italy Vitreous china Brescia, Italy Vitreous china Aguascalientes, Mexico Vitreous china Mexico City, Mexico Vitreous china, water heaters Monterrey, Mexico Brass plumbing fittings Manila, Philippines Vitreous china Seoul, South Korea Brass plumbing fittings Bangkok, Thailand Vitreous china Tianjin, China Vitreous china Beijing, China Enameled steel fixtures Shanghai, China Vitreous china and brass plumbing fittings Guangdong Province, China Vitreous china, brass plumbing fittings and enameled steel fixtures Automotive Campinas, Brazil Braking systems Products Leeds, England Braking systems Claye-Souilly, France Braking systems Hanover, Germany Braking systems Mannheim, Germany Foundation brakes Medical Systems Salugia, Italy Medical diagnostics products Stillwater, MN Medical diagnostics products
8 9 Except for the property located in Manila, Philippines, all of the plants described above are owned by the Company or a subsidiary. Through joint ventures the company operates one plant in each of Indonesia and India. The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business. In 1997 several Air Conditioning Products' plants operated at or near capacity and others operated moderately below capacity. In 1997 Plumbing Products' plants worldwide operated at levels of utilization which varied from country to country but overall were satisfactory. Automotive Products' plants generally operated at good utilization levels in 1997. ITEM 3. LEGAL PROCEEDINGS In late 1996 the Company received letters from Tyco International Ltd. ("Tyco") proposing to acquire all outstanding shares of the Company's common stock. The Company's Board of Directors reviewed the Tyco proposals, consulted with its legal counsel and financial advisors and concluded that the Company would decline any interest in the proposals and so informed Tyco. There were no discussions between the Company and Tyco concerning any of the proposals and the Company contemplates none. Two persons claiming to be shareholders of the Company, represented by the same lawyers, filed separate class action and derivative lawsuits in the Chancery Court of the State of Delaware against the Company, ASI Partners and the Company's directors alleging breeches of fiduciary duties related to the Company's rejection of the Tyco proposals, approval of the secondary offering of Company common stock owned by ASI Partners and the repurchase by the Company of all shares of Company common stock owned by ASI Partners after such secondary offering (collectively, the "Stockholder Transactions"). The Stockholder Transactions were successfully completed in March 1997. The complaints seek unspecified monetary damages, to enjoin the Stockholder Transactions and demand that the Company evaluate alternative transactions to maximize shareholder value. The Company has moved to dismiss the complaints or in the alternative for Summary Judgment, believes the lawsuits are without merit and intends to contest them vigorously. The Delaware Court of Chancery has granted a stay of discovery pending its ruling on the Company's motion to dismiss the complaints. A person claiming to be a holder of certain public debt securities of American Standard Inc. filed, and subsequently withdrew, a class action lawsuit in New York Supreme Court seeking to enjoin the Stockholder Transactions or to require the Company to redeem such debt securities at the election of the security holders For a discussion of German tax issues see Note 6 of Notes to Consolidated Financial Statements incorporated by reference herein (see Item 14(a) of Part IV hereof). 9 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's only issued and outstanding common equity, 1,000 shares of common stock, $.01 par value, is owned by American Standard Companies Inc. There is no established public trading market for these shares. There were no dividends declared on the Company's common stock in 1996 or 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (REDUCED DISCLOSURE FORMAT) The following should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein. The Company achieved record sales and operating income (excluding a $90 million write-off of purchased in-process research and development in connection with the acquisition of medical diagnostics businesses). The improvement in operating income reflected gains in all three major segments -- Air Conditioning Products, Plumbing Products and Automotive Products -- despite the adverse effects on Air Conditioning Products of cooler than normal weather in the U.S. and Europe and the unfavorable effects of foreign exchange. Sales for 1997 were $6.0 billion, an increase of 3% from $5.8 billion in 1996. Operating income was $590 million (excluding the write-off of purchased research and development), an increase of 3% from $573 million in 1996 (excluding an asset impairment charge of $235 million related to the adoption of a new accounting standard). Income before extraordinary item (excluding the write-off of purchased research and development) was $210 million, up 11% from income before extraordinary item (excluding the asset impairment charge) in 1996 of $189 million. Including the write-off of purchased research and development, income before extraordinary item for 1997 was $120 million. Operating losses for Medical Systems and equity in net income of unconsolidated joint ventures for 1996 and prior years have been reclassified to conform to the 1997 presentation. Consolidated sales for 1997 were $6,008 million, an increase of $203 million, or 3% (8% excluding the unfavorable effects of changes in foreign exchange rates), from $5,805 million in 1996. Sales increased 4% for Air Conditioning Products and 4% for Automotive Products, but declined slightly for Plumbing Products. The new Medical Systems segment contributed sales of $50 million in 1997. Consolidated sales for 1996 were $5,805 million, an increase of $584 million, or 11% (12% excluding the unfavorable effects of changes in foreign exchange rates), from $5,221 million in 1995. Sales increased 16% for Air Conditioning Products and 14% for Plumbing Products, but declined 8% for Automotive Products. Operating income for 1997 (excluding the $90 million write-off of purchased research and development) was $590 million, an increase of $17 million, or 3% (7% excluding the unfavorable effects of foreign exchange), from $573 million in 1996 (excluding the $235 million asset impairment charge). Operating income increased 3% for Air Conditioning Products, 8% for Plumbing Products and 3% for Automotive Products, while Medical Systems incurred a larger operating loss. Operating income for 1996 (excluding the $235 million asset impairment charge) was $573 million, an increase of $46 million, or 9% (10% excluding the unfavorable effects of foreign exchange), from $527 million in 1995. Operating income increased 36% for Air Conditioning Products but decreased 8% for Plumbing Products and 20% for Automotive Products, while the operating loss for Medical Systems increased. 10 11 12 THREE-YEAR FINANCIAL SUMMARY
Year Ended December 31, (Dollars in millions) 1997 1996 1995 Sales: Air Conditioning Products $ 3,567 $ 3,437 $ 2,953 Plumbing Products 1,439 1,452 1,270 Automotive Products 952 916 998 Medical Systems 50 -- -- - ---------------------------------------------------------------------------------------------------- $ 6,008 $ 5,805 $ 5,221 ==================================================================================================== Operating income (loss) before asset impairment loss and write-off of purchased research and development: Air Conditioning Products $ 364 $ 353 $ 259 Plumbing Products 119 110 120 Automotive Products 127 123 155 Medical Systems (20) (13) (7) - ---------------------------------------------------------------------------------------------------- 590 573 527 Asset impairment loss and write-off of purchased research and development (a): Air Conditioning Products -- (121) -- Plumbing Products -- (114) -- Medical Systems (90) -- -- - ---------------------------------------------------------------------------------------------------- (90) (235) -- - ---------------------------------------------------------------------------------------------------- Total operating income 500 338 527 Equity in net income of unconsolidated joint ventures 12 3 7 - ---------------------------------------------------------------------------------------------------- 512 341 534 Interest expense (192) (198) (213) Corporate items (83) (85) (94) - ---------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 237 58 227 Income taxes (117) (105) (85) - ---------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item $ 120 $ (47) $ 142 ====================================================================================================
(a) In connection with the June 30, 1997, acquisition of the medical diagnostics businesses, the value of purchased in-process research and development was written off in accordance with applicable accounting rules, resulting in a non-cash charge to income of $90 million. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, resulting in a non-cash charge of $235 million. 11 13 Sales of Air Conditioning Products increased 4% (5% excluding foreign exchange effects) to $3,567 million for 1997 from $3,437 million for 1996, as a result of continued strength in U.S. commercial markets and expanding international sales. Commercial markets account for approximately 75% of Air Conditioning Products' total sales. Approximately 65% of total sales are to the replacement, renovation and repair markets. Operating income of Air Conditioning Products increased 3% (with little effect from foreign exchange) to $364 million in 1997 from $353 million in 1996 (excluding the asset impairment charge). The increase was attributable primarily to increased operating income in the United States due to higher volume. Sales of Plumbing Products were $1,439 million in 1997 compared with $1,452 million in 1996, a decrease of $13 million (but an increase of 5% excluding the unfavorable effects of foreign exchange). The exchange-adjusted increase primarily reflected higher sales in Latin America and the U.S. and the effect of consolidating the operations in China since the acquisition of a majority interest at the end of October 1997. Sales in the U.S. increased as a result of higher volumes, primarily attributable to expansion by major home improvement retailers. Sales and market share in the retail market channel have been growing for several years, a trend the Company believes will continue and lead to increased sales because of strong product and brand-name recognition. Sales for international operations increased by 5% excluding foreign exchange effects, principally attributable to gains in Latin American operations (primarily Mexico) and the sales of the operations in China (consolidated for the last two months of 1997). Europe, which continued to experience weak economic conditions, was flat excluding foreign exchange effects. Operating income of Plumbing Products was $119 million for 1997 compared with $110 million for 1996, an increase of 8% (18% excluding the unfavorable effects of foreign exchange), because of higher operating income for both international and U.S. operations. The increase in operating income for international operations in 1997 (excluding foreign exchange effects) was principally due to improved volumes and margins in Latin America, margin improvement in Europe (primarily from cost reductions in France) and income contributed by operations in China (consolidated for the last two months of 1997). These increases were partly offset by the effects of poor economic conditions in other parts of the Far East. Operating income in the U.S. improved 36%, due to higher sales and lower-cost sourcing from expanded facilities in Mexico as well as manufacturing and operating cost improvements. 12 14 Sales of Plumbing Products were $1,439 million in 1997 compared with $1,452 million in 1996, a decrease of $13 million (but an increase of 5% excluding the unfavorable effects of foreign exchange). The exchange-adjusted increase primarily reflected higher sales in Latin America and the U.S. and the effect of consolidating the operations in China since the acquisition of a majority interest at the end of October 1997. Sales in the U.S. increased as a result of higher volumes, primarily attributable to expansion by major home improvement retailers. Sales and market share in the retail market channel have been growing for several years, a trend the Company believes will continue and lead to increased sales because of strong product and brand-name recognition. Sales for international operations increased by 5% excluding foreign exchange effects, principally attributable to gains in Latin American operations (primarily Mexico) and the sales of the operations in China (consolidated for the last two months of 1997). Europe, which continued to experience weak economic conditions, was flat excluding foreign exchange effects. Operating income of Plumbing Products was $119 million for 1997 compared with $110 million for 1996, an increase of 8% (18% excluding the unfavorable effects of foreign exchange), because of higher operating income for both international and U.S. operations. The increase in operating income for international operations in 1997 (excluding foreign exchange effects) was principally due to improved volumes and margins in Latin America, margin improvement in Europe (primarily from cost reductions in France) and income contributed by operations in China (consolidated for the last two months of 1997). These increases were partly offset by the effects of poor economic conditions in other parts of the Far East. Operating income in the U.S. improved 36%, due to higher sales and lower-cost sourcing from expanded facilities in Mexico as well as manufacturing and operating cost improvements. 17 15 Sales of Automotive Products for 1997 were $952 million, an increase of $36 million, or 4% (14% excluding the unfavorable effects of foreign exchange), from $916 million in 1996. This gain resulted primarily from strengthened markets in Europe because of increased commercial vehicle production, higher product content per vehicle and increased export sales. Unit volume of truck and bus production in Western Europe increased 8%, while aftermarket sales declined 1% for the full year 1997 compared with 1996. Original equipment sales volumes were higher in almost all markets for commercial vehicle braking and other control systems, especially in Germany because of product deliveries to a major truck manufacturer for its new line of heavy-duty trucks. Export sales increased significantly, primarily from sales of antilock braking systems (ABS) to Meritor WABCO (formerly Rockwell WABCO), the Company's North American joint venture, reflecting the first-phase implementation of federal regulations requiring ABS on all new heavy-duty trucks, together with a rebound in U.S. truck production. Sales of original equipment also increased in Brazil, where truck production recovered somewhat from the unusually low level of the prior year. Operating income for Automotive Products was $127 million in 1997, an increase of 3% (14% excluding the unfavorable effects of foreign exchange). This increase reflected the higher volume and improved margins in Europe due to productivity improvements. These factors were partly offset by the effects of product mix (higher original equipment and export sales and lower aftermarket in Europe), lower margins in Brazil (primarily mix) and start-up costs of the new, majority-owned joint ventures in the U.S. (with Cummins Engine Co.) and China. Medical Systems sales reflected the acquisition on June 30, 1997, of the medical diagnostics businesses of Sorin Biomedica S.p.A. and INCSTAR Corporation. Medical Systems incurred an operating loss (before write-off of purchased research and development) as costs of development and of integrating operations more than offset the operating income of the acquired diagnostics businesses. The write-off of purchased research and development of $90 million reflects the required accounting in an acquisition for the portion of the purchase price allocated to the value of purchased in-process research and development. The operating losses in 1996 and 1995 reflected increased development costs of the Company's medical diagnostics ventures. Interest expense decreased $6 million in 1997 compared with 1996, as lower overall interest rates on debt outstanding under the Company's 1997 Credit Agreement, together with the redemption of the 11 3/8% Senior Debentures, more than offset the effect of increased debt arising from share repurchases and the acquisition of the medical diagnostics businesses. Corporate items for 1997 totaled $83 million, approximately the same level as in 1996. The higher equity in net income of unconsolidated joint ventures reflects the strong growth of Automotive Products' North American joint venture with Meritor Automotive Inc., benefits from the restructuring of Air Conditioning Products' scroll compressor joint venture and increased income from the Company's financing joint venture established in 1996. The income tax provisions for 1997 and 1996 were $117 million and $105 million, respectively. The effective income tax rate in 1997 was 35.8% on income before income taxes and extraordinary item of $327 million (excluding the write-off of purchased research and development on which there was no tax benefit) compared with an effective rate in 1996 of 35.6% on income before income taxes and extraordinary item of $293 million (excluding the asset impairment charge on which there was no tax benefit). The effective tax rates for both years are somewhat lower than the statutory rates primarily as a result of higher levels of taxable income in the U.S. which enabled the Company to recognize previously unrecognized tax benefits. In addition, in 1997 and 1996, proportionately greater pretax income was earned in the U.S. (at a lower effective rate) compared to that earned in higher-rate jurisdictions in Europe and elsewhere. Those benefits were partly offset by the effects of rate differences and withholding taxes related to foreign operations and nondeductible goodwill amortization. See Note 6 of Notes to Consolidated Financial Statements. As a result of the redemption of debt with refinancing proceeds, 1997 included an extraordinary charge of $24 million (net of taxes of $6 million). In addition, the first half of 1998 is expected to include an extraordinary charge of approximately $50 million (net of tax) as a result of the planned redemption of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8% Senior Subordinated Notes, both of which are callable on or after June 1, 1998. 