<PAGE> 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, 1998
|_| Transition Report to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the transition period from ________ to ____________.
Commission File Number 1-470
AMERICAN STANDARD INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-0900465
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CENTENNIAL AVENUE, P.O. BOX 6820, PISCATAWAY, NEW JERSEY 08855-6820
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (732) 980-6000
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. (Not applicable; Registrant has outstanding no equity securities
required to be registered under the Securities Exchange Act of 1934.)
Aggregate market value of the voting stock (common stock) held by non-affiliates
of the Registrant: Not applicable; all of the voting stock of the Registrant is
owned by its parent, American Standard Companies Inc.
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the close of business on March 11, 1999:
Common Stock, $.01 par value 1,000 Shares
Documents incorporated by reference: None
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I) (1) (a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE> 2
TABLE OF CONTENTS
(REDUCED DISCLOSURE FORMAT)
PAGE
PART I
Item 1. Business. 2
Item 2. Properties. 8
Item 3. Legal Proceedings. 9
Item 4. Not required under reduced disclosure format as
contemplated by General Instruction I to Form 10-K.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters. 12
Item 6. Not required under reduced disclosure format as
contemplated by General Instruction I to Form 10-K.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12
Item 8. Financial Statements and Supplementary Data. 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 12
PART III
Items 10,11,12, and 13 are not required under reduced disclosure format
as Contemplated by General Instruction I to Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 13
Signatures 20
Financial Supplement
1
<PAGE> 3
PART I
ITEM 1. BUSINESS
American Standard Inc. (the "Company") is a Delaware corporation formed in
1929. All of its outstanding common stock is owned by American Standard
Companies Inc., a Delaware corporation formed in 1988 to acquire American
Standard Inc. Hereinafter, "American Standard" or "the Company" will refer to
the Company, American Standard Companies Inc. or to American Standard Inc.,
including its subsidiaries, as the context requires.
American Standard is a global, diversified manufacturer of high quality,
brand-name products in three major product groups: air conditioning systems (59%
of 1998 sales); bathroom and kitchen fixtures and fittings (23% of 1998 sales);
and braking and control systems for medium-sized and heavy trucks, buses,
trailers and utility vehicles (17% of 1998 sales). The Medical Systems segment,
formed in 1997, had sales of $98 million in 1998 (1% of 1998 sales). American
Standard is among the three largest providers of products it manufactures in
each of its three major business segments in the principal geographic areas
where 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), PORCHER(R), ARMITAGE SHANKS(R) and DOLOMITE(R) for
plumbing products, WABCO(R) for braking and related systems and DiaSorin(TM),
Copalis(R) and Pylori-Chek(TM) for Medical diagnostic systems.
One of the ways the Company makes it products more competitive is by
emphasizing technological advancements such as:
o air conditioning systems that utilize energy-efficient compressors
and refrigerants meeting current environmental standards;
o water-saving plumbing products;
o commercial vehicle antilock braking systems ("ABS") and electronic
controls systems;
o innovative medical diagnostic testing using laser technology.
After the February 1999 acquisition of the Bathrooms Division of Blue
Circle Industries PLC, described below, American Standard had 116 manufacturing
facilities in 33 countries.
Overview of Business Segments
Through 1996 American Standard operated three business segments: Air
Conditioning Products, Plumbing Products and Automotive Products. In 1997 the
Company announced formation of its Medical Systems segment.
Air Conditioning Products. American Standard is one of the three largest
U.S. manufacturers 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 1998. Approximately 65%
2
<PAGE> 4
of Trane's sales in 1998 were in the replacement, renovation and repair markets,
which have been less cyclical than the new residential and commercial
construction markets. Air Conditioning Products derived 74% of its 1998 sales in
the U.S. and 26% outside. 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
slowed due to the unfavorable economic conditions existing in the region since
1997) and Latin America.
Air Conditioning Products began with the 1984 acquisition by the Company
of the Trane Company, a manufacturer and distributor of air conditioning
products since 1913. In 1998 Trane, with revenues of $3,940 million, accounted
for 60% of the Company's sales and 59% of its segment income (excluding Medical
Systems). Trane derived 26% of its 1998 sales from outside the United States.
Trane manufactures three general types of air conditioning systems. The
first, called "unitary," is sold for residential and commercial applications,
and is a factory-assembled central air conditioning system which generally
encloses in one or two units all the components to cool or heat, clean, humidify
or dehumidify, and move air. The second, called "applied," is typically
custom-engineered for commercial use and involves on-site installation of
several different components of the air conditioning system. Trane is one of the
three largest global manufacturers of 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 refrigerants
meeting current environmental standards.
At December 31, 1998 Air Conditioning Products had 31 manufacturing plants
in 9 countries, employing approximately 24,000 people.
