-----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, UA59ZJcZO+hOZdhjB6bo6qcVxUtdwFFe4mL6lYUkUXhVQw/td09KQLsEJ0m3IZ1O Q08GHASOI48Gg+RY1MAESA== 0000950123-97-002613.txt : 19970328 0000950123-97-002613.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950123-97-002613 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN STANDARD COMPANIES INC CENTRAL INDEX KEY: 0000836102 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 133465896 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11415 FILM NUMBER: 97565510 BUSINESS ADDRESS: STREET 1: ONE CENTENNIAL AVENUE STREET 2: P O BOX 6820 CITY: PISCATAWAY STATE: NJ ZIP: 08855-6820 BUSINESS PHONE: 9089806000 MAIL ADDRESS: STREET 1: 1114 AVENUE OF THE AMERICAS STREET 2: ONE CENTENNIAL AVENUE CITY: PISCATAWAY STATE: NJ ZIP: 08855-6820 FORMER COMPANY: FORMER CONFORMED NAME: ASI HOLDING CORP DATE OF NAME CHANGE: 19941114 10-K405 1 AMERICAN STANDARD COMPANIES, 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, 1996 [ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to ______ Commission File Number 1-11415 AMERICAN STANDARD COMPANIES INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3465896 (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: (908) 980-6000 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.01 par value New York Stock Exchange, Inc. (and associated Common Stock Rights)
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. [X] The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the Registrant as of the close of business on March 11, 1997 was approximately $3.1 billion based on the closing sale price of the common stock on the New York Stock Exchange consolidated tape on that date. Number of shares outstanding of each of the Registrant's classes of Common Stock, as of the close of business on March 11, 1997: Common Stock, $.01 par value 73,820,967 Shares Documents incorporated by reference:
Part of the Form 10-K into Document (Portions only) which document is incorporated. -------- ------------------------------- Annual Report to Stockholders for the year Parts I, II and IV ended December 31, 1996 Definitive Proxy Statement dated March 26, 1997 for use in connection with the Annual Meeting of Stockholders to be held on May 1, 1997 Part III
2 TABLE OF CONTENTS
PAGE PART I Item 1. Business. 1 Item 2. Properties. 16 Item 3. Legal Proceedings. 17 Item 4. Submission of Matters to a Vote of Security Holders. 17 Executive Officers of the Registrant. 18 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 21 Item 6. Selected Financial Data. 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 23 Item 8. Financial Statements and Supplementary Data. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 23 PART III Item 10. Directors and Executive Officers of the Registrant. 24 Item 11. Executive Compensation. 24 Item 12. Security Ownership of Certain Beneficial Owners and Management. 24 Item 13. Certain Relationships and Related Transactions. 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 25
3 PART I ITEM 1. BUSINESS American Standard Companies Inc. (the "Company") is a Delaware corporation that has as its only significant asset all the outstanding common stock of American Standard Inc., a Delaware corporation ("American Standard Inc."). Hereinafter, "American Standard" or "the Company" will refer to the Company, or to the Company and 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 (59% of 1996 sales); bathroom and kitchen fixtures and fittings (25% of 1996 sales); and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles (16% of 1996 sales). American Standard is a market leader in each of these 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 and WABCO(R) for braking and related 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, 1996, American Standard had 106 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 Group. 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 1996. Approximately 60% of Trane's sales in 1996 was 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-preferred refrigerants and expansion of operations to developing market areas throughout the world, principally the Asia-Pacific area and Latin America. 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 1 4 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' 1996 sales, 74% was derived from operations outside the United States and 26% 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 and the expansion of existing operations in developing market areas throughout the world, principally the Far East, Latin America and Eastern Europe. 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 phase-in of ABS has been mandated beginning 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. MEDICAL SYSTEMS In January 1997, the Company announced formation of its Medical Systems Group to pursue initiatives in the medical diagnostics field. The Company has for the last several years supported the development of two small medical diagnostic product groups focusing on test instruments using laser technology and reagents. The Company had invested an aggregate of approximately $40 million in the development of these businesses through December 31, 1996. Based upon the progress and prospects for those two businesses, 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. Accordingly, on March 10, 1997, the Company entered into definitive agreements to acquire the European medical diagnostic business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group (the "Sorin Business") and, by means of a merger, all the outstanding shares of Incstar Corporation ("Incstar"), a biotechnology company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. indirectly owned a 52% interest. In 1996, sales for the Sorin Business were approximately $80 million and for Incstar approximately $40 million. The aggregate cost of the acquisitions of the Sorin Business and Incstar is expected to be approximately $220 million (including fees and expenses). STRATEGY GLOBALIZATION American Standard has historically had a significant global presence. One of its major strategic objectives is to continue to expand that presence through the growth of existing operations and the establishment of new operations in developing market areas in the Far East, Latin America and Eastern Europe. The Company often uses joint ventures with local manufacturing and distribution partners to facilitate risk sharing and to allow the Company to benefit from the additional expertise of local market participants. 2 5 Air Conditioning Products plans to continue to expand its operations in the Far East, Latin America and Europe. In 1994 it established an operation in Australia and continues to expand its sales forces in the Far East, Latin America, the Middle East and India. In December 1995 the Company completed arrangements for the development and expansion of its air conditioning business in the People's Republic of China ("PRC"), to become an integrated manufacturer, marketer and distributor of a broad range of air conditioning systems and related products for residential and commercial applications. The Company and a minority investor established ASI China Holdings Limited ("ASI China"), in which the Company has an ownership interest of 64.4%, and formed A-S Air Conditioning Products Limited ("ASAP"), owned 50.4% by ASI China, to establish or acquire majority ownership in up to five manufacturing joint ventures as well as sales and service businesses in the PRC. The Company contributed to ASAP its 50% interest (valued at $10 million) in a Hong Kong joint venture (which imports and distributes air conditioning products) and has committed to contribute $20 million in cash, $16 million of which had been contributed as of December 31, 1996. The minority investor in ASI China and third-party investors in ASAP have committed to contribute a total of $62 million, $50 million of which had been contributed as of December 31, 1996. As of December 31, 1996, ASAP had acquired majority ownership in three manufacturing joint ventures and in conjunction therewith assumed debt of $21 million. Plumbing Products has entered new markets through joint ventures in Eastern Europe, Spain, Portugal and Vietnam and is continuing to expand using this approach. In 1995 operations were expanded in France through the acquisition of Porcher (see "Plumbing Products Segment"). Plumbing Products continues to expand its operations in the PRC through its affiliate, A-S China Plumbing Products Limited ("ASPPL"), in which American Standard has a current ownership position of 28% and effective control over day-to-day operations. ASPPL has expanded its operations to Beijing, Tianjin, Shanghai and Guangzhou in order to provide a full product line of fixtures, fittings, and bathtubs throughout the PRC market. ASPPL, which had total assets of approximately $169 million at December 31, 1996, has entered into seven joint ventures with local business concerns which, together with one wholly-owned operation, have received business licenses from Chinese government authorities. These include two recently constructed chinaware manufacturing facilities, an existing chinaware manufacturing facility being expanded, two operating fittings plants and two operating steel tub factories. The Company's ownership interest in ASPPL is expected to increase over time to at least 51% of the equity of ASPPL through reinvestment of royalties and management fees and through additional stock purchases. Automotive Products, headquartered in Europe, since 1993 has established a joint venture in the PRC, acquired a business in Spain, is in the process of establishing joint ventures in Eastern Europe and is expanding the volume of business done through its existing joint ventures in the United States and Japan. 3 6 DEMAND FLOW(R) TECHNOLOGY* To build on its position as a leader in each of its industries and to increase sales and operating income, American Standard began in 1990 to apply Demand Flow to all its businesses. Under Demand Flow, products are produced as and when required by the customer, the production process is streamlined, and quality control is integrated into each step of the manufacturing process. The benefits of Demand Flow include better customer service, quicker response to changing market needs, improved quality control, higher productivity, increased inventory turnover rates and reduced requirements for working capital and manufacturing and warehouse space. As part of American Standard's strategy to integrate Demand Flow into all of its operations, most of American Standard's approximately 44,000 employees worldwide have been trained in Demand Flow, which has been implemented in substantially all of American Standard's production facilities. American Standard is also applying Demand Flow to administrative functions and is re-engineering its organizational structure to manage its businesses based on processes instead of functions. American Standard believes that its implementation of Demand Flow methods has achieved significant benefits. Product cycle time (the time from the beginning of the manufacturing of a product to its completion) has been reduced and, on average, inventory turnover rates have almost tripled since 1990. Principally as a result of the implementation of Demand Flow American Standard has reduced inventories by 41% from December 31, 1989 through December 31, 1996, while related sales have grown 74% for the same period. American Standard further believes that as a result of the introduction of Demand Flow employee productivity has risen significantly, customer service has improved and, without reducing production capacity, the Company has been able to free more than three million square feet of manufacturing and warehouse space, allowing for expansion, plant consolidation or other uses. AIR CONDITIONING PRODUCTS SEGMENT 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. Air conditioning products are sold primarily under the TRANE(R) and AMERICAN STANDARD(R) names. In 1996 Trane, with revenues of $3,437 million, accounted for approximately 59% of the Company's sales and 60% of its operating income (excluding an asset impairment charge). Trane derived 29% of its 1996 sales from outside the United States. Approximately 60% of Trane's sales in 1996 was in the replacement, renovation and repair markets, which in general are less cyclical than the new residential and commercial construction markets. Trane manufactures three general types of air conditioning systems. The first, called "unitary," which is sold for residential and commercial applications, 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 - ------------------ * Demand Flow is a registered trademark of J-I-T Institute of Technology, Inc. 4 7 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 on 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-preferred refrigerants. In May 1994 a subsidiary of the Company, Standard Compressors Inc., concluded arrangements for a partnership, Alliance Compressors, formed in December 1993 with Heatcraft Technologies Inc., a subsidiary of Lennox International Inc., for the manufacture of compressors for use in air conditioning and refrigeration equipment. On December 31, 1996, The Alliance Compressors partnership was restructured to admit a new partner, Copesub, Inc., a subsidiary of Emerson Electric Co. Following the restructuring, Standard Compressors Inc. and Heatcraft Technologies Inc. each own a 24.5% interest in Alliance and Copesub, Inc. owns a 51% interest. Alliance plans to develop, manufacture, market and sell, primarily to companies related to Standard Compressors Inc. and Heatcraft Technologies Inc., scroll compressors utilized mainly in residential central air conditioning applications. Alliance will operate principally from a newly constructed facility in Natchitoches, Louisiana. Many of the products manufactured by Trane utilized CFCs and in the past utilized CFCs as refrigerants. Various federal and state laws and regulations, principally the 1990 Clean Air Act Amendments, require the eventual phase-out of the production and use of these chemicals because of their possible deleterious effect on the earth's ozone layer if released into the atmosphere. Phase-in of substitute refrigerants will require replacement or modification of much of the air conditioning equipment already installed, which management believes has created a new market opportunity. In order to ensure that Company products will be compatible with the substitute refrigerants, Trane has been working closely with the manufacturers that are developing substitute refrigerants. See "General-Regulations and Environmental Matters." Various federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficiency standards for certain of the Company's unitary air conditioning products. Although the Company has been able to meet or exceed such standards to date, stricter standards in the future could require substantial research and development expense and capital expenditures to maintain compliance. At December 31, 1996 Air Conditioning Products had 33 manufacturing plants in 10 countries, employing approximately 20,700 people. Air Conditioning Products comprises three operating groups: Unitary Products, North American Commercial, and International. 5 8 UNITARY PRODUCTS GROUP Unitary Products, which accounted for 36% of Air Conditioning Products' 1996 sales, manufactures and distributes products for commercial and residential unitary applications in the United States. This group benefits the most from the growth of the replacement market for residential and commercial air conditioning systems. Other major suppliers in the unitary market are Carrier, Rheem, Lennox, Goodman Industries and Intercity Products. Commercial unitary products range from 2 to 120 tons and include combinations of air conditioners, heat pumps, and gas furnaces, along with variable-air-volume equipment and integrated control systems. Typical applications are in retail stores, small-to-medium-size office buildings, manufacturing plants, restaurants, and commercial buildings located in office parks and strip malls. These products are sold through commercial sales offices, independent wholesale distributors and company-owned dealer sales offices in over 375 locations. Residential central air conditioning products range from 1 to 5 tons and include air conditioners, heat pumps, air handlers, furnaces, and coils. These products are sold through independent wholesale distributors and Company-owned sales offices in over 250 locations to dealers and contractors who sell and install the equipment. During 1995 and 1996 the Unitary Products Group successfully introduced several new products including a new line of outdoor condensing units for the AMERICAN STANDARD(R) brand; a very high efficiency residential air conditioner; an ultra-high efficiency packaged air conditioner; modulating gas and variable frequency drive large rooftop units; rooftop units with special features that appeal to national accounts; and a large rooftop line (27.5 tons to 50 tons). The commercial unitary business also concentrated on indoor air quality enhancements and new capabilities for existing products. The Company also markets an AMERICAN STANDARD(R) brand name product to serve distributors who typically carry other products in addition to air conditioning products. NORTH AMERICAN COMMERCIAL GROUP North American Commercial Group, which accounted for 37% of Air Conditioning Products' 1996 sales, manufactures and distributes products in the United States for sale in the U.S. and Canada for air conditioning applications in larger commercial, industrial, and institutional buildings. Other major suppliers of commercial systems are Carrier, McQuay and York. North American Commercial Group distributes its products through 95 sales offices. Thirty-four of these offices are Company-owned and 61 are franchised. The Company acquired the Toronto, Canada, and St. Louis, Missouri offices in 1994 and the Albany, New York, and Nashville, Tennessee offices in 1995. In 1996 the Company acquired the Grand Rapids, Michigan; Pittsburgh, Pennsylvania; and New Haven, Connecticut, offices and expects to continue to acquire major sales offices from its franchisees. Over the last few years the North American Commercial Group has added additional aftermarket business activities, such as emergency rentals of air conditioning equipment. Also, the group has expanded its line to include components for converting installed centrifugal chiller products to use more environmentally-preferred refrigerants. During 1995 and 1996 the Company continued its introduction of a number of newer products broadening the line of high-efficiency centrifugal chillers, expanding the air cooled 6 9 series R chiller line, and introducing a new absorption line. Integrated Comfort Systems continue to grow as a percentage of total sales with the introduction of Tracer Summit and wireless thermostats. Indoor air quality is emerging as a significant new application to be served by the Company's products and services. INTERNATIONAL GROUP The International Group, which accounted for approximately 27% of Trane's 1996 sales manufactures applied and unitary products in foreign facilities operated by subsidiaries and joint ventures and exports many of the products manufactured in the United States by the Unitary Products and North American Commercial Groups. Like the North American Commercial Group, the International Group has an extensive network of sales and service agencies, both Company-owned and franchised, to provide maintenance and warranty service for its equipment installed around the world. Trane expects to continue the expansion of its presence outside the U.S. In the Asia-Pacific region Trane recently established operations in Australia as well as three manufacturing joint ventures in the PRC (see "Globalization") and expanded its operations in Malaysia. In the early 1990's it purchased an air conditioning manufacturing and distribution firm in Taiwan, and entered into a sales and manufacturing joint venture in Thailand. In Europe, in addition to its plants in Epinal and Charmes, France, the group opened plants in Mirecourt and in Colchester, U.K., in 1992. A joint venture in Egypt commenced operations in 1992 to serve markets in the Middle East. PLUMBING PRODUCTS SEGMENT Plumbing Products manufactures and distributes bathroom and kitchen fixtures and fittings primarily under the IDEAL STANDARD(R), AMERICAN STANDARD(R), STANDARD(R) and PORCHER(R), names. In 1996 Plumbing Products, with revenues of $1,452 million, accounted for 25% of the Company's sales and 19% of its operating income (excluding an asset impairment charge). Plumbing Products derived approximately 74% of its total 1996 sales from operations outside the United States. Of Plumbing Products' sales, 45% consists of vitreous china fixtures, 22% consists of fittings (typically brass), 9% consists of bathtubs, and the remainder consists 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 remaining 25%. 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 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, Spain, Portugal, and Egypt. In November 1995 the Company 7 10 acquired substantially all of the remaining outstanding common shares and convertible bonds of Porcher S.A. ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had an ownership interest of 32.88%. 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 majority-owned subsidiaries in Central America. 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 and the Philippines, and its manufacturing joint venture in Indonesia and is developing a new joint venture in Vietnam. In 1996, a wholly-owned marketing operation was established in Japan. The Company is also significantly expanding its operations in the PRC. See - "Globalization". The market for the Company's plumbing products is divided into the replacement and remodeling market and the new construction market. The replacement and remodeling market accounts for about 60% of the European and U.S. groups' sales but only about 40% of the sales of the Far East group, for which new construction is more important. In the United States and Europe the replacement and remodeling market has historically been more stable than the new construction market and has shown moderate growth over the past several years. In 1995 the new construction market in Europe declined, especially in Germany and France, after recovering somewhat in 1994 and 1993. In the U.S. the new construction market hit its recent low in 1992 but had some recovery through 1996. The new construction market, in which the product selection is made by builders or contractors, is more price-competitive and volume-oriented than the replacement and remodeling market. In the replacement and remodeling market consumers make the model selection and, therefore, this market is more responsive to quality and design than price, making it the principal market for higher-margin luxury products. Although management believes it must continue to offer a full line of fixtures and fittings in order to support its distribution system, Plumbing Products' current strategy is to focus on increasing its sales of higher-margin products in the middle and upper segments of both the remodeling and new construction markets. Plumbing Products also has continued its programs to expand its presence in high-quality showrooms and showplaces featuring its higher-end products in certain major countries. These programs, along with expanded sales training activities, have enhanced the image of the Company's products with interior designers, decorators, consumers and plumbers. U.S. Plumbing Products is focusing on the unique needs of the growing mass retail home center industry, using products sourced from several of the Company's manufacturing locations throughout the Americas. This market channel has become a significant part of U.S. Plumbing Products' sales and is expected to continue to grow. In an effort to capture a larger share of the replacement and remodeling market, over the last few years Plumbing Products has introduced a variety of new products designed to suit customer tastes in particular countries. New offerings include additional colors and ensembles, bathroom suites from internationally known designers, and electronically controlled 8 11 products. Faucet technology is centered on anti-leak, anti-scald and other features to meet emerging consumer and legislative requirements. Water-saving fixtures and fittings have been a major focus of Plumbing Products for the past several years, particularly in light of recent water shortages experienced in a number of areas of the U.S. The Company produces one of the most extensive lines of water-saving fixtures available in the United States. Manufacture of water-saving toilets was mandated for residential use by federal law commencing in January 1994 and for commercial use in January 1997. Many of the Company's bathtubs are made from a proprietary porcelain on metal composite, AMERICAST(R), which has gained an increasing share of the worldwide market. Products made from the composite AMERICAST(R) have the durability of cast iron with only one-half the weight and are characterized by improved resistance to breaking and chipping. AMERICAST(R) products are easier to ship, handle and install and are less expensive to produce than cast iron products. Use of this advanced composite was extended to kitchen sinks, bathroom lavatories and acrylic surfaced products during the early 1990's. At December 31, 1996, Plumbing Products employed approximately 18,000 people and, including affiliated companies, had 57 manufacturing plants in 25 countries. In the U.S. Plumbing Products has several important competitors, including Kohler Company and Masco Corporation in selected product lines. There are also important competitors in foreign markets, for the most part operating nationally. Friederich Grohe GmbH, the major manufacturer of fittings in Europe, is a pan-European competitor. In Europe Villeroy Boch and Sanitec are the major fixtures competitors, and in the Far East Toto is the major competitor. Plumbing Products competes in most of its markets on the basis of service to customers, product quality, reliability and price. AUTOMOTIVE PRODUCTS SEGMENT Operating under the WABCO(R) name, Automotive Products manufactures air brake and related systems for the commercial vehicle industry in Europe and Brazil. WABCO's most important products are pneumatic braking systems and related electronic control and other systems and components (including ABS) for medium-size and heavy trucks, tractors, buses, trailers and utility vehicles. In 1996 WABCO, with sales of $916 million, accounted for 16% of the Company's sales and 21% of its total operating income (excluding an asset impairment charge). 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. 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. The European market for new trucks, buses, trailers, and replacement parts recovered in 1994 and 1995, before declining again in 1996. European legislation mandating the phase- 9 12 in of ABS beginning in 1991 has had a positive impact on sales and is expected to continue to do so. The Brazilian market declined significantly in 1996 after three years of continued growth. Through 1996 the WABCO(R) ABS system, which the Company believes leads the market, has been installed in approximately 1.2 million heavy trucks, buses, and trailers worldwide since 1981. Annual sales volume in Europe was approximately 146,000 units in 1996 (down from 175,000 units in 1995) and 67,000 units (56,000 units in 1995) in other markets, primarily the United States and Japan. 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. These systems have resulted in greater sales per vehicle for WABCO. Significant progress was made in recent years in market acceptance of electronically controlled systems. New products under development include additional electronic drive line control systems. In addition, WABCO has developed and implemented an electronic data interchange system, which links certain customers directly to WABCO's information systems, providing timely, accurate information and just-in-time delivery to the customer. At December 31, 1996, WABCO and affiliated companies employed approximately 5,800 people and had 14 manufacturing facilities and 7 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 with Rockwell International (Rockwell WABCO) and Cummins Engine Co. (WABCO Compressor Manufacturing Co., a manufacturing joint venture formed in 1996 to produce air compressors designed by WABCO), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group (Clayton Sundaram) and in the PRC. 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. Since 1991 ABS for commercial vehicles has been gaining acceptance in the United States and Japan, where WABCO participates through its joint venture operations. Rockwell WABCO is now a supplier of WABCO systems to Freightliner, Mack, Volvo-GM, Kenworth, Peterbilt and other vehicle manufacturers in North America. SANWAB supplies Hino, Nissan and trailer manufacturers in Japan. In most European countries, ABS has become mandatory for commercial vehicles. In March 1995, the U.S. Department of Transportation, National Highway Traffic Safety Administration, adopted amended federal regulations which require that new medium and heavy vehicles be equipped with ABS. These amended regulations will be phased in over a two-year period beginning in March 1997. WABCO believes it is in a good position to take advantage of this opportunity. MEDICAL SYSTEMS GROUP In January 1997, the Company announced formation of its Medical Systems Group to pursue initiatives in the medical diagnostics field. The Company has for several years supported the development of two small medical diagnostic product groups focusing on test instruments using laser technology and reagents. The Company had invested an aggregate of approximately $40 million in the development of these businesses through December 31, 1996. 10 13 Based upon the progress and prospects of those two businesses, 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. Accordingly, on March 10, 1997, the Company entered into definitive agreements to acquire the European medical diagnostic business (the "Sorin Business") of Sorin Biomedica S.p.A., an affiliate of the Fiat Group and, by means of a merger, all the outstanding shares of Incstar Corporation ("Incstar"), a biotechnology company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. indirectly owned a 52% interest. The Sorin Business both develops and produces reagents to identify the presence in blood of diseases and other substances that are indicative of a medical patient's condition, and distributes equipment used to perform diagnostic tests. The Sorin Business is headquartered in Saluggia, Italy, where its manufacturing facility is located. The principal markets for the products of the Sorin Business are Western Europe and the United States. Its sales in 1996 were approximately $80 million. Incstar develops, manufactures and markets individual test reagents, test kits and related products used by major hospitals, clinical reference laboratories and researchers involved in diagnosing and treating immunological conditions. Incstar also produces and markets histochemical antisera and natural and synthetic peptides used in clinical diagnostic and medical research. Its products focus on diagnostic tests for autoimmune, infectious disease, endocrinology and bone and mineral metabolism product segments, utilizing a variety of technologies. Incstar's sales in 1996 were approximately $40 million. The Sorin Business and Incstar will be acquired in two transactions: (a) the acquisition from Sorin of the Sorin Business and (b) the merger of a wholly owned subsidiary of the Company with Incstar. The aggregate cost of the acquisitions is expected to be approximately $220 million (including fees and expenses. Completion of the transactions is subject to customary conditions, including regulatory consents and approvals, and in the case of Incstar, shareholder approval. The Sorin and the Incstar transactions are each conditioned upon the closing of the other, which closings are expected to occur in the first half of 1997. The focus of the Company's existing medical businesses is on instruments for obstetrical/gynecological and gastrointestinal tests. The products of its subsidiary Sienna Biotech, Inc. are based on a core technology named Copalis(TM) for Coupled Particle Light Scattering. Several of Sienna's products have received clearance from the U.S. Food and Drug Administration ("FDA"). The Company's subsidiary Alimenterics, Inc. is developing certain clinical laboratory systems for non-invasive diagnostics of gastrointestinal disorders using an automated Laser Assisted Ratio Analyzer ("LARA(TM)") for the measurement of stable isotopes in breath. Initial applications for regulatory approvals of Alimenterics' products have been made in Europe and are planned to be made to the FDA in 1997. The Company believes that the Medical System Acquisitions will position it to develop its medical products more quickly and effectively than would otherwise have been possible. 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. There can be no assurance that the Company will be successful in completing the Medical Systems Acquisitions. 11 14 BUSINESS SEGMENT DATA Information concerning revenues and operating profit and loss attributable to each of the Company's business segments and geographic areas is set forth in the Company's 1996 Annual Report to Stockholders on page 14, "Five-Year Financial Summary", under the caption "Segment Data", on pages 15 though 19 under the caption entitled "Management's Discussion and Analysis" and on page 43 under the caption entitled "Segment Data" which are incorporated herein by reference, and information concerning identifiable assets of each of the Company's business segments is set forth on page 43 of the Company's 1996 Annual Report to Stockholders under the caption entitled "Segment Data", which is incorporated herein by reference. GENERAL RAW MATERIALS The Company purchases a broad range of materials and components throughout the world in connection with its manufacturing activities. Major items include steel, copper tubing, aluminum, ferrous and nonferrous castings, clays, motor and electronics. The ability of the Company's suppliers to meet performance and quality specifications and delivery schedules is important to its operations. The Company is working closely with its suppliers to integrate them into the Demand Flow manufacturing process by developing with them just-in-time supply delivery schedules to coordinate with the Company's customer demand and delivery schedules. The Company expects this closer working relationship to result in better control of inventory quantities and quality and lower related overhead and working capital costs. The energy and materials required for its manufacturing operations have been readily available, and the Company does not foresee any significant shortages. 12 15 PATENTS, LICENSES AND TRADEMARKS The Company's operations are not dependent to any significant extent upon any single or related group of patents, licenses, franchises or concessions. The Company's operations also are not dependent upon any single trademark, although some trademarks are identified with a number of the Company's products and services and are of importance in the sale and marketing of such products and services. Some of the more important of the Company's trademarks are:
Business Segment Trademark ---------------- --------- Air Conditioning Products TRANE(R) AMERICAN STANDARD(R) Plumbing Products AMERICAN STANDARD(R) IDEAL STANDARD(R) STANDARD(R) PORCHER(R) Automotive Products WABCO(R) WABCO WESTINGHOUSE(R) CLAYTON DEWANDRE PERROT(R)