13 16 17 In January 1997 the Company entered into a new credit agreement (the "1997 Credit Agreement"). The 1997 Credit Agreement, which expires in 2002, provides the Company with senior secured credit facilities aggregating $1.75 billion as follows: (a) a $750 million U.S. dollar revolving credit facility and a $625 million multi-currency revolving credit facility (the "Revolving Facilities") and (b) a $375 million multi-currency periodic access credit facility. Up to $500 million of the Revolving Facilities may be used for the issuance of letters of credit. The 1997 Credit Agreement and certain other American Standard Inc. debt instruments contain restrictive covenants and other requirements, with which the Company believes it is currently in compliance. See Note 9 of Notes to Consolidated Financial Statements. The 1997 Credit Agreement provides lower interest rates, significantly increased borrowing capacity, less restrictive covenants and no scheduled principal payments until maturity in 2002. On August 1, 1997, American Standard Companies Inc. and its wholly-owned subsidiary American Standard Inc. jointly filed a shelf registration statement (the "1997 Shelf Registration") with the Securities and Exchange Commission covering $1 billion of debt securities to be offered by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. On January 15, 1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due 2008 and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due 2003 and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the "Offerings") under the 1997 Shelf Registration, the proceeds of which aggregated $737 million, net of underwriting discounts and expenses. The Company currently intends to apply the net proceeds of the Offerings, together with funds available under the 1997 Credit Agreement, to the redemption (the "Redemption"), on or after June 1, 1998, of its $740.7 million principal amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1, 1998, the Senior Subordinated Discount Debentures are redeemable at a price of 104.66% of the principal amount, plus accrued interest and the Senior Subordinated Notes are redeemable at a price of 102.82% of the principal amount, plus accrued interest. Pending the Redemption, the net proceeds of the Offerings were used to reduce borrowings (but not commitments) under the revolving portion of the Company's 1997 Credit Agreement. Unless amended or waived, the provisions of the 1997 Credit Agreement would require the Company to apply the proceeds of the Offerings permanently to reduce the total amount available under the 1997 Credit Agreement, unless the proceeds of the Offerings are applied to the Redemption prior to December 31, 1998, or to redeem up to $150 million of certain other indebtedness prior to June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior Subordinated Discount Debentures, there can be no assurance that market or economic conditions or the Company's business strategy will not change and, therefore, there can be no assurance that the proceeds of the Offerings will be applied towards the Redemption. In the first quarter of 1997, American Standard Companies Inc. completed a secondary offering (the "Secondary Offering") of 12,429,548 shares of its common stock and the repurchase from Kelso ASI Partners, L.P. ("ASI Partners"), the largest stockholder at December 31, 1996, of 4,628,755 shares of common stock of American Standard Companies Inc. for $208 million, plus fees and expenses. In conjunction with the Secondary Offering, ASI Partners distributed to certain of its partners, 3,780,353 shares of American Standard Companies Inc. common stock that it owned. In addition, American Standard Companies Inc. issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of American Standard Companies Inc. common stock at $55 per share, $10 per share over the public offering price. All of the shares sold in the Secondary Offering were previously issued and outstanding shares, and American Standard Companies Inc. received no proceeds therefrom. In October 1997, American Standard Companies Inc. completed its open-market share repurchase program commenced in May 1997 pursuant to which 2,320,900 shares of its common stock were purchased for $100 million. This transaction and the Share Repurchase referred to above were funded with borrowings by American Standard Inc. under the 1997 Credit Agreement which were loaned to American Standard Companies Inc. under a non-interest-bearing demand note. Such amount is included in other assets. 14 18 YEAR 2000 ISSUE For the past several years the Company has been in the process of converting most of its computer applications and systems worldwide to client server technology and in conjunction therewith has been installing software which is Year 2000 compatible. For other systems, software that is Year 2000 compliant is being installed. Most of these initiatives would have been undertaken irrespective of any Year 2000 issues and the Company expects that conversion of all critical business systems will have been completed by mid-1999. In addition the Company has established a comprehensive Year 2000 initiative, having appointed teams for each operating group worldwide, coordinated by a team leader reporting directly to the business group leader. These teams are responsible for assuring that all core business systems will be fully functional for the year 2000, including transactions with customers, suppliers, financial institutions and other third parties. The Company is also reviewing its new and previously sold products that incorporate equipment controls to identify and resolve any problems that such products may have as a result of the arrival of Year 2000. Final cost estimates are not complete, but management does not expect the incremental costs attributable directly to coping with Year 2000 issues to have a material adverse effect on the Company's financial position, results of operations or cash flows. While the Company believes its efforts are adequate to address its Year 2000 concerns, the Company could be adversely affected if suppliers, customers and other third parties the Company does business with do not address this issue successfully. The Company is continuing to assess these risks and develop solutions to minimize the impact on the Company. MARKET RISK The Company is exposed to foreign currency fluctuations and interest rate changes. From time to time the Company enters into agreements to reduce its foreign currency and interest rate risks. Such agreements hedge specific transactions or commitments. The Company does not enter into speculative hedges. The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of Western Europe, Canada, Brazil, Mexico, Bulgaria, the Czech Republic, Central American countries, China, Malaysia, the Philippines, South Korea, Thailand, Taiwan, Australia and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the stock or partnership interest. Because the Company has manufacturing operations in 35 countries, fluctuations in currency exchange rates may have a significant impact on its financial statements. Such fluctuations have much less effect on local operating results, however, because the Company for the most part sells its products within the countries in which they are manufactured. The asset exposure of foreign operations to the effects of exchange volatility has been partly mitigated by the denomination in foreign currencies of a portion of the Company's borrowings. A portion of the Company's debt bears interest at rates which vary with changes in the London Interbank Offered Rate (LIBOR). As of December 31, 1997, $1.1 billion of the Company's total debt bore interest at variable rates. It has been the Company's practice to maintain a significant portion of its debt at fixed rates of interest. As of December 31, 1997, approximately 52% of the Company's total debt was at fixed rates. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management's expectations and belief are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. Many important factors could cause actual results to differ materially from management's expectations, including the level of construction activity in the Company's Air Conditioning Products' and Plumbing Products' markets; the timing of completion and success in the start-up of new production facilities; changes in U.S. or international economic conditions, such as inflation or interest rate fluctuations or recessions in the Company's markets; pricing changes to the Company's products or those of its competitors, and other competitive pressures on pricing and sales; integration of acquired businesses; risks generally relating to the Company's international operations, including governmental, regulatory or political changes; risks and costs related to the year 2000 software issue; the planned redemption of debt; the impact of the Far East economic situation; and transactions or other events affecting the need for, timing and extent of the Company's capital expenditures. 15 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The accompanying consolidated balance sheet at December 31, 1997 and 1996, and related consolidated statements of operations, stockholder's deficit and cash flows for the years ended December 31, 1997, 1996 and 1995, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls which it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of outside Directors which meets periodically with the Company's financial officers, internal auditors and the independent auditors and monitors the accounting affairs of the Company. American Standard Inc. February 16, 1998 REPORT OF INDEPENDENT AUDITORS The Board of Directors American Standard Inc. We have audited the accompanying consolidated balance sheet of American Standard Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholder's deficit, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 2 to the Consolidated Financial Statements, in 1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ Ernst & Young LLP New York, New York February 16, 1998 16 20 CONSOLIDATED STATEMENT OF OPERATIONS
American Standard Inc. Year Ended December 31, (Dollars in thousands) 1997 1996 1995 Sales $ 6,007,509 $ 5,804,561 $ 5,221,476 - -------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 4,481,915 4,379,765 3,887,024 Selling and administrative expenses 979,036 905,427 853,783 Write-off of purchased research and development 90,300 -- -- Asset impairment loss -- 235,234 -- Other expense 27,254 28,337 40,489 Interest expense 192,216 198,192 213,326 - -------------------------------------------------------------------------------------------------------- 5,770,721 5,746,955 4,994,622 - -------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 236,788 57,606 226,854 Income taxes 116,928 104,324 85,070 - -------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item 119,860 (46,718) 141,784 Extraordinary loss on retirement of debt (23,637) -- (30,129) - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 96,223 $ (46,718) $ 111,655 ========================================================================================================
See notes to consolidated financial statements. 17 21 CONSOLIDATED BALANCE SHEET
American Standard Inc. At December 31, (Dollars in thousands, except share data) 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 28,772 $ 59,699 Accounts receivable, less allowance for doubtful accounts - 1997, $30,226; 1996, $28,294 831,285 799,792 Inventories 430,773 408,962 Future income tax benefits 40,756 67,125 Other current assets 62,392 50,796 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 1,393,978 1,386,374 Facilities, at cost, net of accumulated depreciation 1,139,184 1,005,998 Other assets: Goodwill, net of accumulated amortization - 1997, $225,020; 1996, $221,105 844,238 875,111 Debt issuance costs, net of accumulated amortization - 1997, $11,718; 1996, $13,723 22,516 34,451 Other 579,827 217,681 - ----------------------------------------------------------------------------------------------------------------------------- $ 3,979,743 $ 3,519,615 ============================================================================================================================= LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Loans payable to banks $ 718,412 $ 108,856 Current maturities of long-term debt 30,459 72,645 Accounts payable 466,119 469,150 Accrued payrolls 179,635 151,707 Other accrued liabilities 409,800 398,081 Taxes on income 45,717 35,421 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,850,142 1,235,860 Long-term debt 1,550,772 1,741,847 Other long-term liabilities: Reserve for postretirement benefits 437,651 473,229 Deferred tax liabilities -- 68,157 Other 468,618 384,373 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 4,307,183 3,903,466 Commitments and contingencies Stockholder's deficit: Preferred stock, Series A, $.01 par value, 1,000 shares issued and outstanding -- -- Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding -- -- Capital surplus 560,417 560,794 Accumulated deficit (675,264) (771,487) Foreign currency translation effects (212,593) (173,158) - ----------------------------------------------------------------------------------------------------------------------------- Total stockholder's deficit (327,440) (383,851) - ----------------------------------------------------------------------------------------------------------------------------- $ 3,979,743 $ 3,519,615 =============================================================================================================================
See notes to consolidated financial statements. 18 22 CONSOLIDATED STATEMENT OF CASH FLOWS
American Standard Inc. Year Ended December 31, (Dollars in thousands) 1997 1996 1995 Cash provided (used) by: Operating activities: Income (loss) before extraordinary item $ 119,860 $ (46,718) $ 141,784 Write-off of purchased in-process research and development 90,300 -- -- Asset impairment loss -- 235,234 -- Depreciation 124,855 117,951 109,999 Amortization of goodwill and other intangibles 39,107 27,580 33,396 Non-cash interest 59,857 61,794 63,930 Non-cash stock compensation 9,930 31,201 29,014 Changes in assets and liabilities: Accounts receivable (40,652) (25,479) (124,482) Inventories (22,538) (32,499) 8,236 Accounts payable and accrued payrolls 18,739 (21,356) 53,971 Postretirement benefits 8,578 19,770 33,531 Other long-term liabilities 46,785 24,455 22,419 Other, net (59,437) (39,172) (24,092) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 395,384 352,761 347,706 - -------------------------------------------------------------------------------------------------------------------- Investing activities: Purchases of property, plant and equipment (245,258) (212,179) (164,193) Investments in affiliated companies (56,925) (15,321) (42,395) Acquisition of medical diagnostics businesses (212,270) -- -- Proceeds from disposals of property, plant and equipment 19,099 15,105 19,428 Other 18,696 6,293 4,055 - -------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (476,658) (206,102) (183,105) - -------------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds from issuance of long-term debt 401,538 6,912 469,776 Repayments of long-term debt, including redemption premiums (655,335) (73,429) (1,020,004) Net change in revolving credit facilities 622,559 (106,332) 124,768 Net change in other short-term debt 8,673 (13,627) (18,312) Net loan (to) from parent (303,010) 4,069 4,823 Capital contribution from parent -- -- 270,004 Minority partners' contributions to PRC venture 5,920 18,165 26,246 Financing costs and other (24,019) (10,355) (24,466) - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 56,326 (174,597) (167,165) Effect of exchange rate changes on cash and cash equivalents (5,979) (1,067) (1,481) - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (30,927) (29,005) (4,045) Cash and cash equivalents at beginning of period 59,699 88,704 92,749 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 28,772 $ 59,699 $ 88,704 ====================================================================================================================
See notes to consolidated financial statements. 19 23 CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
American Standard Inc. (Dollars in thousands) Foreign Currency Capital Accumulated Translation Surplus Deficit Effects Balance at December 31, 1994 $214,634 $(836,424) $(151,721) Net income -- 111,655 -- American Standard Companies Inc. common stock purchased (6,877) -- -- Capital contribution of IPO proceeds from parent 268,993 -- -- Other capital contributions from parent principally related to ESOP 43,116 -- -- Foreign currency translation -- -- (22,929) -------- --------- --------- Balance at December 31, 1995 519,866 (724,769) (174,650) Net Loss -- (46,718) -- American Standard Companies Inc. common stock purchased (9,897) -- -- Capital contributions from parent principally related to ESOP and stock option exercises 50,825 -- -- Foreign currency translation -- -- 1,492 -------- --------- --------- Balance at December 31, 1996 560,794 (771,487) (173,158) Net income -- 96,223 -- American Standard Companies Inc. common stock purchased (16,937) -- -- Capital contributions from parent, principally related to ESOP, stock bonus plans and related tax benefits 16,560 -- -- Foreign currency translation -- -- (39,435) -------- --------- --------- Balance at December 31, 1997 $560,417 $(675,264) $(212,593) ======== ========= =========