Plumbing Products. American Standard is one of the world's three largest
manufacturers 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, and also under the ARMITAGE SHANKS(R) and
DOLOMITE(R) names since the February 1999 acquisition of the Bathrooms Division
of Blue Circle Industries PLC, described below. Of Plumbing Products' 1998
sales, 69% was derived from operations outside the United States and 31% from
within. Management believes that Plumbing Products is well positioned for growth
due to the high
3
<PAGE> 5
quality associated with its brand-name products, significant existing market
shares in a number of countries, supplying its markets with lower-cost products
manufactured in Mexico, Eastern Europe and the Far East, and the expansion of
existing operations in developing market areas throughout the world, principally
the Far East, Latin America and Eastern Europe, although Far East growth has
slowed because of weak economic conditions existing in the region.
In 1998, Plumbing products, with revenues of $1,510 million, accounted for
23% of the Company's sales and 18% of its segment income (excluding Medical
Systems). Plumbing Products' sales consist 52% of chinaware fixtures, 24% of
fittings (typically brass) and 11% 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 two primary geographic groups: Americas
Group and the Europe and Far East Group. Plumbing Products' fittings operations
are organized as the Worldwide Fittings Group, with manufacturing facilities in
Germany, the U.K., Bulgaria, the U.S., Mexico, Thailand, South Korea and China.
Worldwide Fittings' sales and operating results are reported in the two primary
geographic groups within which it operates.
The European portion of the Europe and Far East Group has sold products in
Europe 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, the United Kingdom,
Greece, the Czech Republic, Bulgaria, Egypt and Turkey and distributes products
in other European countries. 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. The unprofitable
distribution portion of Porcher was sold to a major French plumbing distributor
in October 1998. This sale was part of a major restructuring program involving
the closure of five plants in Europe and the shift of manufacturing capacity to
lower-cost facilities in Bulgaria.
On February 2, 1999, the Company acquired for approximately $417 million
the Bathrooms Division of Blue Circle Industries PLC, a manufacturer of ceramic
sanitaryware, brassware and integrated plumbing systems. The acquired business,
which operates principally under the names ARMITAGE SHANKS(R) and CERAMICA
DOLOMITE(R) ("Armitage Dolomite"), had 1998 sales of approximately $290 million
and assets of approximately $250 million at December 31, 1998 (both at December
31, 1998 exchange rates). Armitage Dolomite has 3 major manufacturing facilities
and nine smaller facilities located in England and Italy, and employs
approximately 3,200 people. The primary markets for its products are in England,
Italy, Ireland and Germany. Management believes that Armitage Dolomite products
will complement the Company's current product lines and strengthen its
competitive position in Europe. The acquisition will be accounted for as a
purchase. The Company is in the process of valuing the assets acquired and
liabilities assumed for purposes of allocating the purchase price. This process
is not complete, but based upon preliminary estimates the Company anticipates
that goodwill of approximately $250 million will be recorded.
The Far East portion of the Europe and Far East 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 and Indonesia, and its majority-owned operations in
Thailand, the Philippines and Vietnam. The 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
4
<PAGE> 6
for $48 million in the fourth quarter of 1997. See - "Globalization". This group
is also developing a wholly-owned marketing operation in Japan.
Plumbing Products' Americas Group manufactures bathroom and kitchen
fixtures and fittings selling under the brand names AMERICAN STANDARD(R) and
STANDARD(R) in the U.S. and under the brand 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.
After the acquisition of Armitage Dolomite in February 1999, Plumbing
Products employed approximately 26,000 people and, including affiliated
companies, had 67 manufacturing plants in 25 countries.
Plumbing Products competes in most of its markets on the basis of service
to customers, product quality and design, reliability and price.
Automotive Products. Automotive Products ("WABCO") is one of the three
largest manufacturers of braking and related systems for the commercial and
utility vehicle industry, primarily in Europe and Brazil. 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 DaimlerChrysler, 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 two-year phase-in of ABS began in March 1997),
as well as from the technological advances embodied in the Company's products
and its close relationships with a number of vehicle manufacturers.
In 1998 WABCO, with sales of $1,106 million, accounted for 17% of the
Company's sales and 23% of its total segment 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 DaimlerChrysler, Volvo, Iveco (Fiat), RVI (Renault) and Rover.
Principal competitors are Knorr, Robert Bosch, and Allied Signal. WABCO competes
primarily on the basis of customer service, quality and reliability of products,
technological leadership and price.
Through 1998 the WABCO(R) ABS system, which the Company believes leads the
market, has been installed in approximately 2.3 million heavy trucks, buses, and
trailers worldwide since 1981. 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. In 1998 WABCO
entered the passenger car market with an advanced, electronically controlled air
suspension system now featured by the two leading German luxury car
manufacturers.
5
<PAGE> 7
At December 31, 1998, WABCO and affiliated companies employed
approximately 6,300 people and had 15 manufacturing facilities and 10 sales
organizations operating in 20 countries. Principal manufacturing operations are
in Germany, France, the United Kingdom, the Netherlands and Brazil. WABCO has
joint ventures in the United States (Meritor WABCO and WABCO Compressor
Manufacturing Co.), in Japan with Sanwa Seiki (SANWAB), in India with TVS Group
(Sundaram Clayton Ltd.) and in China.
