-----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, L8Ci1q9bq/HrsUaZ3tXk3PBSgkVOc2GBBx4Zldzcwa2p7mbWKYWHTSv1FHimdUSj 3OBgxY37lnUUlfGdoBo8hA== 0000950123-98-003127.txt : 19980331 0000950123-98-003127.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003127 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K SEC ACT: SEC FILE NUMBER: 001-11415 FILM NUMBER: 98579584 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-K 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, 1997 [ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . -------------------- ------------------ Commission File Number 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: (732) 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. [ ] 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 12, 1998 was approximately $3.2 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 12, 1998: Common Stock, $.01 par value 72,663,383 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, 1997 Definitive Proxy Statement dated March 26, 1998 for use in connection with the Annual Meeting of Stockholders to be held on May 7, 1998 Part III 2 TABLE OF CONTENTS
Page PART I Item 1. Business. 3 Item 2. Properties. 18 Item 3. Legal Proceedings. 19 Item 4. Submission of Matters to a Vote of Security Holders. 19 Executive Officers of the Registrant. 20 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 24 Item 6. Selected Financial Data. 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 26 Item 8. Financial Statements and Supplementary Data. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 26 PART III Item 10. Directors and Executive Officers of the Registrant. 27 Item 11. Executive Compensation. 27 Item 12. Security Ownership of Certain Beneficial Owners and Management. 27 Item 13. Certain Relationships and Related Transactions. 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 28
2 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 (60% of 1997 sales); bathroom and kitchen fixtures and fittings (24% of 1997 sales); and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles (16% of 1997 sales). These percentages exclude the new Medical Systems segment which had sales of $50 million in the last six months of 1997, after the acquisition of Sorin and INCSTAR (see below). American Standard is a market leader in each of its three major business segments in the principal geographic areas in which it competes. The Company's brand names include TRANE(R) and AMERICAN STANDARD(R) for air conditioning systems, AMERICAN STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and PORCHER(R) for plumbing products, WABCO(R) for braking and related systems and LARA(R), Copalis(R) and DiaSorin(TM) for Medical diagnostic systems. The Company emphasizes technologically advanced products such as air conditioning systems that utilize energy-efficient compressors and environmentally-preferred refrigerants, water-saving plumbing products and commercial vehicle braking and related systems (including antilock braking systems, "ABS") utilizing electronic controls. At December 31, 1997, American Standard had 108 manufacturing facilities in 35 countries. OVERVIEW OF BUSINESS SEGMENTS Through 1996 American Standard operated three business segments: Air Conditioning Products, Plumbing Products and Automotive Products. In January 1997 the Company announced formation of its Medical Systems segment. Air Conditioning Products. American Standard is a leading U.S. manufacturer of air conditioning systems for both domestic and export sales, and also manufactures air conditioning systems outside the United States. Air conditioning products are sold by the Trane Company ("Trane") primarily under the TRANE(R) and AMERICAN STANDARD(R) names. Sales to the commercial and residential markets accounted for approximately 75% and 25%, respectively, of Trane's total sales in 1997. Approximately 65% of Trane's sales in 1997 were in the replacement, renovation and repair markets, which have been less cyclical than the new residential and commercial construction markets. Management believes that Trane is well positioned for growth because of its high quality, brand-name products; significant existing market shares; the introduction of new product features such as electronic controls; the expansion of its broad distribution network; conversion to products utilizing environmentally-preferable refrigerants; and expansion of operations in developing market areas throughout the world, principally the Asia-Pacific area (although expansion in the Asia-Pacific region outside China is expected to slow due to the unfavorable economic conditions existing in the region at the beginning of 1998) and Latin America. 3 4 Plumbing Products. American Standard is a leading manufacturer in Europe, the U.S. and a number of other countries of bathroom and kitchen fixtures and fittings for the residential and commercial construction markets and retail sales channels. Plumbing Products manufactures and distributes its products under the AMERICAN STANDARD(R), IDEAL STANDARD(R), STANDARD(R) and PORCHER(R) names. Of Plumbing Products' 1997 sales, 72% was derived from operations outside the United States and 28% from within. Management believes that Plumbing Products is well positioned for growth due to the high quality associated with its brand-name products, significant existing market shares in a number of countries, lower-cost product sourcing from Mexico and Eastern Europe and the expansion of existing operations in developing market areas throughout the world, principally the Far East, Latin America and Eastern Europe. Automotive Products. Automotive Products ("WABCO") is a leading manufacturer, primarily in Europe and Brazil, of braking and related systems for the commercial and utility vehicle industry. Its most important products are pneumatic braking systems and related electronic and other control systems, including antilock braking systems ("ABS"), marketed under the WABCO(R) name for medium-size and heavy trucks, tractors, buses, trailers and utility vehicles. WABCO supplies vehicle manufacturers such as Mercedes-Benz, Volvo, Iveco (Fiat), RVI (Renault) and Rover. Management believes that WABCO is well positioned to benefit from its strong market positions in Europe and Brazil and from increasing demand for ABS and other sophisticated electronic control systems in a number of markets (including the commercial vehicle market in the United States, where the mandated phase-in of ABS began in 1997), as well as from the technological advances embodied in the Company's products and its close relationships with a number of vehicle manufacturers. Medical Systems. In January 1997, the Company announced formation of its Medical Systems segment to pursue initiatives in the medical diagnostics field. For several years prior thereto, the Company had supported the development of two small medical diagnostic product groups focusing on test instruments using laser technology and reagents. The Company had invested approximately $40 million in these businesses through December 31, 1996. To accelerate the commercialization of its technology and expand the number of diagnostic tests covered by its products, on June 30, 1997, the Company acquired the European medical diagnostic business of Sorin Biomedica S.p.A. ("Sorin"), an affiliate of the Fiat Group, and all the outstanding shares of INCSTAR Corporation ("INCSTAR"), a company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. indirectly owned a 52% interest. The aggregate cost of the acquisitions of Sorin and INCSTAR was $212 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 has frequently structured 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. Air Conditioning Products plans to continue to expand its operations in the Far East, the Middle East, Latin America, Brazil and Europe. It also continues to expand its sales forces in these regions as well as in India. Since the end of 1995 the Company has been developing 4 5 and expanding its air conditioning business in the People's Republic of China ("China"), 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 China. As of December 31, 1997, ASAP had acquired majority ownership in three manufacturing joint ventures. 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 1997 the Company expanded its production capacity in Bulgaria and in 1995 operations were expanded in France through the acquisition of Porcher (see "Plumbing Products Segment"). Plumbing Products continues to expand its operations in China through its affiliate, A-S China Plumbing Products Limited ("ASPPL"), in which American Standard increased its ownership position to approximately 55% through the purchase of additional shares from other investors for $48 million in the fourth quarter of 1997. ASPPL, which had total assets of approximately $135 million at December 31, 1997, has entered into six 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 further over time 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 China and is in the process of establishing joint ventures in Eastern Europe. In the United States the joint venture with Meritor Automotive, Inc. (Meritor WABCO, formerly Rockwell WABCO) is growing rapidly as federal regulations mandating ABS phase in over a two-year period which began in March 1997. The Company is also expanding the volume of business done through its other existing joint venture in the United States with Cummins Engine Co. (WABCO Compressor Manufacturing Co., a manufacturing joint venture formed in 1997 to produce air compressors designed by WABCO), and through another joint venture in Japan. 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. Applying Demand Flow principles, products are produced as and when required by customers, 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 American Standard has trained most of its approximately 51,000 employees worldwide in Demand Flow, and has implemented Demand Flow in substantially all of its - ----------------- * Demand Flow is a registered trademark of J-I-T Institute of Technology, Inc. 5 6 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 tripled since 1990. Principally as a result of the implementation of Demand Flow, American Standard has reduced inventories by approximately 40% from December 31, 1989 through December 31, 1997, while related sales have grown approximately 70% 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 1997 Trane, with revenues of $3,567 million, accounted for approximately 60% of the Company's sales and 60% of its operating income (excluding Medical Systems). Trane derived 28% of its 1997 sales from outside the United States. Approximately 65% of Trane's sales in 1997 were 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," is sold for residential and commercial applications, and is a factory-assembled central air conditioning system which generally encloses in one or two units all the components to cool or heat, clean, humidify or dehumidify, and move air. The second, called "applied," is typically custom-engineered for commercial use and involves on-site installation of several different components of the air conditioning system. Trane is a world leader in both unitary and applied air conditioning products. The third type, called "mini-split," is a small unitary air conditioning system, generally for residential use, which operates without air ducts. Trane manufactures and distributes mini-split units in the Far East, Europe, the Middle East and Latin America. Trane competes in all of its markets on the basis of service to customers, product quality and reliability, technological leadership and price. Product and marketing programs have been, and are being, developed to increase penetration in the growing replacement, repair, and servicing businesses, in which margins are generally higher than for sales of original equipment. Much of the equipment sold in the fast-growing air conditioning markets of the 1960's and 1970's is reaching the end of its useful life. Also, equipment sold in the 1980's is likely to be replaced earlier than originally expected with higher-efficiency products recently developed to meet required efficiency standards and to capitalize on the availability of environmentally-preferable refrigerants. In December 1993 the Company formed a partnership, Alliance Compressors, 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 partnership was restructured to admit a new partner, Copesub, Inc., a subsidiary of 6 7 Emerson Electric Co. Following the restructuring, the Company and Heatcraft Technologies Inc. each own a 24.5% partnership interest and Copesub, Inc. owns the balance. 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 air conditioning products manufactured by Trane utilize HCFCs 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 additional research and development expense and capital expenditures to maintain compliance. At December 31, 1997 Air Conditioning Products had 33 manufacturing plants in 10 countries, employing approximately 22,600 people. Through 1997 Air Conditioning Products was composed of three operating groups: Unitary Products, North American Commercial, and International. Effective January 1, 1998, the Company announced a reorganization of Air Conditioning Products into the following groups: North American Unitary Products, Worldwide Applied Systems (including the international applied business) and International Unitary Products. This reorganization is intended to leverage the strength of the applied business worldwide and to concentrate efforts on the growing international unitary market opportunity. The following section describes Air Conditioning Products as it was organized during 1997. Unitary Products Group Unitary Products, which accounted for 35% of Air Conditioning Products' 1997 sales, manufactures and distributes products for commercial and residential unitary applications in the United States and Canada. This group benefits the most from the growth of the replacement market for residential and commercial unitary air conditioning systems. Other major suppliers in the unitary market are Carrier, York, Rheem, Lennox and Goodman Industries. 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. 7 8 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, 1996 and 1997 the Unitary Products Group successfully introduced several new products including: a line of multi-stage cooling and heat pump units offering the industry's highest efficiencies; a 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 light commercial and residential products under an AMERICAN STANDARD(R) brand name to serve distributors who typically carry other products in addition to air conditioning products. North American Commercial Group The North American Commercial Group, which accounted for 37% of Air Conditioning Products' 1997 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, York and McQuay. North American Commercial Group distributes its products through 95 sales offices, forty of which are Company-owned and 55 of which are franchised. The Company is in the process of acquiring certain commercial sales offices and acquired two offices in 1995, three in 1996 and seven in 1997. Over the last few years the North American Commercial Group has expanded its aftermarket business activities to include services such as emergency rentals of air conditioning equipment. The group has also expanded its line to include components to convert installed centrifugal chiller products to use environmentally-preferable refrigerants. During 1995, 1996 and 1997 the North American Commercial Group continued its introduction of a number of new products broadening its line of high-efficiency centrifugal chillers, expanding the air cooled series R chiller line, and introducing a new absorption line. Building automation systems continue to grow as a percentage of total sales with new product introductions such as 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 28% of Trane's 1997 sales manufactures applied and unitary products, including mini-splits, in foreign facilities operated by subsidiaries and joint ventures, and exports many 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. 8 9 Trane expects to continue the expansion of its presence outside the U.S. In the Asia-Pacific region Trane established operations in Australia in 1994, three manufacturing joint ventures in China in 1995 (see "Globalization") and has had operations in Malaysia since the mid-1980's. Since the early 1990's it has operated an air conditioning manufacturing and distribution firm in Taiwan, and a sales and manufacturing joint venture in Thailand. A Brazilian manufacturing plant and distribution operations were acquired in 1994. In Europe, the group operates plants in Epinal, Mirecourt and Charmes, France, and in Colchester, U.K. 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 1997 Plumbing Products, with revenues of $1,439 million, accounted for 24% of the Company's sales and 19% of its operating income (excluding Medical Systems). Plumbing Products derived approximately 72% of its total 1997 sales from operations outside the United States. Plumbing Products' sales consist 53% of chinaware fixtures, 23% of fittings (typically brass) and 9% of bathtubs, with the remainder consisting of related plumbing products. Throughout the world these products are generally sold through wholesalers and distributors and installed by plumbers and contractors. In total the residential market accounts for approximately 75% of Plumbing Products' sales, with the commercial and industrial markets providing the remainder. Plumbing Products operates through four primary geographic groups: European Plumbing Products, U.S. Plumbing Products, Americas International and the Asia-Pacific Group. Plumbing Products' fittings operations are organized as the Worldwide Fittings Group, which has primary responsibility for faucet technology, product development and manufacturing, with manufacturing facilities in Germany, Bulgaria, the U.S., and Mexico. Worldwide Fittings' sales and operating results are reported in the four primary geographic groups within which it operates. European Plumbing Products, which sells products primarily under the brand names IDEAL STANDARD(R) and PORCHER(R), manufactures and distributes bathroom and kitchen fixtures and fittings through subsidiaries or joint ventures in Germany, Italy, France, England, Greece, the Czech Republic, Bulgaria, Egypt and Turkey and distributes products in Spain and Portugal. In November 1995 the Company acquired Porcher S.A. ("Porcher"), a French manufacturer and distributor of plumbing products in which the Company previously had a minority ownership interest. U.S. Plumbing Products manufactures bathroom and kitchen fixtures and fittings, selling under the brand names AMERICAN STANDARD(R) and STANDARD(R) in the United States. Americas International manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in Mexico, Canada, and Brazil and its joint ventures in Central America and the Dominican Republic. The Asia-Pacific Group manufactures bathroom and kitchen fixtures and fittings, selling under the names AMERICAN STANDARD(R), IDEAL STANDARD(R), and STANDARD(R) through its wholly owned operations in South Korea, its majority-owned operations in Thailand, the Philippines and Vietnam, and its manufacturing joint venture in Indonesia. This group is also 9 10 developing a wholly-owned marketing operation in Japan. The Asia-Pacific Group also has operations in China, in which American Standard increased its ownership position to approximately 55% through the purchase of additional shares from other investors for $48 million in the fourth quarter of 1997. 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. With the exception of the U.K., the new construction market in Europe has been weak since 1994. In the U.S. the new construction market hit its recent low in 1992 but has evidenced some recovery through 1997. The new construction market, in which 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 model selections 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 products in the lower and middle segments of both the remodeling and new construction markets through expansion of low-cost product sourcing. 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, 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 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 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 1996. 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. 10 11 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, 1997, Plumbing Products employed approximately 21,500 people and, including affiliated companies, had 57 manufacturing plants in 25 countries, including its Chinese businesses which were consolidated in October 1997. In the U.S. Plumbing Products has several important competitors, including Kohler Company and, in selected product lines, Masco Corporation. 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 and design, 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 1997 WABCO, with sales of $952 million, accounted for 16% of the Company's sales and 21% of its total operating income (excluding Medical Systems). The Company believes that WABCO is a worldwide technological leader in the heavy truck and bus braking industry. Electronic controls, first introduced in ABS in the early 1980's, are increasingly applied in other systems sold to the commercial vehicle industry. 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 1997 after a decline in 1996 from a somewhat higher level in 1995. The Brazilian market recovered strongly from a significant decline in 1996 after three years of continued growth. Through 1997 the WABCO(R) ABS system, which the Company believes leads the market, has been installed in approximately 1.6 million heavy trucks, buses, and trailers worldwide since 1981. Annual sales volume in Europe was approximately 168,000 units in 1997 (up from 146,000 units in 1996) and 195,000 units (67,000 units in 1996) in other markets, primarily the United States and Japan. The large increase in other markets was primarily in the United States, where the mandated phase-in of ABS began in March 1997. In addition, WABCO has developed an advanced electronic braking system, electronically controlled pneumatic gear shifting systems, electronically controlled air suspension systems, and automatic climate-control and door-control systems for the commercial vehicle industry. These systems have resulted in greater sales per vehicle for WABCO. During 1997 a major European truck manufacturer introduced its new heavy-duty truck line which incorporated a 11 12 significant number of WABCO products, including the electronic braking system ("EBS"). In recent years market acceptance of electronically controlled systems has been significant. New products under development include additional electronic driveline 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, 1997, WABCO and affiliated companies employed approximately 6,100 people and had 13 manufacturing facilities and 8 sales organizations operating in 17 countries. Principal manufacturing operations are in Germany, France, the United Kingdom, the Netherlands and Brazil. WABCO has joint ventures in the United States (Meritor WABCO and WABCO Compressor Manufacturing Co.), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group (Sundaram Clayton Ltd.) and in China. In January 1994 the Company acquired Perrot, a German brake manufacturer. Through this acquisition the Company is able to offer complete brake systems for trucks, buses and trailers, especially in the important and growing air-disc brake business. Since 1991 ABS for commercial vehicles has been gaining acceptance in the United States and Japan, where WABCO participates through its joint venture operations. Meritor 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 are being phased in over a two-year period that began in March 1997. WABCO believes that the new regulations create an important market opportunity for its products and that it is well positioned to benefit as a result of those regulations. MEDICAL SYSTEMS SEGMENT In anticipation of the acquisition of Sorin and INCSTAR described below, the Company announced in January 1997, the formation of its Medical Systems segment to pursue initiatives in the medical diagnostics field. For several years prior thereto, the Company had been supporting the development of two small medical diagnostic product companies, Sienna Biotech, Inc. (Sienna") and Alimenterics, Inc. ("Alimenterics"). Sienna and Alimenterics have developed medical diagnostic technologies that use lasers for sample analysis. The Company had invested approximately $40 million in these businesses through December 31, 1996. Based upon the progress and prospects of Sienna and Alimenterics, the Company decided to explore acquisition opportunities to accelerate the commercialization of its technology and expand the number of diagnostic tests covered by its products. On June 30, 1997, the Company acquired the European medical diagnostic business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and INCSTAR Corporation, a U.S. company, for $212 million, including fees and expenses. Sorin, INCSTAR and Sienna have been combined into a single operating group, DiaSorin. DiaSorin has an extensive menu of diagnostic tests as well as a variety of technologies and platforms. Its products focus on diagnostic tests for autoimmunity and infectious diseases, obstetrical/gynecological and gastrointestinal disorders, endocrinology and bone and mineral metabolism. It develops, manufactures and markets individual test reagents, 12 13 test kits and related products used by major hospitals, clinical reference laboratories and researchers involved in diagnosing and treating immunological conditions. DiaSorin also produces and markets histochemical antisera and natural and synthetic peptides used in clinical diagnostic and medical research. One of the new core technologies, which received U.S. Food and Drug Administration ("FDA") clearance in 1997, is Copalis(R) (for Coupled Particle Light Scattering), a device which enables multiple tests on a single sample. Development is ongoing to accelerate an expanded menu of tests using DiaSorin reagents specifically adapted for use with Copalis. Alimenterics has developed the Laser Assisted Ratio Analyzer ("LARA(R)") system, an analyzer which allows a gastroenterologist to diagnose patient disease via the breath rather than by more invasive procedures such as endoscopy or x-ray. It's first application, the Pylori-Chek(TM), tests for the presence of Helicobacter pylori bacterium associated with 80% of stomach ulcers. The analyzer and reagent have received a Positive Opinion from the European agency for the Evaluation of Medicinal Products. FDA clearance for the LARA instrument and clearance for the Pylori-Chek test is expected later in 1998. In March 1998, the Company entered into an agreement with Astra Pharma Inc. of Canada to market exclusively the LARA System. DiaSorin has manufacturing facilities in Saluggia, Italy, and Stillwater, Minnesota, and Alimenterics has a manufacturing facility in Morris Plains, New Jersey. The principal markets for its products are Western Europe, the United States and Canada. The Company believes that the new Medical Systems Segment is well positioned to develop quickly and effectively its new medical products. The Company may build this group further through acquisitions of businesses that are complementary and would permit further acceleration of development and distribution of its products as well as through further research and development investments. Medical Systems had sales of $50 million in the last six months of 1997, after the acquisition of Sorin and INCSTAR, and an operating loss of $20 million (before write-off of purchased research and development). At December 31, 1997, Medical Systems employed approximately 800 people. 13 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 1997 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. Information concerning identifiable assets of each of the Company's business segments is set forth on page 43 of the Company's 1997 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, motors and electronics. The ability of the Company's suppliers to meet performance and quality specifications and delivery schedules is important to 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. 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: 14 15
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) Medical Systems Copalis(R) LARA(R) DiaSorin(TM)
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 $161 million in 1997, $160 million in 1996 and $146 million in 1995 for research and product development and for product engineering in its four business segments. The expenditures for research and product development alone were $112 million in 1997, $101 million in 1996 and $85 million in 1995 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-preferable 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 1995, 1996 and 1997 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. 15 16 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 past years from sales of air conditioning products using chlorofluorocarbons ("CFCs"), and in 1997 and prior years from sales of products using 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 additional 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. 16 17 Employees The Company employed approximately 51,000 people (excluding employees of unconsolidated joint venture companies) at December 31, 1997. The Company has a total of 18 labor union contracts in North America (covering approximately 8,500 employees), two of which expire in 1998 (covering approximately 2,500 employees) and eight of which expire in 1999 (covering approximately 5,500 employees). One of the contracts expiring in 1998 has already been renegotiated. There can be no assurance that the Company will successfully negotiate the remaining labor contract expiring during 1998 without a work stoppage. However, the Company does not anticipate any problems in renegotiating this contract that would materially affect its results of operations. In February 1998 1,100 Air Conditioning Products employees went on strike for 30 days at the Lexington, Kentucky, manufacturing plant. In 1997, 150 employees went on strike for 77 days at the Rushville, Indiana, air conditioning plant, and in 1994, 230 Plumbing Products employees went on strike for 64 days at the Landsdowne (Toronto), Canada chinaware manufacturing plant. Other than these strikes, 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, the Czech Republic, Bulgaria, Canada, Brazil, Mexico, Central American countries, China, Malaysia, the Philippines, South Korea, Thailand, Taiwan, Australia and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the equity interest in the venture. 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. 17 18 ITEM 2. PROPERTIES At December 31, 1997 the Company conducted its manufacturing activities through 108 plants in 35 countries, of which the principal facilities are as follows:
Business Segment Location Major Products Manufactured at Location ------- -------- --------------------------------------- Air Conditioning Clarksville, TN Commercial unitary air conditioning Products Fort Smith, AK Commercial unitary air conditioning La Crosse, WI Applied air conditioning systems Lexington, KY Air handling products Macon, GA Commercial air conditioning systems Pueblo, CO Applied air conditioning systems Rushville, IN Air handling products Trenton, NJ Residential gas furnaces and air handlers Tyler, TX Residential air conditioning Waco, TX Water source heat pumps and air handling Products Charmes, France Applied air conditioning systems Epinal, France Unitary air conditioning systems and mini-splits Ligang, China Applied air conditioning systems Taicang, China Unitary air conditioning systems and mini-splits Taipei, Taiwan Unitary air conditioning systems Sao Paulo, Brazil Unitary air conditioning systems Plumbing Products Salem, OH Enameled-steel fixtures and acrylic bathtubs Tiffin, OH Vitreous china Trenton, NJ Vitreous china Toronto, Canada Vitreous china and enameled-steel fixtures Sevlievo, Bulgaria Vitreous china and brass plumbing fittings Teplice, Czech Republic Vitreous china Hull, England Vitreous china and acrylic bathtubs Middlewich, England Vitreous china Dole, France Vitreous china and acrylic bathtubs Neuss, Germany Vitreous china Wittlich, Germany Brass plumbing fittings Orcenico, Italy Vitreous china Brescia, Italy Vitreous china Aguascalientes, Mexico Vitreous china Mexico City, Mexico Vitreous china, water heaters Monterrey, Mexico Brass plumbing fittings Manila, Philippines Vitreous china Seoul, South Korea Brass plumbing fittings Bangkok, Thailand Vitreous china Tianjin, China Vitreous china Beijing, China Enameled steel fixtures Shanghai, China Vitreous china and brass plumbing fittings Guangdong Province, China Vitreous china, brass plumbing fittings and enameled steel fixtures Automotive Campinas, Brazil Braking systems Products Leeds, England Braking systems Claye-Souilly, France Braking systems Hanover, Germany Braking systems Mannheim, Germany Foundation brakes Medical Systems Salugia, Italy Medical diagnostics products Stillwater, MN Medical diagnostics products
18 19 Except for the property located in Manila, Philippines, all of the plants described above are owned by the Company or a subsidiary. Through joint ventures the company operates one plant in each of Indonesia and India. The Company considers that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business. In 1997 several Air Conditioning Products' plants operated at or near capacity and others operated moderately below capacity. In 1997 Plumbing Products' plants worldwide operated at levels of utilization which varied from country to country but overall were satisfactory. Automotive Products' plants generally operated at good utilization levels in 1997. ITEM 3. LEGAL PROCEEDINGS In late 1996 the Company received letters from Tyco International Ltd. ("Tyco") proposing to acquire all outstanding shares of the Company's common stock. The Company's Board of Directors reviewed the Tyco proposals, consulted with its legal counsel and financial advisors and concluded that the Company would decline any interest in the proposals and so informed Tyco. There were no discussions between the Company and Tyco concerning any of the proposals and the Company contemplates none. Two persons claiming to be shareholders of the Company, represented by the same lawyers, filed separate class action and derivative lawsuits in the Chancery Court of the State of Delaware against the Company, ASI Partners and the Company's directors alleging breeches of fiduciary duties related to the Company's rejection of the Tyco proposals, approval of the secondary offering of Company common stock owned by ASI Partners and the repurchase by the Company of all shares of Company common stock owned by ASI Partners after such secondary offering (collectively, the "Stockholder Transactions"). The Stockholder Transactions were successfully completed in March 1997. The complaints seek unspecified monetary damages, to enjoin the Stockholder Transactions and demand that the Company evaluate alternative transactions to maximize shareholder value. The Company has moved to dismiss the complaints or in the alternative for Summary Judgment, believes the lawsuits are without merit and intends to contest them vigorously. The Delaware Court of Chancery has granted a stay of discovery pending its ruling on the Company's motion to dismiss the complaints. A person claiming to be a holder of certain public debt securities of American Standard Inc. filed, and subsequently withdrew, a class action lawsuit in New York Supreme Court seeking to enjoin the Stockholder Transactions or to require the Company to redeem such debt securities at the election of the security holders For a discussion of German tax issues see Note 6 of Notes to Consolidated Financial Statements incorporated by reference herein (see Item 14(a) of Part IV hereof). 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 1997. 19 20 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 12, 1998 with respect to each person who is an executive officer of the Company:
Name Age Position with Company ---- --- --------------------- Emmanuel A. Kampouris 63 Chairman, President and Chief Executive Officer, and Director Horst Hinrichs 65 Vice Chairman Fred A. Allardyce 56 Senior Vice President, Medical Systems W. Craig Kissel 47 Senior Vice President , Automotive Products Giancarlo Aimetti 61 Vice President, Automotive Products, Austrian Group Alexander A. Apostolopoulos 55 Vice President and Group Executive, Plumbing Products, Americas International Thomas S. Battaglia 55 Vice President and Treasurer Judith A. Britz, Ph.D 47 Vice President, Medical Systems, Business Development Gary A. Brogoch 47 Vice President and Group Executive, Plumbing Products, Asia Pacific Michael C.R. Broughton 57 Vice President, Automotive Products, United Kingdom Roberto Canizares M. 48 Vice President, Air Conditioning Products, International Applied Business Wilfried Delker 57 Vice President and Group Executive, Plumbing Products, Worldwide Fittings Adrian B. Deshotel 53 Vice President, Human Resources Peter Enss 53 Vice President, Automotive Products, Germany Luigi Gandini 59 Vice President, Special Projects Daniel Hilger 57 Vice President, Air Conditioning Products, Middle East and Africa Region Richard A. Kalaher 57 Vice President, General Counsel and Secretary George H. Kerckhove 60 Vice President and Chief Financial Officer William A. Klug 65 Vice President and Group Executive, Air Conditioning Products, International Fabio Lunghi 53 Vice President and Group Executive, Medical Systems, DiaSorin Jean-Claude Montauze 51 Vice President, Automotive Products, France Janet George Murnick, Ph.D 54 Vice President, Medical Systems, Alimenterics G. Eric Nutter 62 Vice President and Group Executive, Plumbing Products, Americas David R. Pannier 47 Vice President and Group Executive, North American Unitary Products Group Raymond D. Pipes 48 Vice President, Investor Relations James H. Schultz 49 Vice President and Group Executive, Air Conditioning Products, Worldwide Applied Systems G. Ronald Simon 56 Vice President and Controller Benson I. Stein 60 Vice President, Medical Systems, Operations Wolfgang Voss 51 Vice President and Group Executive, Plumbing Products, Europe Robert M. Wellbrock 51 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.). 20 21 Mr. Kampouris was elected Chairman in December 1993 and President and Chief Executive Officer in February 1989. Mr. Kampouris has served as a director of the Company since July 1988. Mr. Hinrichs was elected Vice Chairman in January 1988 to assist the Chairman with special strategic and operational assignments. Prior thereto he served as Senior Vice President, Automotive Products, since December 1990. Mr. Hinrichs has served as a director of the Company since March 1991. Mr. Allardyce was elected Senior Vice President, Medical Systems, in January 1998. Prior thereto he served as Vice President and Chief Financial Officer since January 1992. Mr. Kissel was elected Senior Vice President, Automotive Products in January 1998. Prior thereto he was Vice President of Air Conditioning Products' Unitary Products Group since January 1992, becoming Group Executive in March 1994. 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. 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. Dr. Britz was elected Vice President, Medical Systems, Business Development, in July 1997, after having served as Vice President and Managing Director of Sienna Biotech Inc., a medical diagnostic subsidiary of the Company from January 1995 to July 1997. Dr. Britz joined the staff of Sienna Biotech in January 1993 and prior to that, from 1988 to 1992, Dr. Britz was Director, R&D of Becton Dickinson Advanced Diagnostics. 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 China Plumbing Groups in February 1997. Prior thereto he was Group executive of the China Plumbing Group from December 1994 until February 1997. He served as Vice President of Plumbing Products' operations in China 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 in December 1990. In January 1998 he was given responsibility for the Air Conditioning Products Sector's International Applied Business. Prior thereto, from December 1990, he was in charge of the Trane Asia Pacific Region. 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. 21 22 Mr. Enss was elected Vice President, Automotive Products, 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. 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. Kerckhove was elected Vice President and Chief Financial Officer in January 1998. Prior thereto he was Senior Vice President, Plumbing Products, since June 1990. Mr. Kerckhove has served as a director of the Company since September 1990. Mr. Klug, elected a Vice President in 1985, is providing oversight and assistance in the Trane Air Conditioning organization restructuring pending his retirement during 1998. He has been Group Executive in charge of Air Conditioning Products' International Group since December 1993. He served as Group Executive, Unitary Products Group, from April 1990 until December 1993. Mr. Lunghi was elected Vice President and Group Executive of Medical Systems, DiaSorin, in July 1997, upon the acquisition by the Company of the Sorin Diagnostics and INCSTAR medical diagnostics businesses. He served as Executive Vice President and Chief Operating Officer of INCSTAR, a U.S. medical business, from October 1994 to July 1997, and from 1986 until 1994 was Vice President and General Manager of the Radiopharmaceutical Business Unit of Sorin Biomedica S.p.A. (now Sorin Diagnostics), which he joined in 1974. Mr. Montauze was elected Vice President, Automotive Products, 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 and has been Vice President and Group Executive, Plumbing Products, Americas, since January 1998. Prior thereto he served as Vice President, Automotive Products, United Kingdom from January 1992. Mr. Pannier was elected Vice President and Group Executive, North American Unitary Products Group in January 1998. He served as Coach of Unitary Products Group Marketing and Sales from July 1995 until December 1997, and prior thereto as Vice President, Residential Marketing from November 1991 until July 1995. Mr. Pipes was elected as Vice President in May 1992, and has been Vice President, Investor Relations since January 1998. Prior thereto he was responsible for Corporate Development programs since February 1997 and served as Group Executive for the Far East Region of Plumbing Products from May 1992 until February 1997. 22 23 Mr. Schultz was elected a Vice President in 1987 and has been Vice President and Group Executive, Worldwide Applied Systems, Air Conditioning Products since January 1998. Prior thereto he served as Group Executive, North American Commercial Group of Air Conditioning Products, since 1987. Mr. Simon was elected Vice President and Controller in January 1992. Mr. Stein was elected a Vice President in March 1994; and has been Vice President, Medical Systems, Operations since January 1998. Prior to March 1994 he was the Company's General Auditor. Mr. Voss was elected Vice President and Group Executive, European Plumbing Products in July 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. 23 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 (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 12, 1998, was 1,116. No dividends have been declared on the Company's common stock since the Offering. 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 for each full quarterly period in 1996 and 1997.