See notes to consolidated financial statements. 20 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF THE COMPANY American Standard Inc. (the "Company") is a Delaware corporation incorporated in 1929. All of its outstanding common stock is owned by American Standard Companies Inc., a Delaware corporation that was formed in 1988 by Kelso and Company, L.P. ("Kelso") to effect the acquisition of American Standard Inc. Hereinafter, "American Standard" or "the Company" will refer to the Company, American Standard Companies Inc., or to American Standard Inc., including its subsidiaries, as the context requires. American Standard is a global manufacturer of high quality, brand-name products in three major product groups: air conditioning systems for commercial, institutional and residential buildings; bathroom and kitchen fixtures and fittings; and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles. The Company has also recently formed a medical diagnostics group (see Note 3). Information on the Company's operations by segment and geographic area is included on pages 11, 33 and 34 of this report. NOTE 2. ACCOUNTING POLICIES Financial Statement Presentation -- The consolidated financial statements include the accounts of majority-owned subsidiaries; intercompany transactions are eliminated. Investments in unconsolidated joint ventures are included at cost plus the Company's equity in undistributed earnings. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The most significant estimates included in the preparation of the financial statements are related to postretirement benefits, income taxes, warranties and asset lives. Foreign Currency Translation -- Adjustments resulting from translating foreign functional currency assets and liabilities into U.S. dollars are recorded in a separate component of stockholder's equity. Gains or losses resulting from transactions in other than the functional currency are reflected in the Consolidated Statement of Operations, except for transactions which hedge net investments in a foreign entity and intercompany transactions of a long-term investment nature. For operations in countries that have hyper-inflationary economies, net income includes gains and losses from translating assets and liabilities at year-end rates of exchange, except for inventories and facilities, which are translated at historical rates. The losses from foreign currency transactions and translation losses in countries with hyper-inflationary economies reflected in expense were $4.2 million in 1997, $2.3 million in 1996, and $4.5 million in 1995. Revenue Recognition -- Sales are recorded when shipment occurs and title passes to a customer. Cash Equivalents -- Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. Inventories -- Inventory costs are determined principally by the use of the last-in, first-out (LIFO) method, and are stated at the lower of such cost or realizable value. Facilities -- The Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income as incurred. Significant investment grants are amortized into income over the period of benefit. Goodwill -- Goodwill is being amortized over 40 years. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Applying the criteria established by FAS 121, the Company concluded that certain assets and related goodwill of its Canadian, French and Mexican operating units were impaired. As a result, the Company recorded a non-cash charge of $235 million, approximately 90% of which was the write-down of goodwill, for which there was no tax benefit. This charge included $121 million for Air Conditioning Products' operations in Canada and France, and $114 million for Plumbing Products' operations in Canada and Mexico. The carrying value of goodwill for each business segment is reviewed if the facts and circumstances, such as significant declines in sales, earnings or cash flows or material adverse changes in the business climate, suggest that it may be impaired. If any impairment is indicated as a result of such reviews, the Company would measure it using techniques such as 21 25 comparing the undiscounted cash flow of the business to its book value including goodwill or by obtaining appraisals of the related business. Debt Issuance Costs -- The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Warranties -- The Company provides for estimated warranty costs at the time of sale. Revenues from the sales of extended warranty contracts are deferred and amortized on a straight-line basis over the terms of the contracts. Warranty obligations beyond one year are included in other long-term liabilities. Postretirement Benefits -- Postretirement pension benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and life insurance benefits for certain of its employees. Such benefits are accounted for on an accrual basis using actuarial assumptions. Depreciation -- Depreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group. Research and Development Expenses -- Research and development costs are expensed as incurred. The Company expended approximately $161 million in 1997, $160 million in 1996, and $146 million in 1995 for research activities and product development and for product engineering. Expenditures for research and product development only were $112 million, $101 million and $85 million in the respective years. Certain expenditures for 1996 and 1995 have been reclassified to conform with the 1997 classification. Income Taxes -- Deferred income taxes are determined on the liability method, and are recognized for all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. No provision is made for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested. Advertising Expense-- The cost of advertising is expensed as incurred. The Company incurred $111 million, $88 million and $92 million of advertising costs in 1997, 1996 and 1995, respectively. Financial Instruments with Off-Balance-Sheet Risk -- The Company from time to time enters into agreements to reduce its foreign currency and interest rate risks. Gains and losses from underlying rate changes are included in income unless the contract hedges a net investment in a foreign entity, a firm commitment, or related debt instrument, in which case gains and losses are deferred as a component of foreign currency translation effects in stockholder's equity or included as a component of the transaction (see Note 9). Stock Based Compensation -- The Company grants to employees options to acquire a fixed number of shares of American Standard Companies Inc. common stock with an exercise price equal to the market value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and intends to continue this method in the future. Accordingly, the Company recognizes no compensation expense for the stock option grants. 22 26 NOTE 3. ACQUISITION OF MEDICAL DIAGNOSTICS BUSINESSES In January 1997 the Company announced formation of its Medical Systems Segment to pursue initiatives in the medical diagnostics field. For the last several years the Company has supported the development of two medical diagnostic ventures focusing on test instruments using laser technology and reagents. On June 30, 1997, the Company acquired the European medical diagnostics business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and all the outstanding shares of INCSTAR Corporation, a company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. owned a 52% interest. The aggregate cost of the acquisitions was approximately $212 million, including fees and expenses, and was funded with borrowings under the 1997 Credit Agreement. This transaction has been accounted for as a purchase and, in connection therewith, a portion of the purchase price totaling $90 million was allocated to the value of in-process research and development and was charged to operations in the third quarter of 1997. Approximately $64 million of goodwill resulted after allocation of the purchase price to the fair value of assets acquired and liabilities assumed. NOTE 4. OTHER EXPENSE Other income (expense) was as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Interest income $ 5.9 $ 6.2 $ 8.9 Royalties .7 3.3 4.1 Equity in net income of unconsolidated joint ventures 11.9 2.6 7.1 Minority interest (10.1) (11.7) (12.2) Accretion expense (26.7) (29.3) (36.5) Other, net (9.0) .6 (11.9) - -------------------------------------------------------------------------------- $(27.3) $(28.3) $(40.5) ================================================================================
NOTE 5. POSTRETIREMENT BENEFITS The Company sponsors postretirement pension benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the "ESOP") for the Company's U.S. salaried employees and certain U.S. hourly employees. The ESOP is an individual account, defined contribution plan. Shares of American Standard Companies Inc. common stock are allocated to the accounts of eligible employees (primarily through basic allocations of 3% of covered compensation and a matching Company contribution of up to 6% of covered compensation invested in the Company's 401(k) savings plan by employees). The Company has funded basic and matching allocations to the ESOP accounts through weekly contributions of cash since May 1997. Prior to that date, the Company funded the ESOP with shares of American Standard Companies Inc. common stock based upon the closing price each Friday quoted on the New York Stock Exchange. The Company intends to fund the ESOP in future years through contributions of cash or shares of American Standard Companies Inc. common stock. Benefits under defined benefit pension plans on a worldwide basis are generally based on years of service and employees' compensation during the last years of employment. In the United States the Company also provides various postretirement health care and life insurance benefits for certain of its employees. Funding decisions are based upon the tax and statutory considerations in each country. Accretion expense is the implicit interest cost associated with amounts accrued and not funded and is included in "other expense". At December 31, 1997, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are funded as incurred. 23 27 The Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1997 and 1996, were:
==================================================================================================================================== 1997 1997 1997 1996 1996 1996 (Dollars in millions) Assets in Accumulated Assets in Accumulated Excess of Benefit Health Excess of Benefit Health Accumulated Obligations and Life Accumulated Obligations and Life Benefit in Excess of Insurance Benefit in Excess Insurance Obligations Assets Benefits Obligations of Assets Benefits - ------------------------------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested $518.9 $259.1 $ -- $136.8 $604.3 $ -- Non-vested 26.9 17.4 -- 5.5 43.9 -- - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated benefit obligations 545.8 276.5 -- 142.3 648.2 -- Additional amounts related to projected pay increases 28.1 32.7 -- 24.6 41.4 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total projected benefit obligations 573.9 309.2 191.4 166.9 689.6 179.1 - ------------------------------------------------------------------------------------------------------------------------------------ Assets and book reserves relating to such benefits: Market value of funded assets 607.5 20.1 -- 208.2 343.4 -- Reserve (asset) for postretirement benefits net of recognized overfunding (2.6) 295.4 172.2 (42.3) 362.6 165.7 - ------------------------------------------------------------------------------------------------------------------------------------ 604.9 315.5 172.2 165.9 706.0 165.7 - ------------------------------------------------------------------------------------------------------------------------------------ Assets and book reserves in excess of (less than) projected benefit obligations $ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4) ==================================================================================================================================== Consisting of: Unrecognized prior services benefit (cost) $(29.9) $ (2.0) $ 9.5 $ (8.4) $(24.2) $ 7.2 Unrecognized net gain (loss) from changes in actuarial assumptions and experience 60.9 8.3 (28.7) 7.4 40.6 (20.6) - ------------------------------------------------------------------------------------------------------------------------------------ $ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4) ====================================================================================================================================
At December 31, 1997, the Company's funded domestic plans had assets of $386 million that were in excess of accumulated benefit obligations of $378 million, whereas in 1996, accumulated benefit obligations were in excess of assets. As a result, the table above reflects the funded domestic plans in Assets in Excess of Accumulated Benefit Obligations in 1997 and in Accumulated Benefit Obligations in Excess of Assets in 1996. At December 31, 1997, the projected benefit obligation related to health and life insurance benefits for active employees was $73 million and for retirees was $118.4 million. 24 28 The projected benefit obligation for postretirement benefits was determined using the following assumptions:
=========================================================================================================== 1997 1997 1996 1996 Domestic Foreign Domestic Foreign - ----------------------------------------------------------------------------------------------------------- Discount rate 7.00% 3.75%-7.00% 7.50% 4.25%-8.00% Long-term rate of inflation 2.80% .05%-3.80% 2.80% .05%-3.80% Merit and promotion increase 1.70% 1.70% 1.70% 1.70% Rate of return on plan assets 9.00% 4.50%-8.25% 9.00% 4.50%-8.25% - -----------------------------------------------------------------------------------------------------------
The weighted-average annual assumed rate of increase in the health care cost trend rate is 6% for 1998 and is assumed to decrease gradually to 5% for 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a change in the assumed rate of one percentage point for each future year would change the accumulated postretirement benefit obligation as of December 31, 1997, by $13.4 million and the annual postretirement cost by $2.6 million.
Total postretirement costs were: ================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Pension benefits $ 39.5 $ 41.7 $ 48.3 Health and life insurance benefits 17.2 17.4 15.5 - -------------------------------------------------------------------------------- Defined benefit plan cost 56.7 59.1 63.8 Defined contribution plan cost, principally ESOP 32.1 31.2 27.4 - -------------------------------------------------------------------------------- Total postretirement cost, including accretion expense $ 88.8 $ 90.3 $ 91.2 ================================================================================
Postretirement cost had the following components:
==================================================================================================================================== 1997 1997 1996 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, (Dollars in millions) Health & Health & Health & Pension Life Ins. Pension Life Ins. Pension Life Ins. Benefits Benefits Benefits Benefits Benefits Benefits Service cost-benefits earned during the period $ 26.3 $ 4.7 $ 24.5 $ 4.7 $ 24.6 $ 3.3 Interest cost on the projected benefit obligation 53.9 12.9 55.6 12.5 58.1 12.8 Less assumed return on plan assets: Actual return on plan assets (107.4) -- (64.0) -- (107.1) -- Excess deferred 63.2 -- 22.7 -- 69.7 -- - ------------------------------------------------------------------------------------------------------------------------------------ (44.2) -- (41.3) -- (37.4) -- Other, including amortization of prior service cost 3.5 (.4) 2.9 .2 3.0 (.6) - ------------------------------------------------------------------------------------------------------------------------------------ Defined benefit plan cost $ 39.5 $ 17.2 $ 41.7 $ 17.4 $ 48.3 $ 15.5 ==================================================================================================================================== Accretion expense reclassified to "other expense" $ 13.8 $ 12.9 $ 16.8 $ 12.5 $ 23.7 $ 12.8 ====================================================================================================================================
25 29 NOTE 6. INCOME TAXES The Company's income (loss) before income taxes and extraordinary item, and the applicable provision (benefit) for income taxes were:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item: Domestic $145.7(a) $162.6 $ -- Foreign 91.1(a) (105.0)(b) 226.9 - -------------------------------------------------------------------------------- Pre-tax income $236.8 $ 57.6 $226.9 ================================================================================ Provision (benefit) for income taxes: Current: Domestic $ 96.2 $ 48.2 $ 15.7 Foreign 67.5 70.2 69.6 - -------------------------------------------------------------------------------- 163.7 118.4 85.3 Deferred: Domestic (42.9) (4.2) (7.3) Foreign (3.9) (9.9) 7.1 - -------------------------------------------------------------------------------- (46.8) (14.1) (.2) - -------------------------------------------------------------------------------- Total provision $116.9 $104.3 $ 85.1 ================================================================================
(a) Includes $90 million write-off of purchased research and development: domestic $32 million; foreign $58 million. (b) Includes asset impairment loss of $235 million. A reconciliation between the actual income tax expense provided and the income taxes computed by applying the statutory federal income tax rate of 35% in 1997, 1996 and 1995 to the income (loss) before income taxes and extraordinary item is as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Tax provision at statutory rate $ 82.9 $ 20.2 $ 79.4 Nondeductible write-off of purchased research and development 31.6 -- -- Nondeductible asset impairment loss -- 82.3 -- Nondeductible goodwill amortization 8.3 8.3 11.9 Rate differences and withholding taxes related to foreign operations 14.6 5.5 19.2 State tax provision (benefit) 1.8 1.3 (.5) Foreign exchange gain (loss) (1.1) (.6) 1.2 Decrease in valuation allowance (27.4) (13.0) (31.3) Other, net 6.2 .3 5.2 - -------------------------------------------------------------------------------- Total provision $116.9 $104.3 $ 85.1 ================================================================================