The Company from time to time has granted patent licenses to, and has licensed technology from, other parties. RESEARCH AND PRODUCT DEVELOPMENT The Company made expenditures of $160 million in 1996, $146 million in 1995 and $140 million in 1994 for research and product development and for product engineering. The expenditures for research and product development only were $81 million in 1996, $67 million in 1995 and $60 million in 1994 and were incurred primarily by Automotive Products and Air Conditioning Products. Automotive Products, which expended the largest amount, has conducted research and development in recent years on advanced electronic braking systems, heavy-duty disc brake systems, and additional electronic control systems for commercial vehicles. Air Conditioning Products' research and development expenditures were primarily related to alternative, environmentally-preferred refrigerants, compressors, heat transfer surfaces, air flow technology, acoustics and micro-electronic controls. Any amount spent on customer sponsored research and development activities in these periods was insignificant. REGULATIONS AND ENVIRONMENTAL MATTERS The Company's U.S. operations are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air, water and soil and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with such laws and regulations. A number of the Company's plants are undertaking responsive actions to address soil and groundwater issues. In addition, the Company is a party to a number of remedial actions under various federal and state environmental laws and regulations that impose liability on companies to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed or released, including approximately 30 proceedings under the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes in which the Company has been named a potentially responsible party or a third party by a potentially responsible party. Expenditures in 1994, 13 16 1995 and 1996 to evaluate and remediate such sites were not material. On the basis of the Company's historical experience and information currently available, the Company believes that these environmental actions will not have a material adverse effect on its financial condition, results of operations or liquidity. Additional sites may be identified for environmental remediation in the future, including properties previously transferred by the Company and with respect to which the Company may have contractual indemnification obligations. The Company cannot estimate at this time the ultimate aggregate costs of all remedial actions because of (a) uncertainties surrounding the nature and application of environmental regulations, (b) the Company's lack of information about additional sites at which it may be listed as a potentially responsible party, (c) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions, (d) the number of contributors and the financial capacity of others to contribute to the cost of remediation at specific sites and (e) the time periods over which remediation may occur. The Company's international operations are also subject to various environmental statutes and regulations. Generally, these requirements tend to be no more restrictive than those in effect in the United States. The Company believes it is in substantial compliance with such existing domestic and foreign environmental statutes and regulations. The Company derived significant revenues in 1996 and prior years from sales of air conditioning products using chlorofluorocarbons ("CFCs") and hydrochloroflurocarbons ("HCFCs"). Use of CFCs, HCFCs and other ozone-depleting chemicals is to be phased out over various periods of time under regulations that will require use of substitute permitted refrigerants. Also, utilization of new refrigerants will require replacement or modification of much of the existing air conditioning equipment. The Company believes that these regulations will have the effect of generating additional product sales and parts and service revenues, as existing air conditioning equipment utilizing CFCs is converted to operate on environmentally preferred refrigerants or replaced, although such conversion or replacement is expected to occur only over a period of years, and the Company is unable to estimate the magnitude or timing of such additional conversion or replacements. The Company has been working closely with refrigerant manufacturers that are developing refrigerant substitutes for CFCs and HCFCs, so that the Company's products will be compatible with those substitutes. Although the Company believes that its commercial products currently in production will not require substantial modification to use substitutes, residential and light commercial products produced by the Company and its competitors may require modification for refrigerant substitutes. The costs of introducing alternative refrigerants are expected to be reflected in product pricing and accordingly are not expected to have a material adverse impact on the Company. Certain federal and state statutes, including the National Appliance Energy Conservation Act of 1987, as amended, impose energy efficiency standards for certain of the Company's unitary air conditioning products. Although the Company has been able to meet or exceed such standards to date, stricter standards in the future could require substantial research and development expense and capital expenditures to maintain compliance. The development, testing and distribution of medical products are subject to extensive regulation including, in the United States, approvals by the FDA. Moreover, the medical test market is competitive and many companies with such products have substantially greater resources and experience than the Company. There is no assurance the Company's products will be successfully developed or marketed. 14 17 EMPLOYEES The Company employed approximately 44,000 people (excluding employees of unconsolidated joint venture companies) at December 31, 1996. The Company has a total of 18 labor union contracts in North America (covering approximately 8,500 employees), five of which expire in 1997 (covering approximately 371 employees) and two of which expire in 1998 (covering approximately 2,300 employees). Two of the contracts expiring in 1997 have already been successfully renegotiated. There can be no assurance that the Company will successfully negotiate the remaining labor contracts expiring during 1997 without work stoppages. However, the Company does not anticipate any problems in renegotiating those contracts that would materially affect its results of operations. In 1994, 230 Plumbing Products employees went on strike for 64 days at the Landsdowne (Toronto), Canada chinaware manufacturing plant. Other than this strike, the Company has not experienced any other significant work stoppages in North America in the last five years. The Company also has a total of 40 labor contracts outside North America (covering approximately 18,000 employees). In early 1996 there was a 5-week work stoppage at the two chinaware manufacturing plants of the Philippines plumbing products subsidiary, involving 700 employees, where the Company combined the two facilities. Other than the Philippines work stoppage, the Company has not experienced any significant work stoppage in the last five years outside North America. Although the Company believes relations with its employees are generally satisfactory, there can be no assurance that the Company will not experience significant work stoppages in the future or that its relations with employees will continue to be satisfactory. CUSTOMERS The business of the Company taken as a whole is not dependent upon any single customer or a few customers. INTERNATIONAL OPERATIONS The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of Western Europe, Canada, Brazil, Mexico, Central American countries, the PRC, 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 offset by the denomination in foreign currencies of a portion of the Company's borrowings. 15 18 ITEM 2. PROPERTIES At December 31, 1996 the Company conducted its manufacturing activities through 106 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 Mirecourt, France Applied and air handling products 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 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 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 Automotive Campinas, Brazil Braking equipment Products Leeds, England Braking equipment Claye-Souilly, France Braking equipment Hanover, Germany Braking equipment Mannheim, Germany Foundation brakes
Except for the properties located in Mirecourt, France and Manila, Philippines, all of the plants described above are owned by the Company or a subsidiary. Through joint ventures, the Company participates in the operation of (or is in the process of constructing) up to ten plants in the PRC, and 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. 16 19 In 1996 several Air Conditioning Products' plants operated at or near capacity and others operated moderately below capacity. In 1996 Plumbing Products' plants worldwide operated at levels of utilization which varied from country to country but overall were satisfactory. Automotive Products' plants generally operated moderately below capacity in 1996. ITEM 3. LEGAL PROCEEDINGS American Standard Inc. is the defendant in a lawsuit brought by Entech Sales & Service, Inc., on behalf of itself and a class of contractors engaged in the service and repair of commercial air conditioning equipment. The suit, filed in March 1993 in the United States District Court for the Northern District of Texas, alleges principally that the manner in which Air Conditioning Products distributes repair service parts for its equipment violates the Federal antitrust laws. On May 24, 1996, the district court granted summary judgment in favor of American Standard Inc. with respect to the only claim certified as a class action, alleging a price fixing conspiracy. With respect to Entech's individual claims, American Standard Inc. and Entech have reached a settlement agreement on terms that will not have a material effect on American Standard Inc. The Company received letters from Tyco International Ltd. ("Tyco") on September 30, 1996 setting forth proposals for a possible acquisition by Tyco of all the shares of the Company's common stock, in each case for a combination of cash and Tyco common stock. The final letter included a proposed purchase price of $50 per share. The Company's Board of Directors reviewed the Tyco proposals, consulted with its legal counsel and financial advisors and concluded that the Company's strategies already in place are working and the best way to increase the Company's earnings and shareholder value is to focus on implementing these strategies as an independent company. As a result, the Board of Directors concluded that the Company would decline any interest in the proposals and Tyco was so informed. There have been 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 and represented by the same lawyers have filed separate class action and derivative lawsuits in the Chancery Court of the State of Delaware against the Company, ASI Partners and the directors of the Company alleging breeches of fiduciary duties in respect of the rejection of the Tyco proposals and approval of the secondary offering of Company common stock owned by Kelso ASI Partners L.P. ("ASI Partners") and the repurchase by the Company of all shares owned by ASI Partners after the secondary offering and the distribution by ASI Partners of shares to certain of its partners (collectively, the "Stockholder Transactions"). The lawsuits seek to cause the Company to evaluate alternatives to maximize value for the Company's public shareholders, to enjoin the Stockholder Transactions and to recover damages in an unspecified amount. A person claiming to be a holder of certain public debt securities of American Standard Inc. has filed 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. The Company believes that these lawsuits are without merit and intends to contest them vigorously. 17 20 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). For a discussion of environmental issues see "Item 1. Business - General - Regulations and Environmental Matters." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's stockholders during the fourth quarter of 1996. 18 21 EXECUTIVE OFFICERS OF THE REGISTRANT In reliance on General Instruction G to Form 10-K, information on executive officers of the Registrant is included in this Part I. The following table sets forth certain information as of March 11, 1997 with respect to each person who is an executive officer of the Company:
Name Age Position with Company ---- --- --------------------- Emmanuel A. Kampouris 62 Chairman, President and Chief Executive Officer, and Director Horst Hinrichs 64 Senior Vice President, Automotive Products, and Director George H. Kerckhove 59 Senior Vice President, Plumbing Products, and Director Giancarlo Aimetti 60 Vice President, Automotive Products, Austrian Group Fred A. Allardyce 55 Vice President and Chief Financial Officer Alexander A. Apostolopoulos 54 Vice President and Group Executive, Plumbing Products, Americas International Thomas S. Battaglia 54 Vice President and Treasurer Gary A. Brogoch 46 Vice President and Group Executive, Plumbing Products, Asia Pacific Michael C.R. Broughton 56 Vice President, Automotive Products, United Kingdom Roberto Canizares M. 47 Vice President, Air Conditioning Products, Asia Pacific Region Wilfried Delker 56 Vice President and Group Executive, Plumbing Products, Worldwide Fittings Adrian B. Deshotel 51 Vice President, Human Resources Peter Enss 52 Vice President, Automotive Products, Germany Luigi Gandini 58 Vice President, Special Projects Daniel Hilger 56 Vice President, Air Conditioning Products, Middle East and Africa Region Richard A. Kalaher 56 Vice President, General Counsel and Secretary W. Craig Kissel 46 Vice President and Group Executive, Air Conditioning Products, Unitary Group William A. Klug 64 Vice President and Group Executive, Air Conditioning Products, International Jean-Claude Montauze 50 Vice President, Automotive Products, France Janet George Murnick 53 Vice President, Alimenterics, Medical Systems Group G. Eric Nutter 61 Vice President and Group Executive, Plumbing Products, U.S. Raymond D. Pipes 47 Vice President, Corporate Development Bruce R. Schiller 52 Vice President, Air Conditioning Products, Compressor Business James H. Schultz 48 Vice President and Group Executive, Air Conditioning Products, North American Commercial Group G. Ronald Simon 55 Vice President and Controller Benson I. Stein 59 Vice President, General Auditor Wolfgang Voss 50 Vice President and Group Executive, Plumbing Products, Europe Robert M. Wellbrock 50 Vice President, Taxes
Each officer of the Company is elected by the Board of Directors to hold office until the first Board meeting after the Annual Meeting of Stockholders next succeeding his election. None of the Company's officers has any family relationship with any director or other officer. "Family relationship" for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin. Set forth below is the principal occupation of each of the executive officers named above during the past five years (except as noted, all positions are with the Company and American Standard Inc.). 19 22 Mr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. He is also a director of Daido Hoxan Inc. Mr. Kampouris has served as a director of the Company since July 1988. Mr. Hinrichs was elected Senior Vice President, Automotive Products, in December 1990. Mr. Hinrichs has served as a director of the Company since March 1991. Mr. Kerckhove was elected Senior Vice President, Plumbing Products, in June 1990. Mr. Kerckhove has served as a director of the Company since September 1990. Mr. Aimetti was elected Vice President, Automotive Products, Austrian Group, in January 1997. Prior thereto he served as Business Leader of the Austrian Group from 1995 to 1996, and has been Managing Director and General Manager of WABCO Automotive Company in Italy since 1979. Mr. Allardyce was elected Vice President and Chief Financial Officer in January 1992. Mr. Apostolopoulos was elected Vice President and Group Executive, Plumbing Products, Americas International, in December 1990. Mr. Battaglia was elected Vice President and Treasurer in September 1991. Mr. Brogoch was elected Vice President in December 1994, and has served as Group Executive of the Asia Pacific Plumbing Group since the consolidation of the Far East and PRC Plumbing Groups in February 1997. Prior thereto he was Group executive of the PRC from December 1994 until February 1997. He served as Vice President of Plumbing Products' operations in the PRC from August 1993 until December 1994 and previously served as Vice President of Finance and Planning, European Plumbing Products from August 1991 until August 1993. Mr. Broughton was elected Vice President, Automotive Products, United Kingdom, in January 1997. Prior thereto he served as Managing Director (Business Leader) of that Group from May 1995 to December 1996, as Process Owner, Order Fulfillment from 1993 to May 1995, and from July 1988 to 1993 as Director of Manufacturing of the WABCO Automotive facility in Portsmouth, England. Mr. Canizares was elected Vice President, Air Conditioning Products' Asia Pacific Region, in December 1990. Mr. Delker was elected Vice President and Group Executive, Plumbing Products, Worldwide Fittings, in April 1990. Mr. Deshotel was elected Vice President, Human Resources, in January 1992. Mr. Enss was elected Vice President, Automotive Products in Germany, in July 1995. Prior thereto he served as Vice President, Business Development, and Group Executive of the WABCO Austrian group of companies from January 1994 to June 1995 and in various executive capacities in the WABCO Automotive Products Group headquarters in Brussels from January 1991 to December 1993. Mr. Gandini has served as Vice President, Special Projects since October 1995, having been elected Vice President and Group Executive, European Plumbing Products, in July 1990. Mr. Hilger was elected Vice President, Air Conditioning Products, Middle East and Africa Region, in June 1988. 20 23 Mr. Kalaher was elected Vice President, General Counsel and Secretary in March 1995, having served as Acting General Counsel and Acting Secretary since joining the Company in February 1994. Prior thereto, he was Vice President and General Counsel of AMAX Inc. from 1991 to 1994. Mr. Kissel was elected Vice President in charge of Air Conditioning Products' Unitary Products Group in January 1992, becoming Group Executive in March 1994. Mr. Klug was elected Vice President in 1985 and has been Group Executive in charge of Air Conditioning Products' Trane International since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. Mr. Montauze was elected Vice President, Automotive Products in France, in October 1994. He served as Vice President of Finance and Controller of Automotive Products at the Brussels headquarters from September 1989 until September 1994. Dr. Murnick was elected Vice President in May 1996 and has been President of Alimenterics Inc., a medical diagnostic subsidiary of the Company, since 1995, having served as its Vice President from 1992 until 1995. She founded Diagnostics and Devices, Inc., a medical technology development company, in 1983 and has served as its President since then. Mr. Nutter was elected Vice President and Group Executive, U.S. Plumbing Products, in May 1995. Prior thereto he served as Vice President, Automotive Products in the United Kingdom from January 1992 until April 1995 and as Vice President and General Manager of WABCO Automotive U.K. Limited, the United Kingdom automotive subsidiary of the Company from March 1991 until December 1991. Mr. Pipes has served as Vice President Corporate Development since February 1997. Prior thereto he was elected as Vice President and Group Executive for the Far East Region of Plumbing Products in May 1992 and served in that capacity until its consolidation with the PRC Plumbing Group in February 1997 and prior thereto served as Managing Director of American Standard Inc.'s Philippine subsidiary from May 1990 until April 1992. Mr. Schiller was elected Vice President, Compressor Business (Air Conditioning Products) in March 1994. Prior thereto he served as General Manager, Compressor Business Group, from May 1993 to February 1994 and Manager and then General Manager of the Company's Tyler, Texas, facility from March 1986 to April 1993. Mr. Schultz was elected Vice President and Group Executive, North American Commercial Group of Air Conditioning Products, in 1987. Mr. Simon was elected Vice President and Controller in January 1992. Mr. Stein was elected Vice President, General Auditor, in March 1994; from December 1986 to February 1994 he was the Company's General Auditor. Mr. Voss was elected Vice President and Group Executive, European Plumbing Products in July 1995, to succeed Mr. Gandini in October 1995. Prior thereto, he served as Process Owner, Order Fulfillment from January 1994 to June 1995, and as Works Manager from January 1991 to December 1993, of the WABCO Automotive company in Germany. Mr. Wellbrock was elected Vice President, Taxes, effective January 1, 1994. Prior thereto he served as Director of Taxes from 1988 through 1993. 21 24 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company is listed on the New York Stock Exchange, Inc. (the "Exchange"). The common stock was first traded on the Exchange on February 3, 1995 concurrent with the underwritten initial public offering of shares of the Company's common stock at an initial price to the public of $20.00 per share (the "Offering"). Prior to the Offering there was no established public trading market for the Company's shares. In January 1995 the Company adopted a Restated Certificate of Incorporation, Amended Bylaws and a Stockholder Rights Agreement. The Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock, par value $.01 per share, and 2,000,000 shares of preferred stock, par value $.01 per share, of which the Board of Directors designated 900,000 shares as a new series of Junior Participating Cumulative Preferred Stock. Each outstanding share of common stock has associated with it one right to purchase a specified amount of Junior Participating Cumulative Preferred Stock at a stipulated price in certain circumstances relating to changes in ownership of the common stock of the Company. The number of holders of record of the common stock of the Company as of March 11, 1997, was 1,033. No dividends were declared on the Company's common stock in 1995 or 1996. The Company has no separate operations and its ability to pay dividends or repurchase its common stock is dependent entirely upon the extent to which it receives dividends or other funds from American Standard Inc. The terms of the Company's 1997 Credit Agreement and certain indentures governing publicly-issued debt securities of American Standard Inc. restrict the payment of dividends and other extensions of funds by American Standard Inc. to the Company. Set forth below are the high and low sales prices for shares of the Company's common stock in 1995 from February 3, 1995, the date of the Offering, through the end of the first quarter of 1995 and for each full quarterly period thereafter in 1995 and 1996.
1995: High Low ----- ---- --- First quarter $ 25 $ 19-5/8 Second quarter $ 28-1/4 $ 24-1/4 Third quarter $ 32 $ 26 Fourth quarter $ 31-7/8 $ 26-1/4 1996: ----- First quarter $ 31-3/8 $ 25-1/2 Second quarter $ 33-3/8 $ 26-1/2 Third quarter $ 35-1/4 $ 28-1/8 Fourth quarter $ 39-3/4 $ 34-1/4
22 25 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (Dollars in millions, except per share data)
YEAR ENDED DECEMBER 31 ---------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA Sales $ 5,805 $ 5,221 $ 4,457 $ 3,830 $ 3,792 Income (loss) before extraordinary item and cumulative effect of change in accounting method(a)(b) $ (47) $ 142 $ (77) $ (117) $ (57) ============ ============ ============ ============ ============ Per Common Share: Income (loss) before extraordinary item and cumulative effect of change in accounting method (a) $ (.60) $ 1.90 $ (1.29) $ (2.11) $ (1.24) ============ ============ ============ ============ ============ Average number of outstanding common shares 77,986,511 74,671,830 59,933,435 59,313,073 58,636,118 BALANCE SHEET DATA (AT END OF PERIOD): Total assets $ 3,520 $ 3,520 $ 3,156 $ 2,987 $ 3,126 Total debt 1,923 2,083 2,364 2,336 2,145 -- -- -- -- 133 Exchangeable preferred stock Stockholders' deficit (380) (390) (798) (723) (449)
(a) Effective January 1, 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, resulting in a non-cash charge of $235 million, or $3.02 per share. (b) Retirements of debt in connection with the proceeds of the initial public offering in 1995, an October 1994 borrowing and a 1993 refinancing resulted in extraordinary charges of $30 million, $9 million and $92 million in 1995, 1994 and 1993, respectively, (including call premiums, the write-off of deferred debt issuance costs, and in 1993 the loss on cancellation of foreign currency swap contracts) on which there were no tax benefits (see Notes 6 and 9 of Notes to Consolidated Financial Statements included in the Company's 1996 Annual Report to Stockholders and incorporated herein by reference). 23 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of the financial condition and results of operations of the Company is set forth on pages 15 through 23 of the Company's 1996 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from the Company's 1996 Annual Report to Stockholders are the financial statements and related information listed under the heading "1. Financial Statements" in the Index to Financial Statements and Financial Statement Schedules on page 27 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 24 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except for information regarding the Company's executive officers, the information called for by this Item is incorporated in this report by reference to the Company's definitive Proxy Statement dated March 26, 1997: under the headings: "Stock Ownership" and "1. Election of Directors", except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. For information concerning the executive officers of the Company, see "Executive Officers of the Registrant" under Part I of this report. None of the Company's directors or officers has any family relationship with any other director or officer. ("Family relationship" for this purpose means any relationship by blood, marriage or adoption, not more remote than first cousin.) ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation and related matters is set forth in the Company's definitive Proxy Statement dated March 26, 1996 as follows: under the section entitled "Directors' Fees and Other Arrangements" on page 7 thereof, under the heading entitled "Executive Compensation" on pages 9 through 13 thereof, under the heading entitled "Compensation Committee Interlocks and Insider Participation" on page 17 and under the heading entitled "Certain Relationships and Related Party Transactions" on pages 17 through 19 thereof, and is incorporated herein by reference except for the sections entitled "Management Development and Nominating Committee Report on Compensation of Executive Officers of the Company" and "Performance Graph" appearing on pages 14 through 17. except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning shares of common stock of the Company beneficially owned by management and others is set forth under the heading entitled "Stock Ownership" on pages 3 and 4 in the Company's definitive Proxy Statement dated March 26, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated in this report by reference to the Company's definitive Proxy Statement dated March 26, 1997 under the section entitled "Certain Relationships and Related Party Transactions", except for information not deemed to be "soliciting material" or "filed" with the SEC, information subject to Regulations 14A or 14C under the Exchange Act or information subject to the liabilities of Section 18 of the Exchange Act. 25 28 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 27of this annual report on Form 10-K. The financial statements indicated on the index appearing on page 27 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 for the quarter ended December 31, 1996. The Company filed no current reports on Form 8-K during the fourth quarter ended December 31, 1996. 26 29 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 COMPANIES INC. By: /s/ EMMANUEL A. KAMPOURIS ----------------------------- (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer March 26, 1997 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 26, 1997: /s/ Emmanuel A. Kampouris - ------------------------------ (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer; Director (Principal Executive Officer) /s/ FRED A. ALLARDYCE - ------------------------------ (Fred A. Allardyce) 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/ GEORGE H. KERCKHOVE - ------------------------------ (George H. Kerckhove) Director /s/ SHIGERU MIZUSHIMA - ------------------------------ (Shigeru Mizushima) Director /s/ FRANK T. NICKELL - ------------------------------ (Frank T. Nickell) 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/ JOHN RUTLEDGE - ------------------------------ (John Rutledge) Director /s/ JOSEPH S. SCHUCHERT - ------------------------------ (Joseph S. Schuchert) Director
27 30 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
-------------- 1996 ANNUAL REPORT TO STOCKHOLDERS (PAGES) -------------- 1. Financial Statements incorporated by reference from the Company's 1996 Annual Report to Stockholders) Consolidated Balance Sheet at December 31, 1996, and 1995 27 Years ended December 31, 1996, 1995, and 1994: Consolidated Statement of Operations 26 Consolidated Statement of Cash Flows 28 Consolidated Statement of Stockholders' Deficit 29 Notes to Financial Statements 30-43 Segment Data 14 and 43 Quarterly Data (Unaudited) 44 Report of Independent Auditors 25 -------------- FORM 10-K (PAGES) -------------- 2. Financial statement schedules, years ended December 31, 1996, 1995, and 1994 I Condensed Financial Information of Registrant 29-32 II Valuation and Qualifying Accounts 33
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. 28 31 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Standard Companies Inc. of our report dated February 13, 1997 included in the 1996 Annual Report to Stockholders of American Standard Companies Inc. Our audits also included the financial statement schedules of American Standard Companies Inc. listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP New York, New York March 26, 1997 29 32 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
Year Ended December 31 1996 1995 1994 -------- -------- -------- Interest income $ 747 $ 450 $ 219 Interest expense 747 450 219 Equity in net loss of subsidiary (46,718) 111,655 (86,421) -------- -------- -------- Net loss $(46,718) $111,655 $(86,421) ======== ======== ========
See notes to financial statements 30 33 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED) BALANCE SHEET (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------ ASSETS 1996 1995 --------- --------- Investment in subsidiary $(373,246) $(378,924) Loan receivable from subsidiary 10,000 4,823 LIABILITIES Loan payable to subsidiary 395 629 Stock repurchase obligation (Note C) 16,740 15,333 STOCKHOLDERS' DEFICIT Common stock, $.01 par value, 200,000,000 shares authorized;shares issued and outstanding, 78,572,638 in 1996; 76,733,010 in 1995 786 767 Capital surplus 563,873 509,218 Subscriptions receivable (395) (629) Accumulated deficit (771,487) (724,769) Foreign currency translation effects (173,158) (174,650) Minimum pension liability adjustment -- -- --------- --------- Total stockholders' deficit (380,381) (390,063) --------- --------- $(363,246) $(374,101) ========= =========
See notes to financial statements. 31 34 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (PARENT COMPANY SEPARATELY) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1996 1995 1994 -------- --------- -------- Cash flows from operating activities: Net income (loss) $(46,718) $ 111,655 $(86,421) Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in net loss (income) of subsidiary 46,718 (111,655) 86,421 -------- --------- -------- Net cash flow from operating activities 0 0 0 -------- --------- -------- Cash provided (used) by investing activities: Investment in subsidiary (19,400) (279,983) (3,976) Loan to subsidiary (5,177) (4,823) -- Purchase of common stock by subsidiary 10,000 10,989 16,927 -------- --------- -------- Net cash provided by investing activities (14,577) (273,817) 12,951 -------- --------- -------- Cash provided (used) by financing activities: Proceeds from initial public offering of common stock -- 280,535 -- Other issuances of common stock 24,577 4,271 3,976 Common stock repurchases (10,000) (10,989) (16,927) Repayments on subscriptions receivable 234 1,011 786 Repayment of loan from subsidiary (234) (1,011) (786) -------- --------- -------- Net cash used by financing activities 14,577 273,817 (12,951) -------- --------- -------- Net change in cash and cash equivalents $ 0 $ 0 $ 0 ======== ========= ========
See notes to financial statements. 32 35 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION ON REGISTRANT -- (CONTINUED) NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY SEPARATELY) (A) The notes to the consolidated financial statements of American Standard Companies Inc. (the "Parent Company"), are an integral part of these condensed financial statements. (B) The Parent Company was organized by Kelso & Company, L.P. ("Kelso"), a private merchant banking firm, to participate in the acquisition of American Standard Inc. (the "Acquisition") in 1988. American Standard Inc.'s common stock is owned solely by the Parent Company. The Parent Company has no other investments or operations. (C) The Parent Company has sold its common stock to management employees in connection with the Acquisition and issued common stock under various employee benefit and incentive plans including the ESOP. As no public market existed for the stock prior to the initial public offering in the first quarter of 1995 (see Note D), the Parent Company, to provide liquidity to employees who have terminated employment, has made purchases of such employees' stock. Subsequent to December 2, 1994 the Parent Company is no longer obligated to make such purchases. Purchases through December 31, 1994, were based upon fair market value appraisals obtained in connection with the ESOP. The amount paid on such stock purchases is subject to an annual limitation contained in American Standard Inc.'s lending arrangements and debt instruments (the "Annual Limitation"). As the amount owed to terminated employees has exceeded the Annual Limitation, a liability for the unpaid balance has been recorded on the financial statements of the Parent Company with a concomitant reduction in common stock and capital surplus accounts. (D) In the first quarter of 1995 the Parent Company sold 15,112,300 shares of its common stock in an initial public offering at an initial price to the public of $20 per share. This offering yielded net proceeds of approximately $281 million (including proceeds from the exercised portion of the underwriters' over-allotment option and after deducting underwriting discounts and expenses), which were transferred to American Standard Inc. and used to reduce its indebtedness. Of the total net proceeds transferred, $269 million was contributed to the capital of American Standard Inc. and $12 million was advanced under an intercompany demand note. (E) In the first quarter of 1997, the Parent Company completed a secondary offering of 12,429,548 shares of its common stock owned by Kelso ASI Partners, L.P., ("ASI Partners") an affiliate of Kelso and the Parent Company's largest shareholder as of December 31, 1996. In conjunction with the secondary offering, the Parent Company repurchased 4,628,755 shares of its common stock from ASI Partners for $208 million with funds borrowed by American Standard Inc. under American Standard Inc.'s 1997 Credit Agreement and loaned to the Parent Company under a non-interest-bearing intercompany demand note. 33 36 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1996, 1995, and 1994 (Dollars in thousands)
DESCRIPTION FOREIGN BALANCE ADDITIONS CURRENCY BALANCE BEGINNING CHARGED TO OTHER TRANSLATION END OF OF PERIOD INCOME DEDUCTIONS CHANGES EFFECTS PERIOD 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)(C) (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)(D) $ 20,069 $482,398 ======== ======= ======== ======== ======== ======== 1994: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 15,666 $10,208 $ (6,868)(A) $ 533 $ 30 $ 19,569 ======== ======= ======== ======== ======== ======== Reserve for post-retirement benefits $387,038 $44,352 $(23,062)(B) $ 3,188(E) $ 26,192 $437,708 ======== ======= ======== ======== ======== ========
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 $10 million reduction in minimum pension liability. (D) Includes $6 million reduction in minimum pension liability. (E) Includes $5 million from acquisition of new business offset by $3 million reduction in minimum pension liability. 34 37 AMERICAN STANDARD COMPANIES 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 Companies Inc. (formerly ASI Holding Corporation), the Registrant (sometimes hereinafter referred to as "Holding"), and for all Exhibits incorporated by reference, is 1-11415, except those Exhibits incorporated by reference in filings made by American Standard Inc. (the "Company") the Commission File Number of which is 33-64450. 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 Holding; previously filed as Exhibit 3(i) in Amendment No. 4 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 31, 1995, and herein incorporated by reference. (ii) Amended By-laws of Holding, as amended February 24, 1997, effective May 1, 1997. (4) (i) Form of Common Stock Certificate; previously filed as Exhibit 4(i) in Amendment No. 3 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 5, 1995, and herein incorporated by reference. (ii) 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. (iii) 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)(ii) above; previously filed as Exhibit (4)(ii) to Registration Statement No. 33-64450 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (iv) 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. (v) Form of 10-7/8% Senior Note due 1999 included as Exhibit A to the Indenture described in 38 (4)(iv) above. (vi) Indenture dated as of May 15, 1992, between the Company and First Trust National Association, Trustee, relating to the Company's 11-3/8% Senior Debentures due 2004, in the aggregate principal amount of $250,000,000; previously filed as Exhibit (4)(iii) to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1992, and herein incorporated by reference. (vii) Form of 11-3/8% Senior Debentures due 2004 included as Exhibit A to the Indenture described in (4)(vi) above. (viii) 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 filed as Exhibit (4)(xxxi) to Amendment No. 1 to Registration Statement No. 33-61130 of the Company under the Securities Act of 1933, as amended, and herein incorporated by reference. (ix) 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)(viii) above. (x) 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 under the Securities Act of 1933, as amended, and herein incorporated by reference. (xi) 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)(x) above. (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 under the Securities Act of 1933, as amended, filed February 5, 1997, and herein incorporated by reference. (xiii) 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 39 year ended December 31, 1994, and herein incorporated by reference. (10)* (i) Description of The American Standard Companies Inc. Employee Stock Purchase Plan, incorporated by reference from the Company's definitive proxy statement dated March 28, 1997. (ii) American Standard Inc. Long-Term Incentive Compensation Plan, as amended and restated on December 5, 1996; incorporated herein by reference to Exhibit (10)(i) of Company's Form 10-K for the fiscal year ended December 31, 1996. (iii) Trust Agreement for American Standard Inc. Long-Term Incentive Compensation Plan and American Standard Companies Inc. Supplemental Incentive Compensation Plan, as amended and restated on December 5, 1996; incorporated herein by reference to Exhibit (10)(ii) of Company's Form 10-K for the fiscal year ended December 31, 1996. (iv) American Standard Inc. Annual Incentive Plan, as amended and restated on December 5, 1996; incorporated herein by reference to Exhibit (10)(iii) of Company's Form 10-K for the fiscal year ended December 31, 1996. (v) American Standard Inc. Executive Supplemental Retirement Benefit Program, as restated to include all amendments through July 6, 1995; incorporated herein by reference to Exhibit (10)(iv) of Company's Form 10-K for the fiscal year ended December 31, 1995. (vi) American Standard Inc. Supplemental Compensation Plan for Outside Directors, as amended through February 3, 1995; previously filed as Exhibit (10)(xii) to the Company's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (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. (ix) Estate Preservation Plan, adopted by Company 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. * Items in this section 10 consist of management contracts or compensatory plans or arrangements with the exception of (10)(xv) and (xvi). 40 (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. (xii) American Standard Companies Inc. Stock Incentive Plan, as amended and restated on December 5, 1996. (xiii) American Standard Companies Inc. and Subsidiaries 1996-1998 Supplemental Incentive Compensation Plan, as amended and restated on December 5, 1996. (xiv) Form of Indemnification Agreement; previously filed as Exhibit (10)(xxi) in Amendment No. 3 to Registration Statement No. 33-56409 under the Securities Act of 1933, as amended, filed January 5, 1995, and herein incorporated by reference. (xv) 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 Registration Statement No. 333-18015 under the Securities Act of 1933, as amended, filed December 17, 1996, and herein incorporated by reference. (xvi) 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)(xv) above; previously filed as Exhibit (10)(ii) to Registration Statement No. 333-18015 under the Securities Act of 1933, as amended, filed December 17, 1996, and herein incorporated by reference. (13) 1996 Annual Report to Stockholders. (Only those portions specifically incorporated by reference are filed; no other portions of the Annual Report are to be deemed filed.) (21) Listing of Holding's subsidiaries. (27) Financial Data Schedule. EX-3.II 2 AMENDED BY-LAWS OF HOLDING 1 EXHIBIT 3(ii) AMERICAN STANDARD COMPANIES INC. AMENDED BY-LAWS As Adopted on January 4, 1995, as Amended on December 5, 1996 and February 24, 1997 (effective May 1, 1997) 2 AMERICAN STANDARD COMPANIES INC. AMENDED BY-LAWS TABLE OF CONTENTS PAGE