In January 1994 the Company acquired Perrot, a German brake manufacturer.
Through this acquisition the Company is able to offer complete brake systems for
trucks, buses and trailers, especially in the important and growing air-disc
brake business.
Medical Systems
Following the 1997 acquisition of Sorin and INCSTAR described below, the
Company formed its Medical Systems segment to develop and market medical
diagnostics technology and equipment under the DiaSorin(TM), Copalis(R) and
Pylori-Chek(TM) names. The Company had previously supported the development of
two medical diagnostics product companies, Sienna Biotech, Inc. ("Sienna") and
Alimenterics, Inc. ("Alimenterics").
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., and
INCSTAR Corporation, a U.S. company, for $212 million, including fees and
expenses.
In 1998 Sorin, INCSTAR and Sienna were 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 blood virus and infectious diseases, obstetrical/gynecological
and gastrointestinal disorders, endocrinology and bone and mineral metabolism.
It develops, manufactures and markets individual test reagents, test kits and
related products used by major hospitals, private and public 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
DiaSorin's 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 to be performed
simultaneously on a single sample. Work is ongoing to expand the menu of tests
using DiaSorin reagents specifically adapted for use with Copalis.
Alimenterics has developed the Pylori-Chek(TM) urea-based breath test, for
which it has acquired a U.S. patent. The test allows a physician to diagnose
patient disease via the breath rather than by more invasive procedures such as
endoscopy. The Pylori-Chek(TM) tests for the presence of Helicobacter pylori
bacterium associated with 80% of stomach ulcers. FDA clearance for the
Pylori-Chek(TM) test was received in January 1999, and the Company, under the
DiaSorin name, is developing a sales and marketing program intended to achieve
rapid penetration in the U.S. Market.
In February 1999 DiaSorin scientists discovered a previously unidentified
virus that in initial tests appears to be associated with advanced liver disease
of as yet unknown cause. The virus has been found in the blood of a high
percentage of intravenous drug users. The prevalence of the virus in healthy
blood donors is low. Recognizing the difficulty of linking a new viral agent to
diseases of unknown cause and the potential significance of these findings
6
<PAGE> 8
to blood banking, DiaSorin intends to expeditiously extend its studies to assess
the biological significance of the virus and has invited clinical investigators
to participate in studies of the virus. Patent applications covering this
discovery have been filed. Its future commercialization potential, however, is
considered speculative at present and will depend , among other things, on
issuance of the patents applied for and confirmation of the linkage between the
virus and diseases of currently unknown cause.
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 their products are Western Europe and the
United States.
Medical Systems had sales of $98 million in 1998 and a segment operating
loss of $21 million.
At December 31, 1998, Medical Systems employed approximately 800 people.
7
<PAGE> 9
ITEM 2. PROPERTIES
The Company conducts its manufacturing activities through 116 plants in 33
countries (after the Armitage Dolomite acquisition in February 1999), of which
the principal facilities are:
<TABLE>
<CAPTION>
Business Segment Location Major Products Manufactured at Location
<S> <C> <C>
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 handlers
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
Rugeley, England Vitreous china and acrylic bathtubs
Wolverhampton, England Brass plumbing fittings
Dole, France Vitreous china
Revin, France Vitreous china and bathtubs
Wittlich, Germany Brass plumbing fittings
West Java, Indonesia Vitreous china
Orcenico, Italy Vitreous china
Brescia, Italy Vitreous china
Trichiana, 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, plumbing fittings and bathtubs
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 Saluggia, Italy Medical diagnostics products
Stillwater, MN Medical diagnostics products
</TABLE>
8
<PAGE> 10
Except for the property located in Manila, Philippines which is leased,
all of the plants described above are owned by the Company or a subsidiary. 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 1998 several Air Conditioning Products' plants operated at or near
capacity and others operated moderately below capacity.
In 1998 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 1998.
ITEM 3. LEGAL PROCEEDINGS
As a result of audits of the Company's German subsidiaries by The State
Finance Administration for the State of North Rhine-Westphalia, Germany for the
periods 1984 through 1990 and 1991 through 1994, the Company previously received
two assessments for the 1984-1990 audit period which the Company has been
contesting. The Company believes, based on the opinion of our external German
legal counsel, that its German tax returns are substantially correct as filed
and that any adjustments would be inappropriate. Unless the Company is otherwise
able to reach a satisfactory resolution of these matters with the German tax
authority, the Company intends to contest vigorously the pending assessments and
any other amounts that may be assessed.