The decreases in the valuation allowance of $27.4 million in 1997 and $13 million in 1996 were net of valuation allowances of $ 12.4 million in 1997 and $10.8 million in 1996, respectively, provided on future tax benefits on certain foreign operations. In addition to the 1995 valuation allowance decrease shown above, a valuation allowance of $10.5 million in 1995 was provided for the tax benefits related to the extraordinary loss on retirement of debt (see Note 9). 26 30 The following table details the gross deferred tax liabilities and assets and the related valuation allowances:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $115.4 $127.3 Inventory (LIFO and purchase accounting differences) (1.9) 1.0 Employee benefits 6.7 8.1 Foreign investments 50.1 50.1 Other 46.5 37.9 - -------------------------------------------------------------------------------- 216.8 224.4 - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits 136.8 134.1 Warranties 66.0 61.1 Alternative minimum tax -- 4.7 Foreign tax credits and net operating losses 57.6 45.2 Reserves 49.9 54.8 Other 9.9 8.5 Valuation allowances (57.6) (85.0) - -------------------------------------------------------------------------------- 262.6 223.4 - -------------------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 45.8 $ (1.0) ================================================================================
In 1997 and 1996 the valuation allowance with respect to domestic deferred tax assets was reduced as a result of the reversal of existing domestic deferred tax benefits and higher levels of taxable income in the U.S. in 1997 and 1996 and projected taxable income in the future. Deferred tax assets related to foreign tax credits, net operating loss carryforwards and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited. As a result of the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes. Cash taxes paid were $105 million, $135 million and $90 million, in the years 1997, 1996 and 1995, respectively. In connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, German tax authorities raised questions regarding the treatment of certain significant matters. In prior years the Company paid approximately $17 million (at December 31, 1997, exchange rates) of a disputed German income tax. A suit is pending to obtain a refund of this tax. In March 1996 the Company received an assessment, which it has appealed, for additional taxes of approximately $61 million (at December 31, 1997, exchange rates) (principally relating to the period from 1988 to 1990), plus interest, for the tax return years then under audit. In addition, significant transactions similar to those which gave rise to such assessment occurred in years subsequent to 1990. In June 1997, the German tax authorities commenced an audit of the years 1991 through 1994. Having assessed additional taxes for the 1988-1990 period, the German tax authorities might, after completing the current audit, propose tax adjustments for the 1991-1994 period that could be as much as 50% higher. In addition, based on recent preliminary indications, the Company believes that the German tax authorities are considering proposing additional tax adjustments of approximately $44 million (at December 31, 1997, exchange rates) for the years 1991 to 1994 with respect to the substantial repayment of an intercompany financing instrument. The Company is currently unable to predict the time that or extent to which an assessment, if any, in respect of such potential adjustment would be made. The Company, on the basis of the opinion of legal counsel, believes the German tax returns are substantially correct as filed and any such adjustments would be inappropriate and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company has not recorded any loss contingency at December 31, 1997, with respect to such matters. 27 31 The Company made a partial security deposit in respect of the additional taxes and interest assessed in March 1996. Approximately $13 million was paid in January 1997 and, in addition, the Company has applied approximately $7 million of tax refunds due it with respect to the 1996 tax year to the security deposit. The tax authorities have granted a staying order for the balance of the additional taxes and interest assessed in March 1996, under which no further payment or other security will be required from the Company before litigation of the matter or a final resolution. During litigation, the Company would expect renewal of the staying order. Upon final resolution, the Company will be obligated to pay any tax liability in excess of the security deposit or the Company will receive a refund of any excess security deposit (with interest accruing on the additional tax from the date of the assessment or the refund amount from the date of deposit, respectively). As a result of German tax legislation, first effective in 1994, the Company's tax provision in Germany was higher in 1995, 1996 and 1997 and will continue to be in the future. As a result of this German tax legislation and the related additional tax provisions, the Company believes its tax exposure to the major issues under the audit referred to above will be reduced starting in 1994 and continuing thereafter. NOTE 7. INVENTORIES The components of inventories are as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Finished products $255.0 $235.8 Products in process 86.8 77.7 Raw materials 89.0 95.5 - -------------------------------------------------------------------------------- Inventories at cost $430.8 $409.0 ================================================================================
The carrying cost of inventories approximates current cost. NOTE 8. FACILITIES The components of facilities, at cost, are as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Land $ 72.0 $ 79.0 Buildings 442.2 382.3 Machinery and Equipment 1,093.3 971.0 Improvements in progress 109.2 150.2 - -------------------------------------------------------------------------------- Gross facilities 1,716.7 1,582.5 Less: accumulated depreciation 577.5 576.5 - -------------------------------------------------------------------------------- Net facilities $1,139.2 $1,006.0 ================================================================================
NOTE 9. DEBT In January 1997, the Company entered into the 1997 Credit Agreement, an amendment and restatement of the 1995 Credit Agreement. The 1997 Credit Agreement, which expires in 2002, provides American Standard Inc. and certain subsidiaries (the "Borrowers") with senior secured credit facilities aggregating $1.75 billion to all Borrowers as follows: (a) a $750 million U.S. dollar revolving credit facility and a $625 million multi-currency revolving credit facility (the "Revolving Facilities") and (b) a $375 million multi-currency periodic access credit facility (the "Periodic Access Facility"). The 1997 Credit Agreement provides lower interest rates, significantly increased borrowing capacity, less restrictive covenants and no scheduled principal payments until maturity in 2002. Each of the outstanding revolving loans is due at the end of each interest period (a maximum of six months). The Company may, however, concurrently reborrow the outstanding obligations subject to compliance with applicable conditions of the 1997 Credit Agreement. Borrowings under the Revolving Facilities and the Periodic Access Facility bear interest at the London interbank offered rate ("LIBOR") plus 0.875%, which is .375% lower than rates under the 1995 Credit Agreement. This initial rate is subject to adjustment and may be reduced in the event the Company attains improved financial ratios. In July 1997, the Company achieved an interest rate reduction of 0.125%. Excluding the 1997 Credit Agreement which expires in 2002, the amounts of long-term debt maturing in years 1998 through 2002 are: 1998-$30 million; 1999-$166 million; 2000-$15 million; 2001-$212 million and 2002 - $11 million. 28 32 On August 1, 1997, American Standard Companies Inc. and its wholly-owned subsidiary American Standard Inc. jointly filed a shelf registration statement (the "Shelf Registration") with the Securities and Exchange Commission covering $1 billion of debt securities to be offered by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. On January 15, 1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due 2008 and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due 2003 and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the "Offerings") under the Shelf Registration, the proceeds of which aggregated $737 million, net of underwriting discounts and expenses. The Company currently intends to apply the net proceeds of the Offerings, together with funds available under the 1997 Credit Agreement, to the redemption (the "Redemption"), on or after June 1, 1998, of its $740.2 million principal amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1, 1998, the Senior Subordinated Discount Debentures are redeemable at a price of 104.66% of the principal amount, plus accrued interest and the Senior Subordinated Notes are redeemable at a price of 102.82% of the principal amount, plus accrued interest. Pending the Redemption, the net proceeds of the Offerings were used to reduce borrowings (but not commitments) under the revolving portion of the Company's 1997 Credit Agreement. Unless amended or waived, the provisions of the 1997 Credit Agreement would require the Company to apply the proceeds of the Offerings permanently to reduce the total amount available under the 1997 Credit Agreement, unless the proceeds of the Offerings are applied to the Redemption prior to December 31, 1998, or to redeem up to $150 million of certain other indebtedness prior to June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior Subordinated Discount Debentures, there can be no assurance that market or economic conditions or the Company's business strategy will not change and, therefore, there can be no assurance that the proceeds of the Offerings will be applied towards the Redemption. On May 15, 1997, the Company redeemed the $250 million aggregate principal amount of its 11 3/8% Senior Debentures (at a redemption price of 105.69% of the principal amount plus interest accrued to the redemption date) with lower-rate borrowings under the 1997 Credit Agreement. As a result of the redemption of debt in 1997 and 1995, the Consolidated Statement of Operations included extraordinary charges of $24 million (net of taxes of $6 million) and $30 million (with no tax benefit), respectively (including call premiums and the write-off of deferred debt issuance costs - see Note 6). In addition, it is expected that the first half of 1998 will include an extraordinary charge of approximately $50 million as a result of the planned redemption of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8% Senior Subordinated Notes, both of which are callable on or after June 1, 1998. Short-term -- The Revolving Facilities under the 1997 Credit Agreement provide for aggregate borrowings of up to $1.375 billion for general corporate purposes, of which up to $500 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings. The Company pays a commitment fee of 0.20% per annum on the unused portion of the Revolving Facilities and a fee of 0.875% per annum plus issuance fees for letters of credit. At December 31, 1997, there were $672 million of borrowings outstanding under the Revolving Facilities and $61 million of letters of credit. Remaining availability under the Revolving Facilities was $642 million, which is available to redeem certain outstanding public debt securities of American Standard Inc. and for other general corporate purposes. Borrowings under the Revolving Facilities by their terms are short-term. Average borrowings under the revolving credit facilities available under bank credit agreements for 1997, 1996 and 1995 were $574 million, $215 million and $278 million, respectively. Other short-term borrowings are available outside the United States under informal credit facilities and are typically in the form of overdrafts. At December 31, 1997, the Company had $40 million of such foreign 29 33 short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $81 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time. In 1997 the Company also established credit facilities for its operations in China totaling $58 million, of which $6 million was outstanding as of December 31, 1997, with remaining availability of $41 million after $11 million letters of credit usage. Average short-term borrowings for 1997, 1996 and 1995 were $639 million, $284 million and $334 million respectively, at weighted average interest rates of 6.38%, 7.33% and 7.85%, respectively. Total short-term borrowings outstanding at December 31, 1997, 1996 and 1995 were $718 million, $109 million and $240 million, respectively, at weighted average interest rates of 6.0%, 7.5%, and 7.9%, respectively. Long-term -- Long-term debt was as follows:
================================================================================ At December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Credit Agreements $ 354.1 $ 363.6 9 1/4% sinking fund debentures, due in installments from 1998 to 2016 127.5 150.0 10 7/8% senior notes due 1999 150.0 150.0 11 3/8% senior debentures due 2004 -- 250.0 9 7/8% senior subordinated notes due 2001 200.0 200.0 10 1/2% senior subordinated discount debentures (net of unamortized discount of $23.9 million in 1997; $77.5 million in 1996) due in installments from 2003 to 2005 686.7 633.1 Other long-term debt 63.0 67.7 - -------------------------------------------------------------------------------- 1,581.3 1,814.4 Less current maturities 30.5 72.6 - -------------------------------------------------------------------------------- $1,550.8 $1,741.8 ================================================================================
Interest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1997, 1996, and 1995, were $3.8 million, $3.9 million and $4.0 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $135 million, $140 million and $161 million, respectively. The U.S. Dollar equivalent of the 1997 and 1995 Credit Agreement loans and the effective weighted average interest rates were:
================================================================================ At December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Periodic access loans: Deutschemark loans at 4.44% in 1997; 4.56% in 1996 $ 324.5 $ 263.7 British sterling loans at 7.44% in 1996 -- 5.1 Dutch guilder loans at 4.44% in 1997; 4.31% in 1996 29.6 24.8 - -------------------------------------------------------------------------------- Total periodic access loans 354.1 293.6 Term loans: U.S. dollar loans at 6.63% in 1996 -- 70.0 - -------------------------------------------------------------------------------- Total Credit Agreement long-term loans 354.1 363.6 Revolver loans at 5.7% in 1997; 5.6% in 1996 672.0 67.2 - -------------------------------------------------------------------------------- Total Credit Agreement loans $1,026.1 $ 430.8 ================================================================================
The 9 1/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 103.7% in 1998 to 100% in 2006 and thereafter. The 10 7/8% Senior Notes are not redeemable by the Company. The 9 7/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on or after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10 1/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on or after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the 9 7/8% Senior Subordinated Notes and on the 10 1/2% Senior Subordinated Discount Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the credit agreements, the 9 1/4% Sinking Fund Debentures and the 10 7/8% Senior Notes. 30 34 At December 31, 1997, the Company held swap agreements to hedge the redemption value of a portion of its 10 1/2% Senior Subordinated Discount Debentures and effectively converted such debt to an average fixed interest rate of approximately 7%. The redemption value hedged by the swaps is the fair value of the debt at the commencement of the swaps. The swaps mature in June 1998 and have a notional value of $147 million, which approximates their fair value as of December 31, 1997. In anticipation of the Offerings under the Company's 1997 Shelf Registration, at December 31, 1997, the Company held forward contracts to hedge the risk of interest rate fluctuations in advance of the issuance of Senior Notes. Those contracts, which had a notional value of $350 million (and a fair value of $368 million at December 31, 1997), effectively fixed the interest rate on the 7 3/8% Senior Notes at 7.89%. Similarly, in February 1998 the Company entered into forward contracts (with a notional value of $150 million) to hedge interest rate fluctuations, which had little effect on the interest rate on the 7 1/8% and 7 5/8% Senior Notes issued February 13, 1998. In addition, in anticipation of expected future offerings under the 1997 Shelf Registration, the Company has entered similar forward contracts with a notional value of $150 million to hedge interest rates. The swap and forward contract counterparties are major financial institutions and the Company does not anticipate non-performance by counterparties. Obligations under the 1997 Credit Agreement are guaranteed by the Company, American Standard Companies Inc. and significant domestic subsidiaries of American Standard Inc. (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by a pledge of the stock of American Standard Inc. and its subsidiaries. The 1997 Credit Agreement contains various covenants that limit, among other things, mergers and asset sales, indebtedness, dividends on and redemption of capital stock of the Company, voluntary prepayment of certain other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, the use of proceeds from asset sales, intercompany transactions and transactions with affiliates and certain other business activities. The covenants also require the Company to meet certain financial tests. The Company believes it is currently in compliance with the covenants contained in the 1997 Credit Agreement. The indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales and certain other business activities. The Company believes it is currently in compliance with the covenants of those indentures. NOTE 10. CAPITAL STOCK In the first quarter of 1995 American Standard Companies Inc. sold 15,112,300 shares of its common stock at $20 per share in its initial public offering (the "IPO"), yielding net proceeds of $281 million (including proceeds from the exercised portion of the underwriters' over-allotment option and after deducting underwriting discounts and expenses) which were used to reduce indebtedness. In December 1996, the Company, Kelso & Company, L.P. ("Kelso") and ASI Partners entered into an agreement (the "Stock Disposition Agreement") providing for: (i) the sale by ASI Partners of 12,429,548 shares of American Standard Companies Inc. common stock (including 1,621,245 shares sold pursuant to the underwriters' over-allotment option) in a secondary offering (the "Secondary Offering") completed in the first quarter of 1997; and (ii) the repurchase by American Standard Companies Inc. from ASI Partners of all shares of American Standard Companies Inc. common stock to be owned by ASI Partners after the distribution (the "Share Distribution") by ASI Partners of 3,780,353 shares of such stock to certain of its partners at their election. Accordingly, in conjunction with the Secondary Offering, American Standard Companies Inc. purchased 4,628,755 shares of its common stock from ASI partners for $208 million (the "Share Repurchase"). The Company financed the Share Repurchase (to be held as treasury shares) with borrowings under the 1997 Credit Agreement. American Standard Companies Inc. had previously completed a secondary offering in September 1995 (together with the Secondary Offering, the "Secondary Offerings") for 22,500,000 shares of its common stock, substantially all of which were owned by ASI Partners. After the Secondary Offerings, the Share Distribution and the Share Repurchase, ASI Partners owned no common stock of American Standard Companies Inc. and is no longer entitled to designate any of the Company's directors. All of the shares sold in the Secondary Offerings were previously issued and outstanding shares, and the Company received no proceeds therefrom. 