ARTICLE I STOCKHOLDERS............................................ 1 Section 1.1. Annual Meetings.............................................. 1 Section 1.2. Special Meetings............................................. 1 Section 1.3. Notice of Meetings; Waiver................................... 2 Section 1.4. Quorum....................................................... 2 Section 1.5. Voting....................................................... 2 Section 1.6. Voting by Ballot............................................. 3 Section 1.7. Adjournment.................................................. 3 Section 1.8. Proxies...................................................... 3 Section 1.9. Organization; Procedure...................................... 4 Section 1.10. Stockholder Proposals and Nominations of Directors.............................................. 4 Section 1.11. Inspectors of Elections...................................... 5 Section 1.12. Opening and Closing of Polls.............................. 6 Section 1.13. Consent of Stockholders in Lieu of Meeting........................................... 7 ARTICLE II BOARD OF DIRECTORS....................................... 8 Section 2.1. General Powers............................................... 8 Section 2.2. Number and Term of Office.................................... 8 Section 2.3. Election of Directors........................................ 8 Section 2.4. Annual and Regular Meetings.................................. 9 Section 2.5. Special Meetings; Notice..................................... 9 Section 2.6. Quorum; Voting............................................... 10 Section 2.7. Adjournment.................................................. 10 Section 2.8. Action Without a Meeting..................................... 10 Section 2.9. Organization................................................. 10 Section 2.10. Regulations; Manner of Acting................................ 10 Section 2.11. Action by Telephonic Communications.......................... 10 Section 2.12. Resignations................................................. 11 Section 2.13. Removal of Directors......................................... 11 Section 2.14. Vacancies and Newly Created Directorships............................................. 11 Section 2.15. Compensation................................................. 12 Section 2.16. Reliance on Accounts and Reports, etc........................ 12
3
PAGE ---- ARTICLE III EXECUTIVE COMMITTEE AND OTHER COMMITTEES.. 12 Section 3.1. How Constituted............................................. 12 Section 3.2. Powers...................................................... 13 Section 3.3. Proceedings................................................. 14 Section 3.4. Quorum and Manner of Acting................................. 14 Section 3.5. Action by Telephonic Communications......................... 14 Section 3.6. Absent or Disqualified Members.............................. 14 Section 3.7. Resignations................................................ 15 Section 3.8. Removal..................................................... 15 Section 3.9. Vacancies................................................... 15 ARTICLE IV OFFICERS............................... 15 Section 4.1. Number...................................................... 15 Section 4.2. Election.................................................... 15 Section 4.3. Salaries.................................................... 16 Section 4.4. Removal and Resignation; Vacancies.......................... 16 Section 4.5. Authority and Duties of Officers............................ 16 Section 4.6. The President............................................... 16 Section 4.7. Vice Presidents............................................. 17 Section 4.8. The Secretary............................................... 17 Section 4.9. The Treasurer............................................... 18 Section 4.10. Additional Officers......................................... 19 Section 4.11. Security.................................................... 19 ARTICLE V CAPITAL STOCK............................ 19 Section 5.1. Certificates of Stock, Uncertificated Shares........................................ 19 Section 5.2. Signatures; Facsimile....................................... 20 Section 5.3. Lost, Stolen or Destroyed Certificates...................... 20 Section 5.4. Transfer of Stock........................................... 20 Section 5.5. Record Date................................................. 21 Section 5.6. Registered Stockholders..................................... 22 Section 5.7. Transfer Agent and Registrar................................ 22
ii 4
PAGE ---- ARTICLE VI INDEMNIFICATION........................... 22 Section 6.1. Nature of Indemnity......................................... 22 Section 6.2. Successful Defense.......................................... 23 Section 6.3. Determination That Indemnification is Proper..................................... 24 Section 6.4. Advance Payment of Expenses................................. 24 Section 6.5. Procedure for Indemnification of Directors and Officers........................ 24 Section 6.6. Survival; Preservation of Other Rights...................... 25 Section 6.7. Insurance................................................... 26 Section 6.8. Severability................................................ 26 ARTICLE VII OFFICES............................... 26 Section 7.1. Registered Office........................................... 26 Section 7.2. Other Offices............................................... 26 ARTICLE VIII GENERAL PROVISIONS.......................... 27 Section 8.1. Dividends................................................... 27 Section 8.2. Reserves.................................................... 27 Section 8.3. Execution of Instruments.................................... 27 Section 8.4. Corporate Indebtedness...................................... 28 Section 8.5. Deposits.................................................... 28 Section 8.6. Checks...................................................... 28 Section 8.7. Sale, Transfer, etc. of Securities.......................... 28 Section 8.8. Voting as Stockholder....................................... 28 Section 8.9. Fiscal Year................................................. 29 Section 8.10. Seal........................................................ 29 Section 8.11. Books and Records; Inspection............................... 29 ARTICLE IX AMENDMENT OF AMENDED BY-LAWS..................... 29 Section 9.1. Amendment................................................... 29
iii 5
PAGE ---- ARTICLE X CONSTRUCTION........................... 30 Section 10.1. Construction................................................ 30
iv 6 AMERICAN STANDARD COMPANIES INC. AMENDED BY-LAWS As adopted on January 4, 1995 ARTICLE I STOCKHOLDERS Section 1.1. Annual Meetings. The annual meeting of the stockholders of the Corporation for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, and at 10:00 a.m. (local time) on the first Thursday in May (or, if such day is a legal holiday, then on the next succeeding business day), or at such other date and hour, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. [Sections 211(a), (b).(1) Section 1.2. Special Meetings. Special meetings of the stockholders may be called at any time by the (i) Chief Executive Officer or (ii) by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized Directors or (iii) for purposes of voting on Director nominees designated by Kelso ASI Partners, L.P. ("ASI Partners") pursuant to the Amended and Restated Stockholders Agreement, dated as of December 2, 1994, among the Corporation, ASI Partners and the other stockholders of the Corporation parties thereto (the "Amended and Restated Stockholders Agreement") or the removal of Directors designated for nomination by ASI Partners pursuant to the Amended and Restated Stockholders Agreement, ASI Partners, so long as ASI Partners, together with its Affiliates (as defined in the Amended and Restated Stockholders Agreement), owns at least 10% of the outstanding shares of the Common Stock of the Corporation. Other than as set forth herein, stockholders shall not be able to call special meetings. Special meetings of the stockholders shall be held at such places, within or without the State of Delaware, as shall be specified in the respective notices or waivers of notice thereof. [Section 211(d).] - -------- 1. Citations are to the General Corporation Law of the State of Delaware as in effect on December 20, 1994 (the "GCL"), and are inserted for reference only, and do not constitute a part of the Amended By-Laws. 7 Section 1.3. Notice of Meetings; Waiver. The Secretary, Acting Secretary or any Assistant Secretary shall cause written notice of the place, date and hour of each meeting of the stockholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, to be given personally or by mail, not less than ten nor more than sixty days prior to the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the record of stockholders of the Corporation, or, if he shall have filed with the Secretary or Acting or Assistant Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. Such further notice shall be given as may be required by law. No notice of any meeting of stockholders need be given to any stockholder who submits a signed waiver of notice, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in a written waiver of notice. The attendance of any stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. [Sections 222, 229.] Section 1.4. Quorum. Except as otherwise required by law or by the Restated Certificate of Incorporation, the presence in person or by proxy of the holders of record of a majority of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. [Section 216.] Section 1.5. Voting. If, pursuant to Section 5.5 of these Amended By-Laws, a record date has been fixed, every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share outstanding in his name on the books of the Corporation at the close of business on such record date, provided, however, that the certificate of designation pertaining to any series of the Corporation's preferred stock may provide for a greater number of votes per share of such series. If no record date has been fixed, then every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote (subject to the 2 8 same proviso as set forth in the immediately preceding sentence) for each share of stock standing in his name on the books of the Corporation at the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Except as otherwise required by law, by the Restated Certificate of Incorporation or by these Amended By-Laws, the vote of a majority of the shares represented in person or by proxy at any meeting at which a quorum is present shall be sufficient for the transaction of any business at such meeting. [Sections 212(a), 216.] Section 1.6. Voting by Ballot. No vote of the stockholders need be taken by written ballot unless otherwise required by law. Any vote which need not be taken by ballot may be conducted in any manner approved by the meeting. Section 1.7. Adjournment. If a quorum is not present at any meeting of the stockholders, the stockholders present in person or by proxy shall have the power to adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, date and hour thereof are announced at the meeting at which the adjournment is taken, provided, however, that if the adjournment is for more than thirty days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.5 of these Amended By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.3 hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. [Section 222(c).] Section 1.8. Proxies. Any stockholder entitled to vote at any meeting of the stockholders or to express consent to or dissent from corporate action without a meeting may authorize another person or persons to vote at any such meeting and express such consent or dissent for him by proxy. A stockholder may authorize a valid proxy by executing a written instrument signed by such stockholder, or by causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature, or by transmitting or authorizing the transmission of a telegram, cablegram or other means of electronic transmission to the person designated as the holder of the proxy, a proxy solicitation firm or a like authorized agent. No such proxy shall be voted or acted upon after the expiration of three years from 3 9 the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. Proxies by telegram, cablegram or other electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of a writing or transmission created pursuant to this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. [Sections 212(b), (c), (d), (e).] Section 1.9. Organization; Procedure. At every meeting of stockholders the presiding officer shall be the President or, in the event of his absence or disability, any Vice President or a presiding officer chosen by a majority of the stockholders present in person or by proxy. The Secretary or Acting Secretary, or in the event of his absence or disability, the Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary or Acting Secretary, an appointee of the presiding officer, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be determined by such presiding officer. Section 1.10. Stockholder Proposals and Nominations of Directors. Nominations for election to the Board of Directors of the Corporation at a meeting of the stockholders may be made by the Board of Directors, or on behalf of the Board of Directors by a Nominating Committee appointed by the Board of Directors, or (subject to compliance with the remainder of this section) by any stockholder of the Corporation entitled to vote for the election of Directors at such meeting. Any nominations, other than those made by or on behalf of the Board of Directors or any such Nominating Committee, and any proposal by any stockholder to transact any corporate business at an annual or special stockholders meeting, shall be made by written notice, mailed by certified mail, to the Secretary of the Corporation and (i) in the case of an annual meeting, 4 10 received no later than 50 days prior to the date of the annual meeting; provided, however, that if less than 50 days' advance notice of a meeting of stockholders is given to the stockholders, such advance notice of proposed business or nomination by such stockholder shall have been made or delivered to the Secretary or Acting Secretary of the Corporation not later than the close of business on the seventh day following the day on which the written notice of a meeting was mailed, and (ii) in the case of a special meeting of stockholders, received not later than the close of business on the tenth day following the day on which written notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first; and provided, further, that the foregoing advance notice requirements applicable to stockholder proposals and nominations of Directors shall not apply to ASI Partners, so long as ASI Partners, together with its Affiliates, owns at least 10% of the outstanding shares of the Common Stock of the Corporation. Notwithstanding the foregoing, the inclusion of stockholder proposals in proxy materials prepared by the Corporation shall be governed by Rule 14a-8 under the Securities Exchange Act of 1934, as amended. The form of written notice of Director nominations by a stockholder or stockholders shall set forth as to each proposed nominee who is not an incumbent Director (i) the name, age, business address, and if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee and the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed regarding nominees in proxy solicitations pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules under such section. The Chairman of the Board, or in his absence the President, any Vice President or the Secretary or Acting Secretary, may, if the facts warrant, determine and declare to the meeting of stockholders that a nomination or a proposal made by a stockholder was not made in accordance with the foregoing procedure and that the defective nomination or proposal shall be disregarded. Section 1.11. Inspectors of Elections. Preceding any meeting of the stockholders, the Board of Directors shall appoint one or more persons to act as Inspectors of Elections, and may designate one or more alternate inspectors. In the event no inspector or alternate is able to act, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an 5 11 inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall: (a) ascertain the number of shares outstanding and the voting power of each; (b) determine the shares represented at a meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (e) certify his or her determination of the number of shares represented at the meeting, and his or her count of all votes and ballots. The inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector. When determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 1.8 of these Amended By-Laws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this section, the inspector, at the time of his or her certification pursuant to (e) of this section shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector's belief that such information is accurate and reliable. [Sections 231(a), (b), (d).] Section 1.12. Opening and Closing of Polls. The date and time for the opening and the closing of the polls for each matter to be voted upon at a meeting of stock holders shall be announced at the meeting. The inspector of 6 12 the election shall be prohibited from accepting any ballots, proxies or votes nor any revocations thereof or changes thereto after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise. [Section 231(c).] Section 1.13. Consent of Stockholders in Lieu of Meeting. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of stockholders to consent in writing to the taking of any action is hereby specifically denied, provided, however, that so long as ASI Partners, together with its Affiliates, owns at least 10% of the outstanding shares of the Common Stock of the Corporation, stockholder action may be taken by written consent in order to vote on Director nominees designated by ASI Partners pursuant to the Amended and Restated Stockholders Agreement or the removal of Directors designated for nomination by ASI Partners pursuant to the Amended and Restated Stockholders Agreement. The preceding sentence shall take effect on the day following the closing date of the Corporation's initial underwritten public offering of Common Stock. Every written consent permitted by this section shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent permitted by this section shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by law to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not so consented in writing. [Section 228(a), (c), (d).] 7 13 ARTICLE II BOARD OF DIRECTORS Section 2.1. General Powers. Except as may otherwise be provided by law, by the Restated Certificate of Incorporation or by these Amended By-Laws, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation. [Section 141(a).] Section 2.2. Number and Term of Office. The number of Directors constituting the entire Board of Directors shall be nine (9), which number may be modified from time to time by resolution of the Board of Directors, but in no event shall the number of Directors be less than three (3) or greater than twenty-one (21). Each Director (whenever elected) shall hold office until his successor has been duly elected and qualified, or until his earlier death, resignation or removal. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain a number of Directors in each class as nearly equal as reasonably possible, but no decrease in the number of Directors may shorten the term of any incumbent Director. Section 2.3. Election of Directors. The members of the Board of Directors elected by the holders of the Common Stock of the Corporation shall be divided at the annual meeting of stockholders to be held in 1995 into three classes, designated Classes I, II and III, which shall be as nearly equal in number as possible. At the annual meeting of stockholders in 1995, Directors of Class I shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1996, Directors of Class II shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1997 and Directors of Class III shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1998. At each succeeding annual meeting of stockholders following such initial classification and election, the respective successors of Directors whose terms are expiring shall be elected for terms expiring at the annual meeting of stockholders held in the third succeeding year. If the annual meeting of stockholders for the election of Directors is not held on the date designated there for, the Directors shall cause the meeting to be held as soon thereafter as convenient. At each meeting of the stockholders for the election of Directors, provided a quorum is present, the Directors shall be elected by a plurality of the votes validly cast in such election. Notwithstanding the foregoing, the election, term, removal and 8 14 filling of vacancies with respect to Directors elected separately by the holders of one or more series of Preferred Stock of the Corporation shall not be governed by this Article II, but rather shall be as provided for in the resolutions adopted by the Board of Directors creating and establishing such series of Preferred Stock. [Sections 141(d), 211(b), (c), 216.] Section 2.4. Annual and Regular Meetings. The annual meeting of the Board of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as possible following adjournment of the annual meeting of the stockholders at the place of such annual meeting of the stockholders. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings and fix the place (which may be within or without the State of Delaware) and the date and hour of such meetings. Notice of regular meetings need not be given, provided, however, that if the Board of Directors shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by facsimile transmission or telegram, to each Director who shall not have been present at the meeting at which such action was taken, addressed to him at his usual place of business, or shall be delivered to him personally. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without protesting the lack of notice to him, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. [Section 141(g).] Section 2.5. Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the President or, in the event of his absence or disability, by any Vice President or by the Secretary or Acting Secretary, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors may be called on 24 hours' notice, if notice is given to each Director personally or by telephone, telegram, facsimile or other electronic means of transmission, or on five days' notice, if notice is mailed to each Director, addressed to him at his usual place of business. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after 9 15 such meeting, and any business may be transacted thereat. [Sections 141(g), 229.] Section 2.6. Quorum; Voting. At all meetings of the Board of Directors, the presence of a majority of the total authorized number of Directors shall constitute a quorum for the transaction of business. Except as otherwise required by law, the Restated Certificate of Incorporation or these Amended By-Laws, the vote of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. [Section 141(b).] Section 2.7. Adjournment. A majority of the Directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.5 shall be given to each Director. Section 2.8. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. [Section 141(f).] Section 2.9. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board or, in his absence or if such office is vacant, by the President, or in their absence by a chairman chosen at the meeting. The Secretary or Acting Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.10. Regulations; Manner of Acting. To the extent consistent with applicable law, the Restated Certificate of Incorporation and these Amended By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board, and the individual Directors shall have no power as such. Section 2.11. Action by Telephonic Communications. Members of the Board of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of 10 16 which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. [Section 141(i).] Section 2.12. Resignations. Any Director may resign at any time by delivering a written notice of resignation, signed by such Director, to the President or the Secretary or Acting Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. [Section 141(b).] Section 2.13. Removal of Directors. A Director may be removed only for cause, upon the affirmative vote of the holders of a majority of the outstanding shares of stock of the Corporation then entitled to vote at an election of Directors, cast at a special meeting of stockholders called for the purpose or at an annual meeting; provided, however, that so long as ASI Partners, together with its Affiliates, owns at least 35% of the outstanding Common Stock of the Corporation, Directors (including, without limitation, any Director elected pursuant to Section 2.14) may be removed upon receipt of the requisite vote of stockholders with or without cause. Any vacancy in the Board of Directors caused by any such removal may be filled at any such meeting by the stockholders entitled to vote for the election of the Director so removed. So long as ASI Partners, together with its Affiliates, owns at least 10% of the outstanding shares of Common Stock of the Corporation ASI Partners shall be entitled to either (i) call a special meeting of stockholders or (ii) notwithstanding anything contained in these Amended By-Laws to the contrary, request that the stockholders act by written consent, to vote on the election of Director nominees designated by ASI Partners pursuant to the Amended and Restated Stockholders Agreement or the removal of Directors designated for nomination by ASI Partners pursuant to the Amended and Restated Stockholders Agreement. Notwithstanding the foregoing, the election, term, removal and filling of vacancies with respect to Directors elected separately by the holders of one or more series of Preferred Stock of the Corporation shall not be governed by this Article II, but rather shall be as provided for in the Preferred Stock certificate of designation creating and establishing such series of Preferred Stock. [Section 141(k).] Section 2.14. Vacancies and Newly Created Directorships. If any vacancies shall occur in the Board of Directors, by reason of death, resignation, removal (and the stockholders shall not have filled such vacancy as provided in Section 2.13 above) or otherwise, or if the authorized number of Directors shall be increased, the Directors then 11 17 in office shall continue to act, and such vacancies or newly created directorships, as the case may be, may be filled by a majority of Directors then in office, although less than a quorum, provided that so long as ASI Partners, together with its Affiliates, owns at least 10% of the outstanding shares of the Common Stock of the Corporation, ASI Partners shall have the exclusive right, exercisable at any time, to designate for nomination for election by such remaining Directors an individual to fill any vacancy created by removal or death of or resignation of a Director designated for nomination by ASI Partners pursuant to the Amended and Restated Stockholders Agreement and Directors not affiliated with ASI Partners shall similarly have the exclusive right, exercisable at any time, to designate for nomination for election by such remaining Directors an individual to fill any vacancy created by removal or death of or resignation of a Director designated for election by such non-affiliated Directors pursuant to the Amended and Restated Stockholders Agreement. A Director elected by the Directors pursuant to this Section 2.14 to fill a vacancy or a newly created directorship shall hold office until his successor has been elected and qualified or until his earlier death, resignation or removal. [Section 223.] Section 2.15. Compensation. The amount, if any, which each Director shall be entitled to receive as compensation for his services as such shall be fixed from time to time by resolution of the Board of Directors. [Section 141(h).] Section 2.16. Reliance on Accounts and Reports, etc. A Director, or a member of any Committee designated by the Board of Directors shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or Committees designated by the Board of Directors, or by any other person as to the matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. [Section 141(e).] ARTICLE III EXECUTIVE COMMITTEE AND OTHER COMMITTEES Section 3.1. How Constituted. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more Committees, including an Executive Committee, each such Committee to consist of such 12 18 number of Directors as from time to time may be fixed by the Board of Directors. The Board of Directors may designate one or more Directors as alternate members of any such Committee, who may replace any absent or disqualified member or members at any meeting of such Committee. Thereafter, members (and alternate members, if any) of each such Committee may be designated at the annual meeting of the Board of Directors. Any such Committee may be abolished or re-designated from time to time by the Board of Directors. Each member (and each alternate member) of any such Committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy or otherwise) shall hold office until his successor shall have been designated or until he shall cease to be a Director, or until his earlier death, resignation or removal. [Section 141(c).] Section 3.2. Powers. During the intervals between the meetings of the Board of Directors, the Executive Committee, except as otherwise provided in this section, shall have and may exercise all the powers and authority of the Board of Directors in the management of the property, affairs and business of the Corporation, including the power to declare dividends and to authorize the issuance of stock. Each such other Committee, except as otherwise provided in this section, shall have and may exercise such powers of the Board of Directors as may be provided by resolution or resolutions of the Board of Directors. Neither the Executive Committee nor any such other Committee shall have the power or authority: (a) to amend the Restated Certificate of Incorporation (except that a Committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the Delaware General Corporation Law, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) to adopt an agreement of merger or consolidation, (c) to recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, 13 19 (d) to recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or (e) to amend the Amended By-Laws of the Corporation. The Executive Committee shall have, and any such other Committee may be granted by the Board of Directors, power to authorize the seal of the Corporation to be affixed to any or all papers which may require it. [Section 141(c).] Section 3.3. Proceedings. Each such Committee may fix its own rules of procedure and may meet at such place (within or without the State of Delaware), at such time and upon such notice, if any, as it shall determine from time to time. Each such Committee shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 3.4. Quorum and Manner of Acting. Except as may be otherwise provided in the resolution creating such Committee, at all meetings of any Committee the presence of members (or alternate members) constituting a majority of the total authorized membership of such Committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such Committee. Any action required or permitted to be taken at any meeting of any such Committee may be taken without a meeting, if all members of such Committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the Committee. The members of any such Committee shall act only as a Committee, and the individual members of such Committee shall have no power as such. [Section 141(c), (f).] Section 3.5. Action by Telephonic Communications. Members of any Committee designated by the Board of Directors may participate in a meeting of such Committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. [Section 141(i).] Section 3.6. Absent or Disqualified Members. In the absence or disqualification of a member of any Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member 14 20 of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. [Section 141(c).] Section 3.7. Resignations. Any member (and any alternate member) of any Committee may resign at any time by delivering a written notice of resignation, signed by such member, to the Chairman or the President. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.8. Removal. Any member (and any alternate member) of any Committee may be removed at any time, either for or without cause, by resolution adopted by a majority of the whole Board of Directors. Section 3.9. Vacancies. If any vacancy shall occur in any Committee, by reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. ARTICLE IV OFFICERS Section 4.1. Number. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, one or more Vice Presidents, a Secretary, a Controller, a General Auditor and a Treasurer, and it may, if it so determines, elect a Chairman of the Board of Directors from among its members. The Board of Directors also may elect a Vice Chairman and one or more Acting or Assistant Secretaries, Assistant Controllers and Assistant Treasurers in such numbers as the Board of Directors may determine. Any number of offices may be held by the same person, except that neither the Chairman of the Board of Directors nor the President shall also hold the office of Secretary. No officer, other than the Chairman or Vice Chairman, need be a Director of the Corporation. [Section 142(a), (b).] Section 4.2. Election. Unless otherwise determined by the Board of Directors, the officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board of Directors, and shall be elected to hold office until the next succeeding annual meeting of the Board of Directors. In the event of the failure to elect officers at such annual meeting, officers may be elected at any regular or special meeting of the 15 21 Board of Directors. Each officer shall hold office until his successor has been elected and qualified, or until his earlier death, resignation or removal. [Section 142(b).] Section 4.3. Salaries. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors. Section 4.4. Removal and Resignation; Vacancies. Any officer may be removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors or the President or the Secretary or Acting Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation, by death, resignation, removal or otherwise, shall be filled by the Board of Directors. [Section 142(b), (e).] Section 4.5. Authority and Duties of Officers. The officers of the Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these Amended By-Laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. [Section 142(a).] Section 4.6. The President. The President shall preside at all meetings of the stockholders and Directors at which he is present in the absence of the Chairman or Vice Chairman, shall be the chief executive officer and the chief operating officer of the Corporation, shall have general control and supervision of the policies and operations of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer and a chief operating officer of a corporation. He shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Acting or Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. He shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any employee or agent elected or ap- 16 22 pointed by the President or the Board of Directors. The President shall perform such other duties and have such other powers as the Board of Directors or the Chairman may from time to time prescribe. Section 4.7. Vice Presidents. Each Vice President shall perform such duties and exercise such powers as may be assigned to him from time to time by the President. In the absence of the President, the duties of the President shall be performed and his powers may be exercised by such Vice President as shall be designated by the President, or failing such designation, such duties shall be performed and such powers may be exercised by each Vice President in the order of their earliest election to that office, subject in any case to review and superseding action by the President. Section 4.8. The Secretary. The Secretary shall have the following powers and duties: (a) He shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose. (b) He shall cause all notices to be duly given in accordance with the provisions of these Amended By-Laws and as required by law. (c) Whenever any Committee shall be appointed pursuant to a resolution of the Board of Directors, he shall furnish a copy of such resolution to the members of such Committee. (d) He shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these Amended By-Laws, and when so affixed he may attest the same. (e) He shall properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the Restated Certificate of Incorporation or these Amended By-Laws. (f) He shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corpo- 17 23 ration of each class issued and outstanding, the names (arranged alphabetically or chronologically) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record. (g) He shall sign (unless the Treasurer, an Assistant Treasurer or Acting or Assistant Secretary shall have signed) certificates representing shares of the Corporation the issuance of which shall have been authorized by the Board of Directors. (h) He shall perform, in general, all duties incident to the office of Secretary and such other duties as may be specified in these Amended By-Laws or as may be assigned to him from time to time by the Board of Directors, or the President. Section 4.9. The Treasurer. The Treasurer shall have the following powers and duties: (a) He shall have charge and supervision over and be responsible for the moneys, securities, receipts and disbursements of the Corporation, and shall keep or cause to be kept full and accurate records of all receipts of the Corporation. (b) He shall cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected in accordance with Section 8.5 of these Amended By-Laws. (c) He shall cause the moneys of the Corporation to be disbursed by checks or drafts (signed as provided in Section 8.6 of these Amended By-Laws) upon the authorized depositaries of the Corporation and cause to be taken and preserved proper vouchers for all moneys disbursed. (d) He shall render to the Board of Directors or the President, whenever requested, a statement of the financial condition of the Corporation and of all his transactions as Treasurer, and render a full financial report at the annual meeting of the stockholders, if called upon to do so. (e) He shall be empowered from time to time to require from all officers or agents of the Corporation reports or statements giving such information as he may 18 24 desire with respect to any and all financial transactions of the Corporation. (f) He may sign (unless an Assistant Treasurer or the Secretary or an Acting or Assistant Secretary shall have signed) certificates representing stock of the Corporation the issuance of which shall have been authorized by the Board of Directors. (g) He shall perform, in general, all duties incident to the office of treasurer and such other duties as may be specified in these Amended By-Laws or as may be assigned to him from time to time by the Board of Directors, or the President. Section 4.10. Additional Officers. The Board of Directors may appoint such other officers and agents as it may deem appropriate, and such other officers and agents and the officers specified in Section 4.1 hereof not covered in Sections 4.6 through 4.9 hereof shall hold their offices for such terms and shall exercise such powers and perform such duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be authorized or prescribed by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer or agent appointed by him, for or without cause. [Section 142(a), (b).] Section 4.11. Security. The Board of Directors may require any officer, agent or employee of the Corporation to provide security for the faithful performance of his duties, in such amount and of such character as may be determined from time to time by the Board of Directors. [Section 142(c).] ARTICLE V CAPITAL STOCK Section 5.1. Certificates of Stock, Uncertificated Shares. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation, or rights associated therewith shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each 19 25 certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation, by the Chairman, President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Acting or Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Restated Certificate of Incorporation and these Amended By-Laws. [Section 158.] Section 5.2. Signatures; Facsimile. All of such signatures on the certificate may be a facsimile, engraved or printed, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. [Section 158.] Section 5.3. Lost, Stolen or Destroyed Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of any such new certificate. [Section 167.] Section 5.4. Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General Corporation Law of the 20 26 State of Delaware. Subject to the provisions of the Restated Certificate of Incorporation and these Amended By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. [Section 151(f).] Section 5.5. Record Date. In order to determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty nor less than ten days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled pursuant to these Amended By-Laws to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of 21 27 business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. [Section 213.] Section 5.6. Registered Stockholders. Prior to due surrender of a certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and transferee request the Corporation to do so. [Section 159.] Section 5.7. Transfer Agent and Registrar. The Board of Directors may appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. ARTICLE VI INDEMNIFICATION(2) Section 6.1. Nature of Indemnity. The Corporation shall indemnify any person who was or is a party or is - -------- 2. Section 145. 22 28 threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. The termination of any action, suit or proceeding by judgment, order settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 6.2. Successful Defense. To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in de- 23 29 fense of any action, suit or proceeding referred to in Section 6.1 hereof or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6.3. Determination That Indemnification is Proper. Any indemnification of a Director or officer of the Corporation under Section 6.1 hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the Director or officer is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Section 6.1 hereof. Any indemnification of an employee or agent of the Corporation under Section 6.1 hereof (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 6.1 hereof. Any such determination shall be made (1) by a majority vote of the Directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such Directors, or if such Directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 6.4. Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a Director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent such Director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. Section 6.5. Procedure for Indemnification of Directors and Officers. Any indemnification of a Director or officer of the Corporation under Sections 6.1 and 6.2, or advance of costs, charges and expenses to a Director or officer under Section 6.4 of this Article, shall be made promptly, and in any event within 30 days, upon the written request of the Director or officer. If a determination by the Corporation that the Director or officer is entitled to 24 30 indemnification pursuant to this Article is required, and the Corporation fails to respond within sixty days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article shall be enforceable by the Director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.4 of this Article where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 6.1 of this Article, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 6.1 of this Article, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6.6. Survival; Preservation of Other Rights. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each Director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the General Corporation Law of the State of Delaware are in effect. Any repeal or modification of these indemnification provisions shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such Director, officer, employee or agent. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which 25 31 those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.7. Insurance. The Corporation shall purchase and maintain insurance on behalf of any person who is or was or has agreed to become a Director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him or on his behalf in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article, provided that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the entire Board of Directors. Section 6.8. Severability. If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VII OFFICES Section 7.1. Registered Office. The registered office of the Corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. Section 7.2. Other Offices. The Corporation may maintain offices or places of business at such other locations within or without the State of Delaware as the Board 26 32 of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE VIII GENERAL PROVISIONS Section 8.1. Dividends. Subject to any applicable provisions of law and the Restated Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, shares of the Corporation's capital stock or rights to acquire the same. A member of the Board of Directors, or a member of any Committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or Committees of the Board of Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. [Sections 172, 173.] Section 8.2. Reserves. There may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may similarly modify or abolish any such reserve. Section 8.3. Execution of Instruments. The President, any Vice President, the Secretary or Acting Secretary or the Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors or the President may authorize any other officer or agent to enter into any con tract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. 27 33 Section 8.4. Corporate Indebtedness. No loan shall be contracted on behalf of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors or the President or any Vice President. Such authorization may be general or confined to specific instances. Loans so authorized may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors or the President or any Vice President shall authorize. When so authorized by the Board of Directors or the President or any Vice President, any part of or all the properties, including contract rights, assets, business or good will of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. Section 8.5. Deposits. Any funds of the Corporation may be deposited from time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors or the President, or by such officers or agents as may be authorized by the Board of Directors or the President or any Vice President to make such determination. Section 8.6. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors or the President or any Vice President from time to time may determine. Section 8.7. Sale, Transfer, etc. of Securities. To the extent authorized by the Board of Directors or by the President, any Vice President, the Secretary or Acting Secretary or the Treasurer or any other officers designated by the Board of Directors or the President may sell, transfer, endorse, and assign any shares of stock, bonds or other securities owned by or held in the name of the Corporation, and may make, execute and deliver in the name of the Corporation, under its corporate seal, any instruments that may be appropriate to effect any such sale, transfer, endorsement or assignment. Section 8.8. Voting as Stockholder. Unless otherwise determined by resolution of the Board of Direc- 28 34 tors, the President or any Vice President or the Secretary or Acting Secretary shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. Section 8.9. Fiscal Year. The fiscal year of the Corporation shall commence on the first day of January of each year and shall terminate in each case on December 31. Section 8.10. Seal. The seal of the Corporation shall be circular in form and shall contain the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware". The form of such seal shall be subject to alteration by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. Section 8.11. Books and Records; Inspection. Except to the extent otherwise required by law, the books and records of the Corporation shall be kept at such place or places within or without the State of Delaware as may be determined from time to time by the Board of Directors. ARTICLE IX AMENDMENT OF AMENDED BY-LAWS Section 9.1. Amendment. These Amended By-Laws may be amended, altered or repealed (a) by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or (b) at any regular or special meeting of the stockholders upon the affirmative vote of a majority of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the 29 35 election of Directors, provided, however, that any amendment, alteration or repeal of Article I, sections 1.2, 1.10 and 1.13 or Article VI as it pertains to Directors and officers, shall require the affirmative vote of 65% of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of Directors. In the case of such special meeting only, notice of such amendment, alteration or repeal must be contained in the notice or waiver of notice of such meeting. [Section 109(a).] ARTICLE X CONSTRUCTION Section 10.1. Construction. In the event of any conflict between the provisions of these Amended By-Laws as in effect from time to time and the provisions of the Restated Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Restated Certificate of Incorporation shall be controlling. 30 36 AMERICAN STANDARD COMPANY, INC. AMENDMENT OF BY-LAWS RESOLVED, that, pursuant to Section 109(a) of the Delaware General Corporation Law and Section 9.1(a) of the Amended By-laws of the Corporation, the Board of Directors declares it advisable that Section 2.2 of the Amended By-laws of the Corporation be amended to read and be as follows: "Section 2.2. Number and Term of Office. The number of Directors constituting the entire Board of Directors shall be nine (9), which number may be modified from time to time by resolution of the Board of Directors, but in no event shall the number of Directors be less than three (3) or greater than twenty-one (21). Each Director (whenever elected)shall hold office until his successor has been duly elected and qualified, or until his earlier death, resignation or removal. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain or attain a number of Directors in each class as nearly equal as reasonably possible, but no decrease in the number of Directors may shorten the term of any incumbent Director." [Language added by amendment in italics.] EX-10.VIII 3 CORPORATE OFFICER SEVERANCE PLAN 1 EXHIBIT (10)(viii) AMERICAN STANDARD COMPANIES INC. CORPORATE OFFICER SEVERANCE PLAN (As Amended and Restated as of December 5, 1996) Section I. Purpose. The purpose of the Plan is to provide elected officers of the Company with severance benefits should their employment with the Company terminate under the circumstances described below. The Plan supersedes any and all previous severance pay practices or policies of the Company, whether written or unwritten. Section II. Definitions. A. Board - means the Board of Directors of the Company. B. Cause - means a Participant's (i) willful and continued failure substantially to perform his duties with the Company or any Subsidiary (other than any such failure resulting from incapacity due to reasonably documented physical or mental illness), after a demand for substantial performance is delivered to such Participant by the Chairman of the Board or officer of equivalent authority which specifically identifies the manner in which it is believed that such Participant has not substantially performed his duties, or (ii) the willful engaging by such Participant in illegal misconduct materially and demonstrably injurious to the Company or any Subsidiary or to the trustworthiness or effectiveness of the Participant in the performance of his duties. For purposes hereof, no act, or failure to act, on such Participant's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or a Subsidiary. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by such Participant in good faith and in the best interest of the Company or such Subsidiary. C. Change of Control - means the occurrence of any of the following events: (i) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then-outstanding securities (a "15% Beneficial Owner"); provided, however, that (a) the term "15% Beneficial Owner" shall not include (1) Kelso ASI Partners, L.P. and Kelso American Standard Partners, -1- 2 L.P. ("Kelso") and their affiliates or their immediate transferees provided that any such transferee holding 15% or more of the combined voting power of the Company's outstanding securities following any such transfer does not following or concurrently with such transfer acquire any additional shares of such securities except from Kelso or any of their affiliates or (2) any Beneficial Owner who has crossed such 15% threshold solely as a result of an acquisition of securities directly from the Company, or solely as a result of an acquisition by the Company of Company securities, until such time thereafter as such person acquires additional voting securities other than directly from the Company 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 Company 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 the Company'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 Board together with those individuals who first become directors during such period (other than by reason of an agreement with the Company or the Board in settlement of a proxy contest for the election of directors) and whose election or nomination for election to the 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 Board; (iii) the shareholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, 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 the Company 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 the Company outstanding immediately prior to such transaction, with the relative voting power of -2- 3 each such continuing holder compared to the voting power of each other continuing holder not substantially altered as a result of the transaction; provided 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 the Company or of such surviving entity or of any subsidiary of the Company or such surviving entity and (b) voting securities beneficially owned by such persons who receive them other than as holders of voting securities of the Company 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 the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition of all or substantially all the assets of the Company 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 Plan Administrator 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 and of the Plan Administrator determines 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 the Company: (A) any person who has entered into a binding agreement with the Company, 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 the Company (a "Standstill Agreement"); (B) any employee benefit plan, or trustee or other fiduciary thereof, maintained by the Company or any Subsidiary; (C) any Subsidiary; or (D) the Company. (2) Unless a majority of the Continuing Directors and of the Plan -3- 4 Administrator determines 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 the Company of or by another entity (whether by the merger or consolidation, the acquisition of stock or assets, or otherwise) in exchange, in whole or in part, for securities of the Company, provided that, immediately following such acquisition, the Continuing Directors constitute a majority of the 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 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 the Company. 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. -4- 5 D. Company - means American Standard Companies Inc., a Delaware corporation, and any successor thereto. E. Disability - means a Participant's inability, due to reasonably documented physical or mental illness, for more than six months to perform his duties with the Company or a Subsidiary on a full time basis if, within 30 days after written notice of termination has been given to such Participant, he shall not have returned to the full time performance of his duties. F. Effective Date - means April 27, 1991. G. Good Reason - means any of the following: (i) an adverse change in a Participant's status or position(s) as an executive of the Company or of a subsidiary, any adverse change in a Participant's status or position as an executive of the Company or of a Subsidiary as a result of a material diminution in his duties or responsibilities or a relocation of a Participant's principal place of employment to a location which is at least 50 miles further from such Participant's principal residence than his or her current location or the assignment to him of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of him from or any failure to reappoint or reelect him to such position(s) (except in connection with the termination of his employment for Cause, Disability or retirement or as a result of his death or by him other than for Good Reason); (ii) a reduction by the Company or such subsidiary in such Participant's base salary; (iii) the taking of any action by the Company or a Subsidiary (including the elimination of a plan without providing substitutes therefor or the reduction of his awards thereunder) that would substantially diminish the aggregate projected value of such Participant's awards under the Company's or such Subsidiary's bonus and benefit plans in which he was participating at the time of the taking of such action; (iv) the taking of any action by the Company or such Subsidiary that would substantially diminish the aggregate value of the benefits provided him under the Company's or such subsidiary's medical, health, accident, disability, life insurance, thrift and retirement plans in which he was participating at the time of the taking of such action; or (v) any purported termination by the Company or such Subsidiary of his employment that is not effected for Cause. -5- 6 Notwithstanding the foregoing, a termination for Good Reason shall not have occurred (a) if the Participant consented in writing to the event giving rise to the "Good Reason", or (b) with regard to the occurrence of the events described in paragraphs 4(ii), (iii) and (iv) above prior to a Change of Control, if such reductions or actions are proportionate to the reductions or actions applicable to other employees in similar positions pursuant to a cost savings plan. H. Participant - means each elected officer of the Company. I. Plan - means the American Standard Companies Inc. Corporate Officer Severance Plan. J. Plan Administrator - means the Management Development and Nominating Committee of the Board (the "MDC") or any committee or individual designated by the MDC to perform some or all of its administrative functions hereunder. K. Subsidiary - means any corporation or partnership in which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation or of the capital interest or profits interest of such partnership. Section III. Eligibility. Each Participant shall be eligible to receive the benefits provided under the Plan in the event of such Participant's voluntary termination for Good Reason or involuntary termination by the Company other than a termination for Cause. No other individual shall be eligible for benefits under the Plan and the payment of benefits hereunder shall not be affected by the payment of retirement or other benefits under any other Company plan. Section IV. Severance Payments. A Participant who satisfies the eligibility requirements of Section III hereof shall receive severance payments equal to the sum of the following: A. an amount equal to two times (or in the case of the Chief Executive Officer of the Company three times) the Participant's annual base salary in effect on the date the termination occurs; plus B. the amount of the Participant's annual incentive plan target award in effect for the calendar year in which the termination occurs determined without regard to whether the -6- 7 applicable targets are obtained, multiplied by a fraction, the numerator of which is the number of days in the year of termination that the Participant was an employee of the Company, and the denominator of which is 365; plus C. the amount (or in the case of the Chief Executive Officer, two times the amount) of the Participant's annual incentive plan target award in effect for the year in which the termination occurs determined without regard to whether the applicable targets are obtained. Section V. Certain Additional Payments by the Company. (A) Anything in this Plan to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change of Control (or any of its affiliated entities) to or for the benefit of a Participant (whether pursuant to the terms of this Plan or otherwise, but determined without regard to any additional payments required under this Section V) (the "Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by a Participant with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay to such Participant (or to the Internal Revenue Service on behalf of Participant) an additional payment (a "Gross-Up Payment") in an amount such that after payment by such Participant of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, such Participant retains (or has had paid to the Internal Revenue Service on his behalf) an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in such Participant's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, a Participant shall be deemed (i) to pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, (ii) to pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) to have otherwise allowable deductions for federal income tax purposes at least equal to the Gross-Up Payment. (B) Subject to the provisions of Section V(a), all determinations required to be made -7- 8 under this Section V, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change of Control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Participant within fifteen (15) business days of the receipt of notice from the Company or Participant that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Participant may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement reasonably requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this Section V with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the Participant with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Participant's applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and Participant. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-Up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that the Participant thereafter is required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of the Participant. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Participant for his Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by the Participant (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. -8- 9 Section VI. Payment of Benefits. Unless the Plan Administrator determines otherwise, all severance payments hereunder shall be paid in a single lump sum at, or as soon as practicable after, the Participant's termination of employment. Section VII. Continuation of Welfare Plan Coverage. In the event of a Participant's voluntary termination for Good Reason or his or her involuntary termination by the Company other than a termination for Cause, such Participant will be entitled, upon payment of any premiums or co-payments theretofore required for such coverage, to continue all life, accident, health and disability coverage, on the same basis as in effect on the date he terminated employment, for a period of 24 months from the date of termination (36 months in the case of the Chief Executive Officer), provided that, to the extent permitted by law, such coverage may be terminated at the discretion of the Plan Administrator in the event the Participant obtains at least equal alternate coverage. Section VIII. Financial Planning Assistance. The Company will reimburse a Participant for all bills which the Plan Administrator determines are reasonably related to financial planning assistance and tax preparation, provided that such bills are incurred and evidence of payment by the Participant is submitted to the Plan Administrator within one year after the date of termination. Section IX. Reservation of Right to Amend and Terminate. The Company reserves the right, whether in an individual case or more generally, by a majority of the Continuing Directors to amend, reduce or eliminate the Plan, in whole or in part, at any time and from time to time without notice, provided that no amendment to this Plan shall be made for two years following the occurrence of a Change of Control if such amendment would reduce the benefits hereunder and no such amendment shall be effective if a Change of Control occurs within six months following such amendment. -9- 10 Section X. Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any payments, benefits, coverage levels or participation rates under any incentive compensation plan, any pension, retirement, profit sharing, group insurance, or other benefit plan of the Company; provided that, a Participant shall not be entitled to receive the severance payment set forth in Section IV.B. of this Plan if such Participant becomes entitled to receive a comparable payment pursuant to Article IV of the Company's Annual Incentive Plan by reason of a Change of Control. Section XI. Administration. Subject to Section V of the Plan, the Plan Administrator shall have full power and authority to interpret and carry out the terms of the Plan, and to exercise discretion where necessary or appropriate in the interpretation and administration of the Plan, and prior to a Change of Control all decisions by the Plan Administrator shall be final and binding on all affected parties. Section XII. Expenses. All expenses of administering the Plan shall be borne by the Company. Section XIII. Withholding. The Company may withhold from any amounts payable hereunder such Federal, state or local taxes as may be required to be withheld pursuant to any applicable law or regulation. Section XIV. Governing Law. This Plan and all rights and obligations hereunder shall be construed in accordance with and governed by the laws of the State of Delaware, without reference to the principles of conflict of laws. -10- EX-10.XII 4 STOCK INCENTIVE PLAN 1 EXHIBIT (10)(xii) AMERICAN STANDARD COMPANIES INC. STOCK INCENTIVE PLAN (As Amended and Restated as of December 5, 1996) SECTION 1. PURPOSE The purpose of the Plan is to foster and promote the long-term financial success of the Company and materially increase shareholder value by (a) motivating superior performance by means of performance-related incentives, (b) encouraging and providing for the acquisition of an ownership interest in the Company by Employees, and (c) enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. SECTION 2. DEFINITIONS 2.1 Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Act" means the Securities Exchange Act of 1934, as amended. (b) "Adjustment Event" shall mean any stock dividend, stock split or share combination of, or extraordinary cash dividend on, the Common Stock or recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below Fair Market Value, or other similar event affecting the Common Stock of the Company. (c) "Board" means the Board of Directors of the Company. (d) "Cause" means a Participant's (i) willful and continued failure substantially to perform his duties with the Company or any Subsidiary (other than any such failure resulting from incapacity due to reasonably documented physical or mental illness), after a demand for substantial performance is delivered to such Participant by 2 the Chairman of the Board or any executive officer which specifically identifies the manner in which it is believed that such Participant has not substantially performed his duties, or (ii) the willful engaging by such Participant in illegal misconduct materially and demonstrably injurious to the Company or any Subsidiary or to the trustworthiness or effectiveness of such Participant in the performance of his duties. For purposes hereof, no act, or failure to act, on such Participant's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or a Subsidiary. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by such Participant in good faith and in the best interest of the Company or such Subsidiary. (e) "Change of Control" shall mean the occurrence of any of the following events: (i) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then-outstanding securities (a "15% Beneficial Owner"); provided, however, that (a) the term "15% Beneficial Owner" shall not include (1) Kelso ASI Partners, L.P. and Kelso American Standard Partners, L.P. ("Kelso") and their affiliates or their immediate transferees provided that any such transferee holding 15% or more of the combined voting power of the Company's outstanding securities following any such transfer does not following or concurrently with such transfer acquire any additional shares of such securities except from Kelso or any of their affiliates or (2) any Beneficial Owner who has crossed such 15% threshold solely as a result of an acquisition of securities directly from the Company, or solely as a result of an acquisition by the Company of Company securities, until such time thereafter as such person acquires additional voting securities other than directly from the Company 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 Company 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 the Company's then-outstanding securities; (ii) during any period of two consecutive years beginning after -2- 3 December 1, 1996, individuals who at the beginning of such period constitute the Board together with those individuals who first become directors during such period (other than by reason of an agreement with the Company or the Board in settlement of a proxy contest for the election of directors) and whose election or nomination for election to the 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 Board; (iii) the shareholders of the Company approve a merger, consolidation, recapitalization or reorganization of the Company, or a reverse stock split of any class of voting securities of the Company, 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 the Company 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 the Company 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 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 the Company or of such surviving entity or of any subsidiary of the Company or such surviving entity and (b) voting securities beneficially owned by such persons who receive them other than as holders of voting securities of the Company 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 the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition of all or substantially all the assets of the Company 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- -3- 4 paragraph (iii) above are satisfied; or (v) any other event which the 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 and of the Committee 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 the Company: (A) any person who has entered into a binding agreement with the Company, 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 the Company (a "Standstill Agreement"); (B) any employee benefit plan, or trustee or other fiduciary thereof, maintained by the Company or any Subsidiary; (C) any Subsidiary; or (D) the Company. (2) Unless a majority of the Continuing Directors and of the Committee 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 the Company of or by another entity (whether by the merger or consolidation, the acquisition of stock or assets, or otherwise) in exchange, in whole or in part, for securities of the Company, provided that, immediately following such acquisition, the Continuing Directors constitute a majority of the 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 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 the Company. -4- 5 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. f) "Change of Control Settlement Value" shall mean, with respect to a share of Common Stock, the excess of the Change of Control Stock Value over the option price of the Option covering such share of Common Stock, provided that, with respect to any Option which is an Incentive Stock Option immediately prior to the election to receive the Change of Control Settlement Value, the Change of Control Settlement Value shall not exceed the maximum amount permitted for such Option to continue to qualify as an Incentive Stock Option. (g) "Change of Control Stock Value" shall mean the value of a share of Common Stock determined as follows: (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 the Company 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 -5- 6 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 the Company 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. (h) "Code" means the Internal Revenue Code of 1986, as amended. (i) "Committee" means the Management Development and Nominating Committee of the Board (or such other committee of the Board that the Board shall designate), which shall consist of two or more members, each of whom shall be "disinterested persons" within the meaning of Rule 16b-3, as promulgated under the Act and serving at the pleasure of the Board. (j) "Common Stock" means the common stock of the Company, par value $0.01 per share. (k) "Company" means American Standard Companies Inc., a Delaware corporation, and any successor thereto. (l) "Disability" means a Participant's inability, due to reasonably documented physical or mental illness, for more than six months to perform his duties with the Company or a Subsidiary on a full time basis if, within 30 days after written notice of termination has been given to such Participant, he shall not have returned to the full time performance of his duties. (m) "Dividend Equivalents" means an amount equal to the cash dividends paid by the Company upon one share of Common Stock for each Restricted Unit awarded to a Participant in accordance with Section 7 of the Plan. (n) "Employee" means any officer or other key employee of the Company or any of its Subsidiaries, including any employee of a minority-owned joint venture. -6- 7 (o) "Fair Market Value" means, on any date, the average of the highest and lowest sales price reported for such day on a national exchange or the average of the highest and lowest bid and asked prices on such date as reported on a nationally recognized system of price quotation. In the event that there are no Common Stock transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Stock transactions were so reported. (p) "Incentive Award" means the award of an Option, a Stock Appreciation Right, a Restricted Unit, or Restricted Stock under the Plan and shall also include an award of Common Stock or Restricted Units made in conjunction with other incentive programs established by the Company. (q) "Kelso" means Kelso ASI Partners, L.P. and Kelso American Standard Partners, L.P. (r) "Option" means the right to purchase Common Stock at a stated price for a specified period of time. For purposes of the Plan, an Option may be either (i) an "Incentive Stock Option" with the meaning of Section 222 of the Code or (ii) an Option which is not an Incentive Stock Option (a "Non-Qualified Stock Option"). (s) "Participant" means any Employee designated by the Committee to receive an Incentive Award under the Plan. (t) "Plan" means the American Standard Companies Inc. Stock Incentive Plan, as set forth herein and as the same may be amended from time to time. (u) "Public Offering" means the Company's offering of Common Stock to the general public through a registration statement filed with the Securities and Exchange Commission that covers (together with prior effective registrations) not less than 15% of the shares of Common Stock outstanding at the closing of such offering on a fully diluted basis. (v) "Restricted Period" means the period during which Restricted Units or shares of Restricted Stock are subject to forfeiture or restrictions on transfer (if applicable) pursuant to Section 7 of the Plan. (w) "Restricted Stock" means Common Stock awarded to a Participant pursuant to the Plan which is subject to forfeiture and restrictions on transferability in accordance with Section 7 of the Plan. (x) "Restricted Unit" means a Participant's right to receive pursuant to the -7- 8 Plan one share of Common Stock at the end of a specified period of time, which right is subject to forfeiture in accordance with Section 7 of the Plan. (y) "Retirement" means termination of a Participant's employment on or after the date the Participant attains age 55 with 10 years of service. (z) "Stock Appreciation Right" means the right to receive a payment from the Company, in cash or Common Stock, in an amount determined under Section 6.12 of the Plan. (aa) "Subsidiary" means any corporation or partnership in which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation or of the capital interest or profits interest of such partnership. 