1996: High Low ----- -------- ------- 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 1997: First quarter $ 47-3/4 $ 37-3/4 Second quarter $ 51 $ 41-1/8 Third quarter $ 51-5/8 $ 37-11/16 Fourth quarter $ 41-1/8 $ 34-5/8
24 25 ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data (Dollars in millions, except per share data)
Year Ended December 31 ---------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Statement of Operations Data: Sales $6,008 $5,805 $5,221 $4,457 $3,830 Income (loss) before extraordinary item and cumulative effect of change in accounting method (a)(b) $120 $(47) $142 $(77) $(117) ==== ==== ==== ==== ===== Per Common Share (c): Income (loss) before extraordinary item and cumulative effect of change in accounting method (a): Basic $1.62 $(.60) $1.90 $(1.29) $(2.11) ===== ===== ===== ====== ====== Diluted $1.57 $(.60) $1.87 $(1.29) $(2.11) ===== ===== ===== ====== ====== Average number of outstanding common shares: Basic 73,801,220 77,986,511 74,671,830 59,933,435 59,313,073 Diluted 76,167,486 77,986,511 75,823,854 59,933,435 59,313,073 Balance Sheet Data (at end of period): Total assets $3,669 $3,520 $3,520 $3,156 $2,987 Total debt 2,300 1,923 2,083 2,364 2,336 Stockholders' deficit (610) (380) (390) (798) (723)
(a) In connection with the June 30, 1997, acquisition of the medical diagnostics businesses, the value of purchased in-process research and development was written off in accordance with applicable accounting rules, resulting in a non-cash charge to income of $90 million, or $1.19 per diluted share. 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 $2.95 per diluted share. (b) Retirements of debt in connection with the proceeds of bank debt refinancing in 1997, the initial public offering in 1995, an October 1994 borrowing and a 1993 refinancing resulted in extraordinary charges of $24 million (net of taxes of $6 million) in 1997, and $30 million, $9 million and $92 million in 1995, 1994 and 1993, respectively, on which there were no tax benefits. These charges included call premiums, the write-off of deferred debt issuance costs, and in 1993 the loss on cancellation of foreign currency swap contracts (see Notes 6 and 9 of Notes to Consolidated Financial Statements included in the Company's 1997 Annual Report to Stockholders and incorporated herein by reference). (c) Earnings per share for all periods have been presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share", adopted effective December 31, 1997. See Note 2 of Notes to Consolidated Financial Statements 25 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 1997 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 1997 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 30 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 26 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 1998: 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, 1998 as follows: under the section entitled "Directors' Fees and Other Arrangements" on page 6 thereof, under the heading entitled "Executive Compensation" on pages 7 through 12 thereof, under the heading entitled "Compensation Committee Interlocks and Insider Participation" on page 16 and under the heading entitled "Certain Relationships and Related Party Transactions" on pages 16 and 17 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 13 through 16. 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, 1998 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, 1998 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. 27 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 30 of this annual report on Form 10-K. The financial statements indicated on the index appearing on page 30 hereof are incorporated herein by reference. 3. Exhibits The exhibits to this Report are listed on the accompanying index to exhibits and are incorporated herein by reference or are filed as part of this annual report on Form 10-K. (b) Reports on Form 8-K During the quarter ended December 31, 1997, the company filed a Current Report on Form 8-K describing the First and Second Amendments to the 1997 Credit Agreement. The First Amendment permits the Company to (i) repurchase shares of its common stock in an amount not to exceed $308 million, and (ii) use proceeds of loans under the 1997 Credit Agreement to redeem the Company's 10-7/8% Senior Notes and to refinance such loans prior to June 30, 1998. The Second Amendment permits the Company to issue up to $1 billion of debt securities and to use the proceeds therefrom to redeem its 10-1/2% Senior Subordinated Discount Debentures or its 9-7/8% Senior Subordinated Notes or its 10-7/8% Senior Notes and, pending such redemptions, to prepay temporarily loans outstanding under the 1997 Credit Agreement. 28 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 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1998: /s/ Emmanuel A. Kampouris - ------------------------------ (Emmanuel A. Kampouris) Chairman, President and Chief Executive Officer; Director (Principal Executive Officer) /s/ GEORGE H. KERCKHOVE - ------------------------------ (George H. Kerckhove) Vice President and Chief Financial Officer (Principal Financial Officer) /s/ G. RONALD SIMON - ------------------------------ (G. Ronald Simon) Vice President and Controller (Principal Accounting Officer) /s/ STEVEN E. ANDERSON - ------------------------------ (Steven E. Anderson) Director /s/ HORST HINRICHS - ------------------------------ (Horst Hinrichs) Director /s/ SHIGERU MIZUSHIMA - ------------------------------ (Shigeru Mizushima) Director /s/ ROGER W. PARSONS - ------------------------------ (Roger W. Parsons) Director /s/ J. DANFORTH QUAYLE - ------------------------------ (J. Danforth Quayle) Director /s/ DAVID M. RODERICK - ------------------------------ (David M. Roderick) Director /s/ JOSEPH S. SCHUCHERT - ------------------------------ (Joseph S. Schuchert) Director
29 30 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
------------- 1997 ANNUAL REPORT TO STOCKHOLDERS (PAGES) ------------- 1. Financial Statements (incorporated by reference from the Company's 1997 Annual Report to Stockholders) Consolidated Balance Sheet at December 31, 1997, and 1996 27 Years ended December 31, 1997, 1996, and 1995: Consolidated Statement of Operations 26 Consolidated Statement of Cash Flows 28 Consolidated Statement of Stockholders' Deficit 29 Notes to Financial Statement 30-43 Segment Data 14 and 43 Quarterly Data (Unaudited) 44 Report of Independent Auditors 25 ------------- FORM 10-K (PAGES) ------------- 2. Report of Independent Auditors 31 Financial statement schedules, years ended December 31, 1997, 1996, and 1995 I Condensed Financial Information of Registrant 32-35 II Valuation and Qualifying Accounts 36
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. 30 31 REPORT OF INDEPENDENT AUDITORS We have audited the consolidated financial statements of American Standard Companies Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated February 16, 1998. Our audits also included the financial statement schedules 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. /s/ Ernst & Young LLP New York, New York February 16, 1998 31 32 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (Parent Company Separately) (Dollars in thousands)
Year Ended December 31, 1997 1996 1995 --------- --------- --------- Interest income $ 1,432 $ 747 $ 450 Interest expense (1,432) (747) (450) Equity in net income (loss) of subsidiary 96,223 (46,718) 111,655 --------- --------- --------- Net income (loss) $ 96,223 $ (46,718) $ 111,655 ========= ========= =========
See notes to financial statements. 32 33 SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (Continued) BALANCE SHEET (Parent Company Separately) (Dollars in thousands)
December 31, ASSETS ---------------------- ------ 1997 1996 --------- --------- Investment in subsidiary $(318,906) $(373,246) Loan receivable from subsidiary 19,777 10,000 LIABILITIES ----------- Loan payable to subsidiary 310,654 395 Stock repurchase obligation (Note C) -- 16,740 STOCKHOLDERS' DEFICIT --------------------- Common stock, $.01 par value, 200,000,000 shares authorized; shares issued and outstanding, 71,962,713 in 1997; 78,572,638 in 1996 720 786 Capital surplus 586,968 563,873 Subscriptions receivable (61) (395) Treasury stock (309,553) -- Accumulated deficit (675,264) (771,487) Foreign currency translation effects (212,593) (173,158) --------- --------- Total stockholders'deficit (609,783) (380,381) --------- --------- $(299,129) $(363,246) ========= =========
See notes to financial statements. 33 34 SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS (Parent Company Separately) (Dollars in thousands)
Year Ended December 31, 1997 1996 1995 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 96,223 $ (46,718) $ 111,655 Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in net loss (income) of subsidiary (96,223) 46,718 (111,655) --------- --------- --------- Net cash flow from operating activities 0 0 0 --------- --------- --------- Cash provided (used) by investing activities: Investment in subsidiary (2,647) (19,400) (279,983) Loan to subsidiary (9,716) (5,177) (4,823) Purchase of common stock by subsidiary 16,937 10,000 10,989 --------- --------- --------- Net cash provided (used) by investing activities 4,574 (14,577) (273,817) --------- --------- --------- Cash provided (used) by financing activities: Proceeds from initial public offering of common stock -- -- 280,535 Purchases of treasury stock (310,654) -- -- Other issuance of common stock 12,363 24,577 4,271 Common stock repurchases (16,937) (10,000) (10,989) Repayments on subscriptions receivable 334 234 1,011 Loan from subsidiary 310,654 -- -- Repayment of loan from subsidiary (334) (234) (1,011) --------- --------- --------- Net cash provided (used) by financing activities (4,574) 14,577 273,817 --------- --------- --------- Net change in cash and cash equivalents $ 0 $ 0 $ 0 ========= ========= =========
See notes to financial statements. 34 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 of the Company's common stock 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 purchased 4,628,755 shares of its common stock from ASI Partners for $208 million, plus fees and expenses. In addition, in October 1997 the company completed its open-market share repurchase program commenced in May 1997 pusuant to which 2,320,900 shares of its common stock were purchased for $100 million. Both of these purchases were funded with borrowings by American Standard Inc. under American Standard Inc.'s 1997 Credit Agreement which were loaned to the Parent Company under a non-interest-bearing intercompany demand note. 35 36 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996, and 1995 (Dollars in thousands)
Description Foreign Balance Additions Currency Balance Beginning Charged to Other Translation End of of Period Income Deductions Changes Effects Period 1997: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 28,294 $ 14,212 $ (9,581)(A) $ 500 $ (3,199) $ 30,226 ============================================================================================================================ Reserve for post-retirement benefits $473,229 $ 57,751 $(44,808)(B) $ (6,375)(C) $(42,146) $437,651 ============================================================================================================================ 1996: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 27,330 $ 11,225 $(10,158)(A) $ 304 $ (407) $ 28,294 ============================================================================================================================ Reserve for post-retirement benefits $482,398 $ 60,730 $(40,960)(B) $(10,204)(D) $(18,735) $473,229 ============================================================================================================================ 1995: Reserve deducted from assets: Allowance for doubtful accounts receivable $ 19,569 $ 10,811 $ (6,064)(A) $ 2,662 $ 352 $ 27,330 ============================================================================================================================ Reserve for post-retirement benefits $437,708 $ 52,190 $(21,808)(B) (5,761)(E) $ 20,069 $482,398 ============================================================================================================================
The reserve for postretirement benefits excludes the activity for currently funded U.S. pension plans. (A) Accounts charged off. (B) Payments made during the year. (C) Includes reclassification to current liabilities, offset by effect of acquisition of new businesses. (D) Includes $10 million reduction in minimum pension liability (E) Includes $6 million reduction in minimum pension liability. 36 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; previously filed as Exhibit (3) (ii) to Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (4) (i) Form of Common Stock Certificate; previously filed as Exhibit 4(i) in Amendment No. 3 to Registration Statement No. 33-56409 of Holding, 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, filed June 16, 1993, 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 (4) (iv) above. 37 38 (vi) 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, filed May 10, 1993, and herein incorporated by reference. (vii) 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) (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 10-1/2% Senior Subordinated Discount Debentures Due 2005; previously filed as Exhibit (4) (xxxiii) to Amendment No. 1 to Registration Statement No. 33-61130 of the Company, filed May 10, 1993, and herein incorporated by reference. (ix) 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) (viii) above. (x) Form of Senior Debt Indenture dated as of January 15, 1998 among the Company, Holding and The Bank of New York; filed as Exhibit (4) (i) to Amendment No. 1 to Registration Statement No. 333-32627 filed September 19, 1997, and herein incorporated by reference. (xi) First Supplemental Indenture dated as of January 15, 1998 between the Company, Holding and The Bank of New York, relating to the Company's 7.375% Senior Notes due 2008, guaranteed by Holding; filed herewith. (xii) Second Supplemental Indenture dated as of February 13, 1998 between the Company, Holding and The Bank of New York relating to the Company's 7-1/8% Senior Notes due 2003 and 7-5/8% Senior Notes due 2010, guaranteed by Holding; filed herewith. (xiii) 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, filed February 5, 1997, and herein incorporated by reference. (xiv) First Amendment dated as of May 22, 1997 to the Amended and Restated Credit Agreement dated as of January 31, 1997 among Holding, the Company, certain subsidiaries of the Company, the financial institutions party thereto and The Chase Manhattan Bank, as administrative agent; filed as Exhibit 4 (a) to Holding's Report on Form 8-K dated October 24, 1997. (xv) Second Amendment dated as of August 20, 1997 to the Amended and Restated Credit Agreement dated as of January 31, 1997 among Holding, the Company, certain subsidiaries of the Company, the financial institutions party thereto and The Chase Manhattan Bank, as administrative agent; filed as Exhibit 4 (b) to Holding's Report on Form 8-K dated October 24, 1997. 38 39 (xvi) Rights Agreement, dated as of January 5, 1995, between Holding and Citibank N.A. as Rights Agent; previously filed as Exhibit (4) (xxv) to Holding's Form 10-K for the fiscal year ended December 31, 1994, and herein incorporated by reference. (10)* (i) The American Standard Companies Inc. Employee Stock Purchase Plan; filed herewith. (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 December 4, 1997; incorporated herein by reference to Exhibit (10) (v) to the Company's Form 10-K for the fiscal year ended December 31, 1997, and herein incorporated by reference. (vii) Trust Agreement for the American Standard Inc. Supplemental Compenation Plan for Outside Directors, dated March 7, 1996; incorporated herein by reference to Exhibit (10) (vi) to the Company's Form 10-K for the fiscal year ended December 31, 1997. * Items in this section 10 consist of management contracts or compensatory plans or arrangements with the exception of (10) (xvi) and (xvii). (viii) 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. (ix) American Standard Companies Inc. Corporate Officer Severance Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (vii) in Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (x) 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. (xi) 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. 39 40 (xii) 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. (xiii) American Standard Companies Inc. Stock Incentive Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (xii) to Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (xiv) American Standard Companies Inc. and Subsidiaries 1996-1998 Supplemental Incentive Compensation Plan, as amended and restated on December 5, 1996; previously filed as Exhibit (10) (xiii) to Holding's Form 10-K for the fiscal year ended December 31, 1996, and herein incorporated by reference. (xv) Form of Indemnification Agreement; previously filed as Exhibit (10) (xxi) in Amendment No. 3 to Registration Statement No. 33-56409, filed January 5, 1995, and herein incorporated by reference. (xvi) 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, filed December 17, 1996, and herein incorporated by reference. (xvii) 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) (xvi) above; previously filed as Exhibit (10) (ii) to Registration Statement No. 333-18015, filed December 17, 1996, and herein incorporated by reference. (13) 1997 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. (23) Consent of Ernst & Young LLP. (27) Financial Data Schedule. 40 EX-4.XI 2 FIRST SUPPLEMENTAL INDENTURE 1 Exhibit 4(x) ============================================================================ AMERICAN STANDARD INC., as Issuer AMERICAN STANDARD COMPANIES INC., as Guarantor and THE BANK OF NEW YORK, as Trustee --------------- First Supplemental Indenture Dated as of January 15, 1998 --------------- 7.375% Senior Notes due 2008 ============================================================================ 2 FIRST SUPPLEMENTAL INDENTURE, dated as of January 15, 1998 (the "First Supplemental Indenture"), to the Indenture, dated as of January 15, 1998 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), among AMERICAN STANDARD INC., a Delaware corporation (hereinafter called the "Issuer"), having its principal office at One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08835-6820, and AMERICAN STANDARD COMPANIES INC., a Delaware corporation (hereinafter called the "Guarantor"), having its principal office at One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08835-6820, and THE BANK OF NEW YORK, a New York banking corporation, as Trustee hereunder (hereafter called the "Trustee"), having its principal office at 101 Barclay Street, Floor 21 West, New York, New York 10286. RECITALS WHEREAS, the Issuer, the Guarantor and the Trustee have each duly authorized the execution and delivery of the Indenture to provide for the issuance from time to time of one or more series of its senior debt securities (the "Securities") to be issued in one or more series as in the Indenture provided; WHEREAS, the Issuer and the Guarantor desire and have requested the Trustee to join them in the execution and delivery of this First Supplemental Indenture in order to establish and provide for the issuance by the Issuer and the Guarantor of a series of Securities designated as its 7.375% Senior Notes due 2008 (the "7.375% Notes") in the aggregate principal amount of $350,000,000, substantially in the form attached hereto as Exhibit A, on the terms set forth herein; WHEREAS, Section 9.01 of the Indenture provides that a supplemental indenture may be entered into by the Issuer and the Guarantor and the Trustee for such purpose provided certain conditions are met; WHEREAS, the conditions set forth in the Indenture for the execution and delivery of this First Supplemental Indenture have been complied with; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Issuer, the Guarantor and the Trustee, in accordance with its terms, and a valid amendment of, and supplement to, the Indenture have been done; 3 -2- NOW, THEREFORE: In consideration of the premises and the purchase and acceptance of the 7.375% Notes by the Holders thereof the Company mutually covenants and agrees with the Trustee, for the equal and proportionate benefit of all Holders of the 7.375% Notes, that the Indenture is supplemented and amended, to the extent and for the purposes expressed herein, as follows: Section 1. SCOPE OF THIS FIRST SUPPLEMENTAL INDENTURE (a) The changes, modifications and supplements to the Indenture effected by this First Supplemental Indenture in Section 2 hereof shall only be applicable with respect to, and govern the terms of, the 7.375% Notes issued by the Issuer and the Guarantor, which shall be limited in original aggregate principal amount to $350,000,000, and shall not apply to any other Securities which may be issued under the Indenture unless a supplemental indenture with respect to such other Securities specifically incorporates such changes, modifications and supplements. (b) Pursuant to this First Supplemental Indenture, there is hereby created and designated a series of Securities under the Indenture entitled "7.375% Senior Notes due 2008." The 7.375% Notes shall be in the form of Exhibit A hereto. The Guarantee to be endorsed on the 7.375% Notes shall be in substantially the form set forth in exhibit B. (1) the title of the Securities of such series shall be "7.375% Senior Notes due 2008" and the 7.375% Notes are endorsed to the benefit of Article XII of the Indenture; (2) the 7.375% Notes shall be initially authenticated and delivered from time to time in aggregate principal amount limited to $350,000,000; (3) the Notes will be issued at a price of 99.889%; (4) the principal of each 7.375% Note shall be payable on February 1, 2008; (5) the 7.375% Notes shall bear interest at the rate of seven and three hundred seventy five thousandths per centum (7.375%) per annum; 4 -3- (6) interest shall accrue on the 7.375% Notes from January 15, 1998, or the most recent date to which interest has been paid or duly provided for; the Interest Payment Dates for such Notes shall be February 1 and August 1 in each year, commencing August 1, 1998, and the Regular Record Dates with respect to the Interest Payment Dates for such Notes shall be January 15 and July 15 in each year, respectively (whether or not a Business Day); (7) the Corporate Trust Office of The Bank of New York, in New York, New York shall be the place at which (i) the principal of, premium, if any, and interest, if any, on the 7.375% Notes shall be payable, (ii) registration of transfer of such Notes may be effected, (iii) exchanges of such Notes may be effected and (iv) notices and demands to or upon the Issuer in respect of such Notes and the Indenture may be served; and The Bank of New York shall be the Security Registrar for the 7.375% Notes; (8) the 7.375% Notes shall not be redeemable by the Issuer prior to Maturity; (9) not applicable; (10) not applicable; (11) not applicable; (12) not applicable; (13) not applicable; (14) not applicable; (15) see Section 2 of this First Supplemental Indenture; (16) not applicable; (17) the 7.375%% Notes are to be issued as Registered Securities; each 7.375% Note is to be initially registered in the name of Cede & Co., as nominee for The Depository Trust Company (the "Depositary"). The 7.375% Notes shall not be transferable or exchangeable, nor shall any purported transfer be registered, except as follows: (i) a 7.375% Note may be transferred in whole, and appropriate registration of transfer effected, 5 -4- if such transfer is by such nominee to the Depositary, or by the Depositary to another nominee thereof, or by any nominee of the Depositary to any other nominee thereof, or by the Depositary or any nominee thereof to any successor securities depositary or any nominee thereof; and (ii) a 7.375% Note may be exchanged for certificated notes registered in the respective names of the beneficial holders thereof, and thereafter shall be transferable without restriction, if: (A) The Depositary, or any successor securities depositary, shall have notified the Issuer and the Trustee that it is unwilling or unable to continue to act as securities depositary with respect to such 7.375% Note or the Issuer becomes aware that the Depositary has ceased to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, in any such case, the Trustee shall not have been notified by the Issuer within ninety (90) days of the identity of a successor securities depositary with respect to such 7.375% Note; (B) The Issuer shall have delivered to the Trustee an Issuer's Order to the effect that such 7.375% Note shall be so exchangeable on and after a date specified therein; or (C) (1) an Event of Default shall have occurred and be continuing, (2) the Trustee shall have given notice of such Event of Default pursuant to Section 5.02 of the Indenture and (3) there shall have been delivered to the Issuer and the Trustee an Opinion of Counsel to the effect that the interests of the beneficial owners of such Security in respect thereof will be materially impaired unless such owners become Holders of certificated notes. (18) not applicable; (19) not applicable; (20) the 7.375% Notes will be issued in book entry form; 6 -5- (21) the 7.375% Notes are subject to the defeasance and covenant defeasance provisions of the Indenture; (22) not applicable; (23) not applicable; and (24) not applicable. Section 2. ADDITIONAL PROVISIONS (a) ADDITIONAL DEFINITIONS Each of the following definitions, which constitute part of this First Supplemental Indenture, shall be inserted in proper alphabetical order in Article I of the Indenture. Any definition set forth in the Indenture which is also set forth below shall have the meaning set forth below for purposes of terms of the Indenture and this First Supplemental Indenture. Capitalized terms used in this First Supplemental Indenture but not defined herein shall have the meaning ascribed to such terms in the Indenture. "Attributable Liens" means in connection with a sale and lease-back transaction, the lesser of (a) the fair market value of the assets subject to such transaction and (b) the present value (discounted at a rate per annum equal to the average interest borne by all outstanding securities issued under the Indenture (which may include securities in addition to the 7.375% Notes) determined on a weighted average basis and compounded semiannually) of the obligations of the lessee for rental payments during the term of the related lease. "Capital Lease" means any Indebtedness represented by a lease obligation of a person incurred with respect to real property or equipment acquired or leased by such person and used in its business that is required to be recorded as a capital lease in accordance with GAAP. "Closing Date" means January 15, 1998. "Exempted Debt" means the sum of the following as of the date of determination: (i) Indebtedness of the Issuer and Guarantor incurred after the Closing Date and secured by Liens not otherwise permitted by the first sentence under Limitation on Liens below (Section 10.11), and (ii) Attributable Liens of the Issuer and Guarantor and their Subsidiaries in respect of sale and lease-back transactions entered into after the Closing Date, other than sale and lease-back transactions permitted by the limitation on sale and lease-back transactions set forth 7 -6- under Section 10.12. For purposes of determining whether or not a sale and lease-back transaction is "permitted" by Section 10.12, Limitation on Sale and Lease-Back Transactions, the last paragraph under Section 10.11, Limitation on Liens (creating an exception for Exempted Debt), will be disregarded. "Lien" means any lien, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Permitted Liens" means (i) Liens securing Indebtedness under the Facility and any initial or subsequent renewal, extension, refinancing, replacement or refunding thereof; (ii) Liens on accounts receivable, merchandise inventory, equipment, and patents, trademarks, trade names and other intangibles, securing Indebtedness; (iii) Liens on any asset of the Issuer and Guarantor, any Subsidiary, or any joint venture to which the Issuer or the Guarantor or any of their Subsidiaries is a party, created solely to secure obligations incurred to finance the refurbishment, improvement or construction of such asset, which obligations are incurred no later than 24 months after completion of such refurbishment, improvement or construction, and all renewals, extensions, refinancings, replacements or refundings of such obligations; (iv)(a) Liens given to secure the payment of the purchase price incurred in connection with the acquisition (including acquisition through merger or consolidation) of property (including shares of stock), including Capital Lease transactions in connection with any such acquisition, and (b) Liens existing on property at the time of acquisition thereof or at the time of acquisition by the Issuer or Guarantor or a Subsidiary or any person then owning such property whether or not such existing Liens were given to secure the payment of the purchase price of the property to which they attach; provided that, with respect to clause (a), the Liens shall be given within 24 months after such acquisition and shall attach solely to the property acquired or purchased and any improvements then or thereafter placed thereon; (v) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (vi) Liens upon specific items of inventory or other goods and proceeds of any person securing such person's obligations in respect of bankers' acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods; (vii) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the prod- 8 -7- ucts and proceeds thereof; (viii) Liens on key-man life insurance policies granted to secure Indebtedness of the Issuer or Guarantor against the cash surrender value thereof; (ix) Liens encumbering customary initial deposits and margin deposits and other Liens in the ordinary course of business, in each case securing Indebtedness of the Company under interest swap obligations and currency agreements and forward contract, option, futures contracts, futures options or similar agreements or arrangements designed to protect the Issuer or the Guarantor or any of their Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (x) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Issuer or Guarantor or any of their Subsidiaries in the ordinary course of business and (xi) Liens in favor of the Issuer or Guarantor or any Subsidiary. (b) ADDITIONAL SECTIONS Each of the following provisions, which constitutes part of this First Supplemental Indenture, is numbered to conform with the format of the Indenture: Section 10.11 Limitation on Liens The Issuer and the Guarantor will not, and will not permit any of their Subsidiaries to, create, incur, or permit to exist, any Lien on any of their respective properties or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, in order to secure any Indebtedness of either of the Issuer or the Guarantor, without effectively providing that the 7.375% Notes shall be equally and ratably secured until such time as such Indebtedness is no longer secured by such Lien, except: (i) Liens existing as of the Closing Date; (ii) Liens granted after the Closing Date on any assets or properties of the Issuer or the Guarantor or any of their Subsidiaries securing Indebtedness of the Issuer or the Guarantor created in favor of the Holders of the 7.375% Notes; (iii) Liens securing Indebtedness of the Issuer or the Guarantor which is incurred to extend, renew or refinance Indebtedness which is secured by Liens permitted to be incurred under the Indenture; provided that such Liens do not extend to or cover any property or assets of the Issuer or the Guarantor or any of their Subsidiaries other than the property or assets securing the Indebtedness being refinanced and that the principal amount of such Indebtedness does not exceed the principal amount of the Indebtedness being refinanced; (iv) Permitted Liens; and (v) Liens created in substitution of or as replacements for any Liens permitted by the preceding clauses (i) 9 -8- through (iv), provided that, based on a good faith determination of an officer each of the Issuer and the Guarantor, the property or asset encumbered under any such substitute or replacement Lien is substantially similar in nature to the property or asset encumbered by the otherwise permitted Lien which is being replaced. Notwithstanding the foregoing, the Issuer and the Guarantor and any Subsidiary may, without securing the 7.375% Notes, create, incur or permit to exist Liens which would otherwise be subject to the restrictions set forth in the preceding paragraph, if after giving effect thereto and at the time of determination, Exempted Debt does not exceed the greater of (i) 10% of Consolidated Net Assets or (ii) $250,000,000. Section 10.12 Limitation on Sale and Lease-Back Transactions The Issuer and Guarantor will not, and will not permit any of their Subsidiaries to, enter into any sale and lease-back transaction for the sale and leasing back of any property or asset, whether now owned or hereafter acquired, of the Issuer or Guarantor or any of their Subsidiaries (except such transactions (i) entered into prior to the Closing Date or (ii) for the sale and leasing back of any property or asset by a Subsidiary of the Issuer or Guarantor to the Issuer or Guarantor or (iii) involving leases for less than three years or (iv) in which the lease for the property or asset is entered into within 120 days after the later of the date of acquisition, completion of construction or commencement or full operations of such property or asset) unless (a) the Issuer or Guarantor or such Subsidiary would be entitled under the Limitation on Liens covenant above to create, incur or permit to exist a Lien on the assets to be leased in an amount at least equal to the Attributable Liens in respect of such transaction without equally and ratably securing the 7.375% Notes, or (b) the proceeds of the sale of the assets to be leased are at least equal to their fair market value and the proceeds are applied to the purchase or acquisition (or in the case of real property, the construction) of assets or to the repayment of Indebtedness of the Issuer or Guarantor or a Subsidiary of the Issuer or Guarantor which by its terms matures not earlier than one year after the date of such repayment. 10 -9- IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. AMERICAN STANDARD INC. By: ----------------------------- Name: Title: AMERICAN STANDARD COMPANIES INC., as Guarantor By: ----------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: ----------------------------- Name: Title: 11 EXHIBIT A FORM OF SENIOR SECURITY [Face of Security] If the Holder of this Security (as indicated below) is The Depository Trust Company ("DTC") or a nominee of DTC, this Security is a Global Security and the following two legends apply: Unless this Security is presented by an authorized representative of The Depository Trust Company ("DTC"), 55 Water Street, New York, New York to the issuer or its agent for registration of transfer, exchange or payment, and such Security issued is registered in the name of CEDE & CO., or such other name as requested by an authorized representative of DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, since the registered owner hereof, CEDE & CO., has an interest herein. Unless and until this Security is exchanged in whole or in part for Securities in certificated form, this Security may not be transferred except as a whole by DTC to a nominee thereof or by a nominee thereof to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor. A-1 12 AMERICAN STANDARD INC. 7.375% Senior Notes Due 2008 No. _______ $_________ CUSIP No. ______ AMERICAN STANDARD INC., a Delaware corporation (herein referred to as the "Issuer," which term includes any successor Person under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to ______________________________ or registered assigns the principal sum of _______ Dollars on February 1, 2008 (the "Stated Maturity Date") and to pay interest thereon from January 15, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 1 and August 1 in each year (each, an "Interest Payment Date"), commencing August 1, 1998, at the rate of 7.375% per annum, until the principal hereof is paid or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be January 15 or July 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date at the office or agency of the Issuer maintained for such purpose; provided, however, that such interest may be paid, at the Issuer's option, by mailing a check to such Holder at its registered address or by transfer of funds to an account maintained by such Holder within the United States. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. A-2 13 The principal of this Security payable on the Stated Maturity Date or the principal of, premium, and interest on this Security will be paid against presentation of this Security at the office or agency of the Issuer maintained for that purpose in New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Interest payable on this Security on any Interest Payment Date and on the Stated Maturity Date will include interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for (or from and including January 15, 1998, if no interest has been paid on this Security) to but excluding such Interest Payment Date or the Stated Maturity Date, as the case may be. If any Interest Payment Date or the Stated Maturity Date falls on a day that is not a Business Day, as defined below, principal, premium, and/or interest payable with respect to such Interest Payment Date or Stated Maturity Date, as the case may be, will be paid on the next succeeding Business Day with the same force and effect as if it were paid on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date or Stated Maturity Date, as the case may be. "Business Day" means any day, other than a Saturday or Sunday, on which banks in New York are not required or authorized by law or executive order to close. All payments of principal, premium, and interest in respect of this Security will be made by the Issuer in immediately available funds. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the Certificate of Authentication hereon has been executed by the Trustee by manual signature of one of its authorized signatories, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. A-3 14 IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its facsimile corporate seal. Dated: ______________ AMERICAN STANDARD INC. By: ----------------------------- Attest: - ------------------------- Assistant Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION - ------------------------- Dated: THE BANK OF NEW YORK as Trustee, certifies that this is one of the Securities referred to in the Indenture. by - ------------------------- Authorized Signatory A-4 15 [Reverse of Security] AMERICAN STANDARD INC. This Security is one of a duly authorized issue of securities of the Issuer (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (herein called the "Indenture") among the Issuer, the Guarantor and The Bank of New York, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture with respect to the series of which this Security is a part), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the duly authorized series of Securities designated on the face hereof (collectively, the "Securities"), and the aggregate principal amount of the Securities to be issued under such series is limited to $350,000,000 (except for Securities authenticated and delivered upon transfer of, or in exchange for, or in lieu of other Securities). All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. If an Event of Default, as defined in the Indenture, shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Guarantor and the rights of the Holders of the Securities under the Indenture at any time by the Issuer, the Guarantor and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of all Securities issued under the Indenture at the time Outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of not less than a majority of the aggregate principal amount of the Outstanding Securities, on behalf of the Holders of all such Securities, to waive compliance by the Issuer and the Guarantor with certain provisions of the Indenture. Furthermore, provisions in the Indenture permit the Holders of not less than a majority of the aggregate principal amount, in certain instances, of the Outstanding Securities of any series to waive, A-5 16 on behalf of all of the Holders of Securities of such series, certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and other Securities issued upon the registration of transfer hereof or in exchange hereafter or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of (and premium) and interest on this Security at the times, places and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein and herein set forth, the transfer of this Security is registrable in the Security Register of the Issuer upon surrender of this Security for registration of transfer at the office or agency of the Issuer in any place where the principal of (and premium) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. As provided in the Indenture and subject to certain limitations therein and herein set forth, this Security is exchangeable for a like aggregate principal amount of Securities of different authorized denominations but otherwise having the same terms and conditions, as requested by the Holder hereof surrendering the same. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer or exchange, but the Issuer and the Guarantor may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Guarantor, the Trustee and any agent A-6 17 of the Issuer or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of or premium, or the interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any past, present or future stockholder, employee, officer, director, incorporator, limited or general partner, as such, of the or of any successor, either directly or through the Issuer or any successor, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in such State without regard to conflicts of law principles thereof. A-7 18 ASSIGNMENT FORM To assign this Securities, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. _______________________________________________________________________ Date: ____________________ Your Signature: ____________________________ Signature Guarantee: __________________________________ (Signature must be guaranteed) _______________________________________________________________________ Sign exactly as your name appears on the other side of this Security. A-8 19 EXHIBIT B FORM OF NOTATION ON SECURITY RELATING TO AMERICAN STANDARD COMPANIES INC. The Guarantor has unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, the due and punctual payment and performance of the obligations of the Issuer in connection with the Indenture and each Series of Securities issued thereunder. In case of the failure of the Issuer punctually to perform or make any such payment, the Guarantor hereby agrees to cause such payment and performance to be made punctually. The obligations of the Guarantor to the Holders and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article Twelve of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Capitalized terms used and not defined herein have the meanings ascribed thereto in the Indenture. AMERICAN STANDARD COMPANIES INC. By: ------------------------ Name: ------------------ Title: ------------------ Attest: By: --------------------- Name: ------------------ [Assistant] Secretary (Seal) EX-4.XII 3 SECOND SUPPLEMENTAL INDENTURE 1 Exhibit 4(xi) ================================================================================ AMERICAN STANDARD INC., as Issuer AMERICAN STANDARD COMPANIES INC., as Guarantor and THE BANK OF NEW YORK, as Trustee --------------- Second Supplemental Indenture Dated as of February 13, 1998 --------------- 7 1/8% Senior Notes due 2003 7 5/8% Senior Notes due 2010 ================================================================================ 2 SECOND SUPPLEMENTAL INDENTURE, dated as of February 13, 1998 (the "Second Supplemental Indenture"), to the Indenture, dated as of January 15, 1998 (as amended, modified or supplemented from time to time in accordance therewith, the "Indenture"), among AMERICAN STANDARD INC., a Delaware corporation (hereinafter called the "Issuer"), having its principal office at One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08835-6820, and AMERICAN STANDARD COMPANIES INC., a Delaware corporation (hereinafter called the "Guarantor"), having its principal office at One Centennial Avenue, P.O. Box 6820, Piscataway, New Jersey 08835-6820, and THE BANK OF NEW YORK, a New York banking corporation, as Trustee hereunder (hereafter called the "Trustee"), having its principal office at 101 Barclay Street, Floor 21 West, New York, New York 10286. RECITALS WHEREAS, the Issuer, the Guarantor and the Trustee have each duly authorized the execution and delivery of the Indenture to provide for the issuance from time to time of one or more series of its senior debt securities (the "Securities") to be issued in one or more series as in the Indenture provided; WHEREAS, the Issuer and the Guarantor desire and have requested the Trustee to join them in the execution and delivery of this Second Supplemental Indenture in order to establish and provide for the issuance by the Issuer and the Guarantor of a series of Securities designated as its 7 1/8% Senior Notes due 2003 (the "2003 Notes") in the aggregate principal amount of $125,000,000, substantially in the form attached hereto as Exhibit A, on the terms set forth herein and for the issuance by the Issuer and Guarantor of a series of Securities designated as its 7 5/8% Senior Notes due 2010 (the "2010 Notes" and together with the 2003 Notes, the "Senior Notes") in the aggregate principal amount of $275,000,000, substantially in the form attached hereto as Exhibit C, on the terms set forth herein; WHEREAS, Section 9.01 of the Indenture provides that a supplemental indenture may be entered into by the Issuer and the Guarantor and the Trustee for such purpose provided certain conditions are met; WHEREAS, the conditions set forth in the Indenture for the execution and delivery of this Second Supplemental Indenture have been complied with; and 3 -2- WHEREAS, all things necessary to make this Second Supplemental Indenture a valid agreement of the Issuer, the Guarantor and the Trustee, in accordance with its terms, and a valid amendment of, and supplement to, the Indenture have been done; NOW, THEREFORE: In consideration of the premises and the purchase and acceptance of the Senior Notes by the Holders thereof the Company mutually covenants and agrees with the Trustee, for the equal and proportionate benefit of all Holders of the Senior Notes, that the Indenture is supplemented and amended, to the extent and for the purposes expressed herein, as follows: Section 1. SCOPE OF THIS SECOND SUPPLEMENTAL INDENTURE (a) The changes, modifications and supplements to the Indenture effected by this Second Supplemental Indenture in Section 2 hereof shall only be applicable with respect to, and govern the terms of, the 2003 Notes issued by the Issuer and the Guarantor, which shall be limited in original aggregate principal amount to $125,000,000, and the 2010 Notes issued by the Issuer and the Guarantor which shall be limited in original aggregate principal amount to $275,000,000 and shall not apply to any other Securities which may be issued under the Indenture unless a supplemental indenture with respect to such other Securities specifically incorporates such changes, modifications and supplements. (b) Pursuant to this Second Supplemental Indenture, there is hereby created and designated a series of Securities under the Indenture entitled "7 1/8% Senior Notes due 2003." The 2003 Notes shall be in the form of Exhibit A hereto. The Guarantee to be endorsed on the 2003 Notes shall be in substantially the form set forth in Exhibit B. (1) the title of the Securities of such series shall be "7 1/8% Senior Notes due 2003" and the 2003 Notes are endorsed to the benefit of Article XII of the Indenture; (2) the 2003 Notes shall be initially authenticated and delivered from time to time in aggregate principal amount limited to $125,000,000; (3) the Notes will be issued at a price of 99.523%; 4 -3- (4) the principal of each 7 1/8% Note shall be payable on February 15, 2003; (5) the 2003 Notes shall bear interest at the rate of seven and one hundred twenty five thousandths per centum (7 1/8%) per annum; (6) interest shall accrue on the 2003 Notes from February 13, 1998, or the most recent date to which interest has been paid or duly provided for; the Interest Payment Dates for such Notes shall be February 15 and August 15 in each year, commencing August 15, 1998, and the Regular Record Dates with respect to the Interest Payment Dates for such Notes shall be February l and August 1 in each year, respectively (whether or not a Business Day); (7) the Corporate Trust Office of The Bank of New York, in New York, New York shall be the place at which (i) the principal of, premium, if any, and interest, if any, on the 2003 Notes shall be payable, (ii) registration of transfer of such Notes may be effected, (iii) exchanges of such Notes may be effected and (iv) notices and demands to or upon the Issuer in respect of such Notes and the Indenture may be served; and The Bank of New York shall be the Security Registrar for the 2003 Notes; (8) the 2003 Notes shall not be redeemable by the Issuer prior to Maturity; (9) not applicable; (10) not applicable; (11) not applicable; (12) not applicable; (13) not applicable; (14) not applicable; (15) see Section 2 of this Second Supplemental Indenture; (16) not applicable; (17) the 2003 Notes are to be issued as Registered Securities; each 2003 Note is to be initially registered 5 -4- in the name of Cede & Co., as nominee for The Depository Trust Company (the "Depositary"). The 2003 Notes shall not be transferable or exchangeable, nor shall any purported transfer be registered, except as follows: (i) a 2003 Note may be transferred in whole, and appropriate registration of transfer effected, if such transfer is by such nominee to the Depositary, or by the Depositary to another nominee thereof, or by any nominee of the Depositary to any other nominee thereof, or by the Depositary or any nominee thereof to any successor securities depositary or any nominee thereof; and (ii) a 2003 Note may be exchanged for certificated notes registered in the respective names of the beneficial holders thereof, and thereafter shall be transferable without restriction, if: (A) The Depositary, or any successor securities depositary, shall have notified the Issuer and the Trustee that it is unwilling or unable to continue to act as securities depositary with respect to such 2003 Note or the Issuer becomes aware that the Depositary has ceased to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, in any such case, the Trustee shall not have been notified by the Issuer within ninety (90) days of the identity of a successor securities depositary with respect to such 2003 Note; (B) The Issuer shall have delivered to the Trustee an Issuer's Order to the effect that such 2003 Note shall be so exchangeable on and after a date specified therein; or (C) (1) an Event of Default shall have occurred and be continuing, (2) the Trustee shall have given notice of such Event of Default pursuant to Section 5.02 of the Indenture and (3) there shall have been delivered to the Issuer and the Trustee an Opinion of Counsel to the effect that the interests of the beneficial owners of such Security in respect thereof will be materially impaired unless such owners become Holders of certificated notes. 6 -5- (18) not applicable; (19) not applicable; (20) the 2003 Notes will be issued in book entry form; (21) the 2003 Notes are subject to the defeasance and covenant defeasance provisions of the Indenture; (22) not applicable; (23) not applicable; and (24) not applicable. (c) Pursuant to this Second Supplemental Indenture, there is hereby created and designated a series of Securities under the Indenture entitled "7 5/8% Senior Notes due 2010." The 2010 Notes shall be in the form of Exhibit C hereto. The Guarantee to be endorsed on the 2010 Notes shall be in substantially the form set forth in Exhibit D. (1) the title of the Securities of such series shall be "7 5/8% Senior Notes due 2010" and the 2010 Notes are endorsed to the benefit of Article XII of the Indenture; (2) the 2010 Notes shall be initially authenticated and delivered from time to time in aggregate principal amount limited to $275,000,000; (3) the Notes will be issued at a price of 99.573%; (4) the principal of each 2010 Note shall be payable on February 15, 2010; (5) the 2010 Notes shall bear interest at the rate of seven and six hundred twenty-five thousandths per centum (7 5/8%) per annum; (6) interest shall accrue on the 2010 Notes from February l3, 1998, or the most recent date to which interest has been paid or duly provided for; the Interest Payment Dates for such Notes shall be February 15 and August 15 in each year, commencing August 15, 1998, and the Regular Record Dates with respect to the Interest Payment Dates for such Notes shall be February 1 and August 1 in each year, respectively (whether or not a Business Day); 7 -6- (7) the Corporate Trust Office of The Bank of New York, in New York, New York shall be the place at which (i) the principal of, premium, if any, and interest, if any, on the 2010 Notes shall be payable, (ii) registration of transfer of such Notes may be effected, (iii) exchanges of such Notes may be effected and (iv) notices and demands to or upon the Issuer in respect of such Notes and the Indenture may be served; and The Bank of New York shall be the Security Registrar for the 2010 Notes; (8) the 2010 Notes shall not be redeemable by the Issuer prior to Maturity; (9) not applicable; (10) not applicable; (11) not applicable; (12) not applicable; (13) not applicable; (14) not applicable; (15) see Section 2 of this Second Supplemental Indenture; (16) not applicable; (17) the 2010 Notes are to be issued as Registered Securities; each 2010 Note is to be initially registered in the name of Cede & Co., as nominee for The Depository Trust Company (the "Depositary"). The 2010 Notes shall not be transferable or exchangeable, nor shall any purported transfer be registered, except as follows: (i) a 2010 Note may be transferred in whole, and appropriate registration of transfer effected, if such transfer is by such nominee to the Depositary, or by the Depositary to another nominee thereof, or by any nominee of the Depositary to any other nominee thereof, or by the Depositary or any nominee thereof to any successor securities depositary or any nominee thereof; and (ii) a 2010 Note may be exchanged for certificated notes registered in the respective names of the 8 -7- beneficial holders thereof, and thereafter shall be transferable without restriction, if: (A) The Depositary, or any successor securities depositary, shall have notified the Issuer and the Trustee that it is unwilling or unable to continue to act as securities depositary with respect to such 2010 Note or the Issuer becomes aware that the Depositary has ceased to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, and, in any such case, the Trustee shall not have been notified by the Issuer within ninety (90) days of the identity of a successor securities depositary with respect to such 2010 Note; (B) The Issuer shall have delivered to the Trustee an Issuer's Order to the effect that such 2010 Note shall be so exchangeable on and after a date specified therein; or (C) (1) an Event of Default shall have occurred and be continuing, (2) the Trustee shall have given notice of such Event of Default pursuant to Section 5.02 of the Indenture and (3) there shall have been delivered to the Issuer and the Trustee an Opinion of Counsel to the effect that the interests of the beneficial owners of such Security in respect thereof will be materially impaired unless such owners become Holders of certificated notes. (18) not applicable; (19) not applicable; (20) the 2010 Notes will be issued in book entry form; (21) the 2010 Notes are subject to the defeasance and covenant defeasance provisions of the Indenture; (22) not applicable; (23) not applicable; and (24) not applicable. 9 -8- Section 2. ADDITIONAL PROVISIONS (a) ADDITIONAL DEFINITIONS Each of the following definitions, which constitute part of this Second Supplemental Indenture, shall be inserted in proper alphabetical order in Article I of the Indenture. Any definition set forth in the Indenture which is also set forth below shall have the meaning set forth below for purposes of terms of the Indenture and this Second Supplemental Indenture. Capitalized terms used in this Second Supplemental Indenture but not defined herein shall have the meaning ascribed to such terms in the Indenture. "Attributable Liens" means in connection with a sale and lease-back transaction, the lesser of (a) the fair market value of the assets subject to such transaction and (b) the present value (discounted at a rate per annum equal to the average interest borne by all outstanding securities issued under the Indenture (which may include securities in addition to the Senior Notes) determined on a weighted average basis and compounded semiannually) of the obligations of the lessee for rental payments during the term of the related lease. "Capital Lease" means any Indebtedness represented by a lease obligation of a person incurred with respect to real property or equipment acquired or leased by such person and used in its business that is required to be recorded as a capital lease in accordance with GAAP. "Closing Date" means February 13, 1998. "Exempted Debt" means the sum of the following as of the date of determination: (i) Indebtedness of the Issuer and Guarantor incurred after the Closing Date and secured by Liens not otherwise permitted by the first sentence under Limitation on Liens below (Section 10.11), and (ii) Attributable Liens of the Issuer and Guarantor and their Subsidiaries in respect of sale and lease-back transactions entered into after the Closing Date, other than sale and lease-back transactions permitted by the limitation on sale and lease-back transactions set forth under Section 10.12. For purposes of determining whether or not a sale and lease-back transaction is "permitted" by Section 10.12, Limitation on Sale and Lease-Back Transactions, the last paragraph under Section 10.11, Limitation on Liens (creating an exception for Exempted Debt), will be disregarded. "Lien" means any lien, security interest, charge or encumbrance of any kind (including any conditional sale or 10 -9- other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Permitted Liens" means (i) Liens securing Indebtedness under the Facility and any initial or subsequent renewal, extension, refinancing, replacement or refunding thereof; (ii) Liens on accounts receivable, merchandise inventory, equipment, and patents, trademarks, trade names and other intangibles, securing Indebtedness; (iii) Liens on any asset of the Issuer and Guarantor, any Subsidiary, or any joint venture to which the Issuer or the Guarantor or any of their Subsidiaries is a party, created solely to secure obligations incurred to finance the refurbishment, improvement or construction of such asset, which obligations are incurred no later than 24 months after completion of such refurbishment, improvement or construction, and all renewals, extensions, refinancings, replacements or refundings of such obligations; (iv)(a) Liens given to secure the payment of the purchase price incurred in connection with the acquisition (including acquisition through merger or consolidation) of property (including shares of stock), including Capital Lease transactions in connection with any such acquisition, and (b) Liens existing on property at the time of acquisition thereof or at the time of acquisition by the Issuer or Guarantor or a Subsidiary or any person then owning such property whether or not such existing Liens were given to secure the payment of the purchase price of the property to which they attach; provided that, with respect to clause (a), the Liens shall be given within 24 months after such acquisition and shall attach solely to the property acquired or purchased and any improvements then or thereafter placed thereon; (v) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (vi) Liens upon specific items of inventory or other goods and proceeds of any person securing such person's obligations in respect of bankers' acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods; (vii) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (viii) Liens on key-man life insurance policies granted to secure Indebtedness of the Issuer or Guarantor against the cash surrender value thereof; (ix) Liens encumbering customary initial deposits and margin deposits and other Liens in the ordinary course of business, in each case securing Indebtedness of the Company under interest swap obligations and currency agreements and forward contract, option, futures contracts, futures options or similar agreements or ar- 11 -10- rangements designed to protect the Issuer or the Guarantor or any of their Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (x) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Issuer or Guarantor or any of their Subsidiaries in the ordinary course of business and (xi) Liens in favor of the Issuer or Guarantor or any Subsidiary. (b) ADDITIONAL SECTIONS Each of the following provisions, which constitutes part of this Second Supplemental Indenture, is numbered to conform with the format of the Indenture: Section 10.11 Limitation on Liens The Issuer and the Guarantor will not, and will not permit any of their Subsidiaries to, create, incur, or permit to exist, any Lien on any of their respective properties or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, in order to secure any Indebtedness of either of the Issuer or the Guarantor, without effectively providing that the 2003 Notes and the 2010 Notes shall be equally and ratably secured until such time as such Indebtedness is no longer secured by such Lien, except: (i) Liens existing as of the Closing Date; (ii) Liens granted after the Closing Date on any assets or properties of the Issuer or the Guarantor or any of their Subsidiaries securing Indebtedness of the Issuer or the Guarantor created in favor of the Holders of the 2003 Notes and the 2010 Notes; (iii) Liens securing Indebtedness of the Issuer or the Guarantor which is incurred to extend, renew or refinance Indebtedness which is secured by Liens permitted to be incurred under the Indenture; provided that such Liens do not extend to or cover any property or assets of the Issuer or the Guarantor or any of their Subsidiaries other than the property or assets securing the Indebtedness being refinanced and that the principal amount of such Indebtedness does not exceed the principal amount of the Indebtedness being refinanced; (iv) Permitted Liens; and (v) Liens created in substitution of or as replacements for any Liens permitted by the preceding clauses (i) through (iv), provided that, based on a good faith determination of an officer each of the Issuer and the Guarantor, the property or asset encumbered under any such substitute or replacement Lien is substantially similar in nature to the property or asset encumbered by the otherwise permitted Lien which is being replaced. 12 -11- Notwithstanding the foregoing, the Issuer and the Guarantor and any Subsidiary may, without securing the 2003 Notes and the 2010 Notes, create, incur or permit to exist Liens which would otherwise be subject to the restrictions set forth in the preceding paragraph, if after giving effect thereto and at the time of determination, Exempted Debt does not exceed the greater of (i) 10% of Consolidated Net Assets or (ii) $250,000,000. Section 10.12 Limitation on Sale and Lease-Back Transactions The Issuer and Guarantor will not, and will not permit any of their Subsidiaries to, enter into any sale and lease-back transaction for the sale and leasing back of any property or asset, whether now owned or hereafter acquired, of the Issuer or Guarantor or any of their Subsidiaries (except such transactions (i) entered into prior to the Closing Date or (ii) for the sale and leasing back of any property or asset by a Subsidiary of the Issuer or Guarantor to the Issuer or Guarantor or (iii) involving leases for less than three years or (iv) in which the lease for the property or asset is entered into within 120 days after the later of the date of acquisition, completion of construction or commencement or full operations of such property or asset) unless (a) the Issuer or Guarantor or such Subsidiary would be entitled under the Limitation on Liens covenant above to create, incur or permit to exist a Lien on the assets to be leased in an amount at least equal to the Attributable Liens in respect of such transaction without equally and ratably securing the 2003 Notes and the 2010 Notes, or (b) the proceeds of the sale of the assets to be leased are at least equal to their fair market value and the proceeds are applied to the purchase or acquisition (or in the case of real property, the construction) of assets or to the repayment of Indebtedness of the Issuer or Guarantor or a Subsidiary of the Issuer or Guarantor which by its terms matures not earlier than one year after the date of such repayment. 13 -12- IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. AMERICAN STANDARD INC. By: ------------------------- Name: Title: AMERICAN STANDARD COMPANIES INC., as Guarantor By: ------------------------- Name: Title: THE BANK OF NEW YORK, as Trustee By: ------------------------- Name: Title: 14 EXHIBIT A FORM OF SENIOR SECURITY [Face of Security] If the Holder of this Security (as indicated below) is The Depository Trust Company ("DTC") or a nominee of DTC, this Security is a Global Security and the following two legends apply: Unless this Security is presented by an authorized representative of The Depository Trust Company ("DTC"), 55 Water Street, New York, New York to the issuer or its agent for registration of transfer, exchange or payment, and such Security issued is registered in the name of CEDE & CO., or such other name as requested by an authorized representative of DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, since the registered owner hereof, CEDE & CO., has an interest herein. Unless and until this Security is exchanged in whole or in part for Securities in certificated form, this Security may not be transferred except as a whole by DTC to a nominee thereof or by a nominee thereof to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor. A-1 15 AMERICAN STANDARD INC. 7 1/8% Senior Notes Due 2003 No. _______ $_________ CUSIP No. ______ AMERICAN STANDARD INC., a Delaware corporation (herein referred to as the "Issuer," which term includes any successor Person under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to ______________________________ or registered assigns the principal sum of _______ Dollars on February 15, 2003 (the "Stated Maturity Date") and to pay interest thereon from February 13, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 15 and August 15 in each year (each, an "Interest Payment Date"), commencing August 15, 1998, at the rate of 7 1/8% per annum, until the principal hereof is paid or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date at the office or agency of the Issuer maintained for such purpose; provided, however, that such interest may be paid, at the Issuer's option, by mailing a check to such Holder at its registered address or by transfer of funds to an account maintained by such Holder within the United States. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. A-2 16 The principal of this Security payable on the Stated Maturity Date or the principal of, premium, and interest on this Security will be paid against presentation of this Security at the office or agency of the Issuer maintained for that purpose in New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Interest payable on this Security on any Interest Payment Date and on the Stated Maturity Date will include interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for (or from and including February 13, 1998, if no interest has been paid on this Security) to but excluding such Interest Payment Date or the Stated Maturity Date, as the case may be. If any Interest Payment Date or the Stated Maturity Date falls on a day that is not a Business Day, as defined below, principal, premium, and/or interest payable with respect to such Interest Payment Date or Stated Maturity Date, as the case may be, will be paid on the next succeeding Business Day with the same force and effect as if it were paid on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date or Stated Maturity Date, as the case may be. "Business Day" means any day, other than a Saturday or Sunday, on which banks in New York are not required or authorized by law or executive order to close. All payments of principal, premium, and interest in respect of this Security will be made by the Issuer in immediately available funds. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the Certificate of Authentication hereon has been executed by the Trustee by manual signature of one of its authorized signatories, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. A-3 17 IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its facsimile corporate seal. Dated: ______________ AMERICAN STANDARD INC. By: --------------------- Title: Attest: _____________________________ Assistant Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated:___________________________ THE BANK OF NEW YORK as Trustee, certifies that this is one of the Securities referred to in the Indenture. by ------------------------- Authorized Signatory A-4 18 [Reverse of Security] AMERICAN STANDARD INC. This Security is one of a duly authorized issue of securities of the Issuer (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (herein called the "Indenture") among the Issuer, the Guarantor and The Bank of New York, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture with respect to the series of which this Security is a part), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the duly authorized series of Securities designated on the face hereof (collectively, the "Securities"), and the aggregate principal amount of the Securities to be issued under such series is limited to $125,000,000 (except for Securities authenticated and delivered upon transfer of, or in exchange for, or in lieu of other Securities). All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. If an Event of Default, as defined in the Indenture, shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Guarantor and the rights of the Holders of the Securities under the Indenture at any time by the Issuer, the Guarantor and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of all Securities issued under the Indenture at the time Outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of not less than a majority of the aggregate principal amount of the Outstanding Securities, on behalf of the Holders of all such Securities, to waive compliance by the Issuer and the Guarantor with certain provisions of the Indenture. Furthermore, provisions in the Indenture permit the Holders of not less than a majority of the aggregate principal amount, in certain instances, of the Outstanding Securities of any series to waive, A-5 19 on behalf of all of the Holders of Securities of such series, certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and other Securities issued upon the registration of transfer hereof or in exchange hereafter or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of (and premium) and interest on this Security at the times, places and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein and herein set forth, the transfer of this Security is registrable in the Security Register of the Issuer upon surrender of this Security for registration of transfer at the office or agency of the Issuer in any place where the principal of (and premium) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. As provided in the Indenture and subject to certain limitations therein and herein set forth, this Security is exchangeable for a like aggregate principal amount of Securities of different authorized denominations but otherwise having the same terms and conditions, as requested by the Holder hereof surrendering the same. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer or exchange, but the Issuer and the Guarantor may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Guarantor, the Trustee and any agent A-6 20 of the Issuer or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of or premium, or the interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any past, present or future stockholder, employee, officer, director, incorporator, limited or general partner, as such, of the or of any successor, either directly or through the Issuer or any successor, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in such State without regard to conflicts of law principles thereof. A-7 21 ASSIGNMENT FORM To assign this Securities, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. _______________________________________________________________________ Date: ____________________ Your Signature: ____________________________ Signature Guarantee: __________________________________ (Signature must be guaranteed) _______________________________________________________________________ Sign exactly as your name appears on the other side of this Security. A-8 22 EXHIBIT B FORM OF NOTATION ON SECURITY RELATING TO AMERICAN STANDARD COMPANIES INC. The Guarantor has unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, the due and punctual payment and performance of the obligations of the Issuer in connection with the Indenture and each Series of Securities issued thereunder. In case of the failure of the Issuer punctually to perform or make any such payment, the Guarantor hereby agrees to cause such payment and performance to be made punctually. The obligations of the Guarantor to the Holders and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article Twelve of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Capitalized terms used and not defined herein have the meanings ascribed thereto in the Indenture. AMERICAN STANDARD COMPANIES INC. By: ------------------------ Name: ------------------ Title: ------------------ Attest: By: --------------------- Name: ------------------ [Assistant] Secretary (Seal) A-1 23 EXHIBIT C FORM OF SENIOR SECURITY [Face of Security] If the Holder of this Security (as indicated below) is The Depository Trust Company ("DTC") or a nominee of DTC, this Security is a Global Security and the following two legends apply: Unless this Security is presented by an authorized representative of The Depository Trust Company ("DTC"), 55 Water Street, New York, New York to the issuer or its agent for registration of transfer, exchange or payment, and such Security issued is registered in the name of CEDE & CO., or such other name as requested by an authorized representative of DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, since the registered owner hereof, CEDE & CO., has an interest herein. Unless and until this Security is exchanged in whole or in part for Securities in certificated form, this Security may not be transferred except as a whole by DTC to a nominee thereof or by a nominee thereof to DTC or another nominee of DTC or by DTC or any such nominee to a successor of DTC or a nominee of such successor. A-2 24 AMERICAN STANDARD INC. 7 5/8% Senior Notes Due 2003 No. _______ $_________ CUSIP No. ______ AMERICAN STANDARD INC., a Delaware corporation (herein referred to as the "Issuer," which term includes any successor Person under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to ______________________________ or registered assigns the principal sum of _______ Dollars on February 15, 2010 (the "Stated Maturity Date") and to pay interest thereon from February 13, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on February 15 and August 15 in each year (each, an "Interest Payment Date"), commencing August 15, 1998, at the rate of 7 5/8% per annum, until the principal hereof is paid or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be February 1 or August 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date at the office or agency of the Issuer maintained for such purpose; provided, however, that such interest may be paid, at the Issuer's option, by mailing a check to such Holder at its registered address or by transfer of funds to an account maintained by such Holder within the United States. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the Holder in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. Interest will be computed on the basis of a 360-day year of twelve 30-day months. A-3 25 The principal of this Security payable on the Stated Maturity Date or the principal of, premium, and interest on this Security will be paid against presentation of this Security at the office or agency of the Issuer maintained for that purpose in New York, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Interest payable on this Security on any Interest Payment Date and on the Stated Maturity Date will include interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for (or from and including February 13, 1998, if no interest has been paid on this Security) to but excluding such Interest Payment Date or the Stated Maturity Date, as the case may be. If any Interest Payment Date or the Stated Maturity Date falls on a day that is not a Business Day, as defined below, principal, premium, and/or interest payable with respect to such Interest Payment Date or Stated Maturity Date, as the case may be, will be paid on the next succeeding Business Day with the same force and effect as if it were paid on the date such payment was due, and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date or Stated Maturity Date, as the case may be. "Business Day" means any day, other than a Saturday or Sunday, on which banks in New York are not required or authorized by law or executive order to close. All payments of principal, premium, and interest in respect of this Security will be made by the Issuer in immediately available funds. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the Certificate of Authentication hereon has been executed by the Trustee by manual signature of one of its authorized signatories, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. A-4 26 IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed under its facsimile corporate seal. Dated:__________________ AMERICAN STANDARD INC. By: _______________________________ Title: Attest: _________________________ Assistant Secretary TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated:___________________ THE BANK OF NEW YORK as Trustee, certifies that this is one of the Securities referred to in the Indenture. by_______________________ Authorized Signatory A-5 27 [Reverse of Security] AMERICAN STANDARD INC. This Security is one of a duly authorized issue of securities of the Issuer (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of January 15, 1998 (herein called the "Indenture") among the Issuer, the Guarantor and The Bank of New York, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture with respect to the series of which this Security is a part), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Issuer, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the duly authorized series of Securities designated on the face hereof (collectively, the "Securities"), and the aggregate principal amount of the Securities to be issued under such series is limited to $275,000,000 (except for Securities authenticated and delivered upon transfer of, or in exchange for, or in lieu of other Securities). All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. If an Event of Default, as defined in the Indenture, shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the Guarantor and the rights of the Holders of the Securities under the Indenture at any time by the Issuer, the Guarantor and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of all Securities issued under the Indenture at the time Outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of not less than a majority of the aggregate principal amount of the Outstanding Securities, on behalf of the Holders of all such Securities, to waive compliance by the Issuer and the Guarantor with certain provisions of the Indenture. Furthermore, provisions in the Indenture permit the Holders of not less than a majority of the aggregate principal amount, in certain instances, of the Outstanding Securities of any series to waive, A-6 28 on behalf of all of the Holders of Securities of such series, certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and other Securities issued upon the registration of transfer hereof or in exchange hereafter or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of (and premium) and interest on this Security at the times, places and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein and herein set forth, the transfer of this Security is registrable in the Security Register of the Issuer upon surrender of this Security for registration of transfer at the office or agency of the Issuer in any place where the principal of (and premium) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. As provided in the Indenture and subject to certain limitations therein and herein set forth, this Security is exchangeable for a like aggregate principal amount of Securities of different authorized denominations but otherwise having the same terms and conditions, as requested by the Holder hereof surrendering the same. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. No service charge shall be made for any such registration of transfer or exchange, but the Issuer and the Guarantor may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Issuer, the Guarantor, the Trustee and any agent A-7 29 of the Issuer or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Issuer, the Trustee nor any such agent shall be affected by notice to the contrary. No recourse shall be had for the payment of the principal of or premium, or the interest on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any past, present or future stockholder, employee, officer, director, incorporator, limited or general partner, as such, of the or of any successor, either directly or through the Issuer or any successor, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in such State without regard to conflicts of law principles thereof. A-8 30 ASSIGNMENT FORM To assign this Securities, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________ ________________________________________________________________ ________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. _______________________________________________________________________ Date: ____________________ Your Signature: ____________________________ Signature Guarantee: __________________________________ (Signature must be guaranteed) _______________________________________________________________________ Sign exactly as your name appears on the other side of this Security. A-9 31 EXHIBIT D FORM OF NOTATION ON SECURITY RELATING TO AMERICAN STANDARD COMPANIES INC. The Guarantor has unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions in the Indenture, the due and punctual payment and performance of the obligations of the Issuer in connection with the Indenture and each Series of Securities issued thereunder. In case of the failure of the Issuer punctually to perform or make any such payment, the Guarantor hereby agrees to cause such payment and performance to be made punctually. The obligations of the Guarantor to the Holders and to the Trustee pursuant to the Guarantee and the Indenture are expressly set forth in Article Twelve of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Capitalized terms used and not defined herein have the meanings ascribed thereto in the Indenture. AMERICAN STANDARD COMPANIES INC. By: ------------------------ Name: ------------------ Title: ------------------ Attest: By: --------------------- Name: ------------------ [Assistant] Secretary (Seal) C-1 EX-10.I 4 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10(i) THE AMERICAN STANDARD COMPANIES INC. EMPLOYEE STOCK PURCHASE PLAN SECTION 1. PURPOSE AND EFFECTIVE DATE The purpose of the American Standard Companies Inc. Employee Stock Purchase Plan (the "Plan") is to encourage and facilitate stock ownership by Employees by providing a continued opportunity to purchase Common Stock on attractive terms, generally through voluntary after-tax payroll deductions. It is the intention of the Company to have the Plan qualify as an "employee stock purchase plan" under Section 423 of the Code, but the Company makes no undertaking or representation that such qualification will be maintained. The Plan shall become effective as of January 1, 1998. SECTION 2. DEFINITIONS 2.1. Definitions. Whenever used herein, the following terms shall have the respective meanings set forth below: a. "Board" means the Board of Directors of the Company. b. "Code" means the Internal Revenue Code of 1986, as amended. c. "Common Stock" means the common stock, par value $.01 per share, of the Company. d. "Company" means American Standard Companies Inc., a Delaware corporation. e. "Compensation" means base pay, commissions, short-term incentive compensation and other similar payments, but excludes any portion of such amounts which are deferred or are not benefits eligible under the plans or policies of an Employee's Employer. f. "Custodian" means Smith Barney Inc. or such other entity appointed by the Plan Administrator. g. "Date of Exercise" means the last trading day of each calendar quarter during 2 the period commencing on the Effective Date and ending on the last day of the term of the Plan. h. "Date of Grant" means the date upon which an Option is granted, as set forth in Section 5.3. i. "Employee" means an individual classified as an employee (within the meaning of Code Section 3401(c) and the regulations thereunder) by an Employer, as reflected on the applicable payroll records for the relevant period; Employees shall not include independent contractors, leased employees, or employees of a third party under an agency agreement. j. "Employer" means the Company or a Subsidiary Corporation whose employees are expressly designated by the Plan Administrator as eligible to participate in the Plan. k. "Fair Market Value" means, on any date, the closing price of the Common Stock as reported on the consolidated tape of the New York Stock Exchange (or on such other recognized quotation system on which the trading price of the Common Stock are quoted at the relevant time) on such date. In the event that there are no Common Stock transactions reported on such tape (or such other 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. l. "Individual Account" means a separate account maintained by the Custodian for each participating Employee. m. "Nonqualified Leave" means an unpaid leave of absence that exceeds 90 days and does not meet the requirements of Treasury Regulation Section 1.421 7(h)(2). Such Nonqualified Leave shall be deemed to commence on the ninety-first day of such unpaid leave of absence. n. "Option" means an option granted under Section 5 to a participating Employee to purchase shares of Common Stock. o. "Option Period" has the meaning set forth in Section 5.3. p. "Option Price" has the meaning set forth in Section 5.7. q. "Payroll Contributions" means an Employee's after-tax contributions of 3 Compensation by payroll deduction pursuant to Section 5.5. r. "Plan Administrator" means the Management Development and Nominating Committee of the Company or its delegate. s. "Plan Year" means a period of twelve months commencing on January 1 and ending on the next December 31. t. "Subsidiary Corporation" means any present or future corporation (i) in which the Company holds, directly or indirectly, at least a 50 % ownership interest, and (ii) that is designated as a participant in the Plan by the Plan Administrator. u. "Terminating Event" means a participating Employee's termination of employment for any reason, including death or retirement, such Employee's commencement of Nonqualified Leave, or any other event which causes such Employee to no longer meet the requirements of Section 4. Whether a Terminating Event has occurred shall be determined by the Plan Administrator. SECTION 3. ADMINISTRATION The Plan shall be administered by the Plan Administrator. The Plan Administrator shall have plenary authority in its discretion to interpret and construe any and all provisions of the Plan, to make rules and regulations for the administration of the Plan (including but not limited to providing special rules or procedures relating to the operation and administration of the Plan in non-United States jurisdictions to accommodate the specific requirements of local laws and procedures), and to make all other determinations necessary or advisable for administering the Plan; its determinations on the foregoing shall be final and conclusive. Without limiting the generality of the foregoing, the Committee is specifically authorized to adopt rules and procedures regarding handling of payroll deductions, payment of interest, conversion of local currency, withholding procedures and handling of stock certificates which vary with local requirements. The Plan Administrator may delegate responsibility for the day to day operation and administration of the Plan to any officer or employee or group of officers or employees of the Company. 4 SECTION 4. ELIGIBILITY 4.1. General Rule. Except as otherwise provided herein, all Employees shall be eligible to participate in the Plan. 4.2. Exclusions. Notwithstanding the provisions of Section 4.1, any Employee (i) whose customary employment is 20 hours or less per week, (ii) whose customary employment is for a period of 5 months or less in any calendar year, (iii) who is on Nonqualified Leave or (iv) who, immediately after an Option is granted, owns stock and/or holds outstanding options to purchase stock possessing five percent or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary Corporation, shall not be eligible to participate in the Plan (for purposes of this paragraph, the rules of Section 424(d) of the Code and Section 1.423-2(d) of the Treasury Regulations thereunder shall apply in determining stock ownership of any Employee). The Plan Administrator may also determine that a designated group of highly compensated individuals (within the meaning of Section 414(q) of the Code) are ineligible to participate in the Plan. SECTION 5. QUALIFIED STOCK PURCHASES 5.1 Stock to Be Issued. Subject to the provisions of Section 8.3, the number of shares of Common Stock issuable pursuant to Options under the Plan shall not exceed 1,000,000. The shares to be delivered pursuant to Options under the Plan may consist, in whole or in part, of treasury stock or authorized but unissued Common Stock, not reserved for any other purpose. 5.2. Shareholder Approval. The Plan shall become effective on the Effective Date having been approved by a majority of the votes cast at a duly held stockholders' meeting on May 1, 1997 at which a quorum representing a majority of all outstanding voting stock of the Company was, either in person or by proxy, present and voting on the Plan. 5 5.3. Grant of Options. Subject to Section 5.2, on and after the Effective Date and for so long as the Plan remains in effect, the Company may offer Options under the Plan to all participating Employees. Options may be granted quarterly on January 1, April 1, July 1 and October 1 of each Plan Year (or on such other date or dates as shall be determined by the Plan Administrator) (the "Date of Grant"). The term of each Option shall end on the last day of the calendar quarter in which the Option is granted (or on such earlier or later date as shall be determined by the Plan Administrator, but in no event later than the last day of the sixtieth calendar month beginning after the Date of Grant) (the "Option Period"). The number of shares of Common Stock subject to each Option shall be the lesser of (i) the quotient of (A) the Payroll Contributions authorized by each participating Employee in accordance with Section 5.5 for the term of the Option divided by (B) the Option Price for each share of Common Stock purchased pursuant to such Option, including any fractional amount of such Option Price, or (ii) such maximum number of shares as may be established by the Plan Administrator. A participating Employee shall have no interest in the Common Stock covered by the Options until the related shares are purchased in accordance with Section 5.6 herein and are credited to the Employee's Individual Account. 5.4. Participation. An Employee who meets the requirements of Section 4 may register to participate in the Plan by completing and forwarding an enrollment form to the Plan Administrator or its designee, or satisfying such other conditions as the Plan Administrator shall establish from time to time. Eligible Employees who elect to participate in the Plan shall authorize a payroll deduction from the Employee's Compensation to be made as of any future payroll period. Any election to authorize payroll deductions shall be effective as of the first Date of Grant, or such other date as the Plan Administrator may determine, commencing as soon as practicable after receipt of the enrollment form by the Plan Administrator or its designee. 5.5 Payroll Contributions. There shall be an Individual Account for each participating Employee to which shall be credited the number of full or fractional shares of Common Stock that are purchased by such Employee through Payroll Contributions, pursuant to the terms of the Plan. An Employee may authorize Payroll Contributions in terms of whole number percentages of the Compensation that the Employee receives during each payroll period; provided that no Employee shall be permitted to purchase Common Stock pursuant to Options under the Plan or under any other employee stock purchase plan of the Company or 6 any subsidiary which is intended to qualify under Section 423 of the Code, at a rate which exceeds $25,000 in Fair Market Value (determined at the time the Option is granted) for each calendar year in which such Option granted to such Employee is outstanding at any time. In the event of a participating Employee's Terminating Event, (i) no further Payroll Contributions by such Employee shall be permitted and (ii) the Employee's unexercised Options shall terminate. All Employee contributions under the Plan shall be through Payroll Contributions. No interest shall be paid or allowed on any money paid into the Plan or credited to the Individual Account of any Employee, except as may be required by applicable law. 5.6. Exercise of Options. Each participating Employee automatically and without any act on his part will be deemed to have exercised his Option on each Date of Exercise to the extent that the Payroll Contributions credited to his account are sufficient to purchase at the Option Price shares of Common Stock, including fractional shares. As soon as practicable after the Date of Exercise, the shares purchased upon exercise of an Employee's Option shall be credited to such Employee's Individual Account by the Custodian. Custodian. 5.7. Option Price. The price per share of Common Stock to be paid upon the exercise of Options hereunder (the "Option Price") shall be an amount equal to 85% (or such greater percentage as the Board or its designee may authorize) of the Fair Market Value of a share of Common Stock On the Date of Exercise. 5.8 Holding Period. Any shares of Common Stock acquired pursuant to the exercise of an Option shall be held and not sold for one year following the Date of Exercise (the "Holding Period"), and shall be subject to such restrictions on withdrawals and transfers as described herein. Notwithstanding the foregoing, the Plan Administrator may, at its discretion, waive the Holding Period and its associated restrictions in the event of a participating Employee's Terminating Event. 5.9. Canceled, Terminated or Forfeited Options. Any shares of Common Stock subject to an Option, which for any reason is canceled, terminated or otherwise settled without the issuance of any Common Stock, shall again be available for Options under the Plan. SECTION 6. DEDUCTION CHANGES; WITHDRAWALS AND DISTRIBUTIONS 7 6.1. Deduction Changes. Subject to Section 5.5, a participating Employee may increase or decrease his Payroll Contributions, effective as of the first Date of Grant, (or such earlier date as the Plan Administrator shall determine) commencing as soon as practicable after the receipt of proper notice of such change by the Plan Administrator or its designee. If an Employee suspends his Payroll Contributions at any time prior to a Terminating Event, any cash balance then held for his account shall automatically be distributed to such Employee as soon as practicable after the effective date of such suspension, and the Employee will not again participate in the Plan until such time as the Employee completes a new enrollment form. 6.2. Withdrawals and Distributions. A participating Employee may at any time (subject to such notice requirements as the Plan Administrator may from time to time prescribe), and for any reason, cease participation in the Plan and withdraw all or any portion of shares of Common Stock or cash in his Individual Account (except for any shares subject to the Holding Period described in Section 5.8 herein) and any cash credited to his account by the Company. The Employee may thereafter recommence participation in the Plan on the first Date of Grant following completion of re-enrollment pursuant to Section 5.4 herein. Upon the occurrence of a participating Employee's Terminating Event, any cash held in such Employee's Individual Account and any cash credited to his account by the Company shall be distributed to him or her as soon as practicable thereafter; upon request, any shares in his or her Individual Account shall also be distributed as soon as practicable, except that, the Plan Administrator may delay the distribution of all or any shares acquired pursuant to the exercise of an Option within one year of such termination until not later than the first anniversary of such termination. Any fractional shares in an Employee's Individual Account shall be converted to cash prior to distribution. SECTION 7. ISSUANCE OF CERTIFICATES While maintained by the Custodian, all shares shall be held in the name of the Custodian or its nominee, or in street name. Share certificates shall be issued to an Employee who is to receive a distribution of shares pursuant to Section 6.2 as soon as practicable following the event giving rise to such distribution. Such certificates may be 8 registered only in the name of the Employee. Notwithstanding the foregoing, except for any shares subject to the Holding Period described in Section 5.8 herein, share certificates shall be issued to an Employee upon such Employee's request to the Plan Administrator or its designee as soon as practicable following such request. SECTION 8. MISCELLANEOUS PROVISIONS 8.1. Withholding. The Employer or its designee may make such provisions and take such action as it deems necessary or appropriate for the withholding of any taxes which the Employer is required by law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with Payroll Contributions and, to the extent determined by the Plan Administrator, any allocable purchase expenses under the Plan, including, but not limited to, the withholding of appropriate sums from any amounts otherwise payable to the participating Employee. Each participating Employee, however, shall be responsible for the payment of all individual tax liabilities relating to any such amounts. 8.2. Rights Not Transferable. Neither funds credited to an Individual Account nor rights to Options under the Plan may be assigned, transferred, pledged or otherwise disposed of by the participating Employee other than by will and the laws of descent and distribution, and any attempt to do so shall be void and of no effect. Options may be exercised during a participating Employee's lifetime only by the participating Employee. 8.3. Adjustments in Capitalization; Mergers. In the event of any stock dividend or stock split, recapitalization (including, without limitation, the payment of an extraordinary dividend), merger, consolidation, combination, spin off distribution of assets to shareholders (other than ordinary cash dividends) exchange of shares, or other similar corporate change, (i) shares credited to each Employee's Individual Account shall be adjusted in the same manner as all other outstanding shares of Common Stock in connection with such event, (ii) the Board or a committee thereof shall determine the kind of shares which may be acquired under the Plan after such event, and (iii) the aggregate number of shares of Common Stock available under Section 5.1 or subject to outstanding Options and the respective exercise prices applicable to outstanding Options may be appropriately adjusted by the Board or a committee thereof, in its discretion, and the determination of the Board or a committee thereof shall be 9 conclusive. Except as otherwise determined by the Board, in the event of a merger or a similar reorganization with respect to which the Company is not the surviving entity, a liquidation or distribution of the Company, or a sale of all or substantially all of the assets of the Company, the Plan shall terminate and all shares of Common Stock and cash, if any, in the Individual Accounts of participating Employees shall be distributed to each Employee pursuant to Section 6.2 as soon as practicable unless any surviving entity agrees to assume the obligations hereunder. 8.4. Amendment of the Plan. The Board or its delegate may at any time, or from time to time, amend the Plan in any respect; provided that approval by the shareholders of the Company shall be required to amend the Plan to (i) change the number of shares of Common Stock reserved for Options under Section 5.1 of the Plan, or (ii) alter the requirements for eligibility to participate in the Plan under Section 4. The Plan shall terminate at any time at the discretion of the Board or its delegate. Upon termination of the Plan, all shares of Common Stock and cash, if any, in the Individual Accounts of participating Employees shall be distributed to each Employee pursuant to Section 6.2 as soon as practicable. 8.5. Requirements of Law. The Company's obligation to deliver Common Stock under the Plan shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agency or national securities exchanges as may be required. 8.6. Custodial Arrangement. All cash and Common Stock allocated to an Employee's Individual Account under the Plan shall be held by the Custodian in its capacity as a custodian for the Employee with respect to such cash and Common Stock. Nothing contained in the Plan, and no action taken pursuant to the Plan, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and its officers or the Board or the Plan Administrator or, except as may otherwise be agreed to in writing by the Custodian, the Custodian, on the one hand, and any Employee, the Company or any other person or entity, on the other hand. 8.7. No Right to Continuous Employment. The Plan and any right to purchase Common Stock granted hereunder shall not confer upon any Employee any right with respect to continuance of employment by The Company or any Subsidiary Corporation, nor shall they restrict or interfere in any way with the right of The Company or any Subsidiary Corporation by 10 which an Employee is employed to terminate his employment at any time. 8.8 Indemnification. Each person who is or shall have been a member of the Board or the Plan Administrator shall be indemnified and held harmless by the Company and each Employer 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 (in the absence of bad faith) 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 all such actions, suits, or proceedings against him, provided he shall give the Company the opportunity, at its own expense, to handle and defend the same before he undertakes to 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 Certificate of Incorporation or By-Laws, by contract, as a matter of law, or otherwise. 8.9. No Constraint on Corporate Action. Nothing in this Plan shall be construed (i) to limit, impair or otherwise affect the Company's right, authority or power to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets or (ii) except as provided in Section 8.4, to limit the right or power of the Company or any of its subsidiaries or affiliates to take any action which such entity deems to be necessary or appropriate. 8.10 Binding Effect. The provisions of the Plan shall be binding upon, and inure to the benefit of, all successors of each Employee participating in the Plan, including, without limitation, such Employee's estate and executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Employee. 8.11. Governing Law. The Plan shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to the principles of conflict of laws thereunder. EX-13 5 1997 ANNUAL REPORT TO STOCKHOLDERS 1 Exhibit 13 AMERICAN STANDARD COMPANIES, INC. 1997 ANNUAL REPORT [GRAPHIC OMITTED] "OUR PROCESS ORGANIZATION WILL ENABLE US TO BE BOTH FLEXIBLE AND RESPONSIVE TO THE MARKETPLACE AND, THEREFORE, CAPABLE OF DELIVERING SUPERIOR FINANCIAL PERFORMANCE IN YEARS TO COME." ------------- AMERICAN ----- STANDARD ----- COMPANIES ------------- 2 THE WELL-BEING OF PEOPLE IS OUR BUSINESS COMFORT [TRANE LOGOS] SANITARY [AMERICAN STANDARD LOGO] [IDEAL STANDARD LOGO] [STANDARD LOGO] [PORCHER LOGO] SAFETY [WABCO LOGO] HEALTHCARE [DIASORIN LOGO] [ALIMENTERICS LOGO] Forward-looking information. Forward looking statements contained in this report are based on management's good faith expectations and belief concerning future developments. Factors that may cause actual results to differ materially from such expectations are presented in the "Management's Discussion and Analysis" portion of this report and in the Company's Annual Report on Form 10-K. American Standard is a global, diversified manufacturer. Its operations are comprised of four segments: Air Conditioning, Plumbing, Automotive and Medical Systems. 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. Medical Systems develops and manufactures LARA(R) and Copalis(R) medical diagnostic systems and DiaSorin(TM) medical diagnostic products. 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 value and service by reducing manufacturing cycle time, increasing flexibility and improving product quality. It also improves productivity and profitability by reducing non-value-added work, increasing inventory turnover, reducing working capital requirements and liberating both manufacturing and warehouse space. American Standard operates 108 manufacturing facilities in 35 countries. The Company employs approximately 51,000 people worldwide. Demand Flow(R) is a registered trademark of the Jc-I-T Institute of Technology, Inc. CONTENTS Financial Highlights 1 Letter to Stockholders 2 Business Segments 6 Financial Contents 13 Directors and Officers 45 3 FINANCIAL HIGHLIGHTS Year Ended December 31, (Dollars in millions, except per share amounts)
1997 1996 Change Sales $6,008 $5,805 3% Operating Income (a) $ 590 $ 573 3% Operating Margin 9.8% 9.9% (.1)pts Income Before Extraordinary Item (a) $ 210 $ 189 11% Per Diluted Share (b) $ 2.76 $ 2.36 17% Net Cash Provided by Operating Activities $ 395 $ 353 12% Demand Flow Performance Average Inventory Turnover (c) 9.0x 9.4x (.4)x Operating Working Capital as a Percent of Sales (d) 4.7% 4.9% .2pts