31 35 In accordance with the Stock Disposition Agreement, American Standard Companies Inc. also issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of common stock of American Standard Companies Inc. at $55 per share (the "Exercise Price"), $10 per share over the public offering price. The warrants entitle holders to receive cash or shares, at the Company's option, based on the difference between the then market value of American Standard Companies Inc. common stock and the Exercise Price. The warrants will be exercisable between January 31, 1998, and February 11, 2002. The estimated fair value of these warrants at the date issued was $9.34 per share using a Black-Scholes option pricing model and assumptions similar to those used for valuing American Standard Companies Inc. stock options as described below. On October 6, 1997, American Standard Companies Inc. completed its open-market share repurchase program commenced in May 1997 pursuant to which 2,320,900 shares of its common stock were purchased for $100 million, and will be held as treasury stock. This transaction and the Share Repurchase referred to above were funded with borrowings by American Standard Inc. under the 1997 Credit Agreement which were loaned to American Standard Companies Inc. under a non-interest-bearing demand note. Such amount is included in other assets. In January 1995 American Standard Companies Inc. established the Stock Incentive Plan (the "Stock Plan") under which awards may be granted to officers and other key executives and employees in the form of stock options, stock appreciation rights, restricted stock or restricted units in shares of common stock of American Standard Companies Inc. The maximum number of shares or units that may be issued under the Stock Plan and other incentive bonus plans is 7,604,475. The awards vest ratably over three years on the anniversary date of the awards and are exercisable over a period of ten years. A summary of stock option activity and related information for 1995, 1996 and 1997 follows:
================================================================================ Weighted- Weighted- Average Average Exercise Fair Value Shares Price of Grants - -------------------------------------------------------------------------------- Outstanding - December 31, 1994 -- -- Granted 5,006,000 $ 20.01 $ 7.51 Exercised -- -- Forfeited (32,000) 20.00 - -------------------------------------------------------------------------------- Outstanding - December 31, 1995 4,974,000 20.01 Granted 18,000 32.66 $ 12.26 Exercised (230,483) 20.00 Forfeited (60,343) 20.00 - -------------------------------------------------------------------------------- Outstanding - December 31, 1996 4,701,174 20.06 Granted 1,273,250 41.33 $ 14.13 Exercised (396,224) 20.00 Forfeited (58,515) 22.36 - -------------------------------------------------------------------------------- Outstanding - December 31, 1997 5,519,685 24.93 Exercisable at end of year: 1995 None -- 1996 1,422,539 20.01 1997 2,661,450 20.04
32 36 In addition, on February 2, 1998, the Company granted awards in the form of options to purchase 1,419,750 shares. Exercise prices for options outstanding as of December 31, 1997, ranged from $20 to $47.22. The weighted-average remaining contractual life of those options is 7.5 years. As of December 31, 1997, there were 1,458,083 shares available for grant under the plan and other incentive bonus plans. The Company has elected to follow APB 25 and related interpretations in accounting for stock options and accordingly has recognized no compensation expense. Had compensation cost been determined based upon the fair value at the grant date for awards consistent with the methodology prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net income in 1997 would have decreased by $12.1 million; the net loss in 1996 would have increased by $8.2 million; and net income in 1995 would have decreased by $7.4 million. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.6% in 1997 and 6.3% in 1996 and 1995; volatility of 25% in 1997 and 23% in 1996 and 1995; an expected life of 5 years in 1997 and 6 years in 1996 and 1995; and a dividend yield of zero. These estimated expense amounts are not necessarily indicative of amounts in years beyond 1997 because they are heavily influenced by the large number of options granted in 1995 in connection with the IPO which fully vest at the beginning of 1998. NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments at December 31, 1997, approximate carrying amounts except as follows:
================================================================================ (Dollars in millions) Carrying Fair Amount Value - -------------------------------------------------------------------------------- 10 7/8% senior notes $150 $158 9 7/8% senior subordinated notes 200 208 10 1/2% senior subordinated discount debentures 687 722 9 1/4% sinking fund debentures 150 156
The fair values presented above are estimates as of December 31, 1997, and are not necessarily indicative of amounts for which the Company could settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments. The fair values of the Company's 1997 Credit Agreement loans, which approximate their carrying values, were estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures and sinking fund debentures were based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value. NOTE 12. COMMITMENTS AND CONTINGENCIES Future minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1997, are: 1998 - $59 million; 1999 - $48 million; 2000 - $37 million; 2001 - $26 million; 2002 - $23 million and thereafter - $30 million. Net rental expenses for operating leases were $64 million, $70 million and $59 million for the years ended December 31, 1997, 1996, and 1995, respectively. The Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable as a result of such proceedings that the Company will incur costs which can be reasonably determined, the Company has recorded a liability. The Company believes that these legal, tax and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows or results of operations. The tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 6). NOTE 13. SEGMENT DATA Identifiable assets as of December 31, 1997, 1996 and 1995 and sales and operating income by geographic location for the years then ended are shown in the following tables. Sales and operating income by segment are shown in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 10. 33 37 SEGMENT DATA
Year Ended December 31, (Dollars in millions) 1997 1996 (c) 1995 (c) Sales-Geographic distribution: United States $ 3,002 $ 2,856 $ 2,526 Europe 1,955 2,050 1,951 Other 1,194 1,041 860 Eliminations (143) (142) (116) - ------------------------------------------------------------------------------------------------------------ Total sales $ 6,008 $ 5,805 $ 5,221 ============================================================================================================ Operating income-Geographic distribution: United States $ 310 $ 323 $ 216 Europe 109 102 242 Other 81 (87) 69 - ------------------------------------------------------------------------------------------------------------ Total operating income $ 500(a) $ 338(b) $ 527 ============================================================================================================ Assets Air Conditioning Products $ 1,579 $ 1,480 $ 1,432 Plumbing Products 1,097 1,066 1,088 Automotive Products 701 775 805 Medical Systems 170 6 -- - ------------------------------------------------------------------------------------------------------------ Total identifiable assets $ 3,547 $ 3,327 $ 3,325 ============================================================================================================ Geographic distribution: United States $ 1,372 $ 1,186 $ 1,075 Europe 1,413 1,460 1,557 Other 762 681 693 - ------------------------------------------------------------------------------------------------------------ Total identifiable assets 3,547 3,327 3,325 Prepaid charges 23 34 39 Future income tax benefits 41 67 30 Cash and cash equivalents 29 60 89 Corporate assets 340 32 37 - ------------------------------------------------------------------------------------------------------------ Total assets $ 3,980 $ 3,520 $ 3,520 ============================================================================================================ Goodwill included in assets: Air Conditioning Products $ 196 $ 203 $ 334 Plumbing Products 229 247 302 Automotive Products 350 419 446 Medical Systems 69 6 -- - ------------------------------------------------------------------------------------------------------------ Total goodwill $ 844 $ 875 $ 1,082 ============================================================================================================ Capital expenditures including investments in affiliates: Air Conditioning Products $ 102 $ 93 $ 70 Plumbing Products 154 88 93 Automotive Products 42 46 44 Medical Systems 4 -- -- - ------------------------------------------------------------------------------------------------------------ Total capital expenditures $ 302 $ 227 $ 207 ============================================================================================================ Depreciation and amortization: Air Conditioning Products $ 63 $ 51 $ 51 Plumbing Products 53 50 50 Automotive Products 43 43 42 Medical Systems 5 -- -- - ------------------------------------------------------------------------------------------------------------ Total depreciation and amortization $ 164 $ 144 $ 143 ============================================================================================================
(a) Includes $90 million write-off of purchased research and development, of which $58 million is in Europe and $32 million in the United States (see Note 3). (b) Includes asset impairment charge of $235 million, of which $166 million is included in Other and $69 million in Europe (see Note 2). (c) Amounts related to Medical Systems for years 1995 and 1996 have been reclassified to conform to the 1997 presentation. 34 38 QUARTERLY DATA (UNAUDITED)
1997 - ------------------------------------------------------------------------------------------------------------ (Dollars in millions) First (a) Second Third (b) Fourth Sales $1,360.7 $1,589.3 $1,519.0 $1,538.6 Cost of sales 1,017.5 1,163.2 1,138.2 1,163.0 Income before income taxes and extraordinary item 52.9 113.9 (2.5) 72.5 Income taxes 19.2 40.4 31.0 26.3 - ------------------------------------------------------------------------------------------------------------ Income before extraordinary item 33.7 73.5 (33.5) 46.2 Extraordinary loss on retirement of debt (8.5) (15.1) -- -- - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 25.2 $ 58.4 $ (33.5) $ 46.2 ============================================================================================================ 1996 - ------------------------------------------------------------------------------------------------------------ Sales $1,364.3 $1,518.3 $1,485.1 $1,436.9 Cost of sales 1,031.0 1,135.9 1,115.1 1,097.8 Income before income taxes and extraordinary item (188.3) 91.9 84.1 69.9 Income taxes 17.0 33.3 29.1 24.9 - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ (205.3) $ 58.6 $ 55.0 $ 45.0 ============================================================================================================
(a) The first quarter of 1996 included a non-cash asset impairment charge of $235 million, on which there was no tax benefit. (b) The third quarter of 1997 included a non-cash write-off of purchased research and development of $90 million, on which there was no tax benefit. 35 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III Not required under reduced disclosure format as contemplated by General Instruction J to Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 and 2. Financial statements and financial statement schedules The financial statements and financial statement schedules are listed in the accompanying index to financial statements on page 38 of this annual report on Form 10-K. The financial statements indicated on the index appearing on page 38 hereof are incorporated herein by reference. 3. Exhibits The exhibits to this Report are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of this annual report on Form 10-K. (b) Reports on Form 8-K During the quarter ended December 31, 1997, the company filed a Current Report on Form 8-K describing the First and Second Amendments to the 1997 Credit Agreement. The First Amendment permits the Company to (i) repurchase shares of its common stock in an amount not to exceed $308 million, and (ii) use proceeds of loans under the 1997 Credit Agreement to redeem the Company's 10-7/8% Senior Notes and to refinance such loans prior to June 30, 1998. The Second Amendment permits the Company to issue up to $1 billion of debt securities and to use the proceeds therefrom to redeem its 10-1/2% Senior Subordinated Discount Debentures or its 9-7/8% Senior Subordinated Notes or its 10-7/8% Senior Notes and, pending such redemptions, to prepay temporarily loans outstanding under the 1997 Credit Agreement. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN STANDARD INC. By: /s/ EMMANUEL A. KAMPOURIS (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1998: /s/ EMMANUEL A. KAMPOURIS (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer; Director (Principal Executive Officer) /s/ GEORGE H. KERCKHOVE (George H. Kerckhove) Vice President and Chief Financial Officer (Principal Financial Officer) /s/ G. RONALD SIMON (G. Ronald Simon) Vice President and Controller (Principal Accounting Officer) /s/ STEVEN E. ANDERSON (Steven E. Anderson) Director /s/ HORST HINRICHS (Horst Hinrichs) Director /s/ SHIGERU MIZUSHIMA (Shigeru Mizushima) Director /s/ ROGER W. PARSONS (Roger W. Parsons) Director /s/ J. DANFORTH QUAYLE (J. Danforth Quayle) Director /s/ DAVID M. RODERICK (David M. Roderick) Director /s/ JOSEPH S. SCHUCHERT (Joseph S. Schuchert) Director 41 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF CERTIFIED PUBLIC ACCOUNTANTS 1. Financial Statements Consolidated Balance Sheet at December 31, 1997, and 1996 18 Years ended December 31, 1997, 1996, and 1995: Consolidated Statement of Operations 17 Consolidated Statement of Cash Flows 19 Consolidated Statement of Stockholder's Deficit 20 Notes to Financial Statements 21-33 Segment Data 11 and 34 Quarterly Data (Unaudited) 35 Report of Independent Auditors 16 2. Report of Independent Auditors 38 Financial statement schedule, years ended December 31, 1997, 1996, and 1995 II Valuation and Qualifying Accounts 39 All other schedules have been omitted because the information is not applicable or is not material or because the information required is included in the financial statements or the notes thereto. 42 REPORT OF INDEPENDENT AUDITORS We have audited he consolidated financial statements of American Standard Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 16, 1998 (included elsewhere in this Annual Report on Form 10-K). Our audits also included the financial statement schedule of American Standard Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP New York, New York February 16, 1998 43 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands)
DESCRIPTION FOREIGN BALANCE ADDITIONS CURRENCY BALANCE BEGINNING CHARGED TO OTHER TRANSLATION END OF OF PERIOD INCOME DEDUCTIONS CHANGES EFFECTS PERIOD 1997: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 28,294 $ 14,212 $ (9,581)(A) $ 500 $ (3,199) $ 30,226 ======== ======== ======== ======== ======== ======== Reserve for post-retirement benefits $473,229 $ 57,751 $(44,808)(B) $ (6,375)(C) $(42,146) $437,651 ======== ======== ======== ======== ======== ======== 1996: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 27,330 $ 11,225 $(10,158)(A) $ 304 $ (407) $ 28,294 ======== ======== ======== ======== ======== ======== Reserve for post-retirement benefits $482,398 $ 60,730 $(40,960)(B) $(10,204)(D) $(18,735) $473,229 ======== ======== ======== ======== ======== ======== 1995: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 19,569 $ 10,811 $ (6,064)(A) $ 2,662 $ 352 $ 27,330 ======== ======== ======== ======== ======== ======== Reserve for post-retirement benefits $437,708 $ 52,190 $(21,808)(B) $ (5,761)(E) $ 20,069 $482,398 ======== ======== ======== ======== ======== ========