2.2. Gender and Number. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. SECTION 3. ELIGIBILITY AND PARTICIPATION Participants in the Plan shall be those Employees selected by the Committee to participate in the Plan. SECTION 4. ADMINISTRATION 4.1. Power to Grant and Establish Terms of Awards. The Committee shall have the authority, subject to the terms of the Plan, to determine the Employees to whom Incentive Awards shall be granted and the terms and conditions of any and all Incentive Awards, including but not limited to the number of shares of Common Stock to be covered by each Incentive Award, the time or times at which Incentive Awards shall be granted, and the terms and provisions of the instruments by which Options shall be evidenced; to designate Options as Incentive Stock Options or Non-Qualified Stock Options; and to determine the period of time during which restrictions on Restricted Stock or Restricted Units shall remain in -8- 9 effect. The proper officers of the Company may suggest to the Committee the Participants who should receive Incentive Awards. The terms and conditions of each Incentive Award shall be determined by the Committee at the time of grant, and such terms and conditions shall not be subsequently changed in a manner which would be adverse to the Participant without the consent of the Participant to whom such Incentive Award has been granted. The Committee may establish different terms and conditions for different Participants receiving Incentive Awards and for the same Participant for each Incentive Award such Participant may receive, whether or not granted at different times. The grant of any Incentive Award to any Employee shall neither entitle such Employee to, nor disqualify him from, the grant of any other Incentive Awards. Notwithstanding anything else contained in the Plan to the contrary, the Committee may delegate, subject to such terms and conditions as it shall determine, to any officer of the Company or to a committee of officers of the Company the authority to grant Incentive Awards (and to make any and all determinations related thereto) to Participants who are not subject to the reporting requirements of Section 16(a) of the Act. 4.2. Substitute Options. The Committee shall have the right, subject to the consent of Participants to whom Options have been granted, to grant in substitution for outstanding Options, replacement Options which may contain terms more favorable to the Participant than the Options they replace, including, without limitation, a lower exercise price (subject to Section 6.2), and to cancel replaced Options. 4.3. Administration. The Committee shall be responsible for the administration of the Plan. Any Incentive Award granted by the Committee may be subject to such conditions, not inconsistent with the terms of the Plan, as the Committee shall determine. The Committee, by majority action thereof, is authorized to prescribe, amend and rescind rules and regulations relating to the Plan, to provide for conditions deemed necessary or advisable to protect the interests of the Company to interpret the Plan and to make all other determinations necessary or advisable for the administration and interpretation of the Plan to carry out its provisions and purposes. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final, binding and conclusive for all purposes and upon all persons. The Committee may consult with legal counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. -9- 10 SECTION 5. STOCK SUBJECT TO PLAN 5.1. Number. Subject to the provisions of Section 5.3, the number of shares of Common Stock subject to Incentive Awards under the Plan may not exceed 10% of the number of shares of Common Stock outstanding as of the close of the Public Offering. The shares to be delivered under the Plan may consist, in whole or in part, of Common Stock held in treasury or authorized but unissued Common Stock, not reserved for any other purpose. 5.2. Canceled, Terminated, or Forfeited Awards. Any shares of Common Stock subject to an Incentive Award which for any reason expires, or is canceled, terminated or otherwise settled without the issuance of any Common Stock shall again be available under the Plan. 5.3. Adjustment in Capitalization. The aggregate number of shares of Common Stock available for Incentive Awards under Section 5.1 or subject to outstanding Incentive Awards and the respective prices and/or vesting criteria applicable to outstanding Incentive Awards shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, an Adjustment Event. To the extent deemed equitable and appropriate by the Committee, subject to any required action by stockholders, in any merger, consolidation, reorganization, liquidation, dissolution, or other similar transaction, any Incentive Award granted under the Plan shall pertain to the securities and other property to which a holder of the number of shares of Common Stock covered by the Incentive Award would have been entitled to receive in connection with such event. Any shares of stock (whether Common Stock, shares of stock into which shares of Common Stock are converted or for which shares of Common Stock are exchanged or shares of stock distributed with respect to Common Stock) or cash or other property received with respect to any award of Restricted Stock or Restricted Units granted under the Plan as a result of any Adjustment Event, any distribution of property or any merger, consolidation, reorganization, liquidation, dissolution or other similar transaction shall, except as provided in Section 7.4 or as otherwise provided by the Committee at or after the date an award of Restricted Stock or Restricted Units is made by the Committee, be subject to the same terms and conditions, including restrictions on transfer, as are applicable to such shares of Restricted Stock or Restricted Units and any stock certificate(s) representing or evidencing any shares of stock so received shall be legended in substantially the same manner as provided in Section 7.5 hereof. -10- 11 SECTION 6. STOCK OPTIONS 6.1. Grant of Options. Options may be granted to Participants at such time or times as shall be determined by the Committee. Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options, except that no Incentive Stock Option may be granted to any Employee of a Subsidiary which is not a corporation. The date of grant of an Option under the Plan will be the date on which the Option is awarded by the Committee or, if so determined by the Committee, the date on which occurs any event the occurrence of which is an express condition precedent to the grant of the Option. The Committee shall determine the number of Options, if any, to be granted to the Participant, provided that, in no event shall the number of shares of Common Stock subject to any Options or related Stock Appreciation Rights granted to any Participant during any 12 month period exceed 1,000,000 shares as such number may be adjusted pursuant to Section 5.3. Each Option shall be evidenced by an Option agreement that shall specify the type of Option granted, the exercise price, the duration of the Option, the number of shares of Common Stock to which the Option pertains, and such other terms and conditions not inconsistent with the Plan as the Committee shall determine. 6.2. Option Price. Non-Qualified Stock Options and Incentive Stock Options granted pursuant to the Plan shall have an exercise price which is not less than the Fair Market Value on the date the Option is granted. 6.3. Exercise of Options. Options awarded to a Participant under the Plan shall be exercisable at such times and shall be subject to such restrictions and conditions including the performance of a minimum period of service or the satisfaction of performance goals, as the Committee may impose either at or after the time of grant of such Options, subject to the Committee's right to accelerate the exercisability of such Option in its discretion. Notwithstanding the foregoing, unless otherwise determined by the Committee, Options shall become exercisable in three equal installments on each of the first three anniversaries of the date of grant. Except as may be provided in any provision approved by the Committee pursuant to this Section 6.3, after becoming exercisable each installment shall remain exercisable until expiration, termination or cancellation of the Option. An Option may be exercised from time to time, in whole or in part, up to the total number of shares of Common -11- 12 Stock with respect to which it is then exercisable. Notwithstanding the foregoing, no Option shall be exercisable for more than 10 years after the date on which it is granted. 6.4. Payment. The Committee shall establish procedures governing the exercise of Options, which shall require that written notice of exercise be given and that the Option price be paid in full at the time of exercise (i) in cash or cash equivalents, (ii) in the discretion of the Committee, in shares of Common Stock which have been owned by the Participant for at least six months' (or such greater or lesser period as the Committee shall determine) having a Fair Market Value on the date of exercise equal to such Option price or in a combination of cash and Common Stock or (iii) in accordance with such procedures or in such other form as the Committee shall from time to time determine. As soon as practicable after receipt of a written exercise notice and payment of the exercise price in accordance with this Section 6.4, the Company shall deliver to the Participant a certificate or certificates representing the acquired shares of Common Stock. 6.5. Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of any Participant affected thereby, to cause any Incentive Stock Option previously granted to fail to qualify for the Federal income tax treatment afforded under Section 421 of the Code. 6.6. Settlement. At the time a Participant exercises an Option in lieu of accepting payment of the exercise price of the Option and delivering the number of shares of Common Stock for which the Option is being exercised, the Committee may direct that the Company either (i) pay the Participant a cash amount, or (ii) issue a lesser number of shares of Common Stock having a Fair Market Value on the date of exercise, equal to the amount, if any, by which the aggregate Fair Market Value of the shares of Common Stock as to which the Option is being exercised exceeds the aggregate exercise price for such shares, based on such terms and conditions as the Committee shall establish. 6.7. Termination of Employment Due to Retirement. Unless otherwise determined by the Committee at the time of grant, in the event a Participant's employment with -12- 13 the Company or a Subsidiary terminates by reason of Retirement, any Options granted to such Participant which are exercisable at the date of such Participant's termination of employment may be exercised at any time prior to three (3) years following the Participant's termination of employment or the expiration of the term of the Options, whichever period is shorter. 6.8. Termination of Employment Due to Death or Disability. Unless otherwise determined by the Committee at the time of grant, in the event a Participant's employment with the Company or a Subsidiary terminates by reason of death or Disability, any Options granted to such Participant which are exercisable at the date of such Participant's termination of employment may be exercised by the Participant or the Participant's designated beneficiary, and if none is named, in accordance with Section 10.2, at any time prior to one (1) year following the Participant's termination of employment or the expiration date of the term of the Options, whichever period is shorter. 6.9. Termination of Employment for Cause. Unless otherwise determined by the Committee at the time of grant, in the event a Participant's employment with the Company or a Subsidiary is terminated for Cause, all Options granted to such Participant which are then outstanding (whether or not exercisable prior to the date of such termination) shall be forfeited. 6.10. Termination of Employment for Any Other Reason. Unless otherwise determined by the Committee at or after the time of grant, in the event a Participant's employment with the Company or a Subsidiary terminates for any reason other than one described in Section 6.7, 6.8 or 6.9, any Options granted to such Participant which are exercisable at the date of such Participant's termination of employment shall be exercisable at any time prior to 90 days following such Participant's termination of employment or the expiration of the term of such Options, whichever period is shorter. 6.11. Committee Discretion. Notwithstanding anything else contained in this Section 6 to the contrary, the Committee may permit all or any portion of any Options to be exercised following a Participant's termination of employment for any reason on such terms and subject to such conditions as the Committee shall determine for a period up to and including, but not beyond, the expiration of the term of such Options. -13- 14 6.12. Stock Appreciation Rights. The Committee may, in its discretion, include in any Option, either at the time the Option is granted or thereafter at any time prior to the exercise, termination or expiration of the Option, a right of the Participant to elect, in lieu of purchasing any shares of Common Stock in respect of which such Option is exercisable at any time, to relinquish his Option with respect to any and all of such shares of Common Stock and to receive from the Company a payment, in cash or Common Stock, equal to the amount by which (i) the product of (x) the Fair Market Value of a share of Common Stock on the date of such election multiplied by (y) the number of shares of Common Stock as to which the Participant shall have made such election exceeds (ii) the total exercise price for that number of shares of Common Stock under the terms of such Option. If the Participant shall exercise Stock Appreciation Rights appertaining to any Option, such Option shall thereafter remain exercisable, according to its term, only with respect to the number of shares of Common Stock as to which it would otherwise be exercisable less the number of shares of Common Stock with respect to which such Stock Appreciation Rights have been exercised. Each Stock Appreciation Right shall be subject to the same terms and conditions as the related Option and shall be exercisable only to the extent the related Option is exercisable. SECTION 7. RESTRICTED STOCK AND RESTRICTED UNITS 7.1. Grant of Restricted Stock and Restricted Units. Any award made hereunder of Restricted Stock or Restricted Units shall be subject to the terms and conditions of the Plan and to any other terms and conditions not inconsistent with the Plan (including, but not limited to, requiring the Participant to pay the Company an amount equal to the par value per share for each share of Restricted Stock awarded) as shall be prescribed by the Committee in its sole discretion. As determined by the Committee, with respect to an award of Restricted Stock, the Company shall either (i) transfer or issue to each Participant to whom an award of Restricted Stock has been made the number of shares of Restricted Stock specified by the Committee or (ii) hold such shares of Restricted Stock for the benefit of the Participant for the Restricted Period. In the case of an award of Restricted Units, no shares of Common Stock shall be issued at the time an award is made, and the Company shall not be required to set aside a fund for the payment of such award. 7.2. Restrictions on Transferability. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered by the -14- 15 Participant during the Restricted Period, except as hereinafter provided. Notwithstanding the foregoing, the Committee may permit (on such terms and conditions as it shall establish) shares of Restricted Stock to be transferred during the Restricted Period by the Participant to a member of the Participant's immediate family or to a trust or similar vehicle for the benefit of such immediate family members, provided that any shares of Restricted Stock so transferred shall remain subject to the provisions of this Section 7. 7.3. Rights as a Shareholder. Except for the restrictions set forth herein and unless otherwise determined by the Committee, the Participant shall have all the rights of a shareholder with respect to such shares of Restricted Stock, including but not limited to, the right to vote and the right to receive dividends. A Participant shall not have any right, in respect of Restricted Units awarded pursuant to the Plan, to vote on any matter submitted to the Company's stockholders until such time as the shares of Common Stock attributable to such Restricted Units have been issued. At the discretion of the Committee, a Participant's Restricted Unit account may be credited with Dividend Equivalents during the Restricted Period. 7.4. Restricted Period. Unless the Committee shall otherwise determine at or after the date an award of Restricted Stock or Restricted Units is made to the Participant by the Committee, the Restricted Period shall commence upon the date of grant and shall lapse with respect to the shares of Restricted Stock or Restricted Units on the third anniversary of the date of grant, unless sooner terminated as otherwise provided herein. Without limiting the generality of the foregoing, the Committee may provide for termination of the Restricted Period upon the achievement by the Participant of performance goals specified by the Committee at the date of grant. The determination of whether the Participant has achieved such performance goals shall be made by the Committee in its sole discretion. 7.5. Legend. Each certificate issued to a Participant in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant and Shall bear the following (or similar) legend: "The shares of stock represented by this certificate are subject to the terms and conditions contained in the American Standard Companies Inc. Stock Incentive Plan and may not be sold, pledged, transferred, assigned, hypothecated or otherwise encumbered in an manner (except as provided in Section 7.2 of the Plan) until ____________________." -15- 16 7.6. Death, Disability or Retirement. Unless the Committee shall otherwise determine at the date of grant, if a Participant ceases to be employed by the Company or any Subsidiary by reason of death, Disability or Retirement, the Restricted Period will lapse as to a pro rated portion of the shares of Restricted Stock and Restricted Units transferred or issued to such Participant under the Plan based on the number of days the Participant actually worked since the date the shares of Restricted Stock or Restricted Units were granted (or in the case of an award which becomes vested in installments, since the date, if any, on which the last installment of such Restricted Stock or Restricted Units became vested); provided that, in the case of an award with respect to which the restrictions will lapse, if at all, based on the attainment of performance goals or targets, such vesting shall be deferred until the end of the applicable performance period and be based on that number of shares of Restricted Stock or Restricted Units, if any, that would have been earned based on the attainment or partial attainment of such performance goals or targets. Any shares of Restricted Stock or Restricted Units as to which the Restricted Period has not lapsed at the date of a Participant's termination of employment by reason of death, Disability or Retirement (or which do not become vested after such date under the preceding sentence) shall revert back to the Company upon such Participant's termination of employment (or, if applicable, such deferred vesting date). 7.7. Termination of Employment. Unless the Committee shall otherwise determine at or after the date of grant, if a Participant ceases to be employed by the Company or any Subsidiary for any reason other than those specified in Section 7.6 at any time prior to the date when the Restricted Period lapses, all shares of Restricted Stock held by the Participant shall revert back to the Company and all Restricted Units and any Dividend Equivalents credited to such Participant shall be forfeited upon the Participant's termination of employment. 7.8. Issuance of New Certificates; Settlement of Restricted Units. Upon the lapse of the Restricted Period with respect to any shares of Restricted Stock, such shares shall no longer be subject to the restrictions imposed under Section 7.2 and the Company shall issue or have issued new share certificates without the legend described in Section 7.5 in exchange for those previously issued. Upon the lapse of the Restricted Period with respect to any Restricted Units, the Company shall deliver to the Participant, or the Participant's beneficiary or estate, as provided in Section 10.2, one share of Common Stock for each Restricted Unit as to which restrictions have lapsed and any Dividend Equivalents credited with respect to such Restricted Units and any interest thereon. The Committee may, in its sole discretion, elect to -16- 17 pay cash or part cash and part Common Stock in lieu of delivering only Common Stock for Restricted Units. If a cash payment is made in lieu of delivering Common Stock, the amount of such cash payment for each share of Common Stock to which a Participant is entitled shall be equal to the Fair Market Value of the Common Stock on the date on which the Restricted Period lapsed with respect to the related Restricted Unit. 7.9. Performance Related Awards. Notwithstanding anything else contained in the Plan to the contrary, unless the Committee otherwise determines at the time of grant, any award of Restricted Shares or Restricted Units, or an award of Common Stock or Restricted Units made in conjunction with other incentive plans established by the Company, to an officer of the Company or a Subsidiary who is subject to the reporting requirements of Section 16(a) of the Exchange Act, other than an award which will vest solely on the basis of the passage of time, shall become vested, if at all, upon the determination by the Committee that performance objectives established by the Committee have been attained, in whole or in part (a "Performance Award"), to the extent required to ensure that the grant of such awards are deductible by the Company or such Subsidiary pursuant to Section 162(m) of the Code. Such performance objectives shall be determined over a measurement period or periods established by the Committee and related to at least one of the following criteria, which may be determined solely by reference to the performance of (i) the Company, (ii) a Subsidiary, (iii) an affiliate of the Company, or (iv) a division or unit of any of the foregoing or based on comparative performance of any of the foregoing relative to other companies: (A) earnings per share; (B) revenues; (C) operating cash flow; (D) operating earnings; (E) working capital; (F) inventory turnover rates; (G) earnings to sales ratio; and (H) return on capital (the "Performance Criteria"). The maximum number of shares of Common Stock that may be subject to any such Performance Award in any 12 month period shall not exceed 500,000 shares, as such number may be adjusted pursuant to Section 5.3. SECTION 8. CHANGE OF CONTROL 8.1. Accelerated Vesting and Payment. In the event of a Change of Control, the Restricted Period with respect to each share of Restricted Stock and each Restricted Unit will lapse and each Option and Stock Appreciation Right shall become immediately exercisable on the date of such Change of Control. -17- 18 8.2. Alternative Awards. Notwithstanding any provision of Section 6, any Participant who holds on the date of a Change of Control an Option or Stock Appreciation Right granted under this Plan shall be entitled to elect, during the 60-days period immediately following such Change of Control, in lieu of acquiring the shares of Common Stock covered by any such Option (or, in the case of a Stock Appreciation Right, the amount of cash and Common Stock such Participant would otherwise be entitled to receive upon the relinquishment of the Option related to such Stock Appreciation Right), to receive, and the Company shall be obligated to pay, the Change of Control Settlement Value with respect to shares of Common Stock up to the number of shares covered by such Option or Stock Appreciation Right, which amount shall be paid in cash. 8.3. No Amendment. Notwithstanding Section 9, the provisions of this Section 8 may not be amended in any respect following a Change of Control. SECTION 9. AMENDMENT, MODIFICATION, AND TERMINATION OF PLAN The Board may at any time terminate or suspend the Plan, and from time to time may amend or modify the Plan. No action of the Board may, without the consent of a Participant alter or impair his rights under any previously granted Incentive Award. SECTION 10. MISCELLANEOUS PROVISIONS 10.1. Nontransferability of Awards. Unless the Committee shall permit (on such terms and conditions as it shall establish) an Incentive Award to be transferred, no Incentive Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. All rights with respect to any Incentive Award granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant or, if transferred as contemplated by the previous sentence, a permitted transferee. 10.2. Beneficiary Designation. Each Participant under the Plan may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be -18- 19 exercised in case of his death. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation, benefits remaining unpaid or Incentive Awards outstanding at the Participant's death shall be paid to or exercised by the Participant's surviving spouse, if any, or otherwise to or by his estate. 10.3. No Guarantee of Employment or Participation. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary or affiliate. No Employee shall have a right to be selected as a Participant, or, having been so selected, to receive any future Incentive Awards. 10.4. Tax Withholding. The Company shall have the power to withhold, or require a Participant to remit to the Company promptly upon notification of the amount due, an amount sufficient to satisfy Federal, state and local withholding tax requirements on with respect to any Incentive Award, and the Company may defer payment of cash or issuance or delivery of Common Stock until such requirements are satisfied. The Committee may, in its discretion, permit a Participant to elect, subject to such conditions as the Committee shall impose (i) to have Common Stock otherwise issuable or deliverable under the Plan withheld by the Company or (ii) to deliver to the Company previously acquired shares of Common Stock, in each case, having a Fair Market Value sufficient to satisfy all or part of the Participant's estimated total Federal, state and local tax obligation associated with the transaction. 10.5. Indemnification. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to -19- 20 handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-laws, by contract, as a matter of law, or otherwise. 10.6. No Limitation on Compensation. Nothing in the Plan shall be construed to limit the right of the Company to establish other plans or to pay compensation to its employees in cash or property, in a manner which is not expressly authorized under the Plan. 10.7. Requirements of Law. The granting of Incentive Awards and the issuance of shares of Common Stock shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 10.8. Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. 10.9. No Impact On Benefits. Incentive Awards granted under the Plan are not compensation for purposes of calculating an Employee's rights under any employee benefit plan. 10.10. Securities Law Compliance. Instruments evidencing Incentive Awards may contain such other provisions, not inconsistent with the Plan, as the Committee deems advisable, including (i) a provision limiting the period during which Stock Appreciation Rights could be exercised to the extent required in order to avoid the application of Section 16(b) of the Act in the case of officers of the Company and (ii) a requirement that the Participant represent to the Company in writing, when an Incentive Award is granted or when he receives shares with respect to such Award (or at such other time as the Committee deems appropriate) that he is accepting such Incentive Award, or receiving or acquiring such shares (unless they are then covered by a Securities Act of 1933 registration statement), for his own account for investment only and with no present intention to transfer, sell or otherwise dispose of such shares except such disposition by a legal representative as shall be required by will or the laws -20- 21 of any jurisdiction in winding up the estate of the Participant. Such shares shall be transferable only if the proposed transfer shall be permissible pursuant to the Plan and if, in the opinion of counsel satisfactory to the Company, such transfer at such time will be in compliance with applicable securities laws. 10.11 Term of Plan. The Plan shall be effective upon its adoption by the Board and approval by the holders of the Common Stock, provided, however, that in no event shall the Plan become effective until immediately prior to the occurrence of a Public Offering. The Plan shall expire on the tenth anniversary of the date on which it is adopted by the Board (except as to Incentive Awards outstanding on that date), unless sooner terminated pursuant to Section 9. -21- 22 AMERICAN STANDARD COMPANIES INC. STOCK INCENTIVE PLAN ADDENDUM FRANCE Options may be granted under this Addendum to Participants based in France as follows: 1) Notwithstanding any other provision of the Plan, options granted to any Participant holding shares representing 10% or more of the Company's capital will not be deemed to have been granted pursuant to this Addendum. 2) Notwithstanding any other provision of the Plan, any option whose exercise price at the time of the grant of the option is less than 80% of the arithmetical average of the market value of a share on the 20 daily sessions next preceding the related date of grant, rounded up, shall not be deemed to have been granted under this Addendum. 3) Notwithstanding any other provision of the Plan, the maximum delay to grant options relating to shares that will not be repurchased by the Company is 5 years after the date of the Company shareholders meeting which authorized the grant of options under the Plan. 4) Notwithstanding any other provisions of the Plan, the exercise price of an option shall be adjusted only upon the occurrence of the events specified under the July 24, 1966 corporate law - section 208-5 in accordance with French law. 5) Notwithstanding any other provision of the Plan, upon the death of a French Participant, to the extent an option was exercisable by such Participant at the date of death, all such options shall remain exercisable for a period of six months from the date of the French participant's death. -22- EX-10.XIII 5 SUPPLEMENTAL INCENTIVE COMPENSATION PLAN 1 EXHIBIT (10)(xiii) AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES 1996-1998 SUPPLEMENTAL INCENTIVE COMPENSATION PLAN (As Amended and Restated as of December 5, 1996) Plan Period The Plan Period shall be January 1, 1996 through December 31, 1998. Participants Plan Participants shall be employees of American Standard Companies Inc. (the "Corporation") and its subsidiaries, domestic and foreign, in the following participation categories: - elected officers of the Corporation ("Officer Participants"); - non-officer Executive Level employees ("Executive Participants"); and - non-executive Management Level employees who are designated as Participants by the Officer Participants ("Management Participants"). Plan Award Opportunities and Forms of Awards Plan Award Opportunities and forms of Awards will be as set forth in Schedule A (for Officer Participants), Schedule B (for Executive Participants) and Schedule C (for Management Participants). Change of Control Definition "Change of Control" shall mean the occurrence of any of the following events: (i) any person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing 15% or more of the combined voting power of the Corporation's then-outstanding securities (a "15% Beneficial Owner"); provided, however, that (a) the term "15% Beneficial Owner" shall not include (1) Kelso ASI Partners, L.P. and Kelso American Standard Partners, L.P. ("Kelso") and their affiliates or their immediate transferees provided that any such transferee holding 15% or more 2 of the combined voting power of the Corporation's outstanding securities following any such transfer does not following or concurrently with such transfer acquire any additional shares of such securities except from Kelso or any of their affiliates or (2) any Beneficial Owner who has crossed such 15% threshold solely as a result of an acquisition of securities directly from the Corporation, or solely as a result of an acquisition by the Corporation of Corporation securities, until such time thereafter as such person acquires additional voting securities other than directly from the Corporation 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 Corporation 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 the Corporation'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 Board of Directors of the Corporation together with those individuals who first become directors during such period (other than by reason of an agreement with the Corporation or the Board of Directors of the Corporation in settlement of a proxy contest for the election of directors) and whose election or nomination for election to the Board of Directors of the Corporation 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 Board of Directors of the Corporation; (iii) the shareholders of the Corporation approve a merger, consolidation, recapitalization or reorganization of the Corporation, or a reverse stock split of any class of voting securities of the Corporation, 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 the Corporation 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 the Corporation 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 that, for purposes of this paragraph (iii), (a) such continuity of ownership (and preservation of relative voting -2- 3 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 the Corporation or of such surviving entity or of any subsidiary of the Corporation or such surviving entity and (b) voting securities beneficially owned by such persons who receive them other than as holders of voting securities of the Corporation 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 the Corporation approve a plan of complete liquidation or dissolution of the Corporation or an agreement for the sale or disposition of all or substantially all the assets of the Corporation; or (v) any other event which the Management Development and Nominating Committee determines shall constitute a Change of Control for purposes of this Plan 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; 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 and of the Management Development and Nominating Committee 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 the Corporation: (A) any person who has entered into a binding agreement with the Corporation, 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 the Corporation (a "Standstill Agreement"); (B) any employee benefit plan, or trustee or other fiduciary thereof, maintained by the Corporation or any subsidiary of the Corporation; (C) any subsidiary of the Corporation; or (D) the Corporation. (2) Unless a majority of the Continuing Directors and the Management Development and Nominating Committee 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 the Corporation of or by -3- 4 another entity (whether by the merger or consolidation, the acquisition of stock or assets, or otherwise) in exchange, in whole or in part, for securities of the Corporation, provided that, immediately following such acquisition, the Continuing Directors constitute a majority of the 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 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 the Corporation. 