The first assessment was issued in 1992 for approximately $18 million of
combined corporation and trade taxes and claimed a disallowance of a deduction
of interest expense related to an intercompany finance instrument. Later in 1992
the amount of the assessment was deposited with the German tax authority as
security for the disputed tax and a suit to recover that amount was promptly
commenced and is currently pending before the Tax Court for the State of North
Rhine-Westphalia in Cologne, Germany. As a result of making the deposit, no
interest will accrue on the amount under dispute. The second assessment,
received in March 1996, was for approximately $65 million of combined
corporation and trade taxes. Were the Company not to prevail in its dispute of
this assessment, the Company could be required to pay interest on the assessed
amount of approximately $16 million as of December 31, 1998. Interest on
assessed and unpaid taxes accrues, on a non-compounding basis, at the rate of
six percent per annum commencing fifteen months after the end of the tax year
for which the tax is assessed. The second assessment claimed primarily that
earnings of a Dutch subsidiary should have been recognized as income taxable in
Germany. In early 1997, the German tax authority agreed to accept a partial
deposit of $18 million in respect of the second assessment and the Company
commenced an administrative appeal of the assessment with the German tax
authority. The amounts paid in 1992 and 1997 were recorded as assets on the
Company's consolidated balance sheets because the Company, expecting to prevail
in litigation of these matters, would recover such amounts and, therefore,
appropriately accounted for them as receivables. This position is based upon the
opinion of the Company's external German legal counsel, referred to above, that
the Company's German tax returns are substantially correct as filed and that
adjustments would be inappropriate.
In 1998, in connection with the development of the Company's plan to
restructure certain of its European plumbing operations, including some located
in Germany, the Company entered into discussions with certain German regulatory
authority which could have resulted in an offer to settle the primary issue
under dispute with respect to the second assessment,
9
<PAGE> 11
including all corporation and trade taxes and accrued interest. To facilitate
further discussions, certain agreed supplemental audit procedures were commenced
in the second half of 1998 and completed in December 1998. In January 1999, it
became evident that these efforts would not result in a settlement of any of the
disputed taxes. In addition, on January 22, 1999 the Company's appeal of the
second assessment and any offer of settlement was rejected. In February 1999,
the Company filed notice of appeal with the German Tax Court and moved to join
its appeal of the first assessment with the appeal of the second assessment. In
addition, the Company requested an order from the German tax authority staying
the obligation to pay the amount of the second assessment during the pendency of
the Company's appeal. On March 15, 1999, the staying order was granted. The
Company has agreed to leave the amount already deposited with the German tax
authority pending final resolution of the dispute. In the ordinary course, it is
anticipated that litigation of the Company's appeal before the State Tax Court
will require five to seven years and that any appeal thereafter to the federal
Supreme German Tax Court would require an additional two or three years.
Although the Company's proposal of settlement was rejected, the Company has
continued to pursue settlement on the terms of the proposal.
As a result of the replacement in Germany of the Christian Democratic
party by the Social Democratic party following national elections in September
1998, the Company's discussions with German regulatory authority and the
completion of the supplemental audit in the fourth quarter of 1998 proving to be
inconclusive, and the rejection by the German tax authority of the Company's
appeal request and settlement efforts in January 1999, the Company has recorded
a loss contingency as of December 31, 1998 in the amount of the deposits related
to the first and second assessments, related trade taxes and accrued interest
thereon, which amount represents the amount for which the Company would have
been willing to settle the issue related to the second assessment. Based on the
opinion of the Company's external German legal counsel referred to above, the
Company intends to vigorously contest and to litigate these disputed German tax
matters, and no additional contingency with respect to such matters has been
recorded.
With respect to the 1991-1994 audit period, the Company engaged in
significant transactions similar to those that gave rise to the assessments in
the prior audit period and, with respect to a matter related to the intercompany
instrument at issue in connection with the first assessment, the German tax
auditors have proposed an adjustment of approximately $47 million. In addition,
because the German tax authority assessed additional taxes for the 1984-1990
audit period they might, after completing their audit of the later period,
propose further adjustments for the 1991-1994 audit period related to the
subject matter of the second assessment that might be as much as fifty percent
higher than the amount of the assessments in the first audit period. Although
the Company is unable to predict when the audit of its German tax returns for
the 1991-1994 period will be complete or the amount of any additional taxes that
may be assessed, the Company believes the audit may be completed prior to the
end of 1999.
If all matters currently under review by the German tax authority were
made the subject of assessments and either no orders staying the payment of such
amounts following assessment or during the pendency of the Company's appeal were
granted or the Company was finally determined to owe the full amount of all such
taxes, the Company could be required to pay all assessed amounts plus accrued
interest thereon, together with the amount of all related trade taxes. The total
amount of any payments made with respect to the tax matters described above, and
the timing thereof, could have a material adverse effect on the Company's
liquidity, cash flow and/or results of operation and, consequently, impair the
Company's competitive position. In addition, the Company might need to raise
additional
10
<PAGE> 12
capital and no assurance can be given as to the availability of debt or equity
financing if such need were to arise. See Note 7 of Notes to Consolidated
Financial Statements incorporated by reference herein (see Item 14(a) of Part IV
hereof).
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 sought
unspecified monetary damages, to enjoin the Stockholder Transactions and
evaluation by the Company of alternative transactions to maximize shareholder
value. The Company moved to dismiss the complaints or in the alternative for
Summary Judgment. On March 30, 1999 the plaintiffs in both actions voluntarily
stipulated to settle their claims.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's only issued and outstanding common equity, 1,000 shares of
common stock, $.01 par value, is owned by American Standard Companies Inc. There
is no established public trading market for these shares.