(a) Excludes write-off of purchased research and development in 1997 and asset impairment loss in 1996. In connection with the June 30, 1997 acquisition of the medical diagnostics businesses, the value of purchased in-process research and development was written off in accordance with applicable accounting rules, resulting in a non-cash charge to income of $90 million, or $1.19 per diluted share. 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 $2.95 per diluted share. Including the write-off of purchased research and development and the asset impairment loss, operating income was $500 million in 1997 and $338 million in 1996 and income (loss) before extraordinary item was $120 million, or $1.57 per diluted share in 1997 and $(47) million or $(.60) per diluted share in 1996. See Note 2 of Notes to Consolidated Financial Statements. (b) Earnings per share data have been presented in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, adopted effective December 31, 1997. See Note 2 of Notes to Consolidated Financial Statements. (c) Twelve-month average inventory turnover, exclusive of significant acquisitions, with each month calculated using the following three month's cost of sales annualized, divided by inventories as of each month end. (d) 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-$6.0 BILLION (EXCLUDING MEDICAL SYSTEMS) [The following tables were represented as pie charts in the printed material.] Businesses Air Conditioning 60% Plumbing 24% Automotive 16% Geography U.S. 50% Europe 33% Far East 9% Other 8% ================================================================================ OPERATING INCOME- $610 MILLION (a) (EXCLUDING MEDICAL SYSTEMS) [The following tables were represented as pie charts in the printed material.] Businesses Air Conditioning 60% Plumbing 19% Automotive 21% Geography U.S. 59% Europe 29% Far East 4% Other 8% 1 4 TO OUR STOCKHOLDERS This year your company achieved another record performance. Sales reached $6.0 billion, up 3% from the 1996 record level, and earnings increased 17% to $2.76 per share. The strong gains in Commercial Air Conditioning and Automotive Systems, assisted by the partial recovery of Plumbing Products, helped achieve our performance. On the other hand, the combined negative effects of foreign exchange and the second coolest summer in the last 10 years resulted in earnings being well below expectations. European currencies continued to devalue throughout the year and were followed by the severe crisis in the Far East. The cool summer weather both in the U.S. and Europe hampered our performance, particularly that of the Residential Unitary business. At this stage, we do not assume or expect a repeat performance in 1998. The combined effects of weather and exchange eroded our earnings by an estimated 35 cents per share. On the positive side, both our business and geographic diversity combined well with the responsiveness of our worldwide operations to soften the impact of these adverse conditions, thus validating our strategic direction. ================================================================================ BENEFITS FROM DEMAND FLOW CONTINUE [CHART OMITTED] INVENTORY TURNOVER HAS NEARLY TRIPLED AND WORKING CAPITAL NEEDS REDUCED BY $680 MILLION. Because of the timing of the various devaluations during 1997, we expect that exchange rates again will have a negative impact in 1998, especially during the first half. Although we do not expect any further significant strengthening of the dollar versus the European or Far East currencies, we are concerned by the after-effects of this crisis on the regional economies of the Far East as well as its impact on our global markets. We believe that these markets will stabilize and see some recovery over the next two to three years, as was the case with Mexico. In view of the above, we have been very conservative in our near-term expectations for the Far East, which have included the curtailment of local expenditures. In China, on the other hand, we have not assumed any devaluation at this time but have reduced our growth expectations. In late 1997, we acquired majority ownership in our Chinese plumbing business which will enhance our performance. We have adopted conservative expectations for the region and expect that any further weakening can be offset by the continuing strength of the Automotive and Air Conditioning businesses, particularly in the U.S. In Europe, with the exception of the UK, we see no meaningful improvement in the construction markets which affect both our Plumbing and Air Conditioning businesses. The transportation markets, however, are still growing and are expected to remain strong through 1998. This will continue to help our Automotive business which emerged from 1997 with a strong backlog, supported by its new Electronic Braking Systems (EBS) product line, now tracking the success of the newly launched truck lines of our Original Equipment customers, and the continuing growth of the use of ABS in the U.S. In fact, another key customer adopted our EBS system in January 1998. 2 5 In the U.S., regulations are currently being expanded to require ABS on all new trailers, which will give our joint venture another boost this year following its strong performance in 1997. Turning to Air Conditioning, we expect our Unitary business in the U.S. to continue to expand its sales and earnings, based on a more normal summer and further market penetration as we continue to leverage the benefits of DFT. In Europe we have expectations for year over year improvement, which include more normal weather conditions as well as the benefits of the continued reorganization. On the other hand, weak economies as well as market fragmentation will continue to put pressure on pricing, a problem we faced throughout 1997. In the Far East, despite the economic conditions, we still expect some growth in the Unitary business as we bring new products to market and expand distribution. In our Worldwide Applied Systems business, the backlog is expanding with continued growth in the U.S., helped by additional acquisitions of sales and service operations. Applied's international markets are expected to post good growth in Latin America and the Middle East, with weakness in Asia being offset by growth in China. In 1997, Worldwide Plumbing began its recovery with continued success in North America and some minor improvements in Europe, which substantially offset the crisis in the Far East. In North America, the low-cost sourcing program is gaining momentum. The reduction in our cost structure and our ability to better serve our customers through the benefits of DFT have enabled us to gain market share, especially in the retail channel. We expect this trend to continue in 1998. In Europe, with the exception of the U.K., we continue to suffer from lackluster markets, but we are on plan with our restructuring and low-cost sourcing strategies. Our Bulgarian facility for sanitary fixtures has started initial production while our faucet plant expansion there remains on track. We believe that 1998 will be a watershed year for our European operations as we begin to regain our competitive advantage and expect in 1999 to witness significant improvements in performance. ================================================================================ MANAGING DEBT FOR GROWTH [CHART OMITTED] WHILE DEBT REMAINS AT NEARLY THE SAME LEVEL, AS AT THE 1988 LEVERAGED BUYOUT, THE ANNUAL COST OF DEBT HAS BEEN REDUCED BY $100 MILLION AND SALES HAVE DOUBLED. ================================================================================ MARKET LEADERSHIP: THE FOUNDATION FOR GROWTH [CHART OMITTED] 3 6 The flip side of the devaluations is that they have made products manufactured in the Far East more competitive in both the U.S. and Europe. We will exploit this opportunity to source products from the region, which will also help fill idle local capacity. Our new Medical Systems business is on track with its FDA and European Agency for the Evaluation of Medicinal Products (EMEA) submissions and approvals. The key objective for our Copalis(R) technology is the development of a new menu of tests. We also expect to begin shipments of our new analyzers in the second quarter of 1998, albeit in small quantities. Overall, our model for growth is beginning to gain momentum and, although interrupted by the impact of devaluations and the adverse weather patterns of 1997, we will continue to grow globally. The current weakness in the Far East offers some unique opportunities to expand our ownership in existing joint ventures and to purchase new ones, especially in companies that enjoy leadership positions in our business segments. We have already acted on this strategy with some success. In the meantime, we will continue to leverage our strong market positions worldwide to pursue growth. Demand Flow Technology implementation is being carried to a new level as we accelerate the certification process of our plants throughout the world. This effort will enable us to reach another milestone in productivity and customer service in our drive toward excellence in fill rates and responsiveness. We are thus establishing a critical standard that differentiates our ability to meet ever increasing customer expectations. With the Demand Flow concepts moving into the office through our Process Organization, we expect the transformation of the Company and its organization to be complete by the year 2000, ready to tackle the next millennium. Our Process Organization will enable us to be both flexible and responsive to the marketplace and, therefore, capable of delivering superior financial performance in years to come. Basically, our strategies are focused on establishing and maintaining a competitive advantage by delivering greater value to our customers, which in turn enhances our ability to generate reliable profit growth. Such a mechanism, when set in motion, becomes reinforcing. ================================================================================ STRATEGIES ARE WORKING SALES CAGR 9% [CHART OMITTED] OPERATING INCOME Excluding Special Charges CAGR 15% [CHART OMITTED] MARGINS 1991 7.4% 1997 10.2% DESPITE THREE YEARS OF EUROPEAN RECESSION, SINCE 1991 SALES HAVE GROWN AT A COMPOUND RATE OF 9% AND OPERATING INCOME AT 15%. 4 7 Our recent management changes were designed to offer our most successful associates an opportunity to broaden their skills and global perspectives. This will also help us manage an orderly transition as some of our senior managers begin to seek retirement. Successful companies regard their people as their greatest assets and we firmly believe in this principle. We practice this philosophy more through actions than mere words. Our drive toward a Process Organization gives all our employees the opportunity to exercise more influence over the day-to-day affairs of their businesses as well as broaden their overall perspective of the Company. We continue to adopt incentive programs that are fully aligned with the corporate objectives, something we feel strongly about. We are also expanding the population of associates who participate in these programs. Last, but not least, our associates own some 25% of the Company's stock which certainly aligns their interests with those of all our other stockholders. We thank all our associates worldwide for helping the Company toward its goals, especially as we had to navigate through some troubled waters during 1997. We thank you in particular for supporting our DFT initiatives, which remain critical to our success, and urge you to redouble your efforts as we move toward the Process Organization, thus further strengthening our competitive structure. We must all remember that we are in a race against time. We are also grateful to our customers for giving us the opportunity to serve you. We know that you have choices, but we in turn have a collective mission to gain more and more of your trust and of course your business. We do not underestimate the difficulty of such an assignment, nor do we take it lightly. We realize that it depends on the effort and willingness of all our associates worldwide. This is why it is important that we align our organization toward serving you better, which is the only way to succeed. We also wish to thank all of our suppliers for supporting us during 1997 and accommodating our needs to better serve our customers, including the critical need to reach our DFT objectives. Last, but not least, we wish to thank all of our stockholders, especially those who were patient with us during 1997 and were not deterred by the lackluster performance of our stock. We all felt the pain, but are working hard to justify your confidence in this company as we continue to execute our strategies for value creation. Sincerely yours, /s/ Emmanuel A. Kampouris Emmanuel A. Kampouris Chairman, President and Chief Executive Officer American Standard Companies Inc. [PHOTO OMITTED] 5 8 AIR CONDITIONING [GRAPHIC OMITTED] MINI-SPLIT SYSTEMS CONSIST OF A CONDENSING UNIT (BACKGROUND) MOUNTED OUTDOORS, AND A FAN UNIT (FOREGROUND) INDOORS TO DISTRIBUTE COOL AIR. THESE UNITS ARE CONNECTED BY REFRIGERANT PIPING AND CONTROL WIRING. ================================================================================ Trane offers a broad range of products from small residential air conditioning and heating systems to large, custom-designed chilled water systems, to energy and refrigerant management, indoor air quality and building automation systems. The business, which markets products under both the Trane(R) and American Standard(R) brand names, is the U.S. market leader for commercial unitary products and applied systems. It is also one of the leading manufacturers of residential products in the United States. Trane is steadily growing its international presence with 12 manufacturing locations in Asia, Europe and South America. In the United States, the business derives 65% of both its applied and unitary product sales from the replacement and renovation market. In China and other Far East nations, however, new construction activity is the key business driver. Trane's growth opportunities are market-, service- and product-specific. MODEL FOR GROWTH Trane is pursuing sales and earnings growth through a combination of globalization, expansion of its Worldwide Applied Systems service network, DFT and new product development and technologies. Globalization. Adding local manufacturing as sales grow in a given region is a key element of our globalization strategy. The pattern for expansion begins with establishing a local distribution presence in a new market. The second phase of market development is providing a service business, and the final phase of the process involves local manufacturing and product development. Trane's development of a global mini-split product line is another element of its globalization strategy. Overseas, mini-split products are used extensively because construction practices do not allow for U.S.-type central heating and air conditioning systems. Trane currently has established market positions in mini-splits in Europe, Latin America, the Middle East, Africa and India, and a growing position in the rest of the world. To expand distribution and penetrate new markets, mini-splits will also be distributed through plumbing wholesalers in Europe, Thailand and China under the American Standard(R) brand name, in addition to offering Trane brand mini-splits through traditional HVAC channels. Service network. Acquiring independent service companies and sales offices enables Trane's Applied business to ensure proper maintenance of its equipment and provide consistent service globally. Additionally, by providing these services, the Applied business is able to extend its customer relationships beyond assisting architects and engineers with designing and outfitting a project to working with building management to monitor system performance and provide maintenance. Demand Flow Technology. DFT is a critical element in Trane's model for growth, as it is for all of American Standard. The thrust is to continually achieve shorter 6 9 manufacturing cycles critical to market share gains through enhanced customer service. Trane plans to certify 10 of its plants in DFT during 1998 which will further generate productivity gains as well as other operational benefits. In addition, as the implementation of the process organization is deployed globally within the Worldwide Applied Systems Group, global networking and customer service are expected to improve dramatically. New product developments. In the United States, the installed base of chiller systems over 20 years old is being replaced on an ongoing basis with new, more energy efficient products, due to short payback periods and CFC refrigerant concerns. Trane's Worldwide Applied business is addressing these market needs with continued improvements to its CenTraVac Chiller(R), the most energy efficient and lowest refrigerant emission chiller available today. Energy efficiency will continue to be a strong driver in the selection of air conditioning systems. Trane is well-positioned to take advantage of this opportunity. Building automation systems, which electronically integrate HVAC equipment into a system, run the equipment more efficiently and monitor its performance, are another key growth area. Trane is strengthening its mini-split product line. Mini-split products are the residential and light commercial systems of choice outside of the United States, representing over one-half of the international air conditioning market outside of Japan. MARKET GROWTH AND OUTLOOK Looking forward, international air conditioning markets are expected to grow at a rate of about 6%-7% annually through the year 2000. In 1998, we expect European markets to remain at 1997 levels. The Middle East, Africa and India markets should continue to grow while Latin America is expected to achieve double-digit market growth rates in 1998. While the China market is expected to grow at a rate of 6% - 8%, the outlook for other Asian markets has been lowered as a result of recent currency devaluations and slowing new construction due to overbuilding. Although new construction activity is expected to remain flat in the United States, the Applied markets are anticipated to grow 4% annually due to renovation and replacement activity in the existing building market. This growth, coupled with its expanding service business, should allow Trane's Applied business to achieve double-digit growth each of the next three years. The U.S. residential Unitary market is expected to grow an estimated 3% - 4% annually while the commercial Unitary market is estimated to grow 4% - 6%. Both Trane's residential and commercial revenues are expected to outpace market growth through product and distribution share gains. ================================================================================ AIR CONDITIONING 1997 Sales $3.6 Billion [The following tables were represented as pie charts in the printed material.] Commercial 75% Residential 25% U.S. 72% Far East 12% Other 5% Europe 11% Replacement, Renovation and Repair 65% Residential New Construction 10% New Commercial Construction 25% 7 10 PLUMBING [GRAPHIC OMITTED] AMERICAN STANDARD PIONEERED WASHERLESS CERAMIC DISC VALVING, TO PRODUCE FAUCETS THAT ARE GUARANTEED NOT TO WEAR OUT OR LEAK. ================================================================================ Plumbing Products manufactures kitchen and bathroom products including toilets, sinks, tubs, showers and faucets. Approximately 75% of the product mix is for the home with the remaining 25% used in commercial settings like hotels and offices. Replacement and remodeling are the principal business drivers in the mature markets of the United States and Europe. In emerging economies, like those throughout much of Asia, new construction activity is the predominant business driver. Plumbing Products is the Company's most geographically diversified business with manufacturing facilities in 25 countries. Total market growth per year for the past seven years has been approximately 3%, and a comparable growth rate is projected through the year 2000. From 1990 through 1997, Plumbing Products' sales growth, however, has averaged 5% per year, and is expected to continue at that rate for the next three years primarily through the implementation of our globalization strategy. MODEL FOR GROWTH Globalization. Two strategies form the basis of Plumbing Products' globalization efforts. The first is to enter and develop those markets with strong per capita income growth and new construction activity. The second strategy is to establish manufacturing in countries or regions with lower labor costs to source more competitive products for the mature markets. Our entry into the China market is a good example of the first strategy. Sales growth in China has averaged 60% a year since Plumbing Products' expansion program began in 1995. The Company has sold products in China for more than 50 years, and has manufactured products there for more than 10 years. In China, American Standard is recognized for quality products and the Company's product offerings meet current marketplace demands. With our expanded distribution organization and seven manufacturing plants, production can increase to meet market demand with relative ease. The Company's successful expansion in China mirrors its growth throughout the Far East. Sales growth in the region, excluding Japan where the Company has a modest presence, averaged 13% per year from 1990 through 1997. Additionally, the operating margin during this period was well above the average of Plumbing Products' global operating margins. The manufacture of chinaware bathroom fixtures is a labor-intensive process and, therefore, a costly process in high wage areas. To remain competitive and improve margins, Plumbing Products has adopted a low-cost sourcing strategy to develop or expand production in strategically-situated countries with lower labor costs, with a goal to achieve a 25% unit cost reduction. The U.S. Plumbing Group is a prime example. About 75% 8 11 of its products were manufactured in high-cost U.S. facilities. Over the past two years, a portion of this production has shifted to Mexico, reducing U.S. production to about 60% of output. The success of this strategy can be seen in U.S. Plumbing Group's profit improvement of more than $30 million since 1995. A second phase of production restructuring in the Americas is expected to further improve profitability over the next two years. Similar opportunities are available in Europe where today 80% of chinaware and faucets are manufactured in Western Europe. In 1997, to execute this program, the Company began construction in Bulgaria of what will be its largest European plant, and the next two years will be major transition years for the European low-cost sourcing program. By the year 2000, about one-half of the products for the Western European market will be sourced from outside Western Europe. The European low-cost sourcing program is expected to have a significant beneficial effect on the region's business. Demand Flow Technology provides a significant competitive advantage in Plumbing, where order fill rates tend to be weak. DFT has been a critical factor in enhancing our position, particularly in the Americas, with the fast growing retail channel. Our fill rates are maintained at very high levels. We have also dramatically improved our service to the important wholesale channel. MARKET GROWTH AND OUTLOOK Mature markets are expected to grow about 3% annually, although sales growth in the U.S. is anticipated to continue to outpace the market due to several factors. While we are increasing our share in the wholesale segment overall, the retail segment is the fastest growing channel of distribution in the U.S. The Company has become a significant supplier to some of the largest home improvement retailers. We have increased our share with these retailers as a result of having competitively-priced products and, as already mentioned, by maintaining exceptionally high order fill rates on a consistent basis. The European Plumbing Group is expected to see some market growth and expand their share with operating margins improving as the benefits of the low-cost sourcing strategy are realized. Revenues in the Far East outside of China are expected to be down in 1998 as a result of the currency devaluations and the subsequent weakness in the new construction market. Markets in China, however, are expected to continue to grow even with the turmoil existing throughout the rest of Asia. We expect the overall growth opportunities in Asia to resume within the next two to three years. ================================================================================ PLUMBING 1997 Sales $1.4 Billion [The following tables were represented as pie charts in the printed material.] Commercial 25% Residential 75% U.S. 28% Far East 8% Other 15% Europe 49% Replacement and Remodeling 60% New Construction 40% 9 12 AUTOMOTIVE [GRAPHIC OMITTED] EBS USES ELECTRONIC LOGIC TO MONITOR AND INTERPRET THE VEHICLE'S WHEEL SPEEDS, AXLE LOAD AND BRAKE LINING WEAR, AND SEND RESPONSIVE SIGNALS TO CONTROL INDIVIDUAL BRAKE PRESSURES AND EFFECT A STABLE, SAFE STOP IN LESS TIME AND DISTANCE THAN CONVENTIONAL BRAKING SYSTEMS. ================================================================================ Since it introduced the anti-lock braking system (ABS) for commercial vehicles in the early eighties, WABCO has been the recognized technological leader in its industry. Today, with over 50% market share, WABCO holds Europe's leading position in ABS and other control systems for heavy-duty trucks and buses. WABCO's European customers are the major truck, bus and trailer manufacturers, many of whom sell their vehicles throughout the world. WABCO's sales outside of Europe are primarily through the Company's operations in Brazil and to joint venture companies in the U.S., South Africa, India, China and Japan, who in turn supply major original equipment (OE) manufacturers in their country. Aftermarket products are sold to OE customers and independent distributors. Today this represents over one-quarter of WABCO's sales, and plans are to concentrate further on this profitable business. MODEL FOR GROWTH While European truck and bus production has shown little growth overall since 1986, WABCO's sales (excluding exchange rate effects) have doubled. WABCO is able to continually grow its business through a combination of: globalization, DFT, cost reduction strategies and technological leadership. Globalization. In the North American market, where in 1997 ABS was required on all new air-braked truck tractors, WABCO's market share surged to over 70%. With requirements for ABS broadening over the next two years to include all trailers, buses and medium-size trucks, U.S. market growth is expected to remain strong. WABCO has also introduced other products in the U.S. market through its Meritor WABCO (formerly Rockwell WABCO) joint venture, with the objective to further increase content per vehicle. In 1998, another U.S. joint venture, formed with Cummins Engine Company in 1996, will start production of compressors for braking systems on commercial vehicles. In Japan, WABCO has reached agreement to obtain majority interest in its Sanwab joint venture in 1998. This strategic move is expected to improve the Company's market position. In China, WABCO established its first joint venture in 1995 and discussions concerning a second joint venture are in process. In Eastern Europe, new ventures are planned to provide lower-cost component sourcing and to establish a foothold in these emerging markets. Demand Flow Technology. Productivity and efficiency enhancements achieved through Demand Flow Technology provide WABCO with a significant competitive advantage. In 1997, WABCO increased sales 14% (excluding foreign exchange effects), maintained its high level of profitability, turned inventories 15 times and drove working capital down to near zero. This exceptional performance internally financed WABCO's 10 13 expansion of ventures worldwide and helped maintain its strong commitment to research and new product development. Cost Reduction Strategies. WABCO is planning to out-source nearly all of its high-cost, labor-intensive machining activities which employ about 10% of WABCO's work-force. Most of this workforce will be utilized in other activities to support WABCO's continued sales growth. This strategy is being implemented and should be completed by year-end 2000. With the shift of component sourcing to low-cost suppliers, WABCO can concentrate its resources on product development, assembly and quality control. Technological Leadership. Approximately 500 people - engineers, technicians and others, representing nearly 10% of WABCO's total work-force - are dedicated to product development. R&D spending in 1997 was nearly $50 million, or 5% of sales. This level of spending has averaged between 5% and 7% of sales for many years. WABCO's technology and development expertise is a differentiating capability enabling it to partner with key customers in long-term development and supply agreements. WABCO has such agreements in place with several of its largest customers. WABCO's EBS product, for example, resulted from one such development agreement. Because of the long and expensive process to develop new systems, these partnerships are extremely important in feeding the new product technology pipeline. New Products. Sales of new products, especially electronically controlled systems for transmission, suspension, climate and door controls as well as new generations of ABS, have nearly quadrupled over the last 10 years and have driven the increase in WABCO's product content per vehicle. New product sales remain high. WABCO's Electronic Braking System (EBS) was successfully launched last year with Europe's leading truck manufacturer, featuring the WABCO system on their new line of heavy-duty trucks. Beginning in 1998, we expect other manufacturers will adopt WABCO's EBS. MARKET GROWTH AND OUTLOOK Commercial vehicle production is expected to achieve annual growth of between 3% and 5% in the next few years. Our market share is expected to increase in new product segments and in markets outside Western Europe. WABCO expects to increase its aftermarket sales by 20% between 1997 and the year 2000. ================================================================================ AVERAGE ANNUAL SALES GROWTH [CHART OMITTED] ALTHOUGH EUROPEAN TRUCK AND BUS PRODUCTION HAS BEEN RELATIVELY FLAT SINCE 1986, WABCO`S SALES (EXCLUDING EXCHANGE RATE EFFECTS) HAVE DOUBLED. ================================================================================ AUTOMOTIVE 1997 Sales $1.0 Billion [The following tables were represented as pie charts in the printed material.] Europe 87% Exports to U.S. 6% Other 7% OEM Conventional 42% Aftermarket 26% Electronic 32% 11 14 MEDICAL SYSTEMS [GRAPHIC OMITTED] COPALIS IS A FAST, LOW-COST, EASY-TO-USE SYSTEM THAT CAN PERFORM MULTIPLE TESTS SIMULTANEOUSLY ON A SINGLE TEST SAMPLE. ================================================================================ American Standard's Sienna Biotech and Alimenterics businesses have developed exciting, breakthrough medical diagnostic technologies. To accelerate commercialization of these technologies, the Company acquired Sorin Diagnostics and its affiliate, INCSTAR, in mid 1997. Sorin, INCSTAR and Sienna have been combined to form one business entity, DiaSorin, with manufacturing locations in Italy and the United States and sales offices throughout Europe and in the United States. DiaSorin and U.S.-based Alimenterics comprise the Medical Systems Sector. DiaSorin has an extensive menu of diagnostic tests as well as a number of technologies and platforms, including Copalis(R). Copalis, which received U.S. Food and Drug Administration (FDA) clearance, is a device which enables a user to perform multiple tests simultaneously on a single sample. Development is ongoing to accelerate availability of an expanded menu of tests using DiaSorin(TM) reagents specifically adapted for use with Copalis. Alimenterics has developed the LARA(R) System, an analyzer which allows a gastroenterologist to diagnose patient disease via the breath rather than via more invasive methods such as endoscopy or x-ray. Its first application, the Pylori-Chek(TM), tests for the presence of Helicobacter pylori bacterium associated with 80% of stomach ulcers. Both the drug and the diagnostic analyzer device have received a Positive Opinion from the European Agency for the Evaluation of Medicinal Products. FDA clearance for LARA is expected later this year. Both businesses are developing diagnostic products which address market needs for cost containment and faster results. In a recent survey by Venture Resources, a Barrington, Illinois study group, growing numbers of patients have been dissatisfied with the timeliness of care provided by their physicians. The survey also showed that patients are willing to spend more time in their doctor's office if they get more information at the time of the visit and can begin therapeutic care more quickly. We are preparing for an era in which the focus of technology will be on the immediacy with which results are produced on a cost competitive basis, resulting in a lower total cost of healthcare delivery. The Company's LARA and Copalis diagnostic technologies have been designed to meet these emerging market needs. MARKET AND OUTLOOK The Copalis and LARA technologies target high-growth, profitable sectors within the medical diagnostics market. Initial development focus for Copalis is female health, infectious diseases and autoimmunity. In female health, for example, there are some 33,000 obstetrics/gynecologist practitioners in the United States alone with 64 million patient visits per year. This presents a total market opportunity estimated at about $500 million. The infectious disease market has the potential to be 3-4 times as large. A Copalis test for syphilis is currently in clinical trials and will be submitted to the FDA early in 1998. This test will provide a major contribution to public health by combining screening and confirmation, eliminating the need for a repeat visit to the clinic to initiate antibiotic therapy. Alimenterics' initial product focus, the detection of H.pylori, also has a strong market opportunity. There are an estimated one billion people worldwide infected with H.pylori. In the U.S. alone, there are an estimated 25 million ulcer sufferers, 10% of whom are typically screened once a year generating 2.5 million visits, and 5% are chronic and screened between two to three times per year, generating a significant U.S. market potential for this diagnostic product. 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 18 Medical Systems 18 Financial Review 19 Management's Report on Financial Statements 24 Report of Independent Auditors 25 Financial Statements 26 13 16 FIVE-YEAR FINANCIAL SUMMARY
Year Ended December 31, (Dollars in millions, except per share data) 1997 1996 1995 1994 1993 SEGMENT DATA Sales: Air Conditioning Products $ 3,567 $ 3,437 $ 2,953 $ 2,480 $ 2,100 Plumbing Products 1,439 1,452 1,270 1,218 1,167 Automotive Products 952 916 998 759 563 Medical Systems 50 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ $ 6,008 $ 5,805 $ 5,221 $ 4,457 $ 3,830 ==================================================================================================================================== Operating income (loss) before asset impairment loss and write-off of purchased research and development: Air Conditioning Products $ 364 $ 353 $ 259 $ 182 $ 133 Plumbing Products 119 110 120 111 108 Automotive Products 127 123 155 62 41 Medical Systems (20) (13) (7) (5) (3) - ------------------------------------------------------------------------------------------------------------------------------------ 590 573 527 350 279 Asset impairment loss and write-off of purchased research and development (a): Air Conditioning Products -- (121) -- -- -- Plumbing Products -- (114) -- -- -- Medical Systems (90) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ (90) (235) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total operating income 500 338 527 350 279 Equity in net income of unconsolidated joint ventures 12 3 7 4 -- - ------------------------------------------------------------------------------------------------------------------------------------ 512 341 534 354 279 Interest expense (192) (198) (213) (259) (278) Corporate items (83) (85) (94) (110) (82) - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes and extraordinary item 237 58 227 (15) (81) Income taxes (117) (105) (85) (62) (36) - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before extraordinary item $ 120 $ (47) $ 142 $ (77) $ (117) ==================================================================================================================================== Per share (b): Basic $ 1.62 $ (.60) $ 1.90 $ (1.29) $ (2.11) Diluted $ 1.57 $ (.60) $ 1.87 $ (1.29) $ (2.11) ==================================================================================================================================== OTHER DATA Net cash provided by operating activities $ 395 $ 353 $ 348 $ 257 $ 201 Demand Flow Performance: Average inventory turnover (c) 9.0x 9.4x 8.4x 7.5x 6.0x Operating working capital as a percent of sales (d) 4.7% 4.9% 4.9% 4.9% 5.9%