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. Plan Award Targets Each Participant shall receive a Plan Award, prorated as provided below, equal to 50% of his Plan Award Opportunity as soon as practicable after a determination that the Corporation has achieved the 1995 Strategic Plan management reporting operating earnings before interest and taxes derived from existing core businesses for the year 1998 (the -4- 5 "Threshold"). Such Plan Award shall be increased to up to 75% of the Participant's Plan Award Opportunity if actual 1998 management reporting operating earnings before interest and taxes derived from existing core businesses ("1998 OEBIT") is at least 5.0% above the Threshold, with such increase to be graduated to reflect a 1998 OEBIT falling between the 50% and 75% achievement levels; the Plan Award shall be further increased to up to 100% of the Participant's Plan Award Opportunity if 1998 OEBIT is at least 16.7% above the Threshold, with such increase to be graduated to reflect 1998 OEBIT between the 75% and 100% achievement levels. Calculation of 1998 OEBIT at the 50% and 75% achievement levels shall not include OEBIT derived from acquisitions involving $25,000,000 in capital. Forfeitures and Prorations (a) If a Participant's participation commences after January 1, 1996 or if a Participant's employment terminates during the Plan Period due to Disability, death, or retirement under any retirement plan of the Corporation or any of its subsidiaries, and, in any case, if such Participant's participation in the Plan shall have been for a minimum of seventy-eight weeks, such Participant (or, in the event of such Participant's death, his beneficiary) shall receive, if and when payments with respect to Plan Awards for such Plan Period are made, a payment equal to a fraction of the value of such Participant's Plan Award Opportunity (if any) with respect to the Plan Period. The numerator of such fraction shall be the number of days that such Participant was a Participant during the Plan Period and the denominator shall be the total number of days in the Plan Period. (b) If a Participant's employment terminates during the Plan Period due to termination for Cause, such Participant shall forfeit all rights to any and all of his Plan Award Opportunity, the value of which had not yet been paid, notwithstanding that such Participant may be eligible to retire under a retirement plan of the Corporation or any of its subsidiaries. (c) Except as provided in (a) above, if a Participant's employment terminates during the Plan Period, otherwise than due to Disability, death or retirement under any plan of the Corporation or any of its subsidiaries, such Participant shall forfeit all rights to any and all of his Plan Award Opportunity the value of which had not yet been paid, provided (except as provided in (b) above) the Management Development and Nominating Committee, in its discretion, may waive such forfeiture in whole or in part. (d) For purposes of (a), (b) and (c) above, the terms "Cause" and "Disability" shall have the meanings set forth in Annex A hereto. (e) If a Participant's participation category changes during the Plan Period, his or her Plan -5- 6 Award shall be prorated between the Plan Award amount that would have been received for participation for the entire Plan Period in the earlier participation category and the Plan Award amount that would have been received for participation for the entire Plan Period in the later participation category, based on the number of weeks of participation in each participation category. Plan Awards in Stock Any shares of American Standard Companies Inc. common stock issued as Plan Awards shall be issued from the shares available under the American Standard Companies Inc. Stock Incentive Plan, and shall be issued to and governed by the Trust Agreement for the American Standard Inc. Long-Term Incentive Compensation Plan and 1994-1995 and 1996-1998 American Standard Companies Inc. Supplemental Incentive Compensation Plans. Plan Awards in Cash There shall be deducted from the cash portion of any Plan Awards such payroll withholdings as the Corporation deems necessary. Treatment of Plan Awards Plan Awards will not be treated as compensation for purposes of the Savings Plan of American Standard Inc. and Participating Subsidiary Companies, the American Standard Employee Stock Ownership Plan or any other benefits based on compensation. Change of Control Notwithstanding any other provision of this Plan or any Plan Award, in the event of a Change of Control, the Plan Period shall end and each Participant shall receive a Plan Award equal to 100% of such Participant's Plan Award Opportunity. In such event, (x) the Corporation shall make all payments hereunder in a single lump sum payment, in cash, Shares or a combination of such Shares and cash, to each Participant within ten (10) days of such Change of Control, and (y) each Participant may elect to receive any or all payments hereunder in cash. -6- 7 Administration of Plan Except with respect to the designation of Management Participants, the Plan will be administered by the Management Development and Nominating Committee of the Board of Directors or the delegate of said Committee. Determinations, interpretations or other actions made or taken by the Management Development and Nominating Committee shall, prior to a Change of Control, be final, binding and conclusive for all purposes and upon all persons. The Board, upon recommendation of the Management Development and Nominating Committee, shall have the right to amend, suspend or terminate the Plan at any time; however, no such action of the Board shall diminish, reduce, alter or impair a Participant's rights assigned to him before the date of such amendment, suspension, or termination of the Plan without the consent of such Participant. Other Provisions Participation in the Plan shall not affect the right of the Company or any affiliate thereof at any time to terminate the employment of any Participant. No interest in this Plan shall be assignable or transferable except to the extent provided in the Trust Agreement for the American Standard Inc. Long-Term Incentive Compensation Plan and 1994-1995 and 1996-1998 American Standard Companies Inc. Supplemental Incentive Compensation Plans. -7- 8 AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES 1996-1998 SUPPLEMENTAL INCENTIVE COMPENSATION PLAN SCHEDULE A PLAN AWARD OPPORTUNITIES FOR OFFICER PARTICIPANTS One times the modified initial and the supplemental Payout Awards for the 1996-1998 Performance Period under the American Standard Inc. Long-Term Incentive Compensation Plan, payable half in cash (and/or promissory notes of American Standard Inc.) and half in common stock of American Standard Companies Inc. 9 AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES 1996-1998 SUPPLEMENTAL INCENTIVE COMPENSATION PLAN SCHEDULE B PLAN AWARD OPPORTUNITIES FOR EXECUTIVE PARTICIPANTS Three times the Executive Participants' 1998 awards under American Standard Inc.'s Annual Incentive Plan (or, in the event of a Change of Control, three times the Executive Participants' awards under the American Standard Inc. Annual Incentive Plan in effect for which such Change of Control occurs), payable half in cash (and/or promissory notes of American Standard Inc.) and half in common stock of American Standard Companies Inc. 10 AMERICAN STANDARD COMPANIES INC. AND SUBSIDIARIES 1996-1998 SUPPLEMENTAL INCENTIVE COMPENSATION PLAN SCHEDULE C PLAN AWARD OPPORTUNITIES FOR MANAGEMENT PARTICIPANTS Fifteen Thousand Dollars ($15,000), payable in cash. 11 ANNEX A "Cause" means a Participant's (A) willful and continued failure substantially to perform his duties with the Corporation or any Subsidiary (other than any such failure resulting from incapacity due to reasonably documented physical or mental illness), after a demand for substantial performance is delivered to such Participant by the Chairman of the Board or any executive officer which specifically identifies the manner in which it is believed that such Participant has not substantially performed his duties, or (B) the willful engaging by such Participant in illegal misconduct materially and demonstrably injurious to the Corporation or any Subsidiary or to the trustworthiness or effectiveness of the Participant in the performance of his duties. For purposes hereof, no act, or failure to act, on such Participant's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Corporation or a subsidiary. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Corporation shall be conclusively presumed to be done, or omitted to be done, by such Participant in good faith and in the best interest of the Corporation or such Subsidiary. "Disability" means a Participant's inability, due to reasonably documented physical or mental illness, for more than six months to perform his duties with the Corporation or a Subsidiary on a full time basis if, within 30 days after written notice of termination has been given to such Participant, he shall not have returned to the full time performance of his duties. EX-13 6 1996 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 [GRAPHIC] "AS WE BECOME A TRUE LEARNING ORGANIZATION, WE ARE ACQUIRING THE CRITICAL SKILLS AND ABILITIES TO ADAPT TO THE RAPIDLY SHIFTING REQUIREMENTS OF THE GLOBAL MARKETPLACE." AMERICAN STANDARD COMPANIES INC. 1996 ANNUAL REPORT 2 American Standard is a global, diversified manufacturer. Its operations are comprised of three segments: Air Conditioning, Plumbing Products, and Automotive Products. Air Conditioning Products develops and manufactures Trane(R) and American Standard(R) air conditioning equipment for use in central air conditioning systems for commercial, institutional and residential buildings. Plumbing Products develops and manufactures American Standard(R), Ideal Standard(R), Standard(R) and Porcher(R) bathroom and kitchen fixtures and fittings. Automotive Products develops and manufactures commercial and utility vehicle braking and control systems under the WABCO(R) brand. The Company is a worldwide leader in Demand Flow(R) Technology ("Demand Flow" or "DFT"), having implemented Demand Flow processes in its manufacturing facilities and administrative activities. DFT enhances customer service by reducing manufacturing cycle time, increasing flexibility and improving product quality. It also improves productivity by reducing non-value-added work, increasing inventory turnover, reducing working capital requirements and liberating both manufacturing and warehouse space. American Standard and its 35 joint ventures operate 106 manufacturing facilities in 35 countries. The Company employs approximately 44,000 people worldwide. [AMERICAN STANDARD LOGO] [IDEAL STANDARD LOGO] [PORCHER LOGO] [TRANE LOGO] [TRANE LOGO] [WABCO LOGO] CONTENTS Financial Highlights 1 Letter to Stockholders 2 Medical Systems Group 12 Financial Contents 13 Directors and Officers 45 Demand Flow(R) is a registered trademark of the Jc-I-T Institute of Technology, Inc. 3 FINANCIAL HIGHLIGHTS
1996 1995 Change - ------------------------------------------------------------------------------------------------ Year Ended December 31, (Dollars in millions, except per share amounts) Sales $5,805 $5,221 11% Operating Income (a) $ 586(a) $ 534 10% Operating Margin (a) 10.1%(a) 10.2% (.1) Income Before Extraordinary Item (a) $ 189(a) $ 142 33% Per Share (a) $ 2.42(a) $ 1.90 27% Demand Flow Performance Average Inventory Turnover (b) 8.8x 8.3x .5x Operating Working Capital as a Percent of Sales (c) 4.9% 4.9% -- Net Cash Provided by Operating Activities $ 353 $ 348 1%
(a) Excludes asset impairment loss in 1996. 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, or $3.02 per share. Including the asset impairment loss, operating income was $351 million and loss before extraordinary item was $47 million or $.60 per share. See Note 2 of Notes to Consolidated Financial Statements. (b) Twelve-month average inventory turnover with each month calculated using the following three month's cost of sales annualized, divided by adjusted inventories as of each month end. (c) Operating Working Capital as of December 31 divided by annualized fourth quarter sales. Operating Working Capital is defined as net accounts receivable and adjusted inventories less accounts payable, accrued payrolls and other accrued liabilities. SALES-$5.8 BILLION Businesses Air Conditioning 59% Automotive 16% Plumbing 25%
Geography Europe 35% Far East 10% Other 6% U.S. 49%
OPERATING INCOME- $586 MILLION (a) Businesses Air Conditioning 60% Automotive 21% Plumbing 19%
Geography Europe 29% Far East 8% Other 6% U.S. 57%
1 4 TO OUR STOCKHOLDERS YOUR COMPANY HAD ANOTHER RECORD YEAR IN 1996: - REVENUES REACHED A NEW HIGH OF $5.8 BILLION, - INTERNATIONAL REVENUES REACHED $3.0 BILLION, - EARNINGS PER SHARE, EXCLUDING A GOODWILL WRITE-DOWN, INCREASED 27% TO A RECORD $2.42, - INVENTORY TURNS, OUR KEY DEMAND FLOW(R) TECHNOLOGY (DFT) PERFORMANCE MEASURE, INCREASED ONE-HALF TURN TO 8.8 (NOW CALCULATED ON A MONTHLY AVERAGE), AND - WORKING CAPITAL WAS HELD TO 4.9 CENTS FOR EVERY DOLLAR OF SALES RESULTING IN A TOTAL RETURN TO OUR STOCKHOLDERS OF 37%. These strong results were achieved despite a decline of $71 million in operating income from our European operations where markets continue to be weak. Our model for growth is based on leveraging our key strengths -- - GLOBALIZATION, - NEW PRODUCTS AND TECHNOLOGIES AND - DEMAND FLOW TECHNOLOGY, OUR CORE COMPETENCE, that sustain our market leadership. GLOBALIZATION More than half of our Company's total sales, $3.0 billion, are now generated overseas. Globalization serves us as -- - AN AVENUE FOR ACCELERATED GROWTH, - AN ANTIDOTE TO ADVERSE REGIONAL BUSINESS CYCLES, AND - A MEANS OF ENHANCING OUR COMPETITIVENESS BY PROVIDING LOW-COST SOURCING ALTERNATIVES. Our philosophy is to move in anticipation of growth. Plumbing products are fundamental to the developing infrastructure of emerging markets and, with the rise of middle-class consumers, demand for air conditioning products increases. Entering markets early enables us to establish a strong presence as they develop. Since the early 60's, joint ventures have been the primary expansion vehicle in emerging markets for American Standard. Establishing and successfully running joint ventures are core business competences. Even during the Company's years as a highly leveraged private company with the restrictive covenants that applied, we were able to sustain our aggressive global expansion utilizing cash generated from our DFT implementation and innovative financing methods. These methods have allowed us to start new businesses with minimal up-front capital at risk while maintaining operating control. The Company's manufacturing joint ventures now number 35 in 18 countries. Our approach combines local marketing and distribution expertise with American Standard's brand names, vast practical experience, training skills, Demand Flow Technology competence, technological leadership and capital resources. In this manner, we are continuing to grow our base of operations throughout Asia and are now establishing a presence in Eastern Europe. 2 5 [PHOTO] THE ECONOMIES OF THE DEVELOPING COUNTRIES OF ASIA ARE PROJECTED TO GROW AT TWO TO THREE TIMES THE RATE FOR THE U.S. AND FOR EUROPE. AT ITS HIGH RATE OF GROWTH, CHINA COULD BECOME THE WORLD'S LARGEST MARKET FOR PLUMBING AND AIR CONDITIONING PRODUCTS. 3 6 Asia-Pacific The Asia-Pacific region, particularly the People's Republic of China (PRC), offers exceptional growth opportunities for all our businesses. In just a few years, China itself could become the largest plumbing and air conditioning market in the world. Following the opening of the PRC to the West, we established our first Plumbing Products joint venture in Guangdong province in 1985. From this base, we have expanded our manufacturing presence to provide a full complement of plumbing products through five new joint ventures and one wholly-owned subsidiary in Guanzhou, Beijing, Shanghai and Tianjin. These seven companies position American Standard as the largest full-line manufacturer of plumbing products in the PRC. INTERNATIONAL SALES
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Europe $1,610 $1,361 $1,584 $1,937 $2,033 Far East 193 254 310 426 566 Other 294 329 354 365 377 ----- ----- ----- ----- ----- $2,097 $1,944 $2,248 $2,728 $2,976 ===== ===== ===== ===== =====
$3 BILLION IN TOTAL WITH THE FAR EAST MARKETS NEARLY $600 MILLION AND GROWING 34% ANNUALLY. Air Conditioning Products, with three joint ventures in the PRC, will establish a fourth joint venture in 1997 to become an integrated manufacturer and distributor of a broad range of residential and commercial air conditioning systems and related products. Automotive Products has also established manufacturing operations there. We contemplate further PRC ventures over the next two years for all our businesses. Our goal is to generate $1 billion in annual sales from all our PRC ventures. Elsewhere throughout the Asia-Pacific region, we are expanding our network of companies. Plumbing Products recently added Vietnam to its existing regional manufacturing base of five countries. Air Conditioning Products is looking to expand its four-country network of manufacturing joint-venture companies. Manufacturing joint ventures in India and Japan broaden Automotive Products presence in the region. Eastern Europe The Company is laying the groundwork for a strong regional presence in Eastern Europe. Our largest European vitreous china facility was established through a joint venture in the Czech Republic in 1992. We also have begun building a large vitreous china plant in Bulgaria, complementing our existing fittings facility. Air Conditioning Products is expanding its sales and service network in most eastern European countries, and 4 7 Automotive Products is also seeking a joint venture opportunity there. These initiatives will enhance our competitive advantage in the region. Other Market Opportunities There are a great many opportunities to grow our business both in the countries where we already have an established presence and in new ones. Sourcing its WABCO ABS systems from its European businesses, Automotive Products has gained a leading presence in the U.S. heavy-truck industry through its joint venture with Rockwell International. U.S. federal regulations now mandating anti-lock braking systems on all new heavy trucks will serve as a catalyst for accelerated growth over the next several years. Our new manufacturing joint venture with Cummins Engine will establish an Automotive Products' manufacturing presence in North America and further enhance its growth in the U.S. Air Conditioning Products is now leveraging its strong base of U.S. national accounts by servicing customer needs on a global basis. Customers doing business in two or more regions of the world can rely on consistent quality, standards, performance and service for their indoor environment needs. Targeted market segments that could benefit most from this strategy include fast food restaurants, electronics manufacturing facilities and retail merchandising stores. Low-Cost Sourcing Aside from access to vast new markets, globalization supports our economic model for a low-cost sourcing strategy developed in the early 90's. This strategy has been instrumental in the turnaround of U.S. Plumbing's operating results. Similarly, we will be using our expanding manufacturing base in Eastern Europe to enhance our competitive position in mature markets around the world. NEW PRODUCTS AND TECHNOLOGY Developing advanced technologies is also critical to maintaining our competitive advantage. Automotive Products continues its leadership in braking systems and controls with its recently released "brake-by-wire" or electronic braking system (EBS). WABCO EBS is a natural evolution of anti-lock braking systems (ABS) and has been under development by Automotive Products for more than 10 years. EBS is a unified electronically-controlled system for braking. Mercedes-Benz, the world's largest truck manufacturer, features WABCO EBS as standard equipment on its all-new Actros heavy-duty trucks, and we expect other manufacturers in Europe and the United States to offer EBS. 5 8 Additionally, we introduced a new disc air brake technology for heavy-duty vehicles, which shortens substantially the distance required to come to a full stop compared to conventional braking systems. Through a continued emphasis on product development, we maintain a leading position in the world's commercial vehicle markets. Air Conditioning Products is starting a major strategic product initiative -- a universal mini-split system. Mini-splits are ductless room air conditioning systems consisting of two separate units -- a condensing unit which is mounted outdoors and an indoor unit which distributes cold air. Such products are ideal for housing with solid wall construction and have been popular throughout Asia and Europe. We estimate the worldwide mini-split market potential outside Japan to be in excess of $7 billion. With manufacturing plants in Thailand, China, France and Egypt, we are proceeding with plans to build an effective worldwide distribution base. Air Conditioning Products is also redesigning its chiller lines to further improve efficiencies, the most critical factor to our customers. The success of the new versatile "Horizon" absorption chiller, launched in 1996, is strengthening our leading market position in the U.S. and is ideally suited for the worldwide industrial absorption chiller market. Medical Systems Group Our research efforts have also led to the development of two totally new technologies which have now been incorporated into a fourth business segment -- Medical Systems. Seven years ago, we began exploring the use of laser technology in our ceramics manufacturing and that development continues. During the early stages, however, we were introduced to laser-based medical diagnostic technologies being developed by some of the same scientists. We viewed these technologies as having breakthrough potential and chose to fund their development. We formed an advisory board of noted scientists and medical practitioners to provide counsel and direction to our research. These innovative technologies were quietly nurtured into what is today our two medical diagnostic product companies, Sienna Biotech Inc. and Alimenterics Inc. In order to accelerate the growth of Sienna Biotech, we decided to pursue acquisitions. In March 1997, we signed agreements to acquire the European in vitro medical diagnostic business of Sorin Biomedica S.p.A. and INCSTAR Corporation in the U.S., which is a Sorin subsidiary. Sorin and INCSTAR will enable us to accelerate development of Sienna's Copalis(TM) technology by providing a recognized source of testing assays and an established marketing organization. Our initial focus will be on niche markets such as physicians' office laboratories. 6 9 [PHOTO] THE ECONOMIES OF EASTERN EUROPE ARE EXPECTED TO ACHIEVE SIGNIFICANT GROWTH. INCREASING DEMAND FOR WEST EUROPEAN STYLE PLUMBING LUXURIES AND AIR CONDITIONING SYSTEMS ALONG WITH INCREASING TRUCK TRANSPORTED COMMERCE WITH WESTERN EUROPE PRESENT OPPORTUNITIES FOR ALL OUR BUSINESSES. 7 10 DEMAND FLOW TECHNOLOGY The differentiation of American Standard lies in how its businesses are managed to achieve superior levels of operating performance. The core competence of our Company is Demand Flow Manufacturing (DFM). DFM is a flexible, formulated process that systematically aligns workflow production resources -- people, machines, materials and space allocation -- in the most efficient manner. As discussed at length in our report last year, the Company excels in developing and deploying Demand Flow Technology concepts and techniques throughout our businesses worldwide. While DFM has been implemented in all our facilities, the level of implementation is not the same. Based on our understanding of DFM today, we have achieved, on average, only 60% of full implementation. What is exciting is that as we continue to refine and expand Demand Flow Technology, we see new opportunities to enhance our competitiveness by applying it to all aspects of our business. Process Organization In 1995, we took a bold step toward our transformation into a process organization. The impetus for this radical structural realignment was the introduction of Demand Flow concepts into our administrative areas, which we term Demand Flow Office. This requires the dismantling of the traditional functional boundaries, significantly changing roles and responsibilities within the organization. To date, more than half of our manufacturing and administrative facilities worldwide have established process teams which are collocated to improve communication and information-sharing. This effort is already beginning to pay dividends in our enhanced level of responsiveness to market changes and customer needs. Although some of our businesses have performed very well in this new environment, it is a complex, ongoing transition. Process management is the ultimate extension of Demand Flow Technology and, at this level, there are no textbook examples. We are charting our own course. PROCESS ORGANIZATION
PROCESSES CUSTOMERS - ------------------------------------------------------------------------------------ STRATEGY IDEA CONCEPT - ------------------------------------------------------------------------------------ PRODUCT DEVELOPMENT CONCEPT PRODUCT - ------------------------------------------------------------------------------------ DEMAND CREATION PROPOSAL ORDER - ------------------------------------------------------------------------------------ ORDER FULFILLMENT ORDER PAYMENT - ------------------------------------------------------------------------------------ CUSTOMER SERVICE INQUIRY RESOLUTION - ------------------------------------------------------------------------------------ CENTERS OF EXCELLENCE ENGINEERING FINANCE MARKETING INFO. TECH. COACH COACH COACH COACH
TEAMS, FROM PREVIOUS TRADITIONAL FUNCTIONAL RESPONSIBILITIES, ARE COLLOCATED TO ALIGN WORK, COMMUNICATION AND INFORMATION FLOWS ALONG KEY BUSINESS PROCESSES. COACHING SUPPORTS PROCESSES BY DEVELOPING PEOPLE AND RESOURCES. PRODUCTIVITY IS INCREASED AND RESPONSIVENESS IS ENHANCED. 8 11 Training and Best Practices Significant resources have been dedicated to ensure that our associates are advancing their knowledge and skills. Our training programs have been translated into 11 languages and are taught by a multi-lingual cadre of in-house trainers around the globe. Additionally, the American Standard College, located at our corporate headquarters, provides specialized instruction in Demand Flow Technology and Process Management concepts to several thousand associates who attend annually. Here, the Company's best practices are identified and formalized for global deployment. As we become a true learning organization, we are acquiring the critical skills and abilities to adapt to the rapidly shifting requirements of the global marketplace. Demand Flow Technology is the defining culture of our company. It has not been an easy journey these past eight years, and it is far from over. We are confident that our DFT driven culture has very significant value-enhancing characteristics, benefiting stockholders and other constituents. A NEW ERA The new year begins with another milestone for the Company. In the first quarter of 1997, the Company participated with Kelso ASI Partners in liquidating its investment. Kelso was a very supportive stockholder throughout our LBO period and our transition back to being a publicly-traded company. We are pleased to see its investment brought to a highly successful conclusion, as measured by the stock price appreciation both as a private and public company. Though our stock has more than doubled in value since we went public two years ago, we believe it remains undervalued relative to the Company's growth record and prospects. Therefore in carrying out this transaction, the Company repurchased 4.6 million shares of the Company's stock, and the balance of the shares was sold to the public through a secondary offering. We welcome our new investors who became stockholders through this offering. We are eager to share our growth with you. BENEFITS FROM DEMAND FLOW CONTINUE [Graph depicting reduction in working capital from 16% of sales in 1988 to 4.9% of sales in 1996, and increase in average inventory turns from 3.0 times in 1988 to 8.8 times in 1996.] INVENTORY TURNOVER HAS NEARLY TRIPLED AND WORKING CAPITAL NEEDS REDUCED BY $650 MILLION. 9 12 In recognizing our success to date -- - WE THANK OUR CUSTOMERS -- wholesale and retail distributors, contractors, architects, original equipment manufacturers and consumers -- for their strong belief in the quality of our products and services. We will work hard continually to earn your business through product and service excellence and with uncompromising business integrity. - WE THANK THE MORE THAN 40,000 AMERICAN STANDARD ASSOCIATES WORLDWIDE who make our goals, plans and strategies a reality everyday. You have supported our DFT initiatives -- Demand Flow Manufacturing and Demand Flow Office -- wholeheartedly and enthusiastically. The changes we have introduced over the past several years have been difficult, but we are ever closer to reaching our goals thanks to your personal commitment and daily contributions. - WE THANK OUR SUPPLIERS who have embraced our Demand Flow initiatives and introduced these concepts and principles into their own businesses in order to serve us better. This is a win-win situation for us all, and we are glad you see the opportunities in working together. - WE THANK OUR STOCKHOLDERS for their continued confidence in the long-term prospects for our Company. OUTLOOK Our outlook for 1997 is for continued growth in each of our businesses with the expectation of some market improvement in Europe, particularly in the second half of the year. Looking to the longer term, we have deliberately set our internal stretch goals high -- - $10 BILLION TOTAL SALES IN 2000 - 15 INVENTORY TURNS - 15% OPERATING MARGIN - ZERO WORKING CAPITAL to serve as a beacon toward exceptional levels of performance. Sincerely yours, Emmanuel A. Kampouris Chairman, President and Chief Executive Officer American Standard Companies Inc. [Photo of Emmanuel A. Kampouris] 10 13 [PHOTO] LATIN AMERICA IS ANOTHER REGION WHERE ECONOMIC GROWTH IS PROJECTED TO BE AHEAD OF BOTH THE U.S. AND WESTERN EUROPE. IMPROVING LOCAL MARKETS AND A FAVORABLE BUSINESS ENVIRONMENT CREATED BY THE NORTH AMERICAN FREE TRADE AGREEMENT OPENS THE DOOR TO NEW OPPORTUNITIES. 11 14 LOOKING TO OUR FUTURE -- MEDICAL SYSTEMS Medical diagnostics are high margin, non-cyclical businesses with long-term growth potential and present a significant business opportunity for American Standard. Sienna's Copalis(TM) technology enables a user to perform multiple tests simultaneously on a single sample. This method contrasts with current technologies which require multiple procedures with diverse laboratory instruments, often in separate laboratory locations. Sienna's first products focus on pre-natal diagnostics. The Copalis system and its initial diagnostic tests received U.S. Federal Drug Administration (FDA) approval in 1996 and will be marketed and sold in 1997. Alimenterics' LARATM system provides a noninvasive method for the diagnosis of gastrointestinal diseases via the breath. This method, too, differs from current technologies which require endoscopy or other expensive, invasive testing procedures. Alimenterics' initial product focus is on the detection of H.pylori, the bacterium associated with peptic ulcer disease. It submitted filings with the European Agency for the Evaluation of Medicinal Products in 1996 for its LARA system and will submit a regulatory approval application to the FDA later this year. [PHOTO] DESIGNED FOR EASE OF USE, COPALIS TECHNOLOGY ENABLES A NURSE OR TECHNOLOGIST TO PERFORM MULTIPLE TESTS SIMULTANEOUSLY ON A SINGLE TEST SAMPLE WITH SIGNIFICANTLY FASTER RESULTS AND AT LOWER COSTS THAN OTHER TECHNOLOGIES. Both technologies have extended applications within the medical diagnostics industry. Additional product applications for the Copalis system include fertility and infectious disease testing. Copalis also has applications beyond the bio-medical field including food and dairy testing, environmental monitoring and veterinary diagnostics. Other disease detection areas for the LARA system include lactose intolerance, bacterial overgrowth and liver dysfunction. [PHOTO] THE LARA SYSTEM IS A FULLY-AUTOMATED, FREE STANDING DIAGNOSTIC DEVICE WITH PRE-PROGRAMMED SELF-DIAGNOSTICS AND OTHER FEATURES THAT MAKE IT EASY TO USE. THE TECHNOLOGY, WHICH MEASURES ISOTOPIC RATIOS IN BREATH SAMPLES, IS AS PRECISE AND ACCURATE AS, BUT LESS EXPENSIVE AND COMPLEX THAN, CURRENT TECHNOLOGIES. THE IDEAL MATCH To support the growth and development of Sienna and Alimenterics, the Company is in the process of acquiring Sorin Biomedica and INCSTAR Corporation, a Sorin subsidiary. The synergistic benefits are substantial. Sorin and INCSTAR will accelerate the menu development and marketing process for Sienna's Copalis technology. They will provide Sienna with the chemistry needed for Copalis while obtaining a closed diagnostic platform to enhance their own market positioning. As a result, all three businesses stand to benefit from the merger. Sorin/INCSTAR's diagnostic business, with approximately 100 research and development scientists, will enable the Company to accelerate development of the Copalis technology by providing a recognized source of immunological reagents. Both Sienna and Alimenterics will also benefit from Sorin/INCSTAR's established marketing organization. The Company believes that the value of bringing these businesses together is well over and above the value of the businesses on a standalone basis. 12 15 FINANCIAL CONTENTS Five Year Financial Summary 14 Management's Discussion and Analysis Overview 15 Air Conditioning Products 16 Plumbing Products 17 Automotive Products 19 Financial Review 20 Management's Report on Financial Statements 24 Report of Independent Auditors 25 Financial Statements 26
13 16 FIVE-YEAR FINANCIAL SUMMARY
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Year Ended December 31, (Dollars in millions, except per share data) SEGMENT DATA Sales: Air Conditioning Products $ 3,437 $ 2,953 $ 2,480 $ 2,100 $ 1,892 Plumbing Products 1,452 1,270 1,218 1,167 1,170 Automotive Products 916 998 759 563 730 ------- ------- ------- ------- ------- $ 5,805 $ 5,221 $ 4,457 $ 3,830 $ 3,792 ======= ======= ======= ======= ======= Operating income before asset impairment loss: Air Conditioning Products $ 353 $ 259 $ 182 $ 133 $ 104 Plumbing Products 110 120 111 108 108 Automotive Products 123 155 62 41 88 ------- ------- ------- ------- ------- 586 534 355 282 300 Asset impairment loss: Air Conditioning Products (121)(a) -- -- -- -- Plumbing Products (114)(a) -- -- -- -- ------- ------- ------- ------- ------- (235) -- -- -- -- ------- ------- ------- ------- ------- Total operating income 351 534 355 282 300 Interest expense (198) (213) (259) (278) (289) Corporate items (95) (94) (111) (85) (63) ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item 58 227 (15) (81) (52) Income taxes (105) (85) (62) (36) (5) ------- ------- ------- ------- ------- Income (loss) before extraordinary item $ (47) $ 142 $ (77) $ (117) $ (57) ======= ======= ======= ======= ======= Per share $ (.60)(a) $ 1.90 $ (1.29) $ (2.11) $ (1.24) ======= ======= ======= ======= ======= OTHER DATA Demand Flow Performance: Average inventory turnover (b) 8.8x 8.3x 7.2x 6.2x 5.3x Operating working capital as a percent of sales (c) 4.9% 4.9% 4.9% 5.9% 7.5% Net cash provided by operating activities $ 353 $ 348 $ 257 $ 201 $ 174
(a) 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, or $3.02 per share. Excluding the asset impairment loss, income per share before extraordinary item was $2.42. See Note 2 of Notes to Consolidated Financial Statements. (b) Twelve-month average inventory turnover with each month calculated using the following three month's cost of sales annualized, divided by adjusted inventories as of each month end. (c) Operating working capital as of December 31 divided by annualized fourth quarter sales. Operating working capital is defined as net accounts receivable and adjusted inventories less accounts payable, accrued payrolls and other accrued liabilities. 14 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OVERVIEW The Company achieved record sales and operating income (excluding a non-cash asset impairment charge of $235 million) for the second consecutive year, primarily as a result of a very strong performance by the Air Conditioning Products segment. Sales for 1996 were $5.8 billion, an increase of 11% from $5.2 billion in 1995. Operating income was $586 million, an increase of 10% from $534 million in 1995. Income before extraordinary item (excluding the asset impairment charge) was $188.5 million, or $2.42 per share, up 33% and 27%, respectively, from income before extraordinary item in 1995 of $142 million, or $1.90 per share. Including the asset impairment charge, the net loss for 1996 was $46.7 million, or $.60 per share. Effective January 1, 1996 the Company adopted FAS 121 related to impairment of long-lived assets, resulting in a non-cash charge of $235 million, approximately 90% of which was the write-down of goodwill, for which there was no tax benefit (see Note 2 of Notes to Consolidated Financial Statements). RESULTS OF OPERATIONS FOR 1996 COMPARED WITH 1995 AND 1995 COMPARED WITH 1994 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. Consolidated sales for 1995 were $5,221 million, an increase of 17% (15% excluding the favorable effects of foreign exchange) from $4,457 million in 1994. Sales increased for all three segments with gains of 19% for Air Conditioning Products, 4% for Plumbing Products and 31% for Automotive Products. Operating income for 1996 (excluding the $235 million asset impairment charge previously mentioned) was $586 million, an increase of $52 million, or 10% (11% excluding the unfavorable effects of foreign exchange), from $534 million in 1995. Operating income increased 36% for Air Conditioning Products but decreased 8% for Plumbing Products and 20% for Automotive Products. Operating income for 1995 was $534 million, an increase of $179 million, or 50% (46% excluding the favorable effects of foreign exchange), from $355 million in 1994. Excluding $40 million of special charges from 1994, operating income in 1995 increased 35% (31% excluding favorable foreign exchange effects) from an adjusted operating income of $395 million in 1994. Excluding such special charges and the favorable effects of foreign exchange, operating income increased 38% for Air Conditioning Products and 85% for Automotive Products but declined by 11% for Plumbing Products. Operating income for 1994 included special charges of $40 million related to employee severance, the consolidation of production facilities, the implementation of other cost reduction actions and a provision for loss on the early disposition of assets. Including such special charges in 1994, operating income increased 42% for Air Conditioning Products, 8% for Plumbing Products and 150% for Automotive Products. 15 18 RESULTS OF OPERATIONS BY SEGMENT AIR CONDITIONING PRODUCTS SEGMENT