There were no dividends declared on the Company's common stock in 1997 or
1998.
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 F-2 through F-14 of
the Financial Supplement included herein and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference are the financial statements and related
information listed in the Index to Financial Statements and Financial Statement
Schedule on page F-1 of the Financial Supplement included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
Not required under reduced disclosure format as contemplated by General
instruction I to Form 10-K.
12
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial statements and financial statement schedule
The financial statements and financial statement schedule listed in
the Index to Financial Statements and Financial Statement Schedule
on page F-1 of the Financial Supplement 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, 1998, the company filed no
Current Reports on Form 8-K.
13
<PAGE> 15
AMERICAN STANDARD INC.
INDEX TO EXHIBITS
(ITEM 14(a)3 - EXHIBITS REQUIRED BY ITEM 601
OF REGULATION S-K AND ADDITIONAL EXHIBITS)
(The Commission File Number of American Standard Inc., the Registrant (sometimes
hereinafter referred to as the "Company"), and for all Exhibits incorporated by
reference, is 33-64450, except those Exhibits incorporated by reference in
filings made by American Standard Companies Inc. (formerly named ASI Holding
Corporation) ( "Holding") the Commission File Number of which is 1-11415; prior
to filing its Registration Statement on Form S-2 on November 10, 1994, Holding's
Commission File Number was 33-23070.)
(3) (i) Restated Certificate of Incorporation of American Standard Inc. (the
Company"); previously filed as Exhibit (3)(i) in the Company's Form
10-Q for the quarter ended September 30, 1998, and herein
incorporated by reference.
(ii) Amended By-laws of the Company, as amended February 24, 1997,
effective May 1, 1997; previously filed as Exhibit (3)(ii) to the
Company's Form 10-K for the fiscal year ended December 31, 1996, and
herein incorporated by reference.
(4) (i) Indenture, dated as of November 1, 1986, between the Company and
Manufacturers Hanover Trust Company, Trustee, including the form of
9-1/4% Sinking Fund Debenture Due 2016 issued pursuant thereto on
December 9, 1986, in the aggregate principal amount of $150,000,000;
previously filed as Exhibit (4)(iii) to the Company's Form 10-K for
the fiscal year ended December 31, 1986, and herein incorporated by
reference.
(ii) Instrument of Resignation, Appointment and Acceptance, dated as of
April 25, 1988 among the Company, Manufacturers Hanover Trust
Company (the Resigning Trustee") and Wilmington Trust Company (the
Successor Trustee"), relating to resignation of the Resigning
Trustee and appointment of the Successor Trustee under the Indenture
referred to in Exhibit (4)(i) above; previously filed as Exhibit
(4)(ii) to Registration Statement No. 33- 64450 of the Company,
filed June 16, 1993, and herein incorporated by reference.
(iii) Indenture dated as of May 15, 1992, between the Company and First
Trust National Association, Trustee, relating to the Company's
10-7/8% Senior Notes due 1999, in the aggregate principal amount of
$150,000,000; previously filed as Exhibit (4)(i) to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1992,
and herein incorporated by reference.
14
<PAGE> 16
(iv) Form of 10-7/8% Senior Note due 1999 included as Exhibit A to the
Indenture described in (4)(iii) above.
(v) Form of 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.
(vi) First Supplemental Indenture dated as of January 15, 1998 between
the Company, Holding and The Bank of New York, relating to the
Company's 7.375% Senior Notes due 2008, guaranteed by Holding;
incorporated herein by reference to Exhibit (4)(xi) of Holding's
Form 10-K for the fiscal year ended December 31, 1997.
(vii) Second Supplemental Indenture dated as of February 13, 1998 between
the Company, Holding and The Bank of New York relating to the
Company's 7-1/8% Senior Notes due 2003 and 7-5/8% Senior Notes due
2010, guaranteed by Holding; incorporated herein by reference to
Exhibit (4)(xii) of Holding's Form 10-K for the fiscal year ended
December 31, 1997.
(viii) Indenture, dated as of January 15, 1998, among the Company, Holding
and The Bank of New York, Trustee; previously filed as Exhibit 4.1
in the Company's Form 10-Q for the quarter ended September 30, 1998,
and herein incorporated by reference.