(a) In connection with the June 30, 1997, acquisition of the medical diagnostics businesses, the value of purchased in-process research and development was written off in accordance with applicable accounting rules, resulting in a non-cash charge to income of $90 million, or $1.19 per diluted share. 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 $2.95 per diluted share. Excluding the write-off of purchased research and development and the asset impairment loss, income per diluted share before extraordinary item was $2.76 in 1997 and $2.36 in 1996. See Note 2 of Notes to Consolidated Financial Statements. (b) Earnings per share for all periods have been presented in accordance with Statement of Financial Accounting Standards No. 128 ("FAS 128") Earnings per Share, adopted effective December 31, 1997. See Note 2 of Notes to Consolidated Financial Statements. (c) Twelve-month average inventory turnover, exclusive of significant acquisitions, with each month calculated using the following three month's cost of sales annualized, divided by inventories as of each month end. (d) 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 $90 million write-off of purchased in-process research and development in connection with the acquisition of medical diagnostics businesses). The improvement in operating income reflected gains in all three major segments -- Air Conditioning Products, Plumbing Products and Automotive Products -- despite the adverse effects on Air Conditioning Products of cooler than normal weather in the U.S. and Europe and the unfavorable effects of foreign exchange. Sales for 1997 were $6.0 billion, an increase of 3% from $5.8 billion in 1996. Operating income was $590 million (excluding the write-off of purchased research and development), an increase of 3% from $573 million in 1996 (excluding an asset impairment charge of $235 million related to the adoption of a new accounting standard). Income before extraordinary item (excluding the write-off of purchased research and development) was $210 million, or $2.76 per diluted share, up 11% and 17%, respectively, from income before extraordinary item (excluding the asset impairment charge) in 1996 of $189 million, or $2.36 per diluted share. Including the write-off of purchased research and development, income before extraordinary item for 1997 was $120 million, or $1.57 per diluted share. Effective December 31, 1997, the Company adopted FAS 128 which simplifies computing earnings per share, changes the manner of presentation on the income statement and requires the restatement of all prior periods presented. Accordingly, all per share data included in this Annual Report to Shareholders have been presented in conformity with FAS 128. Adoption of FAS 128 did not have a significant effect on previously reported per share amounts. See Note 2 of Notes to Consolidated Financial Statements. Operating losses for Medical Systems and equity in net income of unconsolidated joint ventures for 1996 and prior years have been reclassified to conform to the 1997 presentation. RESULTS OF OPERATIONS FOR 1997 COMPARED WITH 1996 AND 1996 COMPARED WITH 1995 Consolidated sales for 1997 were $6,008 million, an increase of $203 million, or 3% (8% excluding the unfavorable effects of changes in foreign exchange rates), from $5,805 million in 1996. Sales increased 4% for Air Conditioning Products and 4% for Automotive Products, but declined slightly for Plumbing Products. The new Medical Systems segment contributed sales of $50 million in 1997. Consolidated sales for 1996 were $5,805 million, an increase of $584 million, or 11% (12% excluding the unfavorable effects of changes in foreign exchange rates), from $5,221 million in 1995. Sales increased 16% for Air Conditioning Products and 14% for Plumbing Products, but declined 8% for Automotive Products. Operating income for 1997 (excluding the $90 million write-off of purchased research and development) was $590 million, an increase of $17 million, or 3% (7% excluding the unfavorable effects of foreign exchange), from $573 million in 1996 (excluding the $235 million asset impairment charge). Operating income increased 3% for Air Conditioning Products, 8% for Plumbing Products and 3% for Automotive Products, while Medical Systems incurred a larger operating loss. Operating income for 1996 (excluding the $235 million asset impairment charge) was $573 million, an increase of $46 million, or 9% (10% excluding the unfavorable effects of foreign exchange), from $527 million in 1995. Operating income increased 36% for Air Conditioning Products but decreased 8% for Plumbing Products and 20% for Automotive Products, while the operating loss for Medical Systems increased. 15 18 RESULTS OF OPERATIONS BY SEGMENT ================================================================================ AIR CONDITIONING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Sales: U.S. portion $ 2,562 $ 2,450 $ 2,152 International portion 1,005 987 801 - -------------------------------------------------------------------------------- Total $ 3,567 $ 3,437 $ 2,953 ================================================================================ Operating income before asset impairment loss: U.S. portion $ 333 $ 314 $ 225 International portion 31 39 34 - -------------------------------------------------------------------------------- Total 364 353 259 Asset impairment loss -- (121) -- - -------------------------------------------------------------------------------- Total operating income $ 364 $ 232 $ 259 ================================================================================
The U.S. portion of Air Conditioning Products is composed of the commercial and residential products businesses of the Unitary Products Group and the commercial applied products business of 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. Sales of Air Conditioning Products increased 4% (5% excluding foreign exchange effects) to $3,567 million for 1997 from $3,437 million for 1996, as a result of continued strength in U.S. commercial markets and expanding international sales. Sales of Air Conditioning Products for 1996 increased 16% (with little effect from foreign exchange) to $3,437 million from $2,953 million for 1995. Commercial markets account for approximately 75% of Air Conditioning Products' total sales. Approximately 65% of total sales are to the replacement, renovation and repair markets. Operating income of Air Conditioning Products increased 3% (with little effect from foreign exchange) to $364 million in 1997 from $353 million in 1996 (excluding the asset impairment charge). The increase was attributable primarily to increased operating income in the United States due to higher volume. Operating income of Air Conditioning Products in 1996 increased 36% (excluding the asset impairment charge) to $353 million from $259 million in 1995. United States -- In 1997 U.S. sales increased 5% over those of 1996. Markets in the U.S. for applied and unitary commercial products continued to grow in 1997 for both replacement and new construction. The U.S. portion of sales of commercial products increased primarily because of higher volume resulting from improved markets, and to a lesser extent from increased market share, higher prices and the acquisition of additional sales offices. Sales of residential products decreased because of cooler-than-normal weather in many parts of the U.S., partly offset by a favorable shift to high-end products. Operating income for the U.S. portion of Air Conditioning Products increased 6% in 1997 compared with 1996, as a result of the increased volume of commercial products. In 1996 U.S. sales increased 14% over those of 1995. Markets in the U.S. improved 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 and prices, gains in market share, sales office acquisitions and a favorable sales mix. 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 in product mix. 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. International -- International sales in 1997 increased 2% (7% excluding the unfavorable effects of foreign exchange), principally due to strong growth in Latin American operations and modest growth in the Middle East and Europe (despite a cooler-than-normal summer). Operating income for international operations in 1997 decreased 21% to $31 million compared with $39 million in 1996. This reflected the adverse effects of economic turmoil in the Far East together with cool weather and margin pressures in Europe, partly offset by increased operating income on higher volumes in Latin America. 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 ("China"), 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 China. 16 19 Backlog -- The worldwide backlog for Air Conditioning Products as of December 31, 1997, was $639 million, an increase of 11% from the year-earlier level, excluding foreign exchange effects. This increase reflected continued strong demand for commercial products and growth in international operations. ================================================================================ PLUMBING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Sales: International portion $ 1,035 $ 1,072 $ 928 U.S. portion 404 380 342 - -------------------------------------------------------------------------------- Total $ 1,439 $ 1,452 $ 1,270 ================================================================================ Operating income (loss) before asset impairment loss: International portion $ 89 $ 88 $ 122 U.S. portion 30 22 (2) - -------------------------------------------------------------------------------- Total 119 110 120 Asset impairment loss -- (114) -- - -------------------------------------------------------------------------------- Total operating income (loss) $ 119 $ (4) $ 120 ================================================================================
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. Sales of Plumbing Products were $1,439 million in 1997 compared with $1,452 million in 1996, a decrease of $13 million (but an increase of 5% excluding the unfavorable effects of foreign exchange). The exchange-adjusted increase primarily reflected higher sales in Latin America and the U.S. and the effect of consolidating the operations in China since the acquisition of a majority interest at the end of October 1997. Sales in the U.S. increased as a result of higher volumes, primarily attributable to expansion by major home improvement retailers. Sales and market share in the retail market channel have been growing for several years, a trend the Company believes will continue and lead to increased sales because of strong product and brand-name recognition. Sales for international operations increased by 5% excluding foreign exchange effects, principally attributable to gains in Latin American operations (primarily Mexico) and the sales of the operations in China (consolidated for the last two months of 1997). Europe, which continued to experience weak economic conditions, was flat excluding foreign exchange effects. 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 (a French plumbing business 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. The sales decline for international operations was primarily attributable to a decrease in Europe, particularly in Germany, Italy and France, which suffered from 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. Operating income of Plumbing Products was $119 million for 1997 compared with $110 million for 1996, an increase of 8% (18% excluding the unfavorable effects of foreign exchange), because of higher operating income for both international and U.S. operations. The increase in operating income for international operations in 1997 (excluding foreign exchange effects) was principally due to improved volumes and margins in Latin America, margin improvement in Europe (primarily from cost reductions in France) and income contributed by operations in China (consolidated for the last two months of 1997). These increases were partly offset by the effects of poor economic conditions in other parts of the Far East. Operating income in the U.S. improved 36%, due to higher sales and lower-cost sourcing from expanded facilities in Mexico as well as manufacturing and operating cost improvements. 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 Porcher operations. Operating results in the U.S. improved substantially, due to higher sales, lower-cost sourcing from Mexico and cost improvements. 17 20 Backlog -- Plumbing Products' backlog as of December 31, 1997, was $111 million, essentially the same level as of December 31, 1996 (excluding foreign exchange effects), reflecting improvements in Europe offset by the effects of economic weakness in the Far East. ================================================================================ AUTOMOTIVE PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Sales $ 952 $ 916 $ 998 Operating income $ 127 $ 123 $ 155
Sales of Automotive Products for 1997 were $952 million, an increase of $36 million, or 4% (14% excluding the unfavorable effects of foreign exchange), from $916 million in 1996. This gain resulted primarily from strengthened markets in Europe because of increased commercial vehicle production, higher product content per vehicle and increased export sales. Unit volume of truck and bus production in Western Europe increased 8%, while aftermarket sales declined 1% for the full year 1997 compared with 1996. Original equipment sales volumes were higher in almost all markets for commercial vehicle braking and other control systems, especially in Germany because of product deliveries to a major truck manufacturer for its new line of heavy-duty trucks. Export sales increased significantly, primarily from sales of antilock braking systems (ABS) to Meritor WABCO (formerly Rockwell WABCO), the Company's North American joint venture, reflecting the first-phase implementation of federal regulations requiring ABS on all new heavy-duty trucks, together with a rebound in U.S. truck production. Sales of original equipment also increased in Brazil, where truck production recovered somewhat from the unusually low level of the prior year. 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. This decrease occurred 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. Operating income for Automotive Products was $127 million in 1997, an increase of 3% (14% excluding the unfavorable effects of foreign exchange). This increase reflected the higher volume and improved margins in Europe due to productivity improvements. These factors were partly offset by the effects of product mix (higher original equipment and export sales and lower aftermarket in Europe), lower margins in Brazil (primarily mix) and start-up costs of the new, majority-owned joint ventures in the U.S. (with Cummins Engine Co.) and China. 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, offset partly by productivity improvements from the continuing implementation of manufacturing process improvements. Backlog-- Automotive Products' backlog as of December 31, 1997, was $367 million, an increase of 35% from December 31, 1996 (excluding the unfavorable effects of foreign exchange), reflecting improved markets. ================================================================================ MEDICAL SYSTEMS SEGMENT
Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Sales $ 50 $ -- $ -- - -------------------------------------------------------------------------------- Operating loss before write-off of purchased research and development $ (20) $ (13) $ (7) Write-off of purchased research and development (90) -- -- - -------------------------------------------------------------------------------- Operating loss $ (110) $ (13) $ (7) ================================================================================
Medical Systems sales reflected the acquisition on June 30, 1997, of the medical diagnostics businesses of Sorin Biomedica S.p.A. and INCSTAR Corporation. Medical Systems incurred an operating loss (before write-off of purchased research and development) as costs of development and of integrating operations more than offset the operating income of the acquired diagnostics businesses. The write-off of purchased research and development of $90 million reflects the required accounting in an acquisition for the portion of the purchase price allocated to the value of purchased in-process 18 21 research and development. The operating losses in 1996 and 1995 reflected increased development costs of the Company's medical diagnostics ventures. FINANCIAL REVIEW Interest expense decreased $6 million in 1997 compared with 1996, as lower overall interest rates on debt outstanding under the Company's 1997 Credit Agreement, together with the redemption of the 11 3/8% Senior Debentures, more than offset the effect of increased debt arising from share repurchases and the acquisition of the medical diagnostics businesses. On May 15, 1997, the Company redeemed the $250 million aggregate principal amount of its 11 3/8% Senior Debentures (at a redemption price of 105.69% of the principal amount plus interest accrued to the redemption date) with lower-rate borrowings under the 1997 Credit Agreement. The Company repurchased $311 million (including fees and expenses) of its common stock during 1997 and acquired the medical diagnostics businesses for $212 million (see "Liquidity and Capital Resources"). Upon achieving improved financial ratios, in July 1997 the Company obtained a reduction in interest rates of 0.125% under terms of the 1997 Credit Agreement. Interest expense for 1996 decreased $15 million compared with 1995 because of reduced debt and lower overall interest rates. Corporate items for 1997 totaled $83 million, approximately the same level as in 1996 and $11 million lower than in 1995. The higher equity in net income of unconsolidated joint ventures reflects the strong growth of Automotive Products' North American joint venture with Meritor Automotive Inc., benefits from the restructuring of Air Conditioning Products' scroll compressor joint venture and increased income from the Company's financing joint venture established in 1996. The income tax provisions for 1997 and 1996 were $117 million and $105 million, respectively. The effective income tax rate in 1997 was 35.8% on income before income taxes and extraordinary item of $327 million (excluding the write-off of purchased research and development on which there was no tax benefit) compared with an effective rate in 1996 of 35.6% on income before income taxes and extraordinary item of $293 million (excluding the asset impairment charge on which there was no tax benefit). In 1995 the income tax provision was $85 million, an effective rate of 37.5% on income before income taxes and extraordinary item of $227 million. The effective tax rates for all three years are somewhat lower than the statutory rates primarily as a result of higher levels of taxable income in the U.S. which enabled the Company to recognize previously unrecognized tax benefits. In addition, in 1997 and 1996, proportionately greater pretax income was earned in the U.S. (at a lower effective rate) compared to that earned in higher-rate jurisdictions in Europe and elsewhere. Those benefits were partly offset by the effects of rate differences and withholding taxes related to foreign operations and nondeductible goodwill amortization. See Note 6 of Notes to Consolidated Financial Statements. The Company expects that its effective income tax rate in 1998 will be somewhat higher, as all deferred tax benefits in the U.S. have been utilized. As a result of the redemption of debt in 1997 and 1995 with refinancing proceeds, those years included extraordinary charges of $24 million (net of taxes of $6 million) and $30 million (with no tax benefit), respectively, including call premiums and the write-off of unamortized debt issuance costs. In addition, the first half of 1998 is expected to include an extraordinary charge of approximately $50 million (net of tax) as a result of the planned redemption of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8% Senior Subordinated Notes, both of which are callable on or after June 1, 1998. See the following section, "Liquidity and Capital Resources" and Note 9 of Notes to Consolidated Financial Statements for a description of these transactions. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities, after cash interest paid of $135 million, was $395 million for 1997, compared with $353 million for 1996. The $42 million increase resulted primarily from higher income before extraordinary item (excluding from 1997 the $90 million non-cash write-off of purchased research and development and excluding from 1996 the $235 million non-cash asset impairment charge). Operating working capital as a percentage of sales improved to 4.7% in 1997, from 4.9% in 1996, primarily as a result of discounting receivables through the Company's financing joint venture. Average inventory turnover for 1997 was approximately four-tenths of a turn lower than the average turnover for 1996, primarily attributable to the adverse effects of cooler than normal weather on residential air conditioning in the U.S., and poor economic conditions in the Far East. Net investing activities totaled $477 million, principally capital expenditures of $302 million (including $57 million of investments in affiliated companies) and $212 million for 19 22 the acquisition of the medical diagnostics businesses - see "Capital Expenditures." Net cash provided by financing activities of $56 million reflected the net incremental borrowing incurred which, together with cash provided by operations, funded the net investing activities and the share repurchases. In January 1997 the Company entered into a new credit agreement (the "1997 Credit Agreement"). The 1997 Credit Agreement, which expires in 2002, provides the Company with senior secured credit facilities aggregating $1.75 billion as follows: (a) a $750 million U.S. dollar revolving credit facility and a $625 million multi-currency revolving credit facility (the "Revolving Facilities") and (b) a $375 million multi-currency periodic access credit facility. Up to $500 million of the Revolving Facilities may be used for the issuance of letters of credit. The 1997 Credit Agreement and certain other American Standard Inc. debt instruments contain restrictive covenants and other requirements, with which the Company believes it is currently in compliance. See Note 9 of Notes to Consolidated Financial Statements. The 1997 Credit Agreement provides lower interest rates, significantly increased borrowing capacity, less restrictive covenants and no scheduled principal payments until maturity in 2002. 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, 1997, the Company's total indebtedness was $2.3 billion and annual scheduled debt maturities, excluding the 1997 Credit Agreement, were $30 million, $166 million, $15 million, $212 million and $11 million for the years 1998 through 2002, respectively. The Company had remaining availability under the Revolving Facilities of approximately $642 million after reduction for borrowings and for $61 million of outstanding letters of credit. In addition, at December 31, 1997, the Company's foreign subsidiaries had $166 million available under overdraft facilities which can be withdrawn by the banks at any time. On August 1, 1997, American Standard Companies Inc. and its wholly-owned subsidiary American Standard Inc. jointly filed a shelf registration statement (the "1997 Shelf Registration") with the Securities and Exchange Commission covering $1 billion of debt securities to be offered by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. On January 15, 1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due 2008 and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due 2003 and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the "Offerings") under the 1997 Shelf Registration, the proceeds of which aggregated $737 million, net of underwriting discounts and expenses. The Company currently intends to apply the net proceeds of the Offerings, together with funds available under the 1997 Credit Agreement, to the redemption (the "Redemption"), on or after June 1, 1998, of its $740.7 million principal amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1, 1998, the Senior Subordinated Discount Debentures are redeemable at a price of 104.66% of the principal amount, plus accrued interest and the Senior Subordinated Notes are redeemable at a price of 102.82% of the principal amount, plus accrued interest. Pending the Redemption, the net proceeds of the Offerings were used to reduce borrowings (but not commitments) under the revolving portion of the Company's 1997 Credit Agreement. Unless amended or waived, the provisions of the 1997 Credit Agreement would require the Company to apply the proceeds of the Offerings permanently to reduce the total amount available under the 1997 Credit Agreement, unless the proceeds of the Offerings are applied to the Redemption prior to December 31, 1998, or to redeem up to $150 million of certain other indebtedness prior to June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior Subordinated Discount Debentures, there can be no assurance that market or economic conditions or the Company's business strategy will not change and, therefore, there can be no assurance that the proceeds of the Offerings will be applied towards the Redemption. At December 31, 1997, the Company held swap agreements to hedge the redemption value of a portion of its 10 1/2% Senior Subordinated Discount Debentures and effectively converted such debt to an average fixed interest rate of approximately 7%. The redemption value hedged by the swaps is the fair value of the debt at the commencement of the swaps. The swaps mature in June 1998 and have a notional debt value of $147 million. In anticipation of the Offerings under the Company's 1997 20 23 Shelf Registration, at December 31, 1997, the Company held forward contracts to hedge the risk of interest rate fluctuations in advance of the issuance of Senior Notes. Those contracts, which had a notional value of $350 million, effectively fixed the interest rate on the 7 3/8% Senior Notes at 7.89%. Similarly, in February 1998, the Company entered into forward contracts (with a notional value of $150 million) to hedge interest rate fluctuations, which had little effect on the interest rate on the 7 1/8% and 7 5/8% Senior Notes issued February 13, 1998. In addition, in anticipation of expected future offerings under the 1997 Shelf Registration, the Company has entered similar forward contracts with a notional value of $150 million to hedge interest rates. The swap and forward contract counterparties are major financial institutions. The Company does not anticipate non-performance by such counterparties. In the first quarter of 1997 the Company completed (i) a secondary public offering of 12,429,548 shares of the Company's common stock (the "Secondary Offering") owned by Kelso ASI Partners, L.P. ("ASI Partners") and (ii) the repurchase by the Company from ASI Partners, then the Company's largest stockholder, of 4,628,755 shares of the Company's common stock for $208 million, plus fees and expenses (the "Share Repurchase"), to be held as treasury stock. In conjunction with the Secondary Offering and the Share Repurchase, ASI Partners distributed to certain of its partners 3,780,353 shares (the "Share Distribution") of the Company's common stock that it owned. 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 (the "Exercise Price"), $10 per share above the public offering price in the Secondary Offering. 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 are exercisable between January 31, 1998 and February 11, 2002. After the Secondary Offering, the Share Distribution and the Share Repurchase, ASI Partners owned no common stock of the Company and is no longer entitled to designate any of the Company's directors. 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 of Notes to Consolidated Financial Statements). On October 6, 1997, the Company completed its open-market share repurchase program commenced in May 1997 pursuant to which 2,320,900 shares of its common stock were purchased for $100 million and will be held as treasury stock. In January 1997 the Company announced formation of its Medical Systems Segment to pursue initiatives in the medical diagnostics field. For the last several years the Company has supported the development of two medical diagnostics ventures focusing on test instruments using laser technology and reagents. On June 30, 1997, the Company acquired the European medical diagnostic businesses of Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and all the outstanding shares of INCSTAR Corporation, a U.S. company in which Sorin Biomedica S.p.A. owned a 52% interest. The aggregate cost of the acquisitions was approximately $212 million, including fees and expenses, and was funded with borrowings under the 1997 Credit Agreement. This transaction has been accounted for as a purchase, and in connection therewith, a portion of the purchase price totaling $90 million was allocated to the value of in-process research and development and was charged to operations in the third quarter of 1997. Approximately $64 million of goodwill resulted after allocation of the purchase price to the fair value of assets acquired and liabilities assumed. The Company is a partner in a financial services partnership, American Standard Financial Services, with Transamerica Commercial Finance Corporation, a subsidiary of Transamerica Corporation, which provides a wide range of financial services to support sales of the Company's products, while reducing cash requirements to expand its business. The partnership offers inventory and consumer financing, and plans to provide commercial leasing and asset-based lending programs. Programs thus far implemented have enhanced the Company's cash flow and further enhancements are expected as existing programs are expanded and new ones implemented. Recent currency devaluations and related economic turmoil in certain Far East countries have had an adverse impact on the Company's sales and earnings. Sales in the Far East (excluding China), approximately 6% of total sales, were down $27 million in 1997 from the 1996 level and pretax income of $17 million in 1997 was down $13 million from 1996. The Company expects that sales and operating income in that region will decline further in 1998. 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. The Company has previously disclosed that German tax authorities have raised questions regarding the treatment of certain significant matters in connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, and have begun a subsequent examination of German tax returns for the years 1991 through 1994. See Note 6 of Notes to Consolidated Financial Statements. 21 24 CAPITAL EXPENDITURES The Company's capital expenditures for 1997 were $302 million (including investments in affiliated companies) compared with $227 million for 1996. The increase for 1997 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 1997 were $102 million, an increase of 10% over the $93 million of capital spending in 1996. Major expenditures included expansion of the new operations in the PRC, the acquisition of sales offices, projects related to the expansion of manufacturing capacity, new products and product improvements and improvements related to Demand Flow and productivity. Plumbing Products' capital expenditures for 1997 were $154 million, including $51 million of investments in affiliated companies, compared with capital expenditures of $88 million in 1996 (including investments in affiliated companies of $3 million), an increase of 75% (83% excluding the effects of foreign exchange). Expenditures for 1997 included the acquisition of a majority interest in China, construction of a chinaware plant and expansion of the fittings plant in Bulgaria, and expansion of capacity in Mexico and Thailand. Capital expenditures for Automotive Products in 1997 were $42 million, compared with 1996 capital expenditures of $46 million, a decrease of 9% (2% excluding the effects of foreign exchange). Major projects included expenditures on the U.S. joint venture with Cummins, the joint venture in China and new product introductions in Brazil. On June 30, 1997, the Company acquired the medical diagnostics businesses for $212 million, as described above in Liquidity and Capital Resources. Other capital expenditures for Medical Systems were $4 million. During the past several years, the Company has been implementing a strategy of lower-cost product sourcing across all of its businesses. With respect to Plumbing Products, in 1996 the Company commenced production of chinaware products for its U.S. and Latin American markets at a newly-constructed facility in Aguascalientes, Mexico. Production of plumbing fittings was expanded at a plant in Vidima, Bulgaria, as a source for certain products sold in European markets. In addition, the Company is currently completing construction of a vitreous china production facility in Bulgaria. Although the identification and timing of plant closures has not been finally determined, the Company expects to reorganize certain of its European Plumbing Products operations, including closing high-cost plants and expanding lower-cost production capability in the Bulgarian chinaware facility, and that such reorganization and new product sourcing initiative could result in the Company recording a charge to earnings in 1998 of approximately $75 million to $100 million. With respect to Automotive Products and Air Conditioning Products, the Company has also commenced implementation of its lower-cost sourcing strategy, although such implementation is expected to be substantially smaller in scope than with respect to Plumbing Products. The Company believes capital spending in recent years has been sufficient for maintenance purposes, important product and process redesigns, expansion projects and strategic investments and acquisitions. The Company expects to continue to invest in the expansion and modernization of its existing facilities and affiliated companies and to consider entering into new joint ventures and making complementary acquisitions. The Company expects capital expenditures in 1998, including acquisitions of U.S. air conditioning commercial sales offices, to approximate $350 million. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," No. 131, "Disclosures about Segments of an Enterprise and Related Information," and No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Company will adopt those standards in 1998. Management believes that adoption of these new requirements will not have a material effect on the Company's reported financial position, results of operations or cash flows. CYCLICALITY; SEASONALITY The preponderance of Air Conditioning Products and Plumbing Products sales are to the replacement, remodeling and repair markets. In 1997, 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 40% 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 22 25 products. In addition, a significant percentage of Air Conditioning Products' sales are attributable to residential and commercial construction activity, which is generally higher in the second and third quarters of the year. YEAR 2000 ISSUE For the past several years the Company has been in the process of converting most of its computer applications and systems worldwide to client server technology and in conjunction therewith has been installing software which is Year 2000 compatible. For other systems, software that is Year 2000 compliant is being installed. Most of these initiatives would have been undertaken irrespective of any Year 2000 issues and the Company expects that conversion of all critical business systems will have been completed by mid-1999. In addition the Company has established a comprehensive Year 2000 initiative, having appointed teams for each operating group worldwide, coordinated by a team leader reporting directly to the business group leader. These teams are responsible for assuring that all core business systems will be fully functional for the year 2000, including transactions with customers, suppliers, financial institutions and other third parties. The Company is also reviewing its new and previously sold products that incorporate equipment controls to identify and resolve any problems that such products may have as a result of the arrival of Year 2000. Final cost estimates are not complete, but management does not expect the incremental costs attributable directly to coping with Year 2000 issues to have a material adverse effect on the Company's financial position, results of operations or cash flows. While the Company believes its efforts are adequate to address its Year 2000 concerns, the Company could be adversely affected if suppliers, customers and other third parties the Company does business with do not address this issue successfully. The Company is continuing to assess these risks and develop solutions to minimize the impact on the Company. MARKET RISK The Company is exposed to foreign currency fluctuations and interest rate changes. From time to time the Company enters into agreements to reduce its foreign currency and interest rate risks. Such agreements hedge specific transactions or commitments. The Company does not enter into speculative hedges. The Company conducts significant non-U.S. operations through subsidiaries in most of the major countries of Western Europe, Canada, Brazil, Mexico, Bulgaria, the Czech Republic, Central American countries, China, Malaysia, the Philippines, South Korea, Thailand, Taiwan, Australia and Egypt. In addition, the Company conducts business in these and other countries through affiliated companies and partnerships in which the Company owns 50% or less of the stock or partnership interest. Because the Company has manufacturing operations in 35 countries, fluctuations in currency exchange rates may have a significant impact on its financial statements. Such fluctuations have much less effect on local operating results, however, because the Company for the most part sells its products within the countries in which they are manufactured. The asset exposure of foreign operations to the effects of exchange volatility has been partly mitigated by the denomination in foreign currencies of a portion of the Company's borrowings. A portion of the Company's debt bears interest at rates which vary with changes in the London Interbank Offered Rate (LIBOR). As of December 31, 1997, $1.1 billion of the Company's total debt bore interest at variable rates. It has been the Company's practice to maintain a significant portion of its debt at fixed rates of interest. As of December 31, 1997, approximately 52% of the Company's total debt was at fixed rates. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report (other than the historical financial data and other statements of historical fact), including, without limitation, statements as to management's expectations and belief are forward-looking statements. Forward-looking statements are made based upon management's expectations and belief concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. Many important factors could cause actual results to differ materially from management's expectations, including the level of construction activity in the Company's Air Conditioning Products' and Plumbing Products' markets; the timing of completion and success in the start-up of new production facilities; changes in U.S. or international economic conditions, such as inflation or interest rate fluctuations or recessions in the Company's markets; pricing changes to the Company's products or those of its competitors, and other competitive pressures on pricing and sales; integration of acquired businesses; risks generally relating to the Company's international operations, including governmental, regulatory or political changes; risks and costs related to the year 2000 software issue; the planned redemption of debt; the impact of the Far East economic situation; and transactions or other events affecting the need for, timing and extent of the Company's capital expenditures. 23 26 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The accompanying consolidated balance sheet at December 31, 1997 and 1996, and related consolidated statements of operations, stockholders' deficit and cash flows for the years ended December 31, 1997, 1996 and 1995, have been prepared in conformity with generally accepted accounting principles, and the Company believes the statements set forth a fair presentation of financial condition and results of operations. The Company believes that the accounting systems and related controls which it maintains are sufficient to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. Reporting on the financial affairs of the Company is the responsibility of its principal officers, subject to audit by independent auditors who are engaged to express an opinion on the Company's financial statements. The Board of Directors has an Audit Committee of outside Directors which meets periodically with the Company's financial officers, internal auditors and the independent auditors and monitors the accounting affairs of the Company. /s/ Emmanuel A. Kampouris Emmanuel A. Kampouris Chairman, President and Chief Executive Officer /s/ George H. Kerckhove George H. Kerckhove Vice President and Chief Financial Officer /s/ G. Ronald Simon G. Ronald Simon Vice President and Controller February 16, 1998 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Standard Companies Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 2 to the Consolidated Financial Statements, in 1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." /s/ Ernst & Young LLP New York, New York February 16, 1998 25 28 CONSOLIDATED STATEMENT OF OPERATIONS