1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in millions) Sales: U.S. portion $ 2,450 $2,152 $1,915 International portion 987 801 565 ------- ------ ------ Total $ 3,437 $2,953 $2,480 ======= ====== ====== Operating income before asset impairment loss: U.S. portion $ 314 $ 225 $ 180 International portion 39 34 2 ------- ------ ------ Total 353 259 182 Asset impairment loss (121) -- -- ------- ------ ------ Total operating income $ 232 $ 259 $ 182 ======= ====== ======
The U.S. portion of Air Conditioning Products is composed of the Unitary Products Group and the North American Commercial Group (excluding Canada). The international portion consists of the non-U.S.-based operations of the International Group, the Canadian operations of the North American Commercial Group and exports from the U.S. by the International Group. Export sales from the U.S. have been reclassified to the International portion for 1995 and 1994 to conform with the 1996 classification. Sales of Air Conditioning Products increased 16% (with little effect from foreign exchange) to $3,437 million for 1996 from $2,953 million for 1995, as a result of significant sales gains in the U.S. and expanding international sales. The 1996 increase followed a gain of 19% in 1995 from $2,480 million in 1994. Commercial markets account for approximately 75% of Air Conditioning Products' total sales. Approximately 60% of total sales is to the replacement, renovation and repair markets. Operating income of Air Conditioning Products (excluding the asset impairment charge) increased 36% to $353 million in 1996 from $259 million in 1995. The improvement was principally the result of increased operating income in the United States due to higher sales together with cost reductions. Operating income of Air Conditioning Products increased 42% to $259 million in 1995 from $182 million in 1994. The increase was attributable primarily to the effects of higher volumes in both U.S. and international operations and further reflects that 1994 included special charges of $7 million related to the consolidation of production facilities, employee severance and other cost reduction actions. United States -- In 1996 U.S. sales increased 14% over those of 1995. Markets in the U.S. continued to improve in 1996 in both replacement and new construction for commercial and residential products. The U.S. portion of sales of commercial products increased because of higher volume resulting from improved markets, higher prices, gains in market share, the acquisition of additional sales offices and a favorable shift to higher-efficiency, higher-capacity products. Sales of residential products increased because of strong demand (particularly in the replacement and renovation market), hot weather in some parts of the U.S., and a favorable shift to high-end products. Operating income for the U.S. portion of Air Conditioning Products increased 40% in 1996 compared with 1995, as a result of the increased sales of commercial and residential products and cost improvements. AIR CONDITIONING 1996 Sales-$3.4 Billion Business Mix [PIE CHART] Commercial 75% Residential 25%
Geography [PIE CHART] U.S. 71% Europe 12% Other 4% Far East 13%
Markets [PIE CHART] Replacement, Renovation and Repair 60% Residential New Construction 10% New Commercial Construction 30%
Air Conditioning Products is the Company's largest business segment. The U.S. commercial business, driven by the replacement, renovation and repair markets, is the largest. The International business, particularly in the Far East, is the most rapidly growing. 16 19 In 1995 U.S. sales increased 12% over those of 1994. Sales of commercial products increased because of higher volume attributable to improved markets, accelerated demand for chiller replacement, higher prices, gains in market share and the acquisition of additional sales offices. Sales of residential products increased primarily from higher replacement volume, partly offset by the effect of lower prices on certain products due to competitive market conditions. Operating income for the U.S. portion of Air Conditioning Products increased 25% in 1995 compared with 1994, as a result of the increased sales of commercial products, reduced by lower operating income on residential products due to competitive pricing pressures and increased raw material costs. International -- International sales in 1996 increased 23% (25% excluding the unfavorable effects of foreign exchange), principally due to sales by the new operations in the People's Republic of China ("PRC"), expansion in other Far East and Latin American operations and improved commercial markets in Europe. Operating income (excluding the asset impairment charge) for international operations in 1996 increased 15% to $39 million compared with $34 million in 1995. This reflected improved margins on chillers and modest improvements in Far East operations and Europe, partly offset by costs of expansion, and further reflected that 1995 included a gain on the sale of certain Hong Kong operations in conjunction with establishing operations directly in the PRC. International sales increased 42% in 1995, principally due to expanding operations in the Far East and Latin America (including operations in Thailand, Australia and Brazil which were consolidated beginning in 1995), improved commercial markets, higher export sales (primarily to the Far East) and higher volume in Europe. As a result of the higher sales, international operations achieved operating income of $34 million compared with $2 million in 1994, reflecting operating improvements achieved in Europe, improved margins on chiller sales and the reorganization and sale of certain Hong Kong operations in conjunction with establishing operations directly in the PRC. Backlog -- The worldwide backlog for Air Conditioning Products as of December 31, 1996, was $601 million, essentially at the same high level as of a year earlier (with little effect from foreign exchange) reflecting continued strong demand for commercial products. PLUMBING PRODUCTS SEGMENT
1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in millions) Sales: International portion $ 1,072 $ 928 $ 924 U.S. portion 380 342 294 ------- ------- ------- Total $ 1,452 $ 1,270 $ 1,218 ======= ======= ======= Operating income (loss) before asset impairment loss: International portion $ 88 $ 122 $ 140 U.S. portion 22 (2) (29) ------- ------- ------- Total 110 120 111 Asset impairment loss (114) -- -- ------- ------- ------- Total operating income (loss) $ (4) $ 120 $ 111 ======= ======= =======
The international portion of Plumbing Products is composed of the European Plumbing Products Group, the Americas International Group, the Far East Group and export sales from the U.S. The U.S. portion is generated primarily by the U.S. Plumbing Products Group. Export sales from the U.S. have been reclassified to the International portion for 1995 and 1994 to conform with the 1996 classification. Sales of Plumbing Products increased 14% (15% excluding the unfavorable effects of foreign exchange) to $1,452 million in 1996 from $1,270 million in 1995, primarily as a result of sales by Porcher (acquired in the fourth quarter of 1995) and higher sales in North and Latin American and Middle Eastern operations. Excluding Porcher and foreign exchange effects, 1996 sales were flat, increasing 11% for U.S. operations, but declining 4% for international operations. Sales in the U.S. increased as a result of higher volumes (primarily in the retail market channel) and higher prices. Sales and market share in the retail market channel have been growing in recent years, a trend the Company believes will continue and lead to increased sales because of strong product and brand-name recognition. The sales decline for international operations was primarily attributable to a decrease in Europe, particularly in Germany, Italy and France which continued to experience weak economic conditions and the effects of a strike in the Philippines, partly offset by volume gains in Latin American operations (primarily in Mexico) and Egypt. 17 20 Sales of Plumbing Products increased 4% (with little overall effect from foreign exchange) to $1,270 million in 1995 from $1,218 million in 1994. Sales increased slightly for international operations, primarily attributable to volume and price gains in Italy and to a lesser extent in Greece and the United Kingdom ("U.K."), partly offset by lower sales in Germany, France, Canada and Mexico as a result of weak economic conditions in those countries. Sales in the U.S. increased 16% because of improved markets and expanded distribution through retail market channels. Operating income of Plumbing Products (excluding the asset impairment charge) was $110 million for 1996 compared with $120 million for 1995, a decrease of 8% (7% excluding the unfavorable effects of foreign exchange), because of lower operating income for international operations, partly offset by a solid gain in U.S. operations. The decrease in operating income for international operations in 1996 was principally due to the aforementioned market weakness in Europe, particularly in Germany, Italy and France and the effects of the Philippines strike. In addition, margins in France were lower than in the prior year due to increased costs, primarily in the newly-acquired Porcher operations. The Company is undertaking actions to assimilate Porcher into its European plumbing products operations and to improve operating performance. Operating results in the U.S. improved substantially, due to higher sales and lower-cost sourcing from expanded facilities in Mexico and manufacturing and operating cost improvements. Operating income of Plumbing Products was $120 million for 1995 compared with $111 million for 1994, an increase of 8% (4% excluding foreign exchange effects). In 1994 operating income for Plumbing Products included a provision of $14 million related to the early disposition of certain assets and a provision of $5 million related to employee severance and other cost reduction actions. Excluding such provisions and the effects of foreign exchange from 1994, 1995 operating income would have decreased 11% from 1994, because of lower operating income for international operations, partly offset by improved results in the U.S. The decrease in operating income for international operations in 1995 was principally due to the aforementioned market weakness in Germany, France, Canada and Mexico, start-up expenses of new operations in the Far East, operating difficulties in the Czech Republic and lower profitability in Brazil and Korea. Operating results in the U.S. improved substantially, to near break even, due to higher sales and lower-cost sourcing from expanded facilities in Mexico, partly offset by costs related to the realignment of U.S. manufacturing operations. Backlog -- Plumbing Products' backlog as of December 31, 1996, was $157 million, up slightly from December 31, 1995 (with little effect from foreign exchange), reflecting inclusion of the Porcher backlog offset partly by the effects of continued economic weakness in Europe. PLUMBING 1996 Sales-$1.5 Billion Business Mix [PIE CHART] Residential 75% Commercial 25%
Geography [PIE CHART] Europe 53% U.S. 26% Other 13% Far East 8%
Markets [PIE CHART] Replacement and Remodeling 60% New Construction 40%
Plumbing Products is the most geographically diverse of the Company's three businesses. The majority of its sales in Europe and the Americas are from the replacement and remodeling markets while sales in the Far East are primarily driven by the fast-growing new construction markets. 18 21 AUTOMOTIVE PRODUCTS SEGMENT
1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in millions) Sales $916 $998 $759 Operating Income 123 155 62
Sales of Automotive Products for 1996 were $916 million, a decrease of $82 million, or 8% (6% excluding the unfavorable effects of foreign exchange), from $998 million in 1995, primarily because of a decline in European commercial vehicle production as a result of market weakness and order delays at several large customers in anticipation of new truck model introductions, partly offset by the effect of the increased number of components per truck on new models. After a strong first quarter, unit volume of truck and bus production in Western Europe declined, resulting in a decrease of 9% for the full year 1996 compared with 1995. Sales volumes were lower in all markets for commercial vehicle braking and other control systems except in the U.K. because of the growing utility vehicle business in that country. In Brazil, demand also decreased as truck production declined 32% from the prior year. Sales of Automotive Products for 1995 were $998 million, an increase of $239 million, or 31% (20% excluding the favorable effects of foreign exchange), from $759 million in 1994, due to higher volume, partly offset by the effects of lower prices on electronic products. Unit volume of truck and bus production in Western Europe and aftermarket sales improved 23% and 16%, respectively, in 1995. Sales volumes were significantly higher in all markets for commercial vehicle braking and other control systems and in the U.K. for the growing utility vehicle business in that country. In Brazil demand also increased, as truck production grew 11% over the prior year. Operating income for Automotive Products was $123 million in 1996, a decrease of 20% (18% excluding the unfavorable effects of foreign exchange). This decrease reflected the lower sales and start-up costs associated with new product introductions on 1997 truck models, offset partly by productivity improvements from the continuing implementation of manufacturing process improvements. Operating income for Automotive Products was $155 million in 1995, an increase of 150% (122% excluding the favorable effects of foreign exchange). This increase was primarily attributable to the substantially higher sales volume as well as higher margins achieved through implementation of manufacturing process improvements, a reduced salaried workforce, productivity gains and other cost reduction actions. In addition, 1994 operating income included special charges of $14 million related to employee severance and the consolidation of production facilities. Backlog -- Automotive Products' backlog as of December 31, 1996, was $309 million, a decrease of 9% from December 31, 1995 (excluding the unfavorable effects of foreign exchange), reflecting the weak markets and shortened time horizons on orders placed by certain customers. AUTOMOTIVE 1996 Sales-$.9 Billion Geography [PIE CHART] Europe 94% Export and Other 6%
Markets [PIE CHART] OEM Conventional 42% Aftermarket 28% Electronic 30%
Automotive Products is primarily a European-based business manufacturing original equipment (OEM) for most of the world's leading producers of trucks, buses and utility vehicles. Aftermarket sales serve vehicle owners' add-on and replacement needs. For this segment the electronic products market, including antilock braking and electronic braking systems, is the fastest growing. 19 22 FINANCIAL REVIEW Interest expense decreased $15 million in 1996 compared with 1995 because of reduced debt and lower overall interest rates (see "Liquidity and Capital Resources"). Interest expense for 1995 decreased $46 million compared with 1994 because of reduced debt (due to the application of the net proceeds from the Company's initial public offering ("IPO") in February 1995 and cash flow) together with the effect of lower overall interest rates. Corporate items for 1996 totaled $95 million, approximately the same level as in 1995, reflecting increased spending on development of the Company's medical diagnostics group and increased product development costs in the Alliance Compressor joint venture, offset by lower accretion expense on postretirement benefits and a gain on the reorganization of the Alliance Compressor venture. Excluding from 1994 a special charge of $20 million paid in connection with the amendment of certain agreements in anticipation of the IPO, corporate items increased modestly in 1995 because of higher accretion expense on postretirement benefits and spending on development of medical diagnostics, partly offset by higher equity in net income of unconsolidated joint ventures. The income tax provisions for 1996 and 1995 were $104 million and $85 million, respectively. The effective income tax rate in 1996 was 35.6% on pretax income of $293 million (excluding the asset impairment charge on which there was no tax benefit) compared with an effective rate in 1995 of 37.5% on income before income taxes and extraordinary item of $227 million. In 1994 the income tax provision was $62 million, despite a loss (before income taxes and extraordinary item) of $15 million. The effective tax rates in 1996 and 1995 are somewhat lower than the statutory rates primarily as a result of higher levels of taxable income in the U.S. in 1996 and 1995 and expected in 1997 (which enabled the Company to recognize previously unrecognized tax benefits) and, in 1996, from proportionately greater pretax income 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. The 1994 provision reflected the taxes payable on profitable foreign operations, while tax benefits were not available to offset losses on U.S. operations. See Note 6 of Notes to Consolidated Financial Statements. As a result of the redemption of debt in 1995 and 1994 with refinancing proceeds, those years included extraordinary charges of $30 million and $9 million, respectively, including call premiums and the write-off of unamortized debt issuance costs, on which no tax benefits were recorded. See the following section, "Liquidity and Capital Resources" and Note 9 of Notes to Consolidated Financial Statements for a description of these transactions. In addition, the first quarter of 1997 will include an extraordinary charge of $10 million as a result of the repayment of debt under the 1995 Credit Agreement with proceeds of the 1997 Credit Agreement. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities, after cash interest paid of $140 million, was $353 million for 1996, compared with $348 million for 1995. The $5 million increase resulted primarily from higher income before extraordinary item (excluding the non-cash asset impairment loss of $235 million) offset by the effect of higher payments for income taxes. Average inventory turnover for 1996 improved by half a turn over the average turnover for 1995, while operating working capital as a percentage of sales remained at 4.9%. After allowing for $206 million of net investing activities (principally capital expenditures of $227 million, including $15 million of investments in affiliated companies - see "Capital Expenditures"), net cash flow used for financing activities amounted to $175 million which was applied to the repayment of debt. 20 23 In January 1997 the Company entered into a new credit agreement (the "1997 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"). 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. The Company believes that the amounts available from operating cash flows, funds available under its 1997 Credit Agreement and future borrowings will be sufficient to meet its expected operating needs and planned capital expenditures for the foreseeable future. Obligations under the 1997 Credit Agreement are guaranteed by the Company, American Standard 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 nearly all shares of subsidiary stock. At December 31, 1996, the Company's total indebtedness was $1.9 billion and, after giving effect to the 1997 Credit Agreement, annual scheduled debt maturities were $23 million, $24 million, $164 million, $13 million and $211 million for the years 1997 through 2001, respectively. After completion of the 1997 Credit Agreement on January 31, 1997 and the Share Repurchase (as defined below), the Company had remaining availability under the Revolving Facilities of approximately $1.0 billion after reduction for borrowings and for $55 million of outstanding letters of credit. In addition, at December 31, 1996, the Company's foreign subsidiaries had $83 million available under overdraft facilities which can be withdrawn by the banks at any time. At December 31, 1996, 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 debt value of $147 million. The swap providers are major financial institutions. The Company does not anticipate non-performance by such providers. In December 1996, the Company, Kelso & Company, L.P. ("Kelso") and Kelso ASI Partners, L.P. ("ASI Partners"), the Company's largest stockholder at December 31, 1996, entered into an agreement (the "Stock Disposition Agreement") providing for: (i) the sale by ASI Partners of 12,429,548 shares of the Company's 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 the Company from ASI Partners of all shares of Company common stock 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, the Company repurchased 4,628,755 shares of common stock from ASI partners for $208 million (the "Share Repurchase"). Had the Share Repurchase occurred on January 1, 1996, it would have had the effect on a pro forma basis of increasing earnings per share (excluding the asset impairment loss), despite higher interest expense on the additional borrowings, and management expects that it will increase earnings per share in the future. After the Secondary Offering, the Share Distribution and the Share Repurchase, ASI Partners owned no common stock of the Company and will no longer be 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 (see Note 10 of Notes to Consolidated Financial Statements). 21 24 In accordance with the terms of the Stock Disposition Agreement, the Company also issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of the Company's common stock at $55 per share (the "Exercise Price"), $10 per share above 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 the Company's common stock and the Exercise Price. The warrants will be exercisable between January 31, 1998 (or October 31, 1998 in certain cases) and February 11, 2002. In the event that a Transaction (as defined in the Stock Disposition Agreement) constituting a change in control of the Company occurs prior to January 31, 1998 (or October 31, 1998 for a Transaction proposed prior to January 31, 1998 but not consummated or withdrawn as of January 31, 1998), the Company would be required to make a cash payment to ASI Partners based upon the excess, if any, of the consideration per share received by holders of Company common stock in the Transaction over the $45 per share received by ASI Partners in respect of all shares sold in the Secondary Offering and the Share Repurchase. If a Transaction occurs entitling ASI Partners to such a payment, the warrants would not be exercisable and would expire upon the consummation of such Transaction. In August 1996 the Company entered into a financial services partnership, American Standard Financial Services, with Transamerica Commercial Finance Corporation, a subsidiary of Transamerica Corporation, to provide a wide range of financial services to support sales of the Company's products while reducing cash requirements to expand its business. The partnership will offer inventory and consumer financing, commercial leasing and asset-based lending programs, which are expected to enhance the Company's cash flow. The Company does not currently intend to pay dividends and is limited in the amount it may pay under the terms of both the 1997 Credit Agreement and certain of its publicly-traded debt securities. In connection with an examination of the Company's German subsidiaries for the years 1984 through 1990, the Company agreed to make a partial security deposit of $20 million in respect of taxes and interest assessed in March 1996. See Note 6 of Notes to Consolidated Financial Statements. CAPITAL EXPENDITURES The Company's capital expenditures for 1996 were $227 million compared with $207 million for 1995. The increase for 1996 related primarily to lower-cost product sourcing, expansion of manufacturing capacity to meet market demand, expansion and modernization of recent acquisitions, equipment for new products and the continuing implementation of Demand Flow. Capital expenditures for Air Conditioning Products for 1996 were $93 million, an increase of 33% over the $70 million of capital spending in 1995. Major expenditures included expansion of the new operations in the PRC, and projects related to the expansion of manufacturing capacity for large chillers, implementation of Demand Flow and new products. Plumbing Products' capital expenditures for 1996 were $88 million, including $3 million of investments in affiliated companies, compared with capital expenditures of $93 million in 1995 (including investments in affiliated companies of $31 million, primarily Porcher), a decrease of 5% (1% excluding the effects of foreign exchange). Expenditures for 1996 included expansion of capacity in Mexico, expansion in Far East operations and implementation of Demand Flow. 22 25 Capital expenditures for Automotive Products in 1996 were $46 million, compared with 1995 capital expenditures of $44 million, an increase of 6% (11% excluding the effects of foreign exchange). Major projects included continued implementation of Demand Flow and cost-reduction projects and the initial investment in the joint venture with Cummins Engine Co. Inc. In January 1997 the Company announced formation of its Medical Systems Group to pursue initiatives in the medical diagnostics field. For the last several years the Company has supported the development of two small medical diagnostic products groups focusing on test instruments using laser technology and reagents. The Company had invested an aggregate of approximately $40 million in the development of these businesses through December 31, 1996, including $13 million of development expenses incurred in 1996. Based upon the progress and prospects of those two businesses, the Company decided to explore acquisitions to accelerate the commercialization of its technology and expand the number of diagnostic tests covered by its products. Accordingly, on March 10, 1997 the Company entered into definitive agreements to acquire the European medical diagnostic business (the "Sorin Business") of Sorin Biomedica S.p.A., an affiliate of the Fiat Group and, by means of a merger, all the outstanding shares of Incstar Corporation ("Incstar"), a biotechnology company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. indirectly owned a 52% interest. Sales in 1996 were approximately $80 million for the Sorin Business and approximately $40 million for Incstar. The aggregate cost of the acquisitions (the "Medical Systems Acquisitions") is expected to be approximately $220 million, including fees and expenses, and will be funded with borrowings under the 1997 Credit Agreement. The Company believes capital spending in recent years has been sufficient for maintenance purposes, important product and process redesigns, expansion projects and strategic investments. American Standard expects to continue to invest in the expansion and modernization of its existing facilities and affiliated companies and to consider entering into and increasing investments in joint ventures and making complementary acquisitions. The Company expects capital expenditures in 1997, excluding the acquisition of the medical diagnostic companies, will approximate $250 million. CYCLICALITY; SEASONALITY The preponderance of Air Conditioning Products and Plumbing Products sales are to the replacement, remodeling, and repair markets. In 1996, only about 6% of the Company's sales were associated with new housing in the United States and about 12% were associated with new commercial construction in the United States, both of which are cyclical. The Company's geographic diversity mitigates the effects of fluctuations in individual new construction markets outside the United States. Approximately two-thirds of Automotive Products' sales are dependent on production levels of medium-sized and heavy trucks and buses, particularly in Europe, which have been cyclical. Total Company sales tend to be seasonally higher in the second and third quarters of the year because summer is the peak season for sales of air conditioning products and because a significant percentage of Air Conditioning Products' sales is attributable to residential and commercial construction activity, which is generally higher in the second and third quarters of the year. 23 26 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The accompanying consolidated balance sheet at December 31, 1996 and 1995, and related consolidated statements of operations, stockholders' deficit and cash flows for the years ended December 31, 1996, 1995 and 1994, 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. Emmanuel A. Kampouris Chairman, President and Chief Executive Officer Fred A. Allardyce Vice President and Chief Financial Officer G. Ronald Simon Vice President and Controller February 13, 1997 24 27 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders American Standard Companies Inc. We have audited the accompanying consolidated balance sheet of American Standard Companies Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1996. 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 Companies Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1996, 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. New York, New York February 13, 1997 25 28 CONSOLIDATED STATEMENT OF OPERATIONS
American Standard Companies Inc. 1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in thousands, except share data) Sales $ 5,804,561 $ 5,221,476 $ 4,457,465 ------------ ------------ ------------ Costs and expenses: Cost of sales 4,379,765 3,887,024 3,377,271 Selling and administrative expenses 905,427 853,783 778,550 Asset impairment loss 235,234 -- -- Other expense 28,337 40,489 57,381 Interest expense 198,192 213,326 259,437 ------------ ------------ ------------ 5,746,955 4,994,622 4,472,639 ------------ ------------ ------------ Income (loss) before income taxes and extraordinary item 57,606 226,854 (15,174) Income taxes 104,324 85,070 62,512 ------------ ------------ ------------ Income (loss) before extraordinary item (46,718) 141,784 (77,686) Extraordinary loss on retirement of debt -- (30,129) (8,735) ------------ ------------ ------------ Net income (loss) applicable to common shares $ (46,718) $ 111,655 $ (86,421) ============ ============ ============ Per common share: Income (loss) before extraordinary item $ (.60) $ 1.90 $ (1.29) Extraordinary loss on retirement of debt -- (.40) (.15) ------------ ------------ ------------ Net income (loss) $ (.60) $ 1.50 $ (1.44) ============ ============ ============ Average number of outstanding common shares 77,986,511 74,671,830 59,933,435 ============ ============ ============
See notes to consolidated financial statements. 26 29 CONSOLIDATED BALANCE SHEET
American Standard Companies Inc. 1996 1995 ---- ---- At December 31, (Dollars in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 59,699 $ 88,704 Accounts receivable, less allowance for doubtful accounts - 1996, $28,294; 1995, $27,330 799,792 771,024 Inventories 408,962 362,340 Future income tax benefits 67,125 29,645 Other current assets 50,796 43,213 ----------- ----------- Total current assets 1,386,374 1,294,926 Facilities, at cost, net of accumulated depreciation 1,005,998 924,492 Other assets: Goodwill, net of accumulated amortization - 1996, $221,105; 1995, $249,410 875,111 1,081,622 Debt issuance costs, net of accumulated amortization - 1996, $13,723; 1995, $8,638 34,451 39,267 Other 217,681 179,340 ----------- ----------- $ 3,519,615 $ 3,519,647 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Loans payable to banks $ 108,856 $ 240,040 Current maturities of long-term debt 72,645 72,908 Accounts payable 469,150 438,170 Accrued payrolls 151,707 171,378 Other accrued liabilities 399,152 338,138 Taxes on income 35,421 45,968 ----------- ----------- Total current liabilities 1,236,931 1,306,602 Long-term debt 1,741,847 1,770,098 Other long-term liabilities: Reserve for postretirement benefits 473,229 482,398 Deferred tax liabilities 68,157 44,761 Other 379,832 305,851 ----------- ----------- Total liabilities 3,899,996 3,909,710 Commitments and contingencies Stockholders' deficit: Preferred stock, 2,000,000 shares authorized; none issued and outstanding Common stock, $.01 par value, 200,000,000 shares authorized; 78,572,638 shares issued and outstanding in 1996, 76,733,010 in 1995 786 767 Capital surplus 563,873 509,218 Subscriptions receivable (395) (629) Accumulated deficit (771,487) (724,769) Foreign currency translation effects (173,158) (174,650) ----------- ----------- Total stockholders' deficit (380,381) (390,063) ----------- ----------- $ 3,519,615 $ 3,519,647 =========== ===========
See notes to consolidated financial statements. 27 30 CONSOLIDATED STATEMENT OF CASH FLOWS
American Standard Companies Inc. 1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in thousands) Cash provided (used) by: Operating activities: Income (loss) before extraordinary item $ (46,718) $ 141,784 $ (77,686) Asset impairment loss 235,234 -- -- Depreciation 117,951 109,999 122,944 Amortization of goodwill 27,580 33,396 31,472 Non-cash interest 61,794 63,930 67,837 Non-cash stock compensation 31,201 29,014 28,479 Changes in assets and liabilities: Accounts receivable (25,479) (124,482) (69,991) Inventories (32,499) 8,236 13,092 Accounts payable and accrued payrolls (21,356) 53,971 63,413 Postretirement benefits 19,770 33,531 21,290 Other long-term liabilities 24,455 22,419 32,795 Other, net (39,172) (24,092) 22,941 --------- ----------- --------- Net cash provided by operating activities 352,761 347,706 256,586 --------- ----------- --------- Investing activities: Purchases of property, plant and equipment (212,179) (164,193) (105,741) Investments in affiliated companies (15,321) (42,395) (23,971) Proceeds from disposals of property, plant and equipment 15,105 19,428 14,783 Other 6,293 4,055 (2,071) --------- ----------- --------- Net cash used by investing activities (206,102) (183,105) (117,000) --------- ----------- --------- Financing activities: Net proceeds from issuance of common stock -- 280,535 -- Minority partners' contributions to PRC venture 18,165 26,246 -- Proceeds from issuance of long-term debt 6,912 469,776 336,160 Proceeds from exercise of stock options 4,069 -- -- Repayments of long-term debt, including redemption premiums (73,429) (1,026,723) (439,762) Net change in revolving credit facilities (106,332) 124,768 30,816 Net change in other short-term debt (13,627) (18,312) (10,044) Common stock repurchases (10,000) (10,989) (16,927) Financing costs and other (355) (12,466) (2,441) --------- ----------- --------- Net cash used by financing activities (174,597) (167,165) (102,198) Effect of exchange rate changes on cash and cash equivalents (1,067) (1,481) 2,124 --------- ----------- --------- Net increase (decrease) in cash and cash equivalents (29,005) (4,045) 39,512 Cash and cash equivalents at beginning of period 88,704 92,749 53,237 --------- ----------- --------- Cash and cash equivalents at end of period $ 59,699 $ 88,704 $ 92,749 ========= =========== =========
See notes to consolidated financial statements. 28 31 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
American Standard Companies Inc. (Dollars in thousands) Foreign Currency Common Capital Subscriptions ESOP Accumulated Translation Stock Surplus Receivable Shares Deficit Effects Balance at December 31, 1993 $ 614 $ 188,369 $(2,588) $(4,331) $(750,003) $(149,220) Net loss -- -- -- -- (86,421) -- Common stock repurchased (7) (13,244) -- -- -- -- Common stock issued 2 3,974 -- -- -- -- Payments on subscriptions -- -- 948 -- -- -- ESOP shares allocated to employees -- 15,137 -- 4,331 -- -- Foreign currency translation -- -- -- -- -- (2,501) ----- --------- ------- ----- --------- --------- Balance at December 31, 1994 609 194,236 (1,640) -- (836,424) (151,721) Net income -- -- -- -- 111,655 -- Common stock repurchased -- (781) -- -- -- -- Initial public offering of common stock 151 280,384 -- -- -- -- Other common stock issued 7 35,379 -- -- -- -- Payments on subscriptions -- -- 1,011 -- -- -- Foreign currency translation -- -- -- -- -- (22,929) ----- --------- ------- ----- --------- --------- Balance at December 31, 1995 767 509,218 (629) -- (724,769) (174,650) Net loss -- -- -- -- (46,718) -- Stock options exercised including tax benefit 2 5,342 Common stock issued 17 49,313 -- -- -- -- Payments on subscriptions -- -- 234 -- -- -- Foreign currency translation -- -- -- -- -- 1,492 ----- --------- ------- ----- --------- --------- Balance at December 31, 1996 $ 786 $ 563,873 $ (395) $ -- $(771,487) $(173,158) ===== ========= ======= ===== ========= =========