(ix) Third Supplemental Indenture dated as of April 13, 1998 to the
Indenture dated as of January 15, 1998 among the Company, Holding
and The Bank of New York relating to the 7-3/8% Senior Notes due
2005; previously filed as Exhibit (4.2 in the Company's Form 10-Q
for the quarter ended September 30,1 998, and herein incorporated by
reference
(x) Amended and Restated Credit Agreement, dated as of January 31, 1997,
among Holding, the Company, certain subsidiaries of the Company and
the financial institutions listed therein, The Chase Manhattan Bank,
as Administrative Agent; Citibank, N. A., as Documentation Agent;
The Bank of Nova Scotia and NationsBank, N. A., as Co-Syndication
Agents; Bankers Trust Company, Deutsche Bank AG, The Industrial Bank
of Japan Trust Company, The Sanwa Bank Limited, New York Branch and
The Sumitomo Bank, Ltd., as Senior Managing Agents; and The Bank of
New York, Banque Paribas, CIBC Inc., CIBC Wood Gundy plc, Compagnie
Financiere de CIC et de L'Union Europeenne, Credit Lyonnais, New
York Branch, Fleet National Bank, The Long Tem Credit Bank of Japan,
Limited and The Toronto-Dominion Bank, as Managing Agents;
previously filed as Exhibit (4)(xviii) to Amendment No. 2 to
Registration Statement No. 333-18015 of Holding, filed February 5,
1997, and herein incorporated by reference
15
<PAGE> 17
(xi) 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, and herein incorporated by
reference.
(xii) 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, and herein incorporated by
reference.
(xiii) Third Amendment dated as of August 7, 1998 to the Amended and
Restated Credit Agreement dated as of January 31, 1997 among
Holding, the Company, the financial institutions party thereto and
The Chase Manhattan Bank as Administrative Agent; previously filed
as Exhibit 4.3 in the Company's Form 10-Q for the quarter ended
September 30, 1998, and herein incorporated by reference.
(xiv) Rights Agreement, dated as of January 5, 1995, between Holding and
Citibank, N.A. as Rights Agent; previously filed as Exhibit (4)(xxv)
to Holding's Form 10-K for the fiscal year ended December 31, 1994,
and herein incorporated by reference.
(10) *(i) American Standard Inc. Long-Term Incentive Compensation Plan, as
amended and restated on December 5, 1996; previously filed as
Exhibit (10)(i) to the Company's Form 10-K for the fiscal year ended
December 31, 1996, and herein incorporated by reference.
(ii) Trust Agreement for American Standard Inc. Long-Term Incentive
Compensation Plan and American Standard Companies Inc.Supplemental
Incentive Plan, as amended and restated on December 5, 1996;
previously filed as Exhibit (10)(ii) to the Company's Form 10-K for
the fiscal year ended December 31, 1996, and herein incorporated by
reference.
(iii) American Standard Inc. Annual Incentive Plan, as amended and
restated on December 5, 1996; previously filed as Exhibit (10)(iii)
to the Company's Form 10-K for the fiscal year ended December 31,
1996, and herein incorporated by reference.
16
<PAGE> 18
(iv) American Standard Inc. Executive Supplemental Retirement Benefit
Program, as restated to include all amendments through July 6, 1995;
previously filed as Exhibit (10)(iv) to the Company's Form 10-K for
the fiscal year ended December 31, 1995, and herein incorporated by
reference.
(v) American Standard Inc. Supplemental Compensation Plan for Outside
Directors, as amended through December 4, 1997; previously filed as
Exhibit (10)(v) in Company's Form 10-K for the fiscal year ended
December 31, 1997, and herein incorporated by reference.
(vi) Trust Agreement for the American Standard Inc. Supplemental
Compensation Plan for Outside Directors, dated March 7, 1996;
previously filed As Exhibit (10)(vi) in Company's Form 10-K for the
fiscal year ended December 31, 1997, and herein incorporated by
reference.
(vii) ASI Holding Corporation 1989 Stock Purchase Loan Program; Previously
filed as Exhibit (10)(i) to Holding's Form 10-Q for the quarter
ended September 30, 1989, and herein Incorporated by reference.
* Items in this series 10 consist of management contracts or
compensatory plans or arrangements with exceptions of (10)(xiv) and
(xv).
17
<PAGE> 19
(viii) American Standard Companies Inc. Corporate Officer Severance Plan,
as amended and restated on December 5, 1996; previously filed as
Exhibit (10)(vii) to Holding's Form 10-K for the fiscal year ended
December 31, 1996, and herein incorporated by reference.
(ix) Estate Preservation Plan adopted in December, 1990; previously filed
as Exhibit (10)(xx) to the Company's Form 10-K for the fiscal year
ended December 31, 1990, and herein incorporated by reference.
(x) Amendment adopted in March 1993 to Estate Preservation Plan referred
to in (10)(ix) above; previously filed as Exhibit (10)(xvii) to the
Company's Form 10-K for the fiscal year ended December 31, 1993, and
herein incorporated by reference.
(xi) Summary of terms of Unfunded Deferred Compensation Plan, adopted
December 2, 1993; previously filed as Exhibit (10)(xviii) to the
Company's Form 10-K for the fiscal year ended December 31, 1993, and
herein incorporated by reference.
(xii) American Standard Companies Inc. Stock Incentive Plan, as Amended
and restated as of February 2, 1999, with Addenda to comply with
local regulations in the United Kingdom and France with respect to
options granted in those countries; filed as Exhibit (10)(xiii) in
Holding's Form 10-K for the fiscal year ended December 31, 1998,
filed concurrently with the filing of the Company's Form 10-K for
the same year, and herein incorporated by reference.