American Standard Companies Inc. Year Ended December 31, (Dollars in thousands, except share data) 1997 1996 1995 Sales $ 6,007,509 $ 5,804,561 $ 5,221,476 - -------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 4,481,915 4,379,765 3,887,024 Selling and administrative expenses 979,036 905,427 853,783 Write-off of purchased research and development 90,300 -- -- Asset impairment loss -- 235,234 -- Other expense 27,254 28,337 40,489 Interest expense 192,216 198,192 213,326 - -------------------------------------------------------------------------------------------------------- 5,770,721 5,746,955 4,994,622 - -------------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 236,788 57,606 226,854 Income taxes 116,928 104,324 85,070 - -------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item 119,860 (46,718) 141,784 Extraordinary loss on retirement of debt (23,637) -- (30,129) - -------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common shares $ 96,223 $ (46,718) $ 111,655 ======================================================================================================== Per common share: Basic: Income (loss) before extraordinary item $ 1.62 $ (.60) $ 1.90 Extraordinary loss on retirement of debt (.32) -- (.40) - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 1.30 $ (.60) $ 1.50 ======================================================================================================== Diluted: Income (loss) before extraordinary item $ 1.57 $ (.60) $ 1.87 Extraordinary loss on retirement of debt (.31) -- (.40) - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 1.26 $ (.60) $ 1.47 ======================================================================================================== Average outstanding common shares: Basic 73,801,220 77,986,511 74,671,830 Diluted 76,167,486 77,986,511 75,823,854
See notes to consolidated financial statements. 26 29 CONSOLIDATED BALANCE SHEET
American Standard Companies Inc. At December 31, (Dollars in thousands, except share data) 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 28,772 $ 59,699 Accounts receivable, less allowance for doubtful accounts - 1997, $30,226; 1996, $28,294 831,285 799,792 Inventories 430,773 408,962 Future income tax benefits 40,756 67,125 Other current assets 62,392 50,796 - ----------------------------------------------------------------------------------------------------------------------------- Total current assets 1,393,978 1,386,374 Facilities, at cost, net of accumulated depreciation 1,139,184 1,005,998 Other assets: Goodwill, net of accumulated amortization - 1997, $225,020; 1996, $221,105 844,238 875,111 Debt issuance costs, net of accumulated amortization - 1997, $11,718; 1996, $13,723 22,516 34,451 Other 269,173 217,681 - ----------------------------------------------------------------------------------------------------------------------------- $ 3,669,089 $ 3,519,615 ============================================================================================================================= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Loans payable to banks $ 718,412 $ 108,856 Current maturities of long-term debt 30,459 72,645 Accounts payable 466,119 469,150 Accrued payrolls 179,635 151,707 Other accrued liabilities 400,871 399,152 Taxes on income 45,717 35,421 - ----------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,841,213 1,236,931 Long-term debt 1,550,772 1,741,847 Other long-term liabilities: Reserve for postretirement benefits 437,651 473,229 Deferred tax liabilities -- 68,157 Other 449,236 379,832 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 4,278,872 3,899,996 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; shares issued and outstanding - 1997, 71,962,713; 1996, 78,572,638 720 786 Capital surplus 586,968 563,873 Subscriptions receivable (61) (395) Treasury stock (309,553) -- Accumulated deficit (675,264) (771,487) Foreign currency translation effects (212,593) (173,158) - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' deficit (609,783) (380,381) - ----------------------------------------------------------------------------------------------------------------------------- $ 3,669,089 $ 3,519,615 =============================================================================================================================
See notes to consolidated financial statements. 27 30 CONSOLIDATED STATEMENT OF CASH FLOWS
American Standard Companies Inc. Year Ended December 31, (Dollars in thousands) 1997 1996 1995 Cash provided (used) by: Operating activities: Income (loss) before extraordinary item $ 119,860 $ (46,718) $ 141,784 Write-off of purchased in-process research and development 90,300 -- -- Asset impairment loss -- 235,234 -- Depreciation 124,855 117,951 109,999 Amortization of goodwill and other intangibles 39,107 27,580 33,396 Non-cash interest 59,857 61,794 63,930 Non-cash stock compensation 9,930 31,201 29,014 Changes in assets and liabilities: Accounts receivable (40,652) (25,479) (124,482) Inventories (22,538) (32,499) 8,236 Accounts payable and accrued payrolls 18,739 (21,356) 53,971 Postretirement benefits 8,578 19,770 33,531 Other long-term liabilities 46,785 24,455 22,419 Other, net (59,437) (39,172) (24,092) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 395,384 352,761 347,706 - -------------------------------------------------------------------------------------------------------------------- Investing activities: Purchases of property, plant and equipment (245,258) (212,179) (164,193) Investments in affiliated companies (56,925) (15,321) (42,395) Acquisition of medical diagnostics businesses (212,270) -- -- Proceeds from disposals of property, plant and equipment 19,099 15,105 19,428 Other 18,696 6,293 4,055 - -------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (476,658) (206,102) (183,105) - -------------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds from issuance of long-term debt 401,538 6,912 469,776 Repayments of long-term debt, including redemption premiums (655,335) (73,429) (1,026,723) Net change in revolving credit facilities 622,559 (106,332) 124,768 Net change in other short-term debt 8,673 (13,627) (18,312) Purchases of treasury stock (310,654) -- -- Proceeds from exercise of stock options 7,644 4,069 -- Net proceeds from issuance of common stock -- -- 280,535 Minority partners' contributions to PRC venture 5,920 18,165 26,246 Financing costs and other (24,019) (10,355) (23,455) - -------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 56,326 (174,597) (167,165) Effect of exchange rate changes on cash and cash equivalents (5,979) (1,067) (1,481) - -------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (30,927) (29,005) (4,045) Cash and cash equivalents at beginning of period 59,699 88,704 92,749 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 28,772 $ 59,699 $ 88,704 ====================================================================================================================
See notes to consolidated financial statements. 28 31 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
American Standard Companies Inc. (Dollars in thousands) Foreign Currency Common Capital Subscriptions Treasury Accumulated Translation Stock Surplus Receivable Stock Deficit Effects Balance at December 31, 1994 $ 609 $ 194,236 $ (1,640) $ -- $(836,424) $(151,721) Net income -- -- -- -- 111,655 -- Income public offering of common stock 151 280,384 -- -- -- -- Other common stock issued 7 35,379 -- -- -- -- Common stock repurchased -- (781) -- -- -- -- 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 -- -- -- -- Other 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) Net income -- -- -- -- 96,223 -- Treasury stock purchased (70) -- -- (310,654) -- -- Stock options exercised including tax benefit 4 8,717 -- -- -- -- Other common stock issued and tax benefits -- 14,378 -- 1,101 -- -- Payments on subscriptions -- -- 334 -- -- -- Foreign currency translation -- -- -- -- -- (39,435) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 $ 720 $ 586,968 $ (61) $(309,553) $(675,264) $(212,593) ====================================================================================================================================
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 for commercial, institutional and residential buildings; bathroom and kitchen fixtures and fittings; and braking and control systems for medium-sized and heavy trucks, buses, trailers and utility vehicles. The Company has also recently formed a medical diagnostics group (see Note 3). Information on the Company's operations by segment and geographic area is included on pages 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 $4.2 million in 1997, $2.3 million in 1996, and $4.5 million in 1995. Revenue Recognition -- Sales are recorded when shipment occurs and title passes to a customer. Cash Equivalents -- Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. Inventories -- Inventory costs are determined principally by the use of the last-in, first-out (LIFO) method, and are stated at the lower of such cost or realizable value. Facilities -- The Company capitalizes costs, including interest during construction, of fixed asset additions, improvements, and betterments that add to productive capacity or extend the asset life. Maintenance and repair expenditures are charged against income as incurred. Significant investment grants are amortized into income over the period of benefit. Goodwill -- Goodwill is being amortized over 40 years. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Applying the criteria established by FAS 121, the Company concluded that certain assets and related goodwill of its Canadian, French and Mexican operating units were impaired. As a result, the Company recorded a non-cash charge of $235 million, approximately 90% of which was the write-down of goodwill, for which there was no tax benefit. This charge included $121 million for Air Conditioning Products' operations in Canada and France, and $114 million for Plumbing Products' operations in Canada and Mexico. The carrying value of goodwill for each business segment is reviewed if the facts and circumstances, such as significant declines in sales, earnings or cash flows or material adverse changes in the business climate, suggest that it may be impaired. If any impairment is indicated as a result of such reviews, the Company would measure it using techniques such as 30 33 comparing the undiscounted cash flow of the business to its book value including goodwill or by obtaining appraisals of the related business. Debt Issuance Costs -- The costs related to the issuance of debt are capitalized and amortized to interest expense using the effective interest method over the lives of the related debt. Warranties -- The Company provides for estimated warranty costs at the time of sale. Revenues from the sales of extended warranty contracts are deferred and amortized on a straight-line basis over the terms of the contracts. Warranty obligations beyond one year are included in other long-term liabilities. Postretirement Benefits -- Postretirement pension benefits are provided for substantially all employees of the Company, both in the United States and abroad. In the United States the Company also provides various postretirement health care and life insurance benefits for certain of its employees. Such benefits are accounted for on an accrual basis using actuarial assumptions. Depreciation -- Depreciation and amortization are computed on the straight-line method based on the estimated useful life of the asset or asset group. Research and Development Expenses -- Research and development costs are expensed as incurred. The Company expended approximately $161 million in 1997, $160 million in 1996, and $146 million in 1995 for research activities and product development and for product engineering. Expenditures for research and product development only were $112 million, $101 million and $85 million in the respective years. Certain expenditures for 1996 and 1995 have been reclassified to conform with the 1997 classification. Income Taxes -- Deferred income taxes are determined on the liability method, and are recognized for all temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. No provision is made for U.S. income taxes applicable to undistributed earnings of foreign subsidiaries that are indefinitely reinvested. Advertising Expense-- The cost of advertising is expensed as incurred. The Company incurred $111 million, $88 million and $92 million of advertising costs in 1997, 1996 and 1995, respectively. Earnings Per Share -- Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"), which simplifies the standards for computing earnings per share, changes the manner of presentation and requires the restatement of all prior periods presented. Accordingly, all per share data reported herein have been presented in conformity with FAS 128. Basic earnings per share have been computed using the weighted average number of common shares outstanding. For 1997 and 1995 the average number of outstanding common shares used in computing diluted earnings per share included 2,366,266 and 1,152,024 average incremental shares, respectively, from the assumed exercise of stock options issued under the Company's Stock Incentive Plan (see Note 10). For 1996, the computation of diluted earnings per share excludes 1,767,399 incremental shares because inclusion would have been antidilutive to the per-share loss before extraordinary item and the per-share net loss. 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. 31 34 NOTE 3. ACQUISITION OF MEDICAL DIAGNOSTICS BUSINESSES In January 1997 the Company announced formation of its Medical Systems Segment to pursue initiatives in the medical diagnostics field. For the last several years the Company has supported the development of two medical diagnostic ventures focusing on test instruments using laser technology and reagents. On June 30, 1997, the Company acquired the European medical diagnostics business of Sorin Biomedica S.p.A., an affiliate of the Fiat Group, and all the outstanding shares of INCSTAR Corporation, a company based in Stillwater, Minnesota, in which Sorin Biomedica S.p.A. owned a 52% interest. The aggregate cost of the acquisitions was approximately $212 million, including fees and expenses, and was funded with borrowings under the 1997 Credit Agreement. This transaction has been accounted for as a purchase and, in connection therewith, a portion of the purchase price totaling $90 million was allocated to the value of in-process research and development and was charged to operations in the third quarter of 1997. Approximately $64 million of goodwill resulted after allocation of the purchase price to the fair value of assets acquired and liabilities assumed. NOTE 4. OTHER EXPENSE Other income (expense) was as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Interest income $ 5.9 $ 6.2 $ 8.9 Royalties .7 3.3 4.1 Equity in net income of unconsolidated joint ventures 11.9 2.6 7.1 Minority interest (10.1) (11.7) (12.2) Accretion expense (26.7) (29.3) (36.5) Other, net (9.0) .6 (11.9) - -------------------------------------------------------------------------------- $(27.3) $(28.3) $(40.5) ================================================================================
NOTE 5. POSTRETIREMENT BENEFITS The Company sponsors postretirement pension benefit plans covering substantially all employees, including an Employee Stock Ownership Plan (the "ESOP") for the Company's U.S. salaried employees and certain U.S. hourly employees. The ESOP is an individual account, defined contribution plan. Shares of 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 has funded basic and matching allocations to the ESOP accounts through weekly contributions of cash since May 1997. Prior to that date, the Company funded the ESOP with shares of 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, 1997, funded plan assets related to pensions were held primarily in fixed income and equity funds. Postretirement health and life insurance benefits are funded as incurred. 32 35 The Company's postretirement plans' funded status and amounts recognized in the balance sheet at December 31, 1997 and 1996, were:
==================================================================================================================================== 1997 1997 1997 1996 1996 1996 (Dollars in millions) Assets in Accumulated Assets in Accumulated Excess of Benefit Health Excess of Benefit Health Accumulated Obligations and Life Accumulated Obligations and Life Benefit in Excess of Insurance Benefit in Excess Insurance Obligations Assets Benefits Obligations of Assets Benefits - ------------------------------------------------------------------------------------------------------------------------------------ Actuarial present value of benefit obligations: Vested $518.9 $259.1 $ -- $136.8 $604.3 $ -- Non-vested 26.9 17.4 -- 5.5 43.9 -- - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated benefit obligations 545.8 276.5 -- 142.3 648.2 -- Additional amounts related to projected pay increases 28.1 32.7 -- 24.6 41.4 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total projected benefit obligations 573.9 309.2 191.4 166.9 689.6 179.1 - ------------------------------------------------------------------------------------------------------------------------------------ Assets and book reserves relating to such benefits: Market value of funded assets 607.5 20.1 -- 208.2 343.4 -- Reserve (asset) for postretirement benefits net of recognized overfunding (2.6) 295.4 172.2 (42.3) 362.6 165.7 - ------------------------------------------------------------------------------------------------------------------------------------ 604.9 315.5 172.2 165.9 706.0 165.7 - ------------------------------------------------------------------------------------------------------------------------------------ Assets and book reserves in excess of (less than) projected benefit obligations $ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4) ==================================================================================================================================== Consisting of: Unrecognized prior services benefit (cost) $(29.9) $ (2.0) $ 9.5 $ (8.4) $(24.2) $ 7.2 Unrecognized net gain (loss) from changes in actuarial assumptions and experience 60.9 8.3 (28.7) 7.4 40.6 (20.6) - ------------------------------------------------------------------------------------------------------------------------------------ $ 31.0 $ 6.3 $(19.2) $ (1.0) $ 16.4 $(13.4) ====================================================================================================================================
At December 31, 1997, the Company's funded domestic plans had assets of $386 million that were in excess of accumulated benefit obligations of $378 million, whereas in 1996, accumulated benefit obligations were in excess of assets. As a result, the table above reflects the funded domestic plans in Assets in Excess of Accumulated Benefit Obligations in 1997 and in Accumulated Benefit Obligations in Excess of Assets in 1996. At December 31, 1997, the projected benefit obligation related to health and life insurance benefits for active employees was $73 million and for retirees was $118.4 million. 33 36 The projected benefit obligation for postretirement benefits was determined using the following assumptions:
=========================================================================================================== 1997 1997 1996 1996 Domestic Foreign Domestic Foreign - ----------------------------------------------------------------------------------------------------------- Discount rate 7.00% 3.75%-7.00% 7.50% 4.25%-8.00% Long-term rate of inflation 2.80% .05%-3.80% 2.80% .05%-3.80% Merit and promotion increase 1.70% 1.70% 1.70% 1.70% Rate of return on plan assets 9.00% 4.50%-8.25% 9.00% 4.50%-8.25% - -----------------------------------------------------------------------------------------------------------
The weighted-average annual assumed rate of increase in the health care cost trend rate is 6% for 1998 and is assumed to decrease gradually to 5% for 1999 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, a change in the assumed rate of one percentage point for each future year would change the accumulated postretirement benefit obligation as of December 31, 1997, by $13.4 million and the annual postretirement cost by $2.6 million.
Total postretirement costs were: ================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Pension benefits $ 39.5 $ 41.7 $ 48.3 Health and life insurance benefits 17.2 17.4 15.5 - -------------------------------------------------------------------------------- Defined benefit plan cost 56.7 59.1 63.8 Defined contribution plan cost, principally ESOP 32.1 31.2 27.4 - -------------------------------------------------------------------------------- Total postretirement cost, including accretion expense $ 88.8 $ 90.3 $ 91.2 ================================================================================
Postretirement cost had the following components:
==================================================================================================================================== 1997 1997 1996 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, (Dollars in millions) Health & Health & Health & Pension Life Ins. Pension Life Ins. Pension Life Ins. Benefits Benefits Benefits Benefits Benefits Benefits Service cost-benefits earned during the period $ 26.3 $ 4.7 $ 24.5 $ 4.7 $ 24.6 $ 3.3 Interest cost on the projected benefit obligation 53.9 12.9 55.6 12.5 58.1 12.8 Less assumed return on plan assets: Actual return on plan assets (107.4) -- (64.0) -- (107.1) -- Excess deferred 63.2 -- 22.7 -- 69.7 -- - ------------------------------------------------------------------------------------------------------------------------------------ (44.2) -- (41.3) -- (37.4) -- Other, including amortization of prior service cost 3.5 (.4) 2.9 .2 3.0 (.6) - ------------------------------------------------------------------------------------------------------------------------------------ Defined benefit plan cost $ 39.5 $ 17.2 $ 41.7 $ 17.4 $ 48.3 $ 15.5 ==================================================================================================================================== Accretion expense reclassified to "other expense" $ 13.8 $ 12.9 $ 16.8 $ 12.5 $ 23.7 $ 12.8 ====================================================================================================================================
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:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Income (loss) before income taxes and extraordinary item: Domestic $145.7(a) $162.6 $ -- Foreign 91.1(a) (105.0)(b) 226.9 - -------------------------------------------------------------------------------- Pre-tax income $236.8 $ 57.6 $226.9 ================================================================================ Provision (benefit) for income taxes: Current: Domestic $ 96.2 $ 48.2 $ 15.7 Foreign 67.5 70.2 69.6 - -------------------------------------------------------------------------------- 163.7 118.4 85.3 Deferred: Domestic (42.9) (4.2) (7.3) Foreign (3.9) (9.9) 7.1 - -------------------------------------------------------------------------------- (46.8) (14.1) (.2) - -------------------------------------------------------------------------------- Total provision $116.9 $104.3 $ 85.1 ================================================================================
(a) Includes $90 million write-off of purchased research and development: domestic $32 million; foreign $58 million. (b) Includes asset impairment loss of $235 million. A reconciliation between the actual income tax expense provided and the income taxes computed by applying the statutory federal income tax rate of 35% in 1997, 1996 and 1995 to the income (loss) before income taxes and extraordinary item is as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Tax provision at statutory rate $ 82.9 $ 20.2 $ 79.4 Nondeductible write-off of purchased research and development 31.6 -- -- Nondeductible asset impairment loss -- 82.3 -- Nondeductible goodwill amortization 8.3 8.3 11.9 Rate differences and withholding taxes related to foreign operations 14.6 5.5 19.2 State tax provision (benefit) 1.8 1.3 (.5) Foreign exchange gain (loss) (1.1) (.6) 1.2 Decrease in valuation allowance (27.4) (13.0) (31.3) Other, net 6.2 .3 5.2 - -------------------------------------------------------------------------------- Total provision $116.9 $104.3 $ 85.1 ================================================================================
The decreases in the valuation allowance of $27.4 million in 1997 and $13 million in 1996 were net of valuation allowances of $ 12.4 million in 1997 and $10.8 million in 1996, respectively, provided on future tax benefits on certain foreign operations. In addition to the 1995 valuation allowance decrease shown above, a valuation allowance of $10.5 million in 1995 was provided for the tax benefits related to the extraordinary loss on retirement of debt (see Note 9). 35 38 The following table details the gross deferred tax liabilities and assets and the related valuation allowances:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax liabilities: Facilities (accelerated depreciation, capitalized interest and purchase accounting differences) $115.4 $127.3 Inventory (LIFO and purchase accounting differences) (1.9) 1.0 Employee benefits 6.7 8.1 Foreign investments 50.1 50.1 Other 46.5 37.9 - -------------------------------------------------------------------------------- 216.8 224.4 - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits 136.8 134.1 Warranties 66.0 61.1 Alternative minimum tax -- 4.7 Foreign tax credits and net operating losses 57.6 45.2 Reserves 49.9 54.8 Other 9.9 8.5 Valuation allowances (57.6) (85.0) - -------------------------------------------------------------------------------- 262.6 223.4 - -------------------------------------------------------------------------------- Net deferred tax assets (liabilities) $ 45.8 $ (1.0) ================================================================================
In 1997 and 1996 the valuation allowance with respect to domestic deferred tax assets was reduced as a result of the reversal of existing domestic deferred tax benefits and higher levels of taxable income in the U.S. in 1997 and 1996 and projected taxable income in the future. Deferred tax assets related to foreign tax credits, net operating loss carryforwards and future tax deductions have been reduced by a valuation allowance since realization is dependent in part on the generation of future foreign source income as well as on income in the legal entity which gave rise to tax losses. Other deferred tax assets have not been reduced by valuation allowances because of carrybacks and existing deferred tax credits which reverse in the carryforward period. The foreign tax credits and net operating losses are available for utilization in future years. In some tax jurisdictions the carryforward period is limited to as little as five years; in others it is unlimited. As a result of the allocation of purchase accounting (principally goodwill) to foreign subsidiaries, the book basis in the net assets of the foreign subsidiaries exceeds the related U.S. tax basis in the subsidiaries' stock. Such investments are considered permanent in duration, and accordingly no deferred taxes have been provided on such differences, which are significant. It is impracticable because of the complex legal structure of the Company and the numerous tax jurisdictions in which the Company operates to determine such deferred taxes. Cash taxes paid were $105 million, $135 million and $90 million, in the years 1997, 1996 and 1995, respectively. In connection with examinations of the tax returns of the Company's German subsidiaries for the years 1984 through 1990, German tax authorities raised questions regarding the treatment of certain significant matters. In prior years the Company paid approximately $17 million (at December 31, 1997, exchange rates) of a disputed German income tax. A suit is pending to obtain a refund of this tax. In March 1996 the Company received an assessment, which it has appealed, for additional taxes of approximately $61 million (at December 31, 1997, exchange rates) (principally relating to the period from 1988 to 1990), plus interest, for the tax return years then under audit. In addition, significant transactions similar to those which gave rise to such assessment occurred in years subsequent to 1990. In June 1997, the German tax authorities commenced an audit of the years 1991 through 1994. Having assessed additional taxes for the 1988-1990 period, the German tax authorities might, after completing the current audit, propose tax adjustments for the 1991-1994 period that could be as much as 50% higher. In addition, based on recent preliminary indications, the Company believes that the German tax authorities are considering proposing additional tax adjustments of approximately $44 million (at December 31, 1997, exchange rates) for the years 1991 to 1994 with respect to the substantial repayment of an intercompany financing instrument. The Company is currently unable to predict the time that or extent to which an assessment, if any, in respect of such potential adjustment would be made. The Company, on the basis of the opinion of legal counsel, believes the German tax returns are substantially correct as filed and any such adjustments would be inappropriate and intends to vigorously contest any adjustments which have been or may be assessed. Accordingly, the Company has not recorded any loss contingency at December 31, 1997, with respect to such matters. 36 39 The Company made a partial security deposit in respect of the additional taxes and interest assessed in March 1996. Approximately $13 million was paid in January 1997 and, in addition, the Company has applied approximately $7 million of tax refunds due it with respect to the 1996 tax year to the security deposit. The tax authorities have granted a staying order for the balance of the additional taxes and interest assessed in March 1996, under which no further payment or other security will be required from the Company before litigation of the matter or a final resolution. During litigation, the Company would expect renewal of the staying order. Upon final resolution, the Company will be obligated to pay any tax liability in excess of the security deposit or the Company will receive a refund of any excess security deposit (with interest accruing on the additional tax from the date of the assessment or the refund amount from the date of deposit, respectively). As a result of German tax legislation, first effective in 1994, the Company's tax provision in Germany was higher in 1995, 1996 and 1997 and will continue to be in the future. As a result of this German tax legislation and the related additional tax provisions, the Company believes its tax exposure to the major issues under the audit referred to above will be reduced starting in 1994 and continuing thereafter. NOTE 7. INVENTORIES The components of inventories are as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Finished products $255.0 $235.8 Products in process 86.8 77.7 Raw materials 89.0 95.5 - -------------------------------------------------------------------------------- Inventories at cost $430.8 $409.0 ================================================================================
The carrying cost of inventories approximates current cost. NOTE 8. FACILITIES The components of facilities, at cost, are as follows:
================================================================================ Year Ended December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Land $ 72.0 $ 79.0 Buildings 442.2 382.3 Machinery and Equipment 1,093.3 971.0 Improvements in progress 109.2 150.2 - -------------------------------------------------------------------------------- Gross facilities 1,716.7 1,582.5 Less: accumulated depreciation 577.5 576.5 - -------------------------------------------------------------------------------- Net facilities $1,139.2 $1,006.0 ================================================================================