See notes to consolidated financial statements. 29 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF THE COMPANY American Standard Companies Inc. (the "Company") is a Delaware corporation that has as its only significant asset all the outstanding common stock of American Standard Inc., a Delaware corporation ("American Standard Inc."). Hereinafter, "American Standard" or "the Company" will refer to the Company, or to the Company and 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, 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 14, 42 and 43 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 stockholders' 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 $2.3 million in 1996, $4.5 million in 1995 and $9.9 million in 1994. Revenue Recognition -- Sales are recorded when shipment to a customer occurs. 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 30 33 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 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 $160 million in 1996, $146 million in 1995 and $140 million in 1994 for research activities and product development and for product engineering. Expenditures for research and product development only were $81 million, $67 million and $60 million in the respective years. The expenditures for 1995 and 1994 have been restated to conform with the 1996 classifications of such expenditures. 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 $88 million, $92 million and $84 million of advertising costs in 1996, 1995 and 1994, respectively. Earnings Per Share -- Earnings per share have been computed using the weighted average number of common shares outstanding. The dilutive effect of options outstanding under the Company's Stock Incentive Plan was not material. 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 stockholders' 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 the Company's 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. NOTE 3. SUBSEQUENT EVENTS In January 1997 the Company entered into a new credit agreement (the "1997 Credit Agreement"), an amendment and restatement of the 1995 Credit Agreement, which provided the Company with senior secured credit facilities aggregating $1.75 billion and which matures in 2002. The 1997 Credit Agreement provides lower interest costs, significantly 31 34 increased borrowing capacity, less restrictive covenants and no scheduled principal payments until maturity in 2002 (see Note 9). In the first quarter of 1997 the Company completed a secondary offering (the "Secondary Offering") of 12,429,548 shares of the Company's common stock and the repurchase (the "Share Repurchase") by the Company from Kelso ASI Partners, L.P. ("ASI Partners"), the Company's largest stockholder at December 31, 1996, of 4,628,755 shares of common stock of the Company. In conjunction with the Secondary Offering, ASI Partners distributed to certain of its partners, 3,780,353 shares of the Company's common stock that it owns. In addition, the Company issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of the Company's 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 the Company received no proceeds therefrom (see Note 10). In January 1997 the Company announced formation of its Medical Systems Group to pursue initiatives in the medical diagnostics field. For the last several years the Company has supported the development of two small medical diagnostic products groups focusing on test instruments using laser technology and reagents. The Company had invested an aggregate of approximately $40 million in the development of these businesses through December 31, 1996. Based upon the progress and prospects of those two businesses, the Company decided to explore acquisitions to accelerate the commercialization of its technology and expand the number of diagnostic tests covered by its products. Accordingly, on March 10, 1997 the Company entered into definitive agreements to acquire the European medical diagnostic business (the "Sorin Business") of Sorin Biomedica S.p.A., an affiliate of the Fiat Group and, by means of a merger, all the outstanding shares of Incstar Corporation ("Incstar"), a biotechnology company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. indirectly owned a 52% interest. Sales in 1996 were approximately $80 million for the Sorin Business and approximately $40 million for Incstar. The aggregate cost of the acquisitions (the "Medical Systems Acquisitions") is expected to be approximately $220 million, including fees and expenses, and will be funded with borrowings under the 1997 Credit Agreement. NOTE 4. OTHER EXPENSE Other income (expense) was as follows:
1996 1995 1994 ---- ---- ---- Year Ended December 31, (Dollars in millions) Interest income $ 6.2 $ 8.9 $ 8.2 Royalties 3.3 4.1 3.5 Equity in net income of unconsolidated joint ventures 2.6 7.1 4.0 Minority interest (11.7) (12.2) (13.3) Accretion expense (29.3) (36.5) (26.1) Other, net .6 (11.9) (33.7) $ (28.3) $ (40.5) $ (57.4)
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 common stock of the ESOP 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 funds basic and matching allocations to the ESOP accounts through weekly contributions of shares of the Company's common stock based upon the closing price each Friday for shares of the Company's common stock quoted on the New York Stock Exchange. The Company intends to fund the ESOP in future years through contributions of cash or shares of the Company's 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, 1996, 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. 32 35 The Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1996 and 1995 were:
1996 1996 1996 1995 1995 1995 - ----------------------------------------------------- ----------- ------------ ---------- ----------- ----------- ---------- (Dollars in millions) Assets in Accumulated Assets in Accumulated Excess of Benefit Health and Excess of Benefit Health and Accumulated Obligations Life Accumulated Obligations Life Benefit in Excess of Insurance Benefit in Excess Insurance Obligations Assets Benefits Obligations of Assets Benefits Actuarial present value of benefit obligations: Vested $136.8 $604.3 $ -- $124.8 $613.5 $ -- Non-vested 5.5 43.9 -- 2.6 44.2 -- ----------- ------------ ---------- ----------- ----------- ---------- Accumulated benefit obligations 142.3 648.2 -- 127.4 657.7 -- Additional amounts related to projected pay increases 24.6 41.4 -- 25.9 39.4 -- ----------- ------------ ---------- ----------- ----------- ---------- Total projected benefit obligations 166.9 689.6 179.1 153.3 697.1 186.9 ----------- ------------ ---------- ----------- ----------- ---------- Assets and book reserves relating to such benefits: Market value of funded assets 208.2 343.4 -- 184.7 325.9 -- Reserve (asset) for postretirement benefits net of recognized overfunding (42.3) 362.6 165.7 (39.6) 361.3 161.0 Additional minimum liability -- -- -- -- 9.7 -- ----------- ------------ ---------- ----------- ----------- ---------- 165.9 706.0 165.7 145.1 696.9 161.0 ----------- ------------ ---------- ----------- ----------- ---------- Assets and book reserves in excess of (less than) projected benefit obligations $ (1.0) $ 16.4 $(13.4) $ (8.2) $ (.2) $(25.9) =========== ============ ========== =========== =========== ========== Consisting of: Unrecognized prior services benefit (cost) $ (8.4) $(24.2) $ 7.2 $ (9.7) $ (5.8) $ 9.8 Unrecognized net gain (loss) from changes in actuarial assumptions and experience 7.4 40.6 (20.6) 1.5 5.6 (35.7) ----------- ------------ ---------- ----------- ----------- ---------- $ (1.0) $ 16.4 $(13.4) $ (8.2) $ (.2) $(25.9) =========== ============ ========== =========== =========== ==========
At December 31, 1996, the projected benefit obligation related to health and life insurance benefits for active employees was $68.0 million and for retirees was $111.1 million. For certain plans, the additional minimum liability recorded in 1995 by the Company as part of its reserve for postretirement benefits was $9.7 million at December 31, 1995, (none in 1996). The additional minimum liability is the excess of the accumulated benefit obligation over plan assets and accumulated benefit provisions. In connection with providing for the additional minimum liability, an intangible asset was recorded, to the extent of unrecognized prior service costs, which amounted to $9.7 million at December 31, 1995. 33 36 The projected benefit obligation for postretirement bene- fits was determined using the following assumptions:
1996 1996 1995 1995 Domestic Foreign Domestic Foreign -------- -------------- --------------- --------------- Discount rate 7.50% 4.25%-8.00% 7.00% 4.25%-8.25% Long-term rate of inflation 2.80% .05%-3.80% 2.80% 1.55%-5.05% 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% 6.00%-9.50%
The weighted-average annual assumed rate of increase in the health care cost trend rate is 7% for 1997 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, 1996, by $14.4 million and the annual postretirement cost by $2.0 million. Total postretirement costs were:
1996 1995 1994 ------- -------- -------- Year Ended December 31, (Dollars in millions) Pension benefits $ 41.7 $ 48.3 $ 35.9 Health and life insurance benefits 17.4 15.5 16.3 ------- -------- -------- Defined benefit plan cost 59.1 63.8 52.2 Defined contribution plan cost, principally ESOP 31.2 27.4 24.7 ------- -------- -------- Total postretirement cost, including accretion expense $ 90.3 $ 91.2 $ 76.9 ======= ======== ========
Postretirement cost had the following components:
1996 1996 1995 1995 1994 1994 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 $ 24.5 $ 4.7 $ 24.6 $ 3.3 $ 23.6 $ 3.8 Interest cost on the projected benefit obligation 55.6 12.5 58.1 12.8 47.0 12.3 Less assumed return on plan assets: Actual loss (return) on plan assets (64.0) -- (107.1) -- 13.0 -- Excess (shortfall) deferred 22.7 -- 69.7 -- (49.5) -- -------- --------- -------- --------- -------- --------- (41.3) -- (37.4) -- (36.5) -- Other, including amortization of prior service cost 2.9 .2 3.0 (.6) 1.8 .2 -------- --------- -------- --------- -------- --------- Defined benefit plan cost $ 41.7 $ 17.4 $ 48.3 $ 15.5 $ 35.9 $ 16.3 ======== ========= ======== ========= ======== ========= Accretion expense reclassified to "other expense" $ 16.8 $ 12.5 $ 23.7 $ 12.8 $ 13.8 $ 12.3 ======== ========= ======== ========= ======== =========
34 37 NOTE 6. INCOME TAXES The Company's income (loss) before income taxes and extraordinary item, and the applicable provision (benefit) for income taxes were:
1996 1995 1994 ------- ------ ------- Year Ended December 31, (Dollars in millions) Income (loss) before income taxes and extraordinary item: Domestic $ 162.6 $ -- $(157.0) Foreign (105.0)(a) 226.9 141.8 ------- ------ ------- Pre-tax income (loss) $ 57.6 $226.9 $ (15.2) ======= ====== ======= Provision (benefit) for income taxes: Current: Domestic $ 48.2 $ 15.7 $ 10.5 Foreign 70.2 69.6 57.7 ------- ------ ------- 118.4 85.3 68.2 Deferred: Domestic (4.2) (7.3) .8 Foreign (9.9) 7.1 (6.5) ------- ------ ------- (14.1) (.2) (5.7) ------- ------ ------- Total provision $ 104.3 $ 85.1 $ 62.5 ======= ====== =======
(a) 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 1996, 1995 and 1994 to the income (loss) before income taxes and extraordinary item is as follows:
1996 1995 1994 ------ ------ ------ Year Ended December 31, (Dollars in millions) Tax provision (benefit) at statutory rate $ 20.2 $ 79.4 $ (5.3) Nondeductible asset impairment loss 82.3 -- -- Rate differences and withholding taxes related to foreign operations 5.5 19.2 47.1 Nondeductible goodwill amortization 8.3 11.9 10.0 State tax provision (benefit) 1.3 (.5) (5.3) Nondeductible ESOP allocations -- 3.5 6.8 Foreign exchange gain (loss) (.6) 1.2 (4.3) Increase (decrease) in valuation allowance (13.0) (31.3) 21.4 Other, net .3 1.7 (7.9) ------ ------ ------ Total provision $104.3 $ 85.1 $ 62.5 ====== ====== ======
The decrease in the valuation allowance in 1996 of $13 million was net of a $10.8 million valuation allowance provided on future tax benefits on certain foreign operations. In addition to the 1995 valuation allowance decrease of $31.3 million and the 1994 valuation allowance increase of $21.4 million shown above, valuation allowances of $10.5 million in 1995 and $3.2 million in 1994 were provided for the tax benefits related to the extraordinary losses on retirement of debt (see Note 9). The following table details the gross deferred tax liabilities and assets and the related valuation allowances:
1996 1995 ------ ------ At December 31, (Dollars in millions) Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $127.3 $138.8 Inventory (LIFO and purchase accounting differences) 1.0 10.3 Employee benefits 8.1 3.5 Foreign investments 50.1 50.1 Other 37.9 44.8 ------ ------ 224.4 247.5 ------ ------ Deferred tax assets: Postretirement benefits 134.1 132.7 Warranties 61.1 53.8 Alternative minimum tax 4.7 16.7 Foreign tax credits and net operating losses 45.2 34.4 Reserves 54.8 69.5 Other 8.5 23.3 Valuation allowances (85.0) (98.0) ------ ------ 223.4 232.4 ------ ------ Net deferred tax liabilities $ 1.0 $ 15.1 ------ ------
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. 35 38 In 1995 and 1996 the valuation allowance was reduced as a result of the reversal of existing deferred tax benefits and higher levels of taxable income in the U.S. in 1995, 1996 and expected in 1997. Although realization is not assured, management believes it is more likely than not that all of the resulting net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 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 $135 million, $90 million, and $70 million in the years 1996, 1995 and 1994, respectively. In connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, the German tax authorities have raised questions regarding the treatment of certain significant matters. In prior years the Company paid approximately $20 million (at December 31, 1996 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 $71 million (at December 31, 1996 exchange rates) (principally relating to the 1988 to 1990 period), plus interest, for the tax return years under audit. In addition, significant transactions similar to those which gave rise to such assessment occurred in years subsequent to 1990. Having assessed additional taxes for the 1988-1990 period, the German tax authorities might, after future tax audits, propose tax adjustments for years 1991 to 1993 that could be as much as 50% higher. 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, 1996 with respect to such matters. The Company has agreed with the German tax authorities to make 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 will apply approximately $7 million of tax refunds due it 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 of 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 1994, 1995 and 1996 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. 36 39 NOTE 7. INVENTORIES The components of inventories are as follows:
1996 1995 ------ ------ At December 31, (Dollars in millions) Finished products $235.8 $190.7 Products in process 77.7 84.7 Raw materials 95.5 86.9 ------ ------ Inventories at cost $409.0 $362.3 ====== ======
The carrying cost of inventories approximates current cost. NOTE 8. FACILITIES The components of facilities, at cost, are as follows:
1996 1995 -------- -------- At December 31, (Dollars in millions) Land $ 79.0 $ 74.3 Buildings 382.3 356.3 Machinery and Equipment 971.0 888.3 Improvements in progress 150.2 119.2 -------- -------- Gross facilities 1,582.5 1,438.1 Less: accumulated depreciation 576.5 513.6 -------- -------- Net facilities $1,006.0 $ 924.5 ======== ========
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. After giving effect to the 1997 Credit Agreement, the amounts of long-term debt maturing in years 1997 through 2001 were: 1997-$23 million; 1998-$24 million; 1999-$164 million; 2000-$13 million; and 2001-$211 million. As a result of the redemption of debt in 1995 and 1994, the Consolidated Statement of Operations included extraordinary charges of $30 million and $9 million, respectively (including call premiums and the write-off of deferred debt issuance costs, on which no tax benefit was recorded (see Note 6). In addition, the first quarter of 1997 will include an extraordinary charge of $10 million as a result of the repayment of debt under the 1995 Credit Agreement. Short-term -- At December 31, 1996, there were $67 million of short-term borrowings outstanding and $56 million of letters of credit outstanding under the 1995 Credit Agreement. Average borrowings under the revolving credit facilities available under bank credit agreements for 1996, 1995 and 1994 were $215 million, $278 million and $73 million, respectively. 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. Upon completion of the 1997 Credit Agreement in January 1997 (proceeds of which replaced outstanding borrowings under the 1995 Credit Agreement) and the Share Repurchase for $208 million in February 1997 (see Notes 3 and 10), there were $323 million of borrowings outstanding under the 37 40 Revolving Facilities and $55 million of letters of credit. Remaining availability under the Revolving Facilities was $997 million, which is available to provide financing for the Medical Systems Acquisitions (see Note 3), 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. 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, 1996, the Company had $42 million of such foreign short-term debt outstanding at an average interest rate of 10.6% per annum. The Company also had an additional $83 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time. Average short-term borrowings for 1996, 1995 and 1994 were $284 million, $334 million and $119 million, respectively, at weighted average interest rates of 7.33%, 7.85% and 9.40%, respectively. Total short-term borrowings outstanding at December 31, 1996, 1995 and 1994 were $109 million, $240 million, and $70 million, respectively, at weighted average interest rates of 7.5%, 7.9% and 10.7%, respectively. Long-term -- Long-term debt was as follows:
1996 1995 -------- -------- At December 31, (Dollars in millions) 1995 Credit Agreements $ 363.6 $ 432.1 9 1/4% sinking fund debentures, due in installments from 1997 to 2016 150.0 150.0 10 7/8% senior notes due 1999 150.0 150.0 11 3/8% senior debentures due 2004 250.0 250.0 9 7/8% senior subordinated notes due 2001 200.0 200.0 10 1/2% senior subordinated discount debentures (net of unamortized discount of $77.5 million in 1996; $162.2 million in 1995) due in installments from 2003 to 2005 633.1 578.5 Other long-term debt 67.7 82.4 -------- -------- 1,814.4 1,843.0 Less current maturities 72.6 72.9 -------- -------- $1,741.8 $1,770.1 ======== ========
Interest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1996, 1995, and 1994, were $3.9 million, $4.0 million and $2.9 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $140 million, $161 million and $186 million, respectively. The U.S. Dollar equivalent of the 1995 Credit Agreement loans and the effective weighted average interest rates were:
1996 1995 ------ ------ At December 31, (Dollars in millions) Periodic access loans: Deutschemark loans at 4.56% in 1996; 5.39% in 1995 $263.7 $282.5 ------ ------ British sterling loans at 7.44% in 1996; 8.23% in 1995 5.1 34.8 Dutch guilder loans at 4.31% in 1996; 5.23% in 1995 24.8 24.8 ------ ------ Total periodic access loans 293.6 342.1 Term loans: U.S. dollar loans at 6.63% in 1996; 6.91% in 1995 70.0 90.0 ------ ------ Total 1995 Credit Agreement long-term loans 363.6 432.1 Revolver loans at 5.6% in 1996; 6.9% in 1995 67.2 179.8 ------ ------ Total 1995 Credit Agreement loans $430.8 $611.9 ====== ======
The 9 1/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 104.163% in 1997 to 100% in 2006 and thereafter. The 10 7/8% Senior Notes are not redeemable by the Company. The 11 3/8% Senior Debentures are redeemable at the option of the Company, in whole or in part, on or after May 15, 1997, at redemption prices declining from 105.69% in 1997 to 100% on May 15, 2002, and thereafter. 38 41 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 (together the "Senior Subordinated Debt") 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, the 10 7/8% Senior Notes, and the 11 3/8% Senior Debentures (the said notes and debentures together the "Senior Securities"). At December 31, 1996, the Company held swap agreements to hedge the redemption value of a portion of its 10 1/2% Senior Subordinated Discount Debenture 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 debt value of $147 million, which approximates their fair value as of December 31, 1996. The swap providers are major financial institutions and the Company does not anticipate non-performance by such providers. Obligations under the 1997 Credit Agreement are guaranteed by the Company, American Standard 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"), which yielded 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. 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 the Company's common stock (including 1,621,245 shares sold pursuant to the underwriters' over allotment option) in the Secondary Offering completed in the first quarter of 1997; and (ii) the repurchase by the Company from ASI Partners of all shares of Company 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, the Company repurchased 4,628,755 shares of common stock from ASI partners for $208 million (the "Share Repurchase"). The Company financed the Share Repurchase with borrowings under the 1997 Credit Agreement. The Company had previously completed a secondary offering in September 1995 (together with the Secondary Offering, the "Secondary Offerings") for 39 42 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 will own no common stock of the Company and will not be 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. In accordance with the Stock Disposition Agreement, the Company also issued to ASI Partners 5-year warrants to purchase 3,000,000 shares of common stock of the Company 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 the Company's common stock and the Exercise Price. The warrants will be exercisable between January 31, 1998 (or October 31, 1998 in certain cases) and February 11, 2002. In the event that a Transaction (as defined in the Stock Disposition Agreement) constituting a change in control of the Company occurs prior to January 31, 1998 (or October 31, 1998 for a Transaction proposed prior to January 31, 1998 but not consummated or withdrawn as of January 31, 1998), the Company would be required to make a cash payment to ASI Partners based upon the excess, if any, of the consideration per share received by holders of Company common stock in the Transaction over the cash price per share received by ASI Partners in respect of all shares sold in the Secondary Offering and the Share Repurchase. If a Transaction occurs entitling ASI Partners to such a payment, the warrants would not be exercisable and would expire upon the consummation of such Transaction. 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 the Company's stock options as described below. In January 1995 the Company adopted a Restated Certificate of Incorporation, Amended By-laws and a Stockholder Rights Agreement. The Restated Certificate of Incorporation authorizes the Company to issue up to 200,000,000 shares of common stock, par value $.01 per share and 2,000,000 shares of preferred stock, par value $.01 per share of which the Board of Directors designated 900,000 shares as a new series of Junior Participating Cumulative Preferred Stock. Each outstanding share of common stock has associated with it one right to purchase a specified amount of Junior Participating Cumulative Preferred Stock at a stipulated price in certain circumstances relating to changes in the ownership of the common stock of the Company. In January 1995 the Company 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. The maximum number of shares or units that may be issued under the Stock Plan 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. 40 43 A summary of stock option activity and related information for 1996 and 1995 follows:
1996 1996 1995 1995 ---------- ---------- ---------- ---------- Weighted- Weighted- Average Average Exercise Exercise Shares Price Shares Price Outstanding-beginning of year 4,974,000 $ 20.01 -- -- Granted 18,000 32.66 5,006,000 $ 20.01 Exercised (230,483) 20.00 -- -- Forfeited (60,343) 20.00 (32,000) 20.00 ---------- ---------- ---------- ---------- Outstanding-end of year 4,701,174 $ 20.06 4,974,000 $ 20.01 ========== ========== ========== ========== Exercisable at end of year 1,422,539 $ 20.01 -- -- Weighted average fair value of options granted during the year $ 12.26 $ 7.51
Exercise prices for options outstanding as of December 31, 1996, ranged from $20 to $37.94. The weighted-average remaining contractual life of those options is 8.4 years. As of December 31, 1996, there were 2,672,818 shares available for grant under the plan. 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 loss and net loss per share would have increased by $8.2 million and $.10 per share, respectively, in 1996 and decreased net income and net income per share by $7.4 million and $.10 per share, respectively, in 1995. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for both 1996 and 1995: risk-free interest rate of 6.3%; volatility of 23%; an expected life of 6 years; 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, 1996, approximates carrying amounts except as follows:
-------- ----- (Dollars in millions) Carrying Fair Amount Value 10 7/8% senior notes $150 $161 11 3/8% senior debentures 250 268 9 7/8% senior subordinated notes 200 211 10 1/2% senior subordinated discount debentures 633 694 9 1/4% sinking fund debentures 150 156
The fair values presented above are estimates as of December 31, 1996, 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. 41 44 The fair values of the Company's 1995 Credit Agreement loans, which approximate their carrying values, are 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 are based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value. NOTE 12. RELATED PARTY TRANSACTIONS In 1994 the Company paid Kelso, an affiliate of ASI Partners, the Company's largest shareholder, an annual fee of $2.75 million for providing management consulting and advisory services. In December 1994 the Company paid Kelso a one-time fee of $20 million in connection with the amendment of certain agreements in anticipation of the Company's IPO, including an amendment eliminating future payments of the $2.75 million annual fee but providing for the continuation of such services. See Notes 3 and 10. NOTE 13. COMMITMENTS AND CONTINGENCIES Future minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1996, were: 1997 - $62 million; 1998 - - $55 million; 1999- $38 million; 2000 - $28 million; 2001 - $23 million and thereafter - $44 million. Net rental expenses for operating leases were $70 million, $59 million and $45 million for the years ended December 31, 1996, 1995, and 1994, 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 14. SEGMENT DATA Identifiable assets as of December 31, 1996, 1995 and 1994 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 the Segment Data section of the Five Year Financial Summary on page 14. 42 45
Segment Data 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- Year Ended December 31, (Dollars in millions) Sales-Geographic distribution: United States $ 2,856 $ 2,526 $ 2,238 $ 1,914 $ 1,722 Europe 2,050 1,951 1,600 1,371 1,622 Other 1,041 860 714 617 519 Eliminations (142) (116) (95) (72) (71) ------- ------- ------- ------- ------- Total sales (c) $ 5,805 $ 5,221 $ 4,457 $ 3,830 $ 3,792 ======= ======= ======= ======= ======= Operating income-Geographic distribution: United States $ 336 $ 223 $ 151 $ 104 $ 82 Europe 102 242 147 130 185 Other (87) 69 57 48 33 ------- ------- ------- ------- ------- Total operating income (c) $ 351(a) $ 534 $ 355 $ 282 $ 300 ======= ======= ======= ======= ======= Assets Air Conditioning Products $ 1,480 $ 1,432 $ 1,223 $ 1,167 $ 1,156 Plumbing Products 775 1,088 957 960 1,002 Automotive Products 1,066 805 755 652 722 ------- ------- ------- ------- ------- Total identifiable assets $ 3,321 $ 3,325 $ 2,935 $ 2,779 $ 2,880 ======= ======= ======= ======= ======= Geographic distribution: United States $ 1,180 $ 1,075 $ 1,025 $ 1,013 $ 1,016 Europe 1,460 1,557 1,343 1,196 1,370 Other 681 693 567 570 494 ------- ------- ------- ------- ------- Total identifiable assets 3,321 3,325 2,935 2,779 2,880 Prepaid charges 34 39 64 78 51 Future income tax benefits 67 30 22 25 33 Cash and cash equivalents 60 89 93 53 113 Corporate assets 38 37 42 52 49 ------- ------- ------- ------- ------- Total assets $ 3,520 $ 3,520 $ 3,156 $ 2,987 $ 3,126 ======= ======= ======= ======= ======= Goodwill included in assets: Air Conditioning Products $ 203 $ 334 $ 331 $ 337 $ 351 Plumbing Products 247 302 295 296 320 Automotive Products 419 446 427 393 431 ------- ------- ------- ------- ------- Total goodwill $ 869 $ 1,082 $ 1,053 $ 1,026 $ 1,102 ======= ======= ======= ======= ======= Capital expenditures: Air Conditioning Products $ 93 $ 70 $ 45 $ 38 $ 33 Plumbing Products 88 93 55 46 48 Automotive Products 46 44 30 14 27 ------- ------- ------- ------- ------- Total capital expenditures $ 227 $ 207 $ 130 $ 98 $ 108 ======= ======= ======= ======= ======= Depreciation and amortization: Air Conditioning Products $ 51 $ 51 $ 51 $ 53 $ 55 Plumbing Products 50 50 64(b) 49 49 Automotive Products 43 42 39 35 37 ------- ------- ------- ------- ------- Total depreciation and amortization $ 144 $ 143 $ 154 $ 137 $ 141 ======= ======= ======= ======= =======
(a) Includes asset impairment charge of $235 million, of which $166 million is included in Other and $69 million in Europe (see Note 2). (b) Includes an asset loss provision of $14 million. (c) U.S. export sales and operating income have been reclassified to Europe and Other for 1995, 1994, 1993 and 1992 to conform with the 1996 classification. 43 46
Quarterly Data (Unaudited) 1996 ------------- -------------- -------------- -------------- (Dollars in millions, except share data) First (a) Second Third Fourth 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 ========== ========= ========== ========= Per common share: Net income (loss) $ (2.66) $ .75 $ .72 $ .57 ========== ========= ========== ========= Average number of common shares (thousands) 77,311 77,876 78,242 78,501 Range of prices on common stock: High $ 31 3/8 $ 33 3/8 $ 35 1/4 $ 39 3/4 Low $ 25 1/2 $ 26 1/2 $ 28 1/8 $ 34 1/4
1995 ------------- -------------- ---------- -------------- (Dollars in millions, except share data) First Second Third Fourth Sales $ 1,223.2 $ 1,370.8 $ 1,316.3 $ 1,311.2 Cost of sales 909.1 1,008.5 975.1 994.3 Income before income taxes and extraordinary item 45.4 85.0 67.0 29.5 Income taxes 18.9 35.5 23.6 7.1 --------- --------- --------- --------- Income before extraordinary item 26.5 49.5 43.4 22.4 Extraordinary loss on retirement of debt (30.1) -- -- -- --------- --------- --------- --------- Net income (loss) $ (3.6) $ 49.5 $ 43.4 $ 22.4 ========= ========= ========= ========= Per common share: Income before extraordinary item $ .38 $ .65 $ .57 $ .29 Extraordinary loss on retirement of debt (.43) -- -- -- --------- --------- --------- --------- Net income (loss) $ (.05) $ .65 $ .57 $ .29 ========= ========= ========= ========= Average number of common shares (thousands) 69,889 75,987 76,191 76,553 Range of prices on common stock: High $ 25 $ 28 1/4 $ 32 $ 31 7/8 Low $ 19 5/8 $ 24 1/4 $ 26 $ 26 1/4
(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 first three quarters of 1996 have been restated to properly record costs and expenses for Porcher S.A., the French plumbing products manufacturer acquired in the fourth quarter of 1995. The restatement had the effect of increasing the net loss in the first quarter by $3 million ($.03 per share) and decreasing net income in the second and third quarters by $4 million ($.03 per share) and $2 million ($.01 per share), respectively. 44 47 BOARD OF DIRECTORS 45 Emmanuel A. Kampouris (C-Chairman) Chairman, President and Chief Executive Officer American Standard Companies Inc. Steven E. Anderson (A) (B) Retired National Partner in Charge-Industries KPMG Peat Marwick New York, NY Horst Hinrichs (C) Senior Vice President, Automotive Products American Standard Companies Inc. George H. Kerckhove (C) Senior Vice President, Plumbing Products American Standard Companies Inc. Shigeru Mizushima President, Chief Operating Officer and Director Daido Hoxan Inc. Tokyo, Japan Frank T. Nickell President and Director Kelso & Companies, Inc. New York, NY Roger W. Parsons (A-Chairman) (B) Group Managing Director Rea Brothers Group PLC London, United Kingdom J. Danforth Quayle (A) (B) Former Vice President of the United States Chairman, Circle Investors, Inc. Indianapolis, IN David M. Roderick Chairman Earle M. Jorgensen Company Brea, CA Retired Chairman USX Corporation Pittsburgh, PA John Rutledge Chairman Rutledge & Company, Inc. Founder and Chairman Claremont Economics Institute Greenwich, CT Joseph S. Schuchert (B-Chairman) (C) Chairman, Chief Executive Officer and Director Kelso & Companies, Inc New York, NY Member of: (A) Audit Committee (B) Management Development and Nominating Committee (C) Executive Committee 45 48 OFFICERS - -------------------------------------------------------------------------------- Emmanuel A. Kampouris Chairman, President and Chief Executive Officer Horst Hinrichs Senior Vice President, Automotive Products George H. Kerckhove Senior Vice President, Plumbing Products Giancarlo Aimetti Vice President, Automotive Products, Austria Group Fred A. Allardyce Vice President and Chief Financial Officer Alexander A. Apostolopoulos Vice President and Group Executive, Plumbing Products, Americas International Thomas S. Battaglia Vice President and Treasurer Gary A. Brogoch Vice President and Group Executive, Plumbing Products, Asia Pacific Michael Broughton Vice President, Automotive Products, United Kingdom Roberto Canizares M. Vice President, Air Conditioning Products, Asia-Pacific Wilfried Delker Vice President and Group Executive, Plumbing Products, Worldwide Fittings Adrian B. Deshotel Vice President, Human Resources Peter Enss Vice President, Automotive Products, Germany Luigi Gandini Vice President, Special Projects Daniel Hilger Vice President, Air Conditioning Products, Middle East and Africa Richard A. Kalaher Vice President, General Counsel and Secretary W. Craig Kissel Vice President and Group Executive, Air Conditioning Products, Unitary Products Group William A. Klug Vice President and Group Executive, Air Conditioning Products, International Jean - Claude Montauze Vice President, Automotive Products, France Janet George Murnick, Ph.D Vice President, Alimenterics, Medical Systems Group G. Eric Nutter Vice President and Group Executive, Plumbing Products, U.S. Raymond D. Pipes Vice President, Corporate Development Bruce R. Schiller Vice President, Air Conditioning Products, Compressor Business James H. Schultz Vice President and Group Executive, Air Conditioning Products, North American Commercial Group G. Ronald Simon Vice President and Controller Benson I. Stein Vice President, General Auditor Wolfgang Voss Vice President and Group Executive, Plumbing Products, Europe Robert M. Wellbrock Vice President, Taxes 46 49 CORPORATE INFORMATION - -------------------------------------------------------------------------------- Corporate Headquarters P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 Tel: (908) 980-6000 Web Site Address: http:\\www.americanstandard.com BUSINESS OPERATIONS AIR CONDITIONING PRODUCTS North American Commercial The Trane Company 3600 Pammel Creek Road La Crosse, WI 54601-7599 Tel: (608) 787-2000 Web Site Address: http:\\www.trane.com International The Trane Company 20 Corporate Woods Drive Bridgeton, MO 63044-4419 Tel: (314) 770-6000 Web Site Address: http:\\www.trane.com\global Unitary The Trane Company 6200 Troup Highway Tyler, TX 75707 Tel: (903) 581-3200 Web Site Address: http:\\www.trane.com PLUMBING PRODUCTS U.S. Plumbing Products Americas International, Worldwide Fittings American Standard One Centennial Avenue P.O. Box 6820 Piscataway, NJ 08855-6820 Tel: (908) 980-3000 Asia Pacific World Standard Ltd. 14-16/F. St. John's Building 33 Garden Road Central Hong Kong Tel: (852) 2/971-3688 Europe Ideal Standard Boulevard du Souverain, 348 Box 1 B-1160 Brussels, Belgium Tel: (32) 2/678-0911 AUTOMOTIVE PRODUCTS WABCO Automotive Products Group Boulevard du Souverain, 348 Box 1 B-1160 Brussels, Belgium Tel: (32) 2/663-0120 MEDICAL SYSTEMS Alimenterics, Inc. 301 American Road Morris Plains, NJ 07950 Tel: (201) 285-3100 Sienna Biotech, Inc. 9115 Guilford Road, Suite 180 Columbia, MD 21046 Tel: (301) 497-0007 Annual Meeting May 1, 1997, at 10:00 AM (EDT) Embassy Suites Hotel 121 Centennial Avenue Piscataway, NJ Transfer Agent and Registrar Citibank, NA 120 Wall Street New York, NY 10043 Stock Exchange Listing New York Stock Exchange Ticker Symbol: ASD Additional Information: A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission is available without charge. A copy may be requested from: Investor Relations Department P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 Tel: (908) 980-6038 Please call if you have any questions. 50 AMERICAN ----- STANDARD ----- COMPANIES P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (908) 980-6000 EX-21 7 LISTING OF HOLDINGS SUBSIDIARIES 1 EXHIBIT 21 PARENTS AND SUBSIDIARIES AMERICAN STANDARD COMPANIES INC. (DELAWARE) - REGISTRANT Subsid- iaries* U.S. SUBSIDIARIES: American Standard Inc. (Delaware) - Immediate Parent The American Chinaware Company (Delaware) Alimenterics Inc. American Standard Credit Inc. (Delaware) American Standard Financial Corporation American Standard International Inc. (Delaware) American Standard Medical Systems, Inc. Amstan Trucking Inc. (Delaware) A-S Energy, Inc. (Texas) A-S Thai Holdings Ltd. (Delaware) It Holdings Inc. (Delaware) Sienna Biotech Inc. 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 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 Standard French Holdings SNC (France) WABCO Westinghouse S.A. (France) WABCO France SNC (France) WABCO Automotive AB (Sweden) WABCO Schweiz AG (Switzerland) WABCO Austria G.m.b.H. (Austria) WABCO Belgium S.A.-N.V. (Belgium) WABCO Automotive B.V. (Netherlands) 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 Inc. - Immediate Parent) Westinghouse Air Brake Brasil S.A. (Brazil) (WABCO Standard Trane Holdings Inc., American Standard International Inc., Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany) WABCO GmbH (Germany) Perrot Bremsen GmbH (Germany) Building Products (American Standard Inc. - Immediate Parent) American Standard Sanitaryware (Thailand) Public Company Limited (Thailand) 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 French Holdings SNC and Sanifrance, SNC -- Immediate Parents) Ets. Porcher, S.A. (France) P. Piel S.A. (France) Porcher Distribution SNC (France) (WABCO Westinghouse S.A. & Ideal Standard S.A. - Immediate Parents) Sanifrance, SNC (Westinghouse Air Brake Brasil S.A. - 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. & WABCO Standard Trane B.V. - Immediate Parents) WABCO Standard Trane Inc. (Canada)(b) 3 PARENTS AND SUBSIDIARIES - (Continued) Building Products (Continued) (WABCO Standard Trane Inc. & WABCO Standard Trane B.V. - Immediate Parents) Ideal-Standard, S.A. de C.V. (Mexico) (WABCO Standard Trane Holdings Inc., WABCO Standard Trane B.V. - 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) American Standard Korea, Inc. (Korea) 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 I 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-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 58,038 1,661 828,086 28,294 408,962 1,386,374 1,582,498 576,500 3,519,615 1,236,941 1,741,847 0 0 786 (381,167) 3,519,615 5,804,561 5,804,561 4,379,765 4,379,765 1,168,998 11,225 198,192 57,606 104,324 (46,718) 0 0 0 (46,718) (0.60) 0
-----END PRIVACY-ENHANCED MESSAGE-----