(xiii) American Standard Companies Inc. and Subsidiaries 1996-1998
Supplemental Incentive Compensation Plan, as amended and restated on
December 5, 1996; previously filed as Exhibit (10)(xiii) in
Holding's Form 10-K for the fiscal year ended December 31, 1996, and
herein incorporated by reference.
(xiv) American Standard Companies Inc. and Subsidiaries 1997-1999
Supplemental Incentive Plan as described in the American Standard
Companies Inc. Notice of General Meeting of Stockholders and Proxy
Statement, May 7, 1998 on pages 11 and 18 and herein incorporated by
reference. The plan was amended on March 4, 1999 to extend the
performance period through the year 2000 and modify the target
conditions for the achievement of awards under the Plan and is now
called the American Standard Companies inc. and Subsidiaries
1997-2000 Supplemental Incentive Plan; filed as Exhibit (10)(xv) in
Holding's Form 10-K for the fiscal year ended December 31, 1998, and
herein incorporated by reference.
(xv) Stock Disposition Agreement, dated as of December 16, 1996, among
Holding, Kelso & Company, L. P. and Kelso ASI Partners, L. P.;
previously filed as Exhibit (10)(i) to Holding's Registration
Statement No. 333-18015, filed December 17, 1996, and herein
incorporated by reference.
18
<PAGE> 20
(xvi) Form of Warrant Agreement between Holding and Citibank, N. A. as
Warrant Agent, included as Annex A to the Stock Disposition
Agreement described in (10)(xiii) above; previously filed as Exhibit
(10)(ii) to Holding's Registration Statement No. 333-18015, filed
December 17, 1996, and herein incorporated by reference.
(21) List of Company's subsidiaries.
(23) Consent of Ernst & Young LLP.
(27) Financial Data Schedule
(99) (i) Press release dated February 24, 1999
(ii) Press release dated March 9, 1999
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN STANDARD INC.
By: /s/ EMMANUEL A. KAMPOURIS
-------------------------
(Emmanuel A. Kampouris)
Chairman, President and Chief Executive Officer
March 31, 1999
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:
/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
20
<PAGE> 22
Financial Supplement
AMERICAN STANDARD INC.
Annual Report on Form 10-K
For the Year Ended December 31, 1998
<PAGE> 23
FINANCIAL SUPPLEMENT
to
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
AMERICAN STANDARD INC.
Index to Financial Statements
and Financial Statement Schedule
(Pages)
Five-Year Financial Summary F-2
Management's Discussion and Analysis F-3 to F-15
Management's Report on Financial Statements F-16
Report of Independent Auditors F-16
Consolidated Balance sheet at
December 31, 1998 and 1997 F-18
For the years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Operations F-17
Consolidated Statement of Cash Flows F-19
Consolidated Statement of Stockholder's Deficit F-20
Notes to Consolidated Financial Statements F-21 to F-35
Segment Data F-34
Quarterly Data (Unaudited) F-36
Report of Independent Auditors on financial statement schedule F-37
Financial statement schedule, years ended
December 31, 1998, 1997 and 1996
II Valuation and Qualifying Accounts F-38
F-1
<PAGE> 24
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
==============================================================================================================
Year Ended December 31, (Dollars in millions) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SEGMENT DATA
Sales:
Air Conditioning Products $ 3,940 $ 3,567 $ 3,437 $ 2,953 $ 2,480
Plumbing Products 1,510 1,439 1,452 1,270 1,218
Automotive Products 1,106 952 916 998 759
Medical Systems 98 50 -- -- --
- --------------------------------------------------------------------------------------------------------------
$ 6,654 $ 6,008 $ 5,805 $ 5,221 $ 4,457
==============================================================================================================
Segment income (loss):
Air Conditioning Products (a) $ 386 $ 386 $ 372 $ 276 $ 195
Plumbing Products 119 119 110 120 111
Automotive Products 153 127 123 155 62
Medical Systems (21) (20) (13) (7) (5)
- --------------------------------------------------------------------------------------------------------------
637 612 592 544 363
Equity in net income of unconsolidated joint ventures 27 12 3 7 4
Restructuring and asset impairment charges (b) (200) -- -- -- --
Write-off of purchased research and development (b) -- (90) -- -- --
Asset impairment loss (b) -- -- (235) -- --
Interest expense (188) (192) (198) (213) (259)
Corporate expenses (110) (105) (104) (111) (123)
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 166 237 58 227 (15)
Income taxes (132) (117) (105) (85) (62)
- --------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item $ 34 $ 120 $ (47) $ 142 $ (77)
==============================================================================================================
</TABLE>
(a) Financing fees related to the sale of receivables by Air Conditioning
Products of $13 million, $17 million, $19 million, $22 million and $23
million for each of the years from 1994 through 1998, respectively, have
been reclassified to Corporate expenses from segment income upon adoption
of the new segment reporting standard as of December 31, 1998.