The reserve for postretirement benefits excludes the activity for currently funded U.S. pension plans. (A) Accounts charged off. (B) Payments made during the year. (C) Includes reclassification to current liabilities, offset by effect of acquisition of new businesses. (D) Includes $10 million reduction in minimum pension liability (E) Includes $6 million reduction in minimum pension liability. 44 AMERICAN STANDARD INC. INDEX TO EXHIBITS (ITEM 14(a)3 - EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K AND ADDITIONAL EXHIBITS) (The Commission File Number of American Standard Inc., the Registrant (sometimes hereinafter referred to as the "Company"), and for all Exhibits incorporated by reference, is 33-64450, except those Exhibits incorporated by reference in filings made by American Standard Companies Inc. (formerly named ASI Holding Corporation) ( "Holding") the Commission File Number of which is 1-11415; prior to filing its Registration Statement on Form S-2 on November 10, 1994, Holding's Commission File Number was 33-23070.) (3) (i) Restated Certificate of Incorporation of American Standard Inc. (the Company"); previously filed as Exhibit (3) (i) in the Company's Form 10-Q for the quarter ended June 30, 1995, and herein incorporated by reference. (ii) Amended By-laws of the Company, as amended February 24, 1997, effective May 1, 1997; previously filed as Exhibit (3) (ii) to the Company's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (4) (i) Indenture, dated as of November 1, 1986, between the Company and Manufacturers Hanover Trust Company, Trustee, including the form of 9-1/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on December 9, 1986, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4) (iii) to the Company's Form 10-K for the fiscal year ended December 31, 1986, and herein incorporated by reference. (ii) Instrument of Resignation, Appointment and Acceptance, dated as of April 25, 1988 among the Company, Manufacturers Hanover Trust Company (the Resigning Trustee") and Wilmington Trust Company (the Successor Trustee"), relating to resignation of the Resigning Trustee and appointment of the Successor Trustee under the Indenture referred to in Exhibit (4) (i) above; previously filed as Exhibit (4) (ii) to Registration Statement No. 33- 64450 of the Company, filed June 16, 1993, and herein incorporated by reference. (iii) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 10-7/8% Senior Notes due 1999, in the aggregate principal amount of $150,000,000; previously filed as Exhibit (4) (i) to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference. (iv) Form of 10-7/8% Senior Note due 1999 included as Exhibit A to the Indenture described in (4) (iii) above. (v) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 9-7/8% Senior Subordinated Notes Due 2001; previously 45 filed as Exhibit (4) (xxxi) to Amendment No. 1 to Registration Statement No. 33-61130 of the Company filed May 10, 1993, and herein incorporated by reference. (vi) Form of Note evidencing the 9-7/8% Senior Subordinated Notes Due 2001 included as Exhibit A to the Form of Indenture referred to in (4) (v) above. (vii) Form of Indenture, dated as of June 1, 1993, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 10-1/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4) (xxxiii) to Amendment No. 1 to Registration Statement No. 33-61130 of the Company, filed May 10, 1993, and herein incorporated by reference. (viii) Form of Debenture evidencing the 10-1/2% Senior Subordinated Discount Debentures Due 2005 included as Exhibit A to the Form of Indenture referred to in (4) (vii) above. (ix) Form of Senior Debt Indenture dated as of January 15, 1998 among the Company, Holding and The Bank of New York; filed as Exhibit (4) (i) to Amendment No. 1 to Registration Statement No. 333-32627 filed September 19, 1997, and herein incorporated by reference. (x) First Supplemental Indenture dated as of January 15, 1998 between the Company, Holding and The Bank of New York, relating to the Company's 7.375% Senior Notes due 2008, guaranteed by Holding; incorporated herein by reference to Exhibit (4) (xi) of Holding's Form 10-K for the fiscal year ended December 31, 1997. (xi) Second Supplemental Indenture dated as of February 13, 1998 between the Company, Holding and The Bank of New York relating to the Company's 7-1/8% Senior Notes due 2003 and 7-5/8% Senior Notes due 2010, guaranteed by Holding; incorporated herein by reference to Exhibit (4) (xii) of Holding's Form 10-K for the fiscal year ended December 31, 1997. (xii) Amended and Restated Credit Agreement, dated as of January 31, 1997, among Holding, the Company, certain subsidiaries of the Company and the financial institutions listed therein, The Chase Manhattan Bank, as Administrative Agent; Citibank, N. A., as Documentation Agent; The Bank of Nova Scotia and NationsBank, N. A., as Co-Syndication Agents; Bankers Trust Company, Deutsche Bank AG, The Industrial Bank of Japan Trust Company, The Sanwa Bank Limited, New York Branch and The Sumitomo Bank, Ltd., as Senior Managing Agents; and The Bank of New York, Banque Paribas, CIBC Inc., CIBC Wood Gundy plc, Compagnie Financiere de CIC et de L'Union Europeenne, Credit Lyonnais, New York Branch, Fleet National Bank, The Long Tem Credit Bank of Japan, Limited and The Toronto-Dominion Bank, as Managing Agents; previously filed as Exhibit (4) (xviii) to Amendment No. 2 to Registration Statement No. 333-18015 of Holding, filed February 5, 1997, and herein incorporated by reference. (xiii) First Amendment dated as of May 22, 1997 to the Amended and Restated Credit Agreement dated as of January 31, 1997 among Holding, the Company, certain subsidiaries of the Company, the financial institutions party thereto and The Chase Manhattan Bank, as administrative agent; filed as Exhibit 4 (a) to Holding's Report on Form 8-K dated October 24, 1997. (xiv) Second Amendment dated as of August 20, 1997 to the Amended and Restated Credit Agreement dated as of January 31, 1997 among Holding, the Company, certain subsidiaries of the Company, the financial institutions party thereto and The Chase Manhattan Bank, as administrative agent; filed as Exhibit 4 (b) to Holding's Report on Form 8-K dated October 24, 1997. 46 (xv) Rights Agreement, dated as of January 5, 1995, between Holding and Citibank, N.A. as Rights Agent; previously filed as Exhibit (4) (xxv) to Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (10) *(i) American Standard Inc. Long-Term Incentive Compensation Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (i) to the Company's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (ii) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan and American Standard Companies Inc. Supplemental Incentive Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (ii) to the Company's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (iii) American Standard Inc. Annual Incentive Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (iii) to the Company's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (iv) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through July 6, 1995; previously filed as Exhibit (10) (iv) to the Company's Form 10-K for the fiscal year ended December 31, 1995, and herein incorporated by reference. (v) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through December 4, 1997; filed herewith. (vi) Trust Agreement for the American Standard Inc. Supplemental Compensation Plan for Outside Directors, dated March 7, 1996; filed herewith. (vii) ASI Holding Corporation 1989 Stock Purchase Loan Program; previously filed as Exhibit (10) (i) to Holding's Form 10-Q for the quarter ended September 30, 1989, and herein Incorporated by reference. (viii) American Standard Companies Inc. Corporate Officer Severance Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (vii) to Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (ix) Estate Preservation Plan adopted in December, 1990; previously filed as Exhibit (10) (xx) to the Company's Form 10-K for the fiscal year ended December 31, 1990, and herein incorporated by reference. (x) Amendment adopted in March 1993 to Estate Preservation Plan referred to in (10) (ix) above; previously filed as Exhibit (10) (xvii) to the Company's Form 10-K for the fiscal year ended December 31, 1993, and herein incorporated by reference. (xi) Summary of terms of Unfunded Deferred Compensation Plan, adopted December 2, 1993; previously filed as Exhibit (10) (xviii) to the Company's Form 10-K for the fiscal year ended December 31, 1993, and herein incorporated by reference. * Items in this series 10 consist of management contracts or compensatory plans or arrangements with exception of (10)(xiv) and (xv). 47 (xii) American Standard Companies Inc. Stock Incentive Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (xi) in Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (xiii) American Standard Companies Inc. and Subsidiaries 1996-1998 Supplemental Incentive Compensation Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (xiii) in Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (xiv) Stock Disposition Agreement, dated as of December 16, 1996, among Holding, Kelso & Company, L. P. and Kelso ASI Partners, L. P.; previously filed as Exhibit (10) (i) to Holding's Registration Statement No. 333-18015, filed December 17, 1996, and herein incorporated by reference. (xv) Form of Warrant Agreement between Holding and Citibank, N. A. as Warrant Agent, included as Annex A to the Stock Disposition Agreement described in (10) (xiii) above; previously filed as Exhibit (10) (ii) to Holding's Registration Statement No. 333-18015, filed December 17, 1996, and herein incorporated by reference. (21) List of Company's subsidiaries. (23) Consent of Ernst & Young LLP. (27) Financial Data Schedule EX-10.V 2 SUPP. COMPENSATION PLAN FOR OUTSIDE DIRECTORS 1 American Standard Inc. Supplemental Compensation Plan for Outside Directors (as amended through December 4, 1997) 1. Definitions (a) "Administrator" means the Secretary of the Company. (b) "Annual Stockholders Meeting" means the annual meeting of the stockholders of ASCI. (c) "ASCI" means American Standard Companies Inc., the successor in interest to ASI Holding Corporation. (d) "Board" means the Board of Directors of the Company. (e) "Company" means American Standard Inc. or any successor thereto by consolidation, merger or other resolution. (f) "Fair Market Value" on any date means the closing price of a Share on such a date as reported on the New York Stock Exchange consolidated reporting system. (g) "Participant" means any director of the Company who is not an employee of the Company, provided that Mr. Schuchert shall become a Participant effective as of December 4, 1997. Participants are also referred to herein as "Outside Directors". (h) "Plan" means this Supplemental Compensation Plan for Outside Directors, as set forth herein and as amended from time to time. (i) "Plan Account" means the account established for each Participant pursuant to Section 2. (j) "Share" means a share of common stock of ASCI. (k) "Trust" means the Trust Agreement for the American Standard Inc. Supplemental Compensation Plan for Outside Directors. (l) "Unit" means the factor of $50,000 ($100,000 in the case of any director first elected to the Board after January 1, 1993) calculated in accordance with Section 2 of the Plan as it existed before March 7, 1996. 1 2 2. Establishment of Plan Accounts. The Administrator shall establish a Plan Account hereunder for each Participant as soon as he or she becomes a member of the Board, or in the case of Mr. Schuchert, on the date immediately preceding the 1998 Annual Stockholder Meeting. Whenever a Plan Account is established, the Administrator shall credit to such Plan Account, that number of Shares and fractions thereof equal in value to $50,000 ($100,000 in the case of any director first elected to the Board after January 1, 1993), with the value of a Share based on the Fair Market Value on the date immediately preceding the date that the Participant becomes a member of the Board (the "Initial Allocation"). Notwithstanding the foregoing, there shall be no Initial Allocation made to the Plan Account of Mr. Schuchert. Any Units credited to Participants' Plan Accounts under the terms of the Plan as it existed before March 7, 1996 shall be converted to Shares on a one for one basis. 3. Annual Grants of Shares. Effective on and after December 4, 1997, each Participant shall have 500 Shares credited to his or her Plan Account on the date immediately preceding each Annual Stockholders Meeting. 4. Shares Held in Trust. Any Shares issued pursuant to the Plan shall be issued to and governed by the terms of the Trust. Upon the termination of a Participant's Board membership other than for cause, such Participant (or, if such termination is due to his or her death, his or her Beneficiary) shall receive a distribution from the Trust, net of any required tax or other withholdings, of the Shares in his or her Plan Account. 5. Forfeiture Upon the termination for cause of a Participant's membership on the Board, all of the Shares and fractions thereof credited to his or her Plan Account shall revert back to ASCI. 2 3 6. Rights of Participants Regarding the Shares in their Plan Account. A Participant shall have the right to direct the voting of a number of Shares held by the Trust that is equal to the number of Shares credited to his or her Plan Account as to all matters with respect to which such Shares are entitled to vote. The Trust shall distribute to each Participant (or in the event of a Participant's death, such Participant's Beneficiary) an amount in cash equal to the amount of any cash dividends payable on the number of Shares allocated to the Participant's Plan Account. 7. Non-assignability. The right of a Participant or Beneficiary to the distribution provided for in the Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. 8. Amendment and Termination. The Plan may at any time be amended, modified or terminated by the Board; provided that no amendment, modification or termination shall, without the consent of a Participant, reduce the number of Shares and fractions thereof credited to such Participant's Plan Account pursuant to Sections 2 and 3. 9. Notices. All notices to the Company under this Plan, including a Participant's designation of a Beneficiary, shall be in writing and mailed or hand delivered to the Secretary of the Company at its Corporate Headquarters. 10. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of New York without reference to the principles of conflict of laws of such State. 3 EX-10.VI 3 TRUST AGREEMENT 1 TRUST AGREEMENT FOR THE AMERICAN STANDARD INC. SUPPLEMENTAL COMPENSATION PLAN FOR OUTSIDE DIRECTORS This Trust Agreement dated as of March 7, 1996, by and among American Standard Companies Inc., a Delaware corporation, American Standard Inc., a Delaware corporation, and Robert M. Kennedy, as Trustee, provides, on the terms and conditions set forth below, for the establishment and administration of a trust to hold shares of Common Stock issued as payouts under the American Standard Inc. Supplemental Compensation Plan for Outside Directors. 1. Definitions. For purposes of this Trust Agreement, the following definitions shall apply: 1.1. Act means the Securities Exchange Act of 1934, as amended. 1.2. ASCI means American Standard Companies Inc., a Delaware corporation, which is the successor in interest to ASI Holding Corporation. 1.3. ASCI Board means the Board of Directors of ASCI. 1.4. ASI Board means the Board of Directors of the Company. 1.5. Beneficiary means any one person or trust appointed by a Participant in an unrevoked writing filed with the Company directing that, in the event of such Participant's death, all of such Participant's rights under and interests in the Plan, as recorded pursuant to this Trust, shall vest in such person or trust, provided that a Participant's Beneficiary shall be deemed to be the estate or legal representative of such Participant if such written appointment is revoked and not replaced by another such written appointment filed with the Company, or if a Participant's Beneficiary does not survive such Participant. 