NOTE 9. DEBT In January 1997, the Company entered into the 1997 Credit Agreement, an amendment and restatement of the 1995 Credit Agreement. The 1997 Credit Agreement, which expires in 2002, provides American Standard Inc. and certain subsidiaries (the "Borrowers") with senior secured credit facilities aggregating $1.75 billion to all Borrowers as follows: (a) a $750 million U.S. dollar revolving credit facility and a $625 million multi-currency revolving credit facility (the "Revolving Facilities") and (b) a $375 million multi-currency periodic access credit facility (the "Periodic Access Facility"). The 1997 Credit Agreement provides lower interest rates, significantly increased borrowing capacity, less restrictive covenants and no scheduled principal payments until maturity in 2002. Each of the outstanding revolving loans is due at the end of each interest period (a maximum of six months). The Company may, however, concurrently reborrow the outstanding obligations subject to compliance with applicable conditions of the 1997 Credit Agreement. Borrowings under the Revolving Facilities and the Periodic Access Facility bear interest at the London interbank offered rate ("LIBOR") plus 0.875%, which is .375% lower than rates under the 1995 Credit Agreement. This initial rate is subject to adjustment and may be reduced in the event the Company attains improved financial ratios. In July 1997, the Company achieved an interest rate reduction of 0.125%. Excluding the 1997 Credit Agreement which expires in 2002, the amounts of long-term debt maturing in years 1998 through 2002 are: 1998-$30 million; 1999-$166 million; 2000-$15 million; 2001-$212 million and 2002 - $11 million. 37 40 On August 1, 1997, American Standard Companies Inc. and its wholly-owned subsidiary American Standard Inc. jointly filed a shelf registration statement (the "Shelf Registration") with the Securities and Exchange Commission covering $1 billion of debt securities to be offered by American Standard Inc. and unconditionally guaranteed by American Standard Companies Inc. On January 15, 1998, American Standard Inc. issued $350 million of 7 3/8% Senior Notes Due 2008 and on February 13, 1998, issued $125 million of 7 1/8% Senior Notes Due 2003 and $275 million of 7 5/8% Senior Notes Due 2010 (collectively, the "Offerings") under the Shelf Registration, the proceeds of which aggregated $737 million, net of underwriting discounts and expenses. The Company currently intends to apply the net proceeds of the Offerings, together with funds available under the 1997 Credit Agreement, to the redemption (the "Redemption"), on or after June 1, 1998, of its $740.2 million principal amount of 10 1/2% Senior Subordinated Discount Debentures and $200 million principal amount of its 9 7/8% Senior Subordinated Notes. On or after June 1, 1998, the Senior Subordinated Discount Debentures are redeemable at a price of 104.66% of the principal amount, plus accrued interest and the Senior Subordinated Notes are redeemable at a price of 102.82% of the principal amount, plus accrued interest. Pending the Redemption, the net proceeds of the Offerings were used to reduce borrowings (but not commitments) under the revolving portion of the Company's 1997 Credit Agreement. Unless amended or waived, the provisions of the 1997 Credit Agreement would require the Company to apply the proceeds of the Offerings permanently to reduce the total amount available under the 1997 Credit Agreement, unless the proceeds of the Offerings are applied to the Redemption prior to December 31, 1998, or to redeem up to $150 million of certain other indebtedness prior to June 1, 1999. Although the Company intends to redeem the 10 1/2% Senior Subordinated Discount Debentures, there can be no assurance that market or economic conditions or the Company's business strategy will not change and, therefore, there can be no assurance that the proceeds of the Offerings will be applied towards the Redemption. On May 15, 1997, the Company redeemed the $250 million aggregate principal amount of its 11 3/8% Senior Debentures (at a redemption price of 105.69% of the principal amount plus interest accrued to the redemption date) with lower-rate borrowings under the 1997 Credit Agreement. As a result of the redemption of debt in 1997 and 1995, the Consolidated Statement of Operations included extraordinary charges of $24 million (net of taxes of $6 million) and $30 million (with no tax benefit), respectively (including call premiums and the write-off of deferred debt issuance costs - see Note 6). In addition, it is expected that the first half of 1998 will include an extraordinary charge of approximately $50 million as a result of the planned redemption of the 10 1/2% Senior Subordinated Discount Debentures and the 9 7/8% Senior Subordinated Notes, both of which are callable on or after June 1, 1998. Short-term -- The Revolving Facilities under the 1997 Credit Agreement provide for aggregate borrowings of up to $1.375 billion for general corporate purposes, of which up to $500 million may be used for the issuance of letters of credit and $40 million of which is available for same-day short-term borrowings. The Company pays a commitment fee of 0.20% per annum on the unused portion of the Revolving Facilities and a fee of 0.875% per annum plus issuance fees for letters of credit. At December 31, 1997, there were $672 million of borrowings outstanding under the Revolving Facilities and $61 million of letters of credit. Remaining availability under the Revolving Facilities was $642 million, which is available to redeem certain outstanding public debt securities of American Standard Inc. and for other general corporate purposes. Borrowings under the Revolving Facilities by their terms are short-term. Average borrowings under the revolving credit facilities available under bank credit agreements for 1997, 1996 and 1995 were $574 million, $215 million and $278 million, respectively. Other short-term borrowings are available outside the United States under informal credit facilities and are typically in the form of overdrafts. At December 31, 1997, the Company had $40 million of such foreign 38 41 short-term debt outstanding at an average interest rate of 11% per annum. The Company also had an additional $81 million of unused foreign facilities. These facilities may be withdrawn by the banks at any time. In 1997 the Company also established credit facilities for its operations in China totaling $58 million, of which $6 million was outstanding as of December 31, 1997, with remaining availability of $41 million after $11 million letters of credit usage. Average short-term borrowings for 1997, 1996 and 1995 were $639 million, $284 million and $334 million respectively, at weighted average interest rates of 6.38%, 7.33% and 7.85%, respectively. Total short-term borrowings outstanding at December 31, 1997, 1996 and 1995 were $718 million, $109 million and $240 million, respectively, at weighted average interest rates of 6.0%, 7.5%, and 7.9%, respectively. Long-term -- Long-term debt was as follows:
================================================================================ At December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Credit Agreements $ 354.1 $ 363.6 9 1/4% sinking fund debentures, due in installments from 1998 to 2016 127.5 150.0 10 7/8% senior notes due 1999 150.0 150.0 11 3/8% senior debentures due 2004 -- 250.0 9 7/8% senior subordinated notes due 2001 200.0 200.0 10 1/2% senior subordinated discount debentures (net of unamortized discount of $23.9 million in 1997; $77.5 million in 1996) due in installments from 2003 to 2005 686.7 633.1 Other long-term debt 63.0 67.7 - -------------------------------------------------------------------------------- 1,581.3 1,814.4 Less current maturities 30.5 72.6 - -------------------------------------------------------------------------------- $1,550.8 $1,741.8 ================================================================================
Interest costs capitalized as part of the cost of constructing facilities for the years ended December 31, 1997, 1996, and 1995, were $3.8 million, $3.9 million and $4.0 million, respectively. Cash interest paid for those same years on all outstanding indebtedness amounted to $135 million, $140 million and $161 million, respectively. The U.S. Dollar equivalent of the 1997 and 1995 Credit Agreement loans and the effective weighted average interest rates were:
================================================================================ At December 31, (Dollars in millions) 1997 1996 - -------------------------------------------------------------------------------- Periodic access loans: Deutschemark loans at 4.44% in 1997; 4.56% in 1996 $ 324.5 $ 263.7 British sterling loans at 7.44% in 1996 -- 5.1 Dutch guilder loans at 4.44% in 1997; 4.31% in 1996 29.6 24.8 - -------------------------------------------------------------------------------- Total periodic access loans 354.1 293.6 Term loans: U.S. dollar loans at 6.63% in 1996 -- 70.0 - -------------------------------------------------------------------------------- Total Credit Agreement long-term loans 354.1 363.6 Revolver loans at 5.7% in 1997; 5.6% in 1996 672.0 67.2 - -------------------------------------------------------------------------------- Total Credit Agreement loans $1,026.1 $ 430.8 ================================================================================
The 9 1/4% Sinking Fund Debentures are redeemable at the Company's option, in whole or in part, at redemption prices declining from 103.7% in 1998 to 100% in 2006 and thereafter. The 10 7/8% Senior Notes are not redeemable by the Company. The 9 7/8% Senior Subordinated Notes may be redeemed at the Company's option, in whole or in part, on or after June 1, 1998, at redemption prices declining from 102.82% in 1998 to 100% on June 1, 2000, and thereafter. The 10 1/2% Senior Subordinated Discount Debentures may be redeemed at the Company's option, in whole or in part, on or after June 1, 1998, at redemption prices declining from 104.66% in 1998 to 100% on June 1, 2002, and thereafter. The payment of the principal and interest on the 9 7/8% Senior Subordinated Notes and on the 10 1/2% Senior Subordinated Discount Debentures is subordinated in right of payment to the payment when due of all Senior Debt (as defined in the related indenture) of the Company, including all indebtedness under the credit agreements, the 9 1/4% Sinking Fund Debentures and the 10 7/8% Senior Notes. 39 42 At December 31, 1997, the Company held swap agreements to hedge the redemption value of a portion of its 10 1/2% Senior Subordinated Discount Debentures and effectively converted such debt to an average fixed interest rate of approximately 7%. The redemption value hedged by the swaps is the fair value of the debt at the commencement of the swaps. The swaps mature in June 1998 and have a notional value of $147 million, which approximates their fair value as of December 31, 1997. In anticipation of the Offerings under the Company's 1997 Shelf Registration, at December 31, 1997, the Company held forward contracts to hedge the risk of interest rate fluctuations in advance of the issuance of Senior Notes. Those contracts, which had a notional value of $350 million (and a fair value of $368 million at December 31, 1997), effectively fixed the interest rate on the 7 3/8% Senior Notes at 7.89%. Similarly, in February 1998 the Company entered into forward contracts (with a notional value of $150 million) to hedge interest rate fluctuations, which had little effect on the interest rate on the 7 1/8% and 7 5/8% Senior Notes issued February 13, 1998. In addition, in anticipation of expected future offerings under the 1997 Shelf Registration, the Company has entered similar forward contracts with a notional value of $150 million to hedge interest rates. The swap and forward contract counterparties are major financial institutions and the Company does not anticipate non-performance by counterparties. Obligations under the 1997 Credit Agreement are guaranteed by the Company, American Standard Inc. and significant domestic subsidiaries of American Standard Inc. (with foreign borrowings also guaranteed by certain foreign subsidiaries) and are secured by a pledge of the stock of American Standard Inc. and its subsidiaries. The 1997 Credit Agreement contains various covenants that limit, among other things, mergers and asset sales, indebtedness, dividends on and redemption of capital stock of the Company, voluntary prepayment of certain other indebtedness of the Company (including its outstanding debentures and notes), rental expense, liens, capital expenditures, investments or acquisitions, the use of proceeds from asset sales, intercompany transactions and transactions with affiliates and certain other business activities. The covenants also require the Company to meet certain financial tests. The Company believes it is currently in compliance with the covenants contained in the 1997 Credit Agreement. The indentures related to the Company's debentures and notes contain various covenants which, among other things, limit debt and preferred stock of the Company and its subsidiaries, dividends on and redemption of capital stock of the Company and its subsidiaries, redemption of certain subordinated obligations of the Company, the use of proceeds from asset sales and certain other business activities. The Company believes it is currently in compliance with the covenants of those indentures. NOTE 10. CAPITAL STOCK In the first quarter of 1995 American Standard Companies Inc. sold 15,112,300 shares of its common stock at $20 per share in its initial public offering (the "IPO"), yielding net proceeds of $281 million (including proceeds from the exercised portion of the underwriters' over-allotment option and after deducting underwriting discounts and expenses) which were used to reduce indebtedness. In December 1996, the Company, Kelso & Company, L.P. ("Kelso") and ASI Partners entered into an agreement (the "Stock Disposition Agreement") providing for: (i) the sale by ASI Partners of 12,429,548 shares of 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 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 purchased 4,628,755 shares of common stock from ASI partners for $208 million (the "Share Repurchase"). The Company financed the Share Repurchase (to be held as treasury shares) with borrowings under the 1997 Credit Agreement. The Company had previously completed a secondary offering in September 1995 (together with the Secondary Offering, the "Secondary Offerings") for 22,500,000 shares of its common stock, substantially all of which were owned by ASI Partners. After the Secondary Offerings, the Share Distribution and the Share Repurchase, ASI Partners owned no common stock of the Company and is no longer entitled to designate any of the Company's directors. All of the shares sold in the Secondary Offerings were previously issued and outstanding shares, and the Company received no proceeds therefrom. 40 43 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, and February 11, 2002. The estimated fair value of these warrants at the date issued was $9.34 per share using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. On October 6, 1997, the Company completed its open-market share repurchase program commenced in May 1997 pursuant to which 2,320,900 shares of its common stock were purchased for $100 million, and will be held as treasury stock. 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 and other incentive bonus plans is 7,604,475. The awards vest ratably over three years on the anniversary date of the awards and are exercisable over a period of ten years. A summary of stock option activity and related information for 1995, 1996 and 1997 follows:
================================================================================ Weighted- Weighted- Average Average Exercise Fair Value Shares Price of Grants - -------------------------------------------------------------------------------- Outstanding - December 31, 1994 -- -- Granted 5,006,000 $ 20.01 $ 7.51 Exercised -- -- Forfeited (32,000) 20.00 - -------------------------------------------------------------------------------- Outstanding - December 31, 1995 4,974,000 20.01 Granted 18,000 32.66 $ 12.26 Exercised (230,483) 20.00 Forfeited (60,343) 20.00 - -------------------------------------------------------------------------------- Outstanding - December 31, 1996 4,701,174 20.06 Granted 1,273,250 41.33 $ 14.13 Exercised (396,224) 20.00 Forfeited (58,515) 22.36 - -------------------------------------------------------------------------------- Outstanding - December 31, 1997 5,519,685 24.93 Exercisable at end of year: 1995 None -- 1996 1,422,539 20.01 1997 2,661,450 20.04
41 44 In addition, on February 2, 1998, the Company granted awards in the form of options to purchase 1,419,750 shares. Exercise prices for options outstanding as of December 31, 1997, ranged from $20 to $47.22. The weighted-average remaining contractual life of those options is 7.5 years. As of December 31, 1997, there were 1,458,083 shares available for grant under the plan and other incentive bonus plans. The Company has elected to follow APB 25 and related interpretations in accounting for stock options and accordingly has recognized no compensation expense. Had compensation cost been determined based upon the fair value at the grant date for awards consistent with the methodology prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net income and net income per diluted share in 1997 would have decreased by $ 12.1 million and $.16, respectively; the net loss and net loss per diluted share in 1996 would have increased by $8.2 million and $.10, respectively; and net income and net income per diluted share in 1995 would have decreased by $7.4 million and $.10, respectively. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.6% in 1997 and 6.3% in 1996 and 1995; volatility of 25% in 1997 and 23% in 1996 and 1995; an expected life of 5 years in 1997 and 6 years in 1996 and 1995; and a dividend yield of zero. These estimated expense amounts are not necessarily indicative of amounts in years beyond 1997 because they are heavily influenced by the large number of options granted in 1995 in connection with the IPO which fully vest at the beginning of 1998. NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments at December 31, 1997, approximate carrying amounts except as follows:
================================================================================ (Dollars in millions) Carrying Fair Amount Value - -------------------------------------------------------------------------------- 10 7/8% senior notes $150 $158 9 7/8% senior subordinated notes 200 208 10 1/2% senior subordinated discount debentures 687 722 9 1/4% sinking fund debentures 150 156
The fair values presented above are estimates as of December 31, 1997, and are not necessarily indicative of amounts for which the Company could settle currently or indicative of the intent or ability of the Company to dispose of or liquidate such instruments. The fair values of the Company's 1997 Credit Agreement loans, which approximate their carrying values, were estimated using indicative market quotes obtained from a major bank. The fair values of senior notes, senior debentures, senior subordinated notes, senior subordinated discount debentures and sinking fund debentures were based on indicative market quotes obtained from a major securities dealer. The fair values of other loans approximate their carrying value. NOTE 12. COMMITMENTS AND CONTINGENCIES Future minimum rental commitments under the terms of all noncancellable operating leases in effect at December 31, 1997, are: 1998 - $59 million; 1999 - $48 million; 2000- $37 million; 2001 - $26 million; 2002 - $23 million and thereafter - $30 million. Net rental expenses for operating leases were $64 million, $70 million and $59 million for the years ended December 31, 1997, 1996, and 1995, respectively. The Company and certain of its subsidiaries are parties to a number of pending legal and tax proceedings. The Company is also subject to federal, state and local environmental laws and regulations and is involved in environmental proceedings concerning the investigation and remediation of numerous sites. In those instances where it is probable as a result of such proceedings that the Company will incur costs which can be reasonably determined, the Company has recorded a liability. The Company believes that these legal, tax and environmental proceedings will not have a material adverse effect on its consolidated financial position, cash flows or results of operations. The tax returns of the Company's German subsidiaries are currently under examination by the German tax authorities (see Note 6). NOTE 13. SEGMENT DATA Identifiable assets as of December 31, 1997, 1996, 1995, 1994 and 1993 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 Year Ended December 31, (Dollars in millions) 1997 1996 (d) 1995 (d) 1994 (d) 1993 (d) Sales-Geographic distribution: United States $ 3,002 $ 2,856 $ 2,526 $ 2,238 $ 1,914 Europe 1,955 2,050 1,951 1,600 1,371 Other 1,194 1,041 860 714 617 Eliminations (143) (142) (116) (95) (72) - ------------------------------------------------------------------------------------------------------------------------------------ Total sales $ 6,008 $ 5,805 $ 5,221 $ 4,457 $ 3,830 ==================================================================================================================================== Operating income-Geographic distribution: United States $ 310 $ 323 $ 216 $ 146 $ 101 Europe 109 102 242 147 130 Other 81 (87) 69 57 48 - ------------------------------------------------------------------------------------------------------------------------------------ Total operating income $ 500(a) $ 338(b) $ 527 $ 350 $ 279 ==================================================================================================================================== Assets Air Conditioning Products $ 1,579 $ 1,480 $ 1,432 $ 1,223 $ 1,167 Plumbing Products 1,097 1,066 1,088 957 960 Automotive Products 701 775 805 755 652 Medical Systems 170 6 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total identifiable assets $ 3,547 $ 3,327 $ 3,325 $ 2,935 $ 2,779 ==================================================================================================================================== Geographic distribution: United States $ 1,372 $ 1,186 $ 1,075 $ 1,025 $ 1,013 Europe 1,413 1,460 1,557 1,343 1,196 Other 762 681 693 567 570 - ------------------------------------------------------------------------------------------------------------------------------------ Total identifiable assets 3,547 3,327 3,325 2,935 2,779 Prepaid charges 23 34 39 64 78 Future income tax benefits 41 67 30 22 25 Cash and cash equivalents 29 60 89 93 53 Corporate assets 29 32 37 42 52 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 3,669 $ 3,520 $ 3,520 $ 3,156 $ 2,987 ==================================================================================================================================== Goodwill included in assets: Air Conditioning Products $ 196 $ 203 $ 334 $ 331 $ 337 Plumbing Products 229 247 302 295 296 Automotive Products 350 419 446 427 393 Medical Systems 69 6 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total goodwill $ 844 $ 875 $ 1,082 $ 1,053 $ 1,026 ==================================================================================================================================== Capital expenditures including investments in affiliates: Air Conditioning Products $ 102 $ 93 $ 70 $ 45 $ 38 Plumbing Products 154 88 93 55 46 Automotive Products 42 46 44 30 14 Medical Systems 4 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total capital expenditures $ 302 $ 227 $ 207 $ 130 $ 98 ==================================================================================================================================== Depreciation and amortization: Air Conditioning Products $ 63 $ 51 $ 51 $ 51 $ 53 Plumbing Products 53 50 50 64(c) 49 Automotive Products 43 43 42 39 35 Medical Systems 5 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total depreciation and amortization $ 164 $ 144 $ 143 $ 154 $ 137 ====================================================================================================================================
(a) Includes $90 million write-off of purchased research and development, of which $58 million is in Europe and $32 million in the United States (see Note 3). (b) Includes asset impairment charge of $235 million, of which $166 million is included in Other and $69 million in Europe (see Note 2). (c) Includes an asset loss provision of $14 million. (d) Amounts related to Medical Systems for years 1993 through 1996 have been reclassified to conform to the 1997 presentation. 43 46
QUARTERLY DATA (UNAUDITED) 1997 - ------------------------------------------------------------------------------------------------------------ (Dollars in millions, except share data) First (a) Second Third (b) Fourth Sales $1,360.7 $1,589.3 $1,519.0 $1,538.6 Cost of sales 1,017.5 1,163.2 1,138.2 1,163.0 Income before income taxes and extraordinary item 52.9 113.9 (2.5) 72.5 Income taxes 19.2 40.4 31.0 26.3 - ------------------------------------------------------------------------------------------------------------ Income before extraordinary item 33.7 73.5 (33.5) 46.2 Extraordinary loss on retirement of debt (8.5) (15.1) -- -- - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 25.2 $ 58.4 $ (33.5) $ 46.2 ============================================================================================================ Per common share: Basic Income (loss) before extraordinary item $ .44 $ .99 $ (.46) $ .64 Extraordinary loss on retirement of debt (.11) (.20) -- -- - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ .33 $ .79 $ (.46) $ .64 ============================================================================================================ Diluted Income (loss) before extraordinary item $ .43 $ .96 $ (.46) $ .62 Extraordinary loss on retirement of debt (.11) (.20) -- -- - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ .32 $ .76 $ (.46) $ .62 ============================================================================================================ Average number of common shares (thousands): Basic 76,296 74,034 72,985 71,947 Diluted 78,757 76,565 72,985 74,020 Range of prices on common stock: High $ 47 3/4 $ 51 $ 51 5/8 $ 41 1/8 Low $ 37 3/4 $ 41 1/8 $ 37 11/16 $ 34 5/8 1996 - ------------------------------------------------------------------------------------------------------------ Sales $1,364.3 $1,518.3 $1,485.1 $1,436.9 Cost of sales 1,031.0 1,135.9 1,115.1 1,097.8 Income before income taxes and extraordinary item (188.3) 91.9 84.1 69.9 Income taxes 17.0 33.3 29.1 24.9 - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ (205.3) $ 58.6 $ 55.0 $ 45.0 ============================================================================================================ Per common share: Basic $ (2.66) $ .75 $ .72 $ .57 ============================================================================================================ Diluted $ (2.66) $ .74 $ .70 $ .56 ============================================================================================================ Average number of common shares (thousands) Basic 77,311 77,876 78,242 78,501 Diluted 77,311 79,446 80,076 80,654 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
(a) The first quarter of 1996 included a non-cash asset impairment charge of $235 million, on which there was no tax benefit. (b) The third quarter of 1997 included a non-cash write-off of purchased research and development of $90 million, on which there was no tax benefit. 44 47 BOARD OF DIRECTORS 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) Vice Chairman American Standard Companies Inc. George H. Kerckhove (C) Vice President and Chief Financial Officer American Standard Companies Inc. Shigeru Mizushima Sapporo, Japan 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 Indianapolis, IN David M. Roderick Chairman Earle M. Jorgensen Company Brea, CA Retired Chairman USX Corporation Pittsburgh, PA Joseph S. Schuchert (B-Chairman) (C) Chairman, Kelso & Companies, Inc New York, NY Member of: (A) Audit Committee (B) Management Development and Nominating Committee (C) Executive Committee 45 48 CORPORATE OFFICERS Emmanuel A. Kampouris Chairman, President and Chief Executive Officer Horst Hinrichs Vice Chairman Thomas S. Battaglia Vice President and Treasurer Adrian B. Deshotel Vice President, Human Resources Luigi Gandini Vice President, Special Projects Richard A. Kalaher Vice President, General Counsel and Secretary George H. Kerckhove Vice President and Chief Financial Officer Raymond D. Pipes Vice President, Investor Relations G. Ronald Simon Vice President and Controller Robert M. Wellbrock Vice President, Taxes AIR CONDITIONING PRODUCTS Roberto Canizares M. Vice President, Air Conditioning Products, International Applied Systems Daniel Hilger Vice President, Air Conditioning Products, Middle East and Africa William A. Klug Vice President and Group Executive, Air Conditioning Products, International David R. Pannier Vice President and Group Executive, Air Conditioning Products, North American Unitary Products James H. Schultz Vice President and Group Executive, Air Conditioning Products, Worldwide Applied Systems PLUMBING PRODUCTS Alexander A. Apostolopoulos Vice President and Group Executive, Plumbing Products, Americas International Gary A. Brogoch Vice President and Group Executive, Plumbing Products, Asia Pacific Wilfried Delker Vice President and Group Executive, Plumbing Products, Worldwide Fittings G. Eric Nutter Vice President and Group Executive, Americas Plumbing Products Group Wolfgang Voss Vice President and Group Executive, Plumbing Products, Europe AUTOMOTIVE PRODUCTS W. Craig Kissel Senior Vice President, Automotive Products Giancarlo Aimetti Vice President, Automotive Products, Austria Group Michael Broughton Vice President, Automotive Products, United Kingdom Peter Enss Vice President, Automotive Products, Germany Jean - Claude Montauze Vice President, Automotive Products, France MEDICAL SYSTEMS Fred A. Allardyce Senior Vice President, Medical Systems Judith A. Britz, Ph.D Vice President, Medical Systems, Business Development Fabio Lunghi Vice President and Group Executive, Medical Systems, DiaSorin Janet George Murnick, Ph.D Vice President, Medical Systems, Alimenterics Benson I. Stein Vice President, Medical Systems, Operations 46 49 CORPORATE INFORMATION Corporate Headquarters P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (732) 980-6000 BUSINESS OPERATIONS AIR CONDITIONING PRODUCTS Worldwide Applied Systems The Trane Company 3600 Pammel Creek Road La Crosse, WI 54601-7599 Tel: (608) 787-2000 Web Site Address: http:\\www.trane.com International Unitary Systems Societe Trane 1, rue des Ameriques, B.P. 6 88191 Golbey Cedex, France Tel: (33) 3/29317300 North American Unitary Products 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: (732) 980-3000 Web Site Address: www.us.amstd.com Asia Pacific Plumbing Products World Standard Ltd. 14-16/F. St. John's Building 33 Garden Road Central Hong Kong Tel: (852) 2/971-3688 Europe Plumbing Products 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 Web Site Address: www.wabco-auto.com MEDICAL SYSTEMS American Standard Medical Systems 10 Rockefeller Plaza Suite 1120 New York, NY 10020 Tel: (212) 332-2975 DiaSorin - USA 1990 Industrial Boulevard P.O. Box 285 Stillwater, MN 55082 Tel: (612) 439-9710 DiaSorin - Europe Via Crescentino 13040 Saluggia (VC), Italy Tel: (39) 161-487093 Alimenterics Inc. 301 American Road Morris Plains, NJ 07950 Tel: (973) 285-3100 Annual Meeting May 7, 1998, at 10:00 AM (EDT) Embassy Suites Hotel 121 Centennial Avenue Piscataway, NJ 08855 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 either printed from the Company's corporate website (Internet address shown below) or requested from: Investor Relations Department P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (732) 980-6095 ASD Newsline No.: 1-888-ASD-News Internet address: www.americanstandard.com 50 ------------- AMERICAN ----- STANDARD ----- COMPANIES ------------- P.O. Box 6820 One Centennial Avenue Piscataway, NJ 08855-6820 (732) 980-6000 EX-21 6 LISTING OF HOLDING'S 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) American Standard Credit Inc. (Delaware) American Standard International Inc. (Delaware) American Standard Medical Systems, Inc. (Delaware) DiaSorin International Inc. (Delaware) INCSTAR Corporation (Minnesota) Amstan Trucking Inc. (Delaware) A-S Energy, Inc. (Texas) A-S Thai Holdings Ltd. (Delaware) It Holdings Inc. (Delaware) Standard Compressors Inc. (Delaware) Standard Sanitary Manufacturing Company (Delaware) The Trane Company (Delaware) Trane Export, Inc. (Delaware) WABCO Automotive Control Systems Inc. (Delaware) WABCO Company (Pennsylvania) World Standard Ltd. (Delaware) (American Standard Inc., American Standard International Inc., WABCO Company and Standard Sanitary Manufacturing Company - Immediate Parents) Wabco Standard Trane Holdings Inc. (Delaware) FOREIGN SUBSIDIARIES: Air Conditioning Products (Wabco Standard French Holdings SNC - Immediate Parent) Societe Trane (France) (The Trane Company - Immediate Parent) Trane S.A. (Switzerland) (American Standard (U.K.) Limited - Immediate Parent) Trane Limited (U.K.) Trane (United Kingdom) Limited Trane (Scotland) Limited Transportation Products (WABCO Standard GmbH, Wabco Standard Trane Holdings Inc., and Ideal Standard S.p.A. - Immediate Parents) WABCO Standard TRANE B.V. (Netherlands) WABCO Austria G.m.b.H. (Austria) WABCO Automotive AB (Sweden) WABCO Automotive B.V. (Netherlands) WABCO Belgium S.A.-N.V. (Belgium) WABCO B.V. (Netherlands) WABCO (Schweiz) AG (Switzerland) WABCO Standard French Holdings SNC (France) WABCO Westinghouse S.A. (France) WABCO France SNC (France) 2 PARENTS AND SUBSIDIARIES - (Continued) Subsid- iaries* Transportation Products - (Continued) (Ideal Standard S.p.A. and Wabco Standard Trane Holdings Inc. - Immediate Parents) American Standard (U.K.) Limited (England) Clayton Dewandre Holdings Limited (England) WABCO Automotive UK Limited (England) The Bridge Foundry Company Limited (England) (Ideal Standard S.p.A.- Immediate Parent) WABCO Automotive Italia S.p.A. (Italy) (WABCO Standard Trane Holdings Inc., American Standard International Inc., Standard Sanitary Manufacturing Company - Immediate Parents) WABCO-Standard GmbH (Germany) WABCO GmbH (Germany) WABCO Perrot Bremsen GmbH (Germany) Building Products (American Standard Inc. and A-S Thai Holdings Ltd. - Immediate Parents) American Standard Sanitaryware (Thailand) Public Company Limited (Thailand) (American Standard Inc. - Immediate Parent) EBS Eczacibasi Banyo Kuvetleri Sanayi Ve Ticaret A.S. (Turkey) Egyptian American Sanitary Wares Co. S.A.E. (Egypt) American Standard Philippine Holdings Inc. (Philippines) Sanitary Wares Manufacturing Corporation (Philippines) (Wabco Standard French Holdings SNC - Immediate Parent) Ideal-Standard S.A. (France) (Wabco Standard Trane Inc. - Immediate Parent) Ideal Standard Wabco Industria e Comercio Ltda. (Brazil) (a) (American Standard (U.K.) Limited - Immediate Parent) Ideal-Standard Limited (England) (Wabco Standard Trane Holdings Inc. - Immediate Parent) WABCO Standard Trane Inc. (Canada) (b) (Wabco Standard Trane Inc. and Wabco Standard Trane B.V. - Immediate Parents) Ideal-Standard, S.A. de C.V. (Mexico) 1 (WABCO Standard Trane B.V. and Wabco Standard Trane Holdings Inc. - Immediate Parents) Ideal Standard S.p.A. (Italy) Ideal Standard S.A. (Greece) Sanistan B.V. (Netherlands) 3 PARENTS AND SUBSIDIARIES - (Continued) (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) Medical Systems (WABCO Standard Trane B.V. and DiaSorin International Inc. - Immediate Parents) DiaSorin International B.V. (Netherlands) Sorin Diagnostics Belgium (Belgium) Sorin Diagnostics Deutschland GmbH (Germany) Sorin Diagnostics Espana S.A. (Spain) Sorin Diagnostics France (France) Sorin Diagnostics S.r.l. (Italy) Miscellaneous Standard Europe (EEIG)(France) (c) All of the companies listed above operate under their company names and use one or more of the trademarks listed under "Patents and Trademarks" of Item 1 of this annual report on Form 10-K. * The number shown under this heading indicates other subsidiaries, not listed by name herein, which are in the same line of business. The name of the immediate parent of such subsidiary or subsidiaries appears opposite the number. (a) This subsidiary participates in Building Products and Transportation Products. (b) This subsidiary participates in Building Products and Air Conditioning Products. (c) A European Economic Interest Grouping organized by certain French and Italian subsidiaries of the Company. There are omitted from the table a number of minor or inactive or name- saving subsidiaries, all of which together would not constitute a significant subsidiary. EX-23 7 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Standard Companies Inc. and in the Registration Statements on Form S-3 pertaining to the registration of $1,000,000,000 of debt securities (Registration No. 333-32627), Form S-8 pertaining to the Stock Incentive Plan (Registration No. 33-63007) and Form S-8 pertaining to the Employee Stock Purchase Plan (Registration No. 333-40575) of our reports dated February 16, 1998 with respect to the consolidated financial statements of American Standard Companies Inc. included in the 1997 Annual Report to Stockholders of American Standard Companies Inc., and with respect to the financial statement schedules included in this Annual Report (Form 10-K). /s/ Ernst & Young LLP New York, New York March 27, 1998 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 28,772 0 861,511 30,226 430,773 1,393,978 1,716,682 577,498 3,669,089 1,841,213 1,550,772 0 0 720 (610,503) 3,669,089 6,007,509 6,007,509 4,481,915 4,481,915 27,254 14,212 192,216 236,788 116,928 119,860 0 (23,637) 0 96,223 1.30 1.26
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