1.6. Change of Control means the occurrence of any of the following events: 2 (i) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of ASCI representing 15% or more of the combined voting power of ASCI's then-outstanding securities (a "15% Beneficial Owner"); provided, however, that (a) the term "15% Beneficial Owner" shall not include any Beneficial Owner who has crossed such 15% threshold solely as a result of an acquisition of securities directly from ASCI, or solely as a result of an acquisition by ASCI of ASCI's securities, until such time thereafter as such person acquires additional voting securities other than directly from ASCI and, after giving effect to such acquisition, such person would constitute a 15% Beneficial Owner; and (b) with respect to any person eligible to file a Schedule 13G pursuant to Rule 13d-1(b)(1) under the Act with respect to ASCI securities (an "Institutional Investor"), there shall be excluded from the number of securities deemed to be beneficially owned by such person a number of securities representing not more than 10% of the combined voting power of ASCI's then-outstanding securities; (ii) during any period of two consecutive years beginning after December 1, 1996, individuals who at the beginning of such period constitute the ASCI Board together with those individuals who first become directors during such period (other than by reason of an agreement with ASCI or the ASCI Board in settlement of a proxy contest for the election of directors) and whose election or nomination for election to the ASCI Board was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (the "Continuing Directors"), cease for any reason to constitute a majority of the ASCI Board; (iii) the shareholders of ASCI approve a merger, consolidation, recapitalization or reorganization of ASCI, or a reverse stock split of any class of voting securities of ASCI, or the consummation of any such transaction if shareholder approval is not obtained, other than such transaction which would result in at least 75% of the total voting power represented by the voting securities of ASCI or the surviving entity outstanding immediately after such transaction being beneficially owned by persons who together owned at least 75% of the combined voting power of the voting securities of ASCI outstanding immediately prior to such transaction, with the relative voting power of each such continuing holder compared to the voting power of each other continuing holder not substantially altered as a result of the transaction; provided -2- 3 that, for purposes of this paragraph (iii), (a) such continuity of ownership (and preservation of relative voting power) shall be deemed to be satisfied if the failure to meet such 75% threshold (or to preserve such relative voting power) is due solely to the acquisition of voting securities by an employee benefit plan of ASCI or of such surviving entity or of any subsidiary of ASCI or such surviving entity and (b) voting securities beneficially owned by such persons who receive them other than as holders of voting securities of ASCI outstanding immediately prior to such transaction shall not be taken into account for purposes of determining whether such 75% threshold (or such relative voting power) is satisfied; (iv) the shareholders of ASCI approve a plan of complete liquidation or dissolution of ASCI or an agreement for the sale or disposition of all or substantially all the assets of ASCI unless following the completion of such liquidation or dissolution, or such sale or disposition, the 75% threshold (and relative voting power) requirements set forth in sub-paragraph (iii) above are satisfied; or (v) any other event which the ASCI Committee determines shall constitute a Change of Control for purposes of this Plan; provided, however, that a Change of Control shall not be deemed to have occurred if one of the following exceptions applies: (1) Unless a majority of the Continuing Directors determine that the exception set forth in this paragraph (1) shall not apply, none of the foregoing conditions would have been satisfied but for one or more of the following persons acquiring or otherwise becoming the Beneficial Owner of securities of ASCI: (A) any person who has entered into a binding agreement with ASCI, which agreement has been approved by two-thirds of the Continuing Directors, limiting the acquisition of additional voting securities by such person, the solicitation of proxies by such person or proposals by such person concerning a business combination with ASCI (a "Standstill Agreement"); (B) any employee benefit plan, or trustee or other fiduciary thereof, maintained by ASCI or any subsidiary of ASCI; (C) any subsidiary of ASCI; or (D) ASCI. (2) Unless a majority of the Continuing Directors determine that the exception set forth in this paragraph (2) shall not apply, none of the foregoing conditions would have been satisfied but for the acquisition by or of ASCI of or by another entity (whether by -3- 4 the merger or consolidation, the acquisition of stock or assets, or otherwise) in exchange, in whole or in part, for securities of ASCI, provided that, immediately following such acquisition, the Continuing Directors constitute a majority of the ASCI Board, or a majority of the board of directors of any other surviving entity, and, in either case, no agreement, arrangement or understanding exists at that time which would cause such Continuing Directors to cease thereafter to constitute a majority of the ASCI Board or of such other board of directors. Notwithstanding the foregoing, unless otherwise determined by a majority of the Continuing Directors, no Change of Control shall be deemed to have occurred with respect to a particular Participant if the Change of Control results from actions or events in which such Participant is involved in a capacity other than solely as an officer, employee or director of ASCI. For purposes of the foregoing definition of Change of Control, the term "Beneficial Owner," with respect to any securities, shall mean any person who, directly or indirectly, has or shares the right to vote or dispose of such securities or otherwise has "beneficial ownership" of such securities (within the meaning of Rule 13d-3 and Rule 13d-5 (as such Rules are in effect on December 1, 1996) under the Act), including pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that (i) a person shall not be deemed the Beneficial Owner of any security as a result of any agreement, arrangement or understanding to vote such security (A) arising solely from a revocable proxy or consent solicited pursuant to, and in accordance with, the applicable provisions of the Act and the rules and regulations thereunder or (B) made in connection with, or otherwise to participate in, a proxy or consent solicitation made, or to be made, pursuant to, and in accordance with, the applicable provisions of the Act and the rules and regulations thereunder, in either case described in clause (A) or clause (B) above whether or not such agreement, arrangement or understanding is also then reportable by such person on Schedule 13D under the Act (or any comparable or successor report), and (ii) a person engaged in business as an underwriter of securities shall not be deemed to be the Beneficial Owner of any securities acquired through such person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. 1.7. Change of Control Stock Value means the value of a share of Common Stock determined as follows: -4- 5 (i) if the Change of Control results from an event described in clause (iii) of the Change of Control definition, the highest per share price paid for shares of Common Stock of ASCI in the transaction resulting in the Change of Control; (ii) if the Change of Control results from an event described in clauses (i), (ii) or (v) of the Change of Control definition and no event described in clauses (iii) or (iv) of the Change of Control definition has occurred in connection with such Change of Control, the highest sale price of a share of Common Stock of ASCI on any trading day during the 60 consecutive trading days immediately preceding and following the date of such Change of Control as reported on the New York Stock Exchange Composite Tape, or other national securities exchange on which the Common Stock is traded, and published in The Wall Street Journal; or (iii) if the Change of Control results from an event described in clause (iv) of the Change of Control definition, the price per share at which shares of Common Stock are redeemed or exchanged by their holders in the transaction described in such clause (iv) or, if there has been no such redemption or exchange, the higher of the amounts determined in accordance with clause (i) or clause (ii) of this Change of Control Stock Value definition. 1.8. Common Stock means the common stock, par value $0.01 per share, of ASCI. 1.9. Company means American Standard Inc., a Delaware corporation. 1.10. Creditor means a general creditor of ASCI, the Company or a Subsidiary, as appropriate, and Judgment Creditor means a Creditor who has obtained a judgment against ASCI, the Company or a Subsidiary, as appropriate, from a court of competent jurisdiction and who has made written demand to ASCI, the Company or such Subsidiary for payment on such judgment which has gone unsatisfied for at least 180 days. 1.11. Fair Market Value on any date means the closing price of a Share on such date as reported on the New York Stock Exchange consolidated reporting system. 1.12. Insolvent means the inability to pay debts as they mature or being subject to proceedings as a debtor under the United States Bankruptcy Code, and Insolvency means the state of being insolvent. 1.13. Participant means a member of the ASI Board who is not an employee of ASI. -5- 6 1.14. Plan means American Standard Inc. Supplemental Compensation Plan for Outside Directors, as such is in effect from time to time. 1.15. Plan Administrator means the Secretary of the Company. 1.16. Plan Payout means a payment made pursuant to Sections 2 or 3 of the Plan. 1.17. Prime Rate means the rate of interest publicly announced from time to time by the New York City office of Citibank N.A. as its prime or reference rate, adjusted as of the first business day of each calendar quarter. 1.18. Share means a share of Common Stock. 1.19. Share Award Account means a separate account established under the Trust with respect to which the Participant's interests under the Plan are credited. 1.20. Subsidiary means a corporation in which the Company owns, directly or indirectly, more than 50% of the voting power represented by stock entitled to vote for the election of directors, or a partnership in which the Company owns, directly or indirectly, at least 50% of the capital or profits interests in such partnership. 1.21. Termination Date of a Participant means the date on which such Participant's membership with the Board of ASI terminates for any reason, including death. 1.22. Trust means the trust fund established under this Trust Agreement. 1.23. Trustee means Robert M. Kennedy or such successor trustee as shall be appointed by the ASI Committee pursuant to Section 19 hereof. 2. Establishment and Duration of Trust; Trustees Powers. The Trust is hereby established under the Plan to fulfill certain obligations thereunder of ASCI and the Company to Participants. ASCI and the Company shall remain primarily responsible to fulfill payment obligations under the Plan. To the extent payments are made from the Trust, the employer's liability to make payments shall be reduced correspondingly. The Trust shall continue in effect until terminated by action of the ASI Board; provided that the Trust shall in any event terminate when all amounts owed to Participants have been paid or the Trust has been exhausted. The Trust is intended to be a grantor trust within the meaning -6- 7 of Sections 671 through 679 of the Internal Revenue Code of 1986, as needed (the "Code"). The Trustee shall invest and reinvest the assets of the Trust without distinction between principal and income; provided, however, that the Trustee shall hold in the Trust all Shares that it receives, and the Trustee shall distribute such Shares to the Participants (or to their Beneficiaries) entitled to such distributions when and as directed by the Plan Administrator in accordance with the terms of the Plan. The Plan Administrator shall direct the investment of any cash contributions to the Trust in its discretion. Pending investment of any such cash contributions, the Trustee may temporarily invest and reinvest such contributions in any marketable short- and medium-term fixed income securities, United States Treasury Bills, other short- and medium-term government obligations, commercial paper, other money market instruments and part interests in any one or more of the foregoing, or may maintain cash balances consistent with the liquidity needs of the Trust as determined by the Trustee. The Plan Administrator may direct the Trustee to maintain separate investment funds, allocate contributions among such funds, and make transfers among such funds. Subject to the provisions hereof, the Trustee shall be authorized and empowered to exercise any and all of the following rights, powers and privileges with respect to any cash, securities or other properties held by the Trustee in trust hereunder: 1. To sell, exchange, mortgage or lease any such property and to convey, transfer or dispose of any such property on such terms and conditions as the Trustee deems appropriate. 2. To grant options for the sale, transfer, exchange or disposal of any such property and to exercise any subscription rights or conversion privileges with respect to any securities held in the Trust Fund. 3. To exercise all voting rights pertaining to any securities, provided that Shares credited to Share Award Accounts of Participants shall be voted as directed by such Participants ; to consent to or request any action on the part of the issuer of any such securities; and to give general or special proxies or powers of attorney with or without power of substitution. 4. To collect and receive any and all money and other property of whatsoever kind or nature due or owing or belonging to the Trust Fund and to give full discharge and acquaintance therefor; and to extend the time of payment of any obligation at any time owing -7- 8 to the Trust Fund, as long as such extension is for a reasonable period and continues reasonable interest. 5. To cause any securities or other property to be registered in, or transferred to, the individual name of the Trustee or in the name of one or more of its nominees, or one or more nominees of any system for the centralized handling of securities, or to retain such investments unregistered and in form permitting transferability by delivery (provided that the books and records of the Trust at all times show that all such investments are a part of the Trust Fund). 6. To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; to commence or defend suits or legal proceedings whenever, in its judgment, any interest of the Trust requires it; and to represent the Trust in all suits or legal proceedings in any court of law or equity or before any other body or tribunal, insofar as such suits or proceedings relate to any property forming part of the Trust Fund or to the administration of the Trust Fund. 7. Generally, to do all acts, whether or not expressly authorized, which are necessary or appropriate to carry out the intent of this Trust Agreement. 3. Contribution of Shares to Trust. As of the date any Plan Payout authorized under the Plan which consists in whole or in part of Shares is made, ASCI or the Company shall contribute to the Trust, for credit to the Share Award Account of each Participant who is granted such a Plan Payout, that number of whole and fractional Shares credited to such Participant under the Plan. 4. Share Award Accounts. Each Participant's Share Award Account shall record the number of Shares and fractions thereof credited to such Share Award Account as a Plan Payout and the date as of which each such Plan Payout was made. -8- 9 5. Voting Rights. Shares credited to each Participant's Share Award Account shall be voted by the Trustee as directed by such Participant. 6. Distributions from Trust. The Plan Administrator may at any time prior to a Change of Control direct that the Shares and any other property ("Non-Share Interests") credited to a Participant's Share Award Account be distributed from the Trust. If not earlier distributed in accordance with the foregoing sentence, upon the termination of a Participant's membership on the ASI Board, other than a termination for cause, prior to a Change of Control, such Participant (or, in the event of his death, his Beneficiary) shall be entitled to a distribution from the Trust of all Shares and Non-Share Interests credited to his Share Award Account. In the event that a Participant's membership on the Board is terminated for cause, such Participant shall forfeit all interest to his or her Share Award Account and any Shares in such account shall revert back to ASCI. 7. Change of Control. Upon a Change of Control, each Participant shall be entitled to receive a lump sum cash payment equal to the sum of (i) the Change of Control Stock Value of all Shares credited to his Share Award Account and (ii) the value of any Non-Share Interests credited to his Share Award Account (unless within one (1) business day following such a Change of Control, such Participant has delivered written notice to the Trustee pursuant to Section 10 hereof requesting a distribution from the Trust of all Shares and/or Non-Share Interests credited to such Participant's Share Award Account in the event of a Change of Control, in lieu of a cash payment equal to the Change of Control Stock Value of such Shares and/or the value of Non-Share Interests, in which case such Participant shall be entitled to receive a distribution of all Shares and/or Non-Share Interests credited to such Participant's Share Award Account) as soon as practicable. Upon a Change of Control, the Trustee shall determine as promptly as practicable the Change of Control Stock Value of the Shares in the Trust and shall promptly thereafter deliver a written notice (the "Trustee Notice") to the Company setting forth such Change of Control Stock Value and the manner of its determination and requesting that the Company purchase all Shares in the Trust (except for Shares credited to Participants' Share Award Accounts as to which Participants have requested a distribution in the event of a -9- 10 Change of Control in lieu of a cash payment equal to the Change of Control Value therefor). A copy of such Trustee Notice shall be sent to each Participant. Following the receipt of the Trustee Notice, the Company shall, within three (3) business days following the Company's receipt of such Trustee Notice, make a cash payment to the Trustee equal to the Change of Control Stock Value of such Shares against delivery of such Shares by the Trustee to the Company. In the event that the Company shall not have made such cash payment to the Trustee within such (3) business day period, interest on the amount owing to the Trustee will accrue at a rate per annum equal to the Prime Rate plus 4% and shall be compounded monthly until paid. Upon a Change of Control, the Trustee shall sell as promptly as practicable the Non-Share Interests (other than cash) of the Trust (except for such Non-Share Interests credited to Participants' Share Award Accounts as to which Participants have requested a distribution in-kind in the event of a Change of Control in lieu of a cash payment equal to the value therefor). Upon receipt by the Trustee of (i) the cash payment from the Company for the Shares and (ii) the proceeds from the sale of the Non-Share Interests (other than cash), the Trustee shall make to each Participant the lump-sum cash payment contemplated by the first sentence of this Section 7 with interest, if any, accrued pursuant to this Section 7, plus a cash payment equal to the cash, if any, credited to such Participant's Share Award Account. For purposes of this Section 7, the Trustee's determination of the Change of Control Stock Value of a Participant in the Trust shall be binding and conclusive. 8. Issuance of Share Certificates. If a Participant (or, in the event of his death, his Beneficiary) receives a distribution of Shares pursuant to Section 6 or 7, the Trustee shall deliver to such Participant or Beneficiary a certificate or certificates evidencing the Shares credited to such Participant's Share Award Account, as soon as administratively practicable after the Participant's Termination Date or a Change of Control, as the case may be. 9. Changes in Capital Structure. In the event of the payment of any dividend payable in, or the making of any distribution of, Shares to holders of record of Shares during the period any Shares awarded under the Plan are credited to a Participant's Share Award Account; or in the event of any -10- 11 stock split, combination of Shares, recapitalization or other similar change in the authorized capital stock of ASCI during such period; or in the event of the merger or consolidation of ASCI into or with any other corporation or the reorganization, dissolution or liquidation of ASCI during such period; there shall be credited to such Participant's Share Award Account such new, additional or other shares of capital stock of any class, or other property (including cash), as such Participant would be entitled to receive as a matter of law if such Participant were a shareholder of ASCI at the time of such event. 10. Administration. This Trust Agreement shall be administered by the Plan Administrator, who shall have full power and authority (to the extent not inconsistent with the terms and purposes of the Plan and this Trust Agreement) prior to a Change of Control to interpret and carry out the terms of, and to establish, amend or rescind rules and regulations relating to, this Trust Agreement; to appoint a recordkeeper for this Trust Agreement and to rescind any such appointment; and to take such other actions and to make such other determinations relating to this Trust Agreement as may be necessary or advisable in connection with the Plan. The Plan Administrator may by written direction delegate to any agent or agents it shall appoint, including any officer or employee of the Company or ASCI, the authority to exercise any of its administrative duties and responsibilities hereunder. All forms required to be filed hereunder and all other communications with respect hereto shall be addressed to the Secretary, American Standard Inc., One Centennial Avenue, Piscataway, New Jersey, 088556820, or to such other address as the Plan Administrator, ASI Committee, ASCI, the Company or the Trustee, as the case may be, may designate from time to time. 11. Trust Subject to Creditor Claims. Notwithstanding any other provision of this Trust Agreement or the Plan, the Trustee shall hold the assets of the Trust for the benefit of Creditors to the extent provided in Sections 12 and 13 hereof. No Participant or Beneficiary shall have any rights greater than the rights of any other unsecured Creditor, and no Participant or Beneficiary shall have any right against or -11- 12 security interest in the Trust. The Chief Executive Officer or Chief Financial Officer of ASCI, the Company or each Subsidiary shall have the duty to inform the Trustee in writing of the Insolvency of ASCI, the Company or any such Subsidiary, as the case may be. 12. Effects of Insolvency. Upon receipt prior to a Change of Control of any written allegation of the Insolvency of ASCI or the Company, the Trustee shall suspend the making of any distribution from the Trust and shall immediately notify ASCI or the Company in writing of such allegation. Within 30 days of receipt of such an allegation, the Trustee shall determine whether ASCI or the Company is Insolvent. If the Trustee determines ASCI or the Company to be Insolvent, or if the Trustee otherwise has actual knowledge that ASCI or the Company is Insolvent, the Trustee shall cease making distributions hereunder and shall hold the portion of the Trust held for the benefit of such entity for the benefit of its Creditors until otherwise instructed by a court of competent jurisdiction. If the Trustee determines that ASCI or the Company is not Insolvent, the Trustee shall resume making appropriate distributions from the Trust to Participants and Beneficiaries in accordance with this Agreement. Notwithstanding the foregoing, if the ASCI Board, the ASI Board, the Chief Executive Officer or the Chief Financial Officer of ASCI or the Company delivers to the Trustee a sworn statement that ASCI or the Company is Insolvent, the Trustee shall make distributions from the portion of the Trust held for the benefit of such entity only as directed by a court of competent jurisdiction, until such time as the Trustee determines that ASCI or the Company, as the case may be, is not Insolvent. 13. Judgment Creditor Claims. In addition to the rights of Creditors set forth in Section 12 hereof, and notwithstanding any other provision of this Trust Agreement, the assets of the Trust shall at all times prior to a Change of Control be available to satisfy claims of Judgment Creditors. Upon receipt by the Trustee of proof satisfactory to the Trustee that a Creditor is a Judgment Creditor, the Trustee shall satisfy the claim of such Judgment Creditor, to the extent possible, from the assets of the Trust, and the Trustee shall be fully indemnified hereunder in satisfying such claim. -12- 13 14. Distributions Due to Certain Tax Consequences. Notwithstanding any provision of this Trust Agreement other than Sections 12 and 13 hereof, if a Participant (or Beneficiary) is determined to be subject to United States federal income tax on any portion of his interest in the Trust prior to the time of distribution of such interest that portion of such interest shall be distributed by the Trustee to such Participant or Beneficiary. A portion of a Participant's (or Beneficiary's) interest in the Trust shall be determined to be subject to United States federal income tax upon the earliest of (i) receipt by the Participant (or Beneficiary) of a notice of deficiency from the United States Internal Revenue Service with respect to such interest which is not contested by such Participant (or Beneficiary); (ii) execution of a closing agreement between the Participant (or Beneficiary) and the Internal Revenue Service which provides that such interest is includible in the Participant's (or Beneficiary's) gross income; and (iii) a final determination by the United States Tax Court or any other federal court which holds that such interest is includible in the Participant's (or Beneficiary's) gross income. 15. Reports and Records. The Trustee shall: 15.1. keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions in the Trust as he shall deem necessary and proper with respect to his administration of the Trust, and permit inspection of such accounts, records and assets of the Trust by any duly authorized representative of the Company or ASCI at any time during usual business hours; 15.2. make such periodic reports to the Company or ASCI as it shall reasonably request; 15.3. prepare and timely file such tax returns and other reports, together with supporting data and schedules, as may be required of the Trustee by law, with any taxing authority or any other government authority, whether local, state or federal. -13- 14 16. Taxes. ASCI and the Company agree that their respective share of all income, deductions and credits of the Trust belong to them as owners for income tax purposes and shall, as appropriate, be included on their tax returns. The Company or ASCI shall from time to time pay taxes (references in this Trust Agreement to the payment of taxes shall include interest and applicable penalties) of any and all kinds whatsoever which at any time are lawfully levied or assessed upon or become payable in respect of the Trust, the income or any property forming a part thereof, or any security transaction pertaining thereto. Any amounts distributed from the Trust shall be reduced by the amount of any withholding taxes required by law, and the Trustee shall have the responsibility to withhold and pay such amounts to the appropriate governmental authorities. The Trustee shall inform the Company and ASCI in writing of all amounts withheld and of all distributions hereunder to a Participant or Beneficiary. The Trustee shall be entitled to satisfy such withholding tax obligations and payments to a Participant or Beneficiary by retaining an appropriate number of Shares and selling such Shares. 17. For the Benefit of the Trustee. 17.1. Expenses of the Trustee. The Company or ASCI shall reimburse the Trustee for any expenses incurred by the Trustee including, but not limited to, all proper charges and disbursements of the Trustee, and reasonable fees for legal services rendered to the Trustee (whether or not rendered in connection with a judicial or administrative proceeding). The Trustee's entitlement to reimbursement hereunder shall not be affected by the resignation or removal of the Trustee or by the termination of the Trust. 17.2. Indemnification of Trustee. ASCI or the Company shall indemnify, defend and hold the Trustee harmless from and against any claim, liability, cost or expense (including reasonable attorneys' fees) asserted against, imposed on or suffered or incurred by the Trustee in the good-faith carrying out of his duties and responsibilities hereunder and in his good-faith compliance with any written instructions delivered to him by the Company or ASCI with respect thereto. -14- 15 18. Resignation and Removal of Trustee. The Trustee may be removed by the Plan Administrator at any time with the approval of Participants whose Share Award Accounts comprise 75% or more of the Shares held by the Trust. The Trustee may resign at any time upon notice in writing to the Company and ASCI. 19. Successor Trustee. Upon the removal, resignation or death of the Trustee, the Plan Administrator may designate a successor Trustee to act hereunder, which shall have the same powers and duties as those conferred upon the Trustee. Upon such designation, and upon the written acceptance of the successor Trustee, the former Trustee shall, if necessary, assign, transfer and pay over to such successor Trustee the assets then constituting the Trust. A successor Trustee shall have all the rights and powers under this Trust Agreement as an original Trustee. 20. Amendment of Trust. All contributions made by ASCI or the Company shall be irrevocable unless the benefits payable hereunder have been otherwise paid to the Participants by ASCI or the Company; provided that, the Company or ASCI may amend, in whole or in part, any or all of the provisions of this Trust Agreement, provided that no such amendment may affect the rights, protections, duties or responsibilities of the Trustee without his consent and, provided further, that no such amendment may (a) permit any part of the corpus or income of the Trust to be returned or diverted to the Company or ASCI or (b) diminish, reduce, alter, or impair any Participant's Share Award Account without such Participant's consent. 21. No Right of Alienation. Except as required in Sections 11 through 13 hereof, at no time prior to the satisfaction of all liabilities with respect to Participants and their Beneficiaries shall any part of the corpus and/or income of the Trust be used for, or diverted to purposes other than for the exclusive purpose of providing benefits to Participants and their Beneficiary. No Participant or Beneficiary shall have any right or interest in the assets of the Trust which is greater than the rights of any Creditor. The assets of the Trust shall not be subject to anticipation, alienation, -15- 16 sale, transfer, assignment, pledge, encumbrance or charge. 22. Headings. Section headings in this Trust Agreement are for reference only. In the event of a conflict between a heading and the content of a Section, the content of the Section shall control. 23. Construction. This Trust Agreement shall be construed and regulated by the laws of the State of New York except where such laws are superseded by federal laws. 24. Successors. This Trust Agreement shall be binding upon, and the powers herein granted to the ASI Committee, the Company, ASCI and the Trustee, respectively, shall be exercisable by, the respective successors and assigns of the ASI Committee, the Company, ASCI and the Trustee. 25. Separability. If any part of this Trust Agreement shall be found to be invalid or unenforceable, such invalidity or unenforceability shall not affect the remaining provisions hereof. Such invalid or unenforceable part shall be fully separable and this Trust Agreement shall be construed and enforced as if such part had not been inserted herein. 26. Gender and Number. Whenever used herein, the masculine shall be interpreted to include the feminine and neuter, the neuter to include the masculine and feminine, the singular to include the plural and the plural to include the singular, in each case unless the context requires otherwise. -16- 17 27. Assignment. The benefits payable under this Trust Agreement may not be assigned, alienated, pledged, attached or garnished. IN WITNESS WHEREOF, each of the parties hereto has executed or caused to be executed this Trust Agreement as of the date and year first written above. AMERICAN STANDARD COMPANIES INC. ---------------------------------- By: Adrian B. Deshotel Its: Vice President - Human Resources AMERICAN STANDARD INC. ---------------------------------- By: Adrian B. Deshotel Its: Vice President - Human Resources THE TRUSTEE: ---------------------------------- ROBERT M. KENNEDY -17- EX-21 4 LIST OF COMPANY'S SUBSIDIARIES 1 EXHIBIT 21 PARENTS AND SUBSIDIARIES AMERICAN STANDARD INC. (DELAWARE) - REGISTRANT Subsid- iaries* U.S. SUBSIDIARIES: The American Chinaware Company (Delaware) American Standard Credit Inc. (Delaware) American Standard International Inc. (Delaware) American Standard Medical Systems, Inc. (Delaware) DiaSorin International Inc. (Delaware) INCSTAR Corporation (Minnesota) Amstan Trucking Inc. (Delaware) A-S Energy, Inc. (Texas) A-S Thai Holdings Ltd. (Delaware) It Holdings Inc. (Delaware) Standard Compressors Inc. (Delaware) Standard Sanitary Manufacturing Company (Delaware) The Trane Company (Delaware) Trane Export, Inc. (Delaware) WABCO Automotive Control Systems Inc. (Delaware) WABCO Company (Pennsylvania) World Standard Ltd. (Delaware) (American Standard Inc., American Standard International Inc., WABCO Company and Standard Sanitary Manufacturing Company - Immediate Parents) Wabco Standard Trane Holdings Inc. (Delaware) FOREIGN SUBSIDIARIES: Air Conditioning Products (Wabco Standard French Holdings SNC - Immediate Parent) Societe Trane (France) (The Trane Company - Immediate Parent) Trane S.A. (Switzerland) (American Standard (U.K.) Limited - Immediate Parent) Trane Limited (U.K.) Trane (United Kingdom) Limited Trane (Scotland) Limited Transportation Products (WABCO Standard GmbH, Wabco Standard Trane Holdings Inc., and Ideal Standard S.p.A. - Immediate Parents) WABCO Standard TRANE B.V. (Netherlands) WABCO Austria G.m.b.H. (Austria) WABCO Automotive AB (Sweden) WABCO Automotive B.V. (Netherlands) WABCO Belgium S.A.-N.V. (Belgium) WABCO B.V. (Netherlands) WABCO (Schweiz) AG (Switzerland) WABCO Standard French Holdings SNC (France) WABCO Westinghouse S.A. (France) WABCO France SNC (France) 2 PARENTS AND SUBSIDIARIES - (Continued) Subsid- iaries* Transportation Products - (Continued) (Ideal Standard S.p.A. and Wabco Standard Trane Holdings Inc. - Immediate Parents) American Standard (U.K.) Limited (England) Clayton Dewandre Holdings Limited (England) WABCO Automotive UK Limited (England) The Bridge Foundry Company Limited (England) (Ideal Standard S.p.A.- Immediate Parent) WABCO Automotive Italia S.p.A. (Italy) (WABCO Standard Trane Holdings Inc., American Standard International Inc., Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany) WABCO GmbH (Germany) WABCO Perrot Bremsen GmbH (Germany) Building Products (American Standard Inc. and A-S Thai Holdings Ltd. - Immediate Parents) American Standard Sanitaryware (Thailand) Public Company Limited (Thailand) (American Standard Inc. - Immediate Parent) EBS Eczacibasi Banyo Kuvetleri Sanayi Ve Ticaret A.S. (Turkey) Egyptian American Sanitary Wares Co. S.A.E. (Egypt) American Standard Philippine Holdings Inc. (Philippines) Sanitary Wares Manufacturing Corporation (Philippines) (Wabco Standard French Holdings SNC - Immediate Parent) Ideal-Standard S.A. (France) (Wabco Standard Trane Inc. - Immediate Parent) Ideal Standard Wabco Industria e Comercio Ltda. (Brazil) (a) (American Standard (U.K.) Limited - Immediate Parent) Ideal-Standard Limited (England) (Wabco Standard Trane Holdings Inc. - Immediate Parent) WABCO Standard Trane Inc. (Canada) (b) (Wabco Standard Trane Inc. and Wabco Standard Trane B.V. - Immediate Parents) Ideal-Standard, S.A. de C.V. (Mexico) (WABCO Standard Trane B.V. and Wabco Standard Trane Holdings Inc. - Immediate Parents) Ideal Standard S.p.A. (Italy) Ideal Standard S.A. (Greece) Sanistan B.V. (Netherlands) (Wabco Standard Trane Holdings Inc., American Standard International Inc. and Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany) Ideal-Standard GmbH (Germany) 3 American Standard Korea, Inc. (Korea) PARENTS AND SUBSIDIARIES - (Continued) Medical Systems (WABCO Standard Trane B.V. and DiaSorin International Inc. - Immediate Parents) DiaSorin International B.V. (Netherlands) Sorin Diagnostics Belgium (Belgium) Sorin Diagnostics Deutschland GmbH (Germany) Sorin Diagnostics Espana S.A. (Spain) Sorin Diagnostics France (France) Sorin Diagnostics S.r.l. (Italy) Miscellaneous Standard Europe (EEIG)(France) (c) All of the companies listed above operate under their company names and use one or more of the trademarks listed under "Patents and Trademarks" of Item 1 of this annual report on Form 10-K. * The number shown under this heading indicates other subsidiaries, not listed by name herein, which are in the same line of business. The name of the immediate parent of such subsidiary or subsidiaries appears opposite the number. (a) This subsidiary participates in Building Products and Transportation Products. (b) This subsidiary participates in Building Products and Air Conditioning Products. (c) A European Economic Interest Grouping organized by certain French and Italian subsidiaries of the Company. There are omitted from the table a number of minor or inactive or name-saving subsidiaries, all of which together would not constitute a significant subsidiary. EX-23 5 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-3 pertaining to the registration of $1,000,000,000 of debt securities (Registration No. 333-32627) of our reports dated February 16, 1998, with respect to the consolidated financial statements of American Standard Inc. and the financial statement schedule included in this Annual Report (Form 10-K) of American Standard Inc. /s/ Ernst & Young LLP New York, New York March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 28,722 0 861,511 30,226 430,773 1,393,978 1,716,682 577,498 3,979,743 1,850,142 1,550,772 0 0 0 (327,440) 3,979,743 6,007,509 6,007,509 4,481,915 4,481,915 27,254 14,212 192,216 236,788 116,928 119,860 0 (23,637) 0 96,223 0 0
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