(b) In 1998 the Company recorded restructuring and asset impairment charges of
$200 million ($186 million, net of tax benefits), including $185 million
for Plumbing Products, $7 million for Air Conditioning Products, $5
million for Automotive Products and $3 million for Medical Systems. In
1997 in connection with the acquisition of the medical diagnostics
businesses, the value of purchased in-process research and development was
written off resulting in a non-cash charge of $90 million. In 1996, upon
the adoption of the accounting standard on impairment of assets, the
Company incurred a non-cash charge of $235 million. See Notes 3 and 4 of
Notes to Consolidated Financial Statements.
F-2
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
OVERVIEW
The Company achieved record sales and segment income in 1998 as a result of
strong performance by the Automotive Products and Worldwide Unitary Air
Conditioning businesses and continued improvement in the Americas Plumbing
Products business. These results were attained despite continued economic
weakness in the Far East, global pricing pressure in Worldwide Applied Air
Conditioning and the unfavorable effects of foreign exchange. Sales for 1998
were $6.7 billion, an increase of 11% from $6.0 billion in 1997. Segment income
was $637 million, an increase of 4% from $612 million in 1997, and up 6%
excluding the unfavorable effects of foreign exchange. Income before
extraordinary item in 1998 was $34 million. This included restructuring charges
of $200 million ($186 million, net of tax benefits). This compares with income
before extraordinary item in 1997 of $120 million, including the write-off of
purchased research and development of $90 million on which there was no tax
benefit. Excluding such restructuring charges and write-off, income before
extraordinary item increased 5% to $220 million in 1998 from $210 million in
1997.
In accordance with the requirements of the new segment reporting standard
adopted in 1998, the Company has changed its reporting of segment data to
reflect its internal management method of reporting and, as required, has
restated all prior periods presented for comparability. Accordingly, items which
are excluded from segment income for internal management reporting, such as
restructuring charges in 1998, the write-off of purchased research and
development in 1997 and asset impairment charges in 1996, are excluded from
segment income. Financing fees related to the sale of receivables by Air
Conditioning Products in the U.S. for all years presented have been reclassified
to corporate expenses since they are also excluded from the new measurement of
segment income. The Company continues to have four reportable segments under
this new standard - Air Conditioning Products, Plumbing Products, Automotive
Products and Medical Systems. The segment data reflect the realigned
organizational structure for Air Conditioning Products into Worldwide Applied
Systems and Worldwide Unitary Systems, and for Plumbing Products into the
Americas group and the Europe and Far East group. See Note 14 of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR 1998 COMPARED WITH 1997 AND 1997 COMPARED WITH
1996
Consolidated sales for 1998 were $6,654 million, an increase of $646 million, or
11% (13% excluding the unfavorable effects of changes in foreign exchange
rates), from $6,008 million in 1997. Sales increased 10% for Air Conditioning
Products, 5% for Plumbing Products and 16% for Automotive Products. Medical
Systems sales were $98 million for the full year 1998 compared to $50 million
for 1997 which included sales subsequent to the June 30, 1997 acquisition of the
medical diagnostic businesses.
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
================================================================================
F-3
<PAGE> 26
================================================================================
$5,805 million in 1996. Sales increased 4% for Air Conditioning Products and 4%
for Automotive Products, but declined slightly for Plumbing Products. The
Medical Systems segment contributed sales of $50 million.
Segment income for 1998 was $637 million, an increase of $25 million, or
4% (6% excluding the unfavorable effects of foreign exchange), from $612 million
in 1997. Segment income increased 20% for Automotive Products, and was flat for
Air Conditioning Products and Plumbing Products, while Medical Systems incurred
a loss similar to that of 1997.
Segment income for 1997 was $612 million, an increase of $20 million, or
3% (7% excluding the unfavorable effects of foreign exchange), from $592 million
in 1996. Segment income increased 4% for Air Conditioning Products, 8% for
Plumbing Products and 3% for Automotive Products, while Medical Systems incurred
a larger loss compared with 1996.
RESULTS OF OPERATIONS BY SEGMENT
Sales of Air Conditioning Products increased 10% (12%
<TABLE>
<CAPTION>
================================================================================
AIR CONDITIONING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Worldwide Applied Systems $2,034 $1,879 $1,878
Worldwide Unitary Systems 1,906 1,688 1,559
- --------------------------------------------------------------------------------
Total $3,940 $3,567 $3,437
================================================================================
Segment income:
Worldwide Applied Systems $ 148 $ 201 $ 198
Worldwide Unitary Systems 238 185 174
- --------------------------------------------------------------------------------
Total $ 386 $ 386 $ 372
================================================================================
</TABLE>
excluding foreign exchange effects) to $3,940 million for 1998 from $3,567
million for 1997. Worldwide Applied Systems sales increased 8% and Worldwide
Unitary Systems sales increased 13%. In 1997 sales of Air Conditioning Products
increased 4% (5% excluding foreign exchange effects) to $3,567 million from
$3,437 million for 1996. Worldwide Applied Systems sales were flat and Worldwide
Unitary Systems sales increased 8%. Commercial markets account for approximately
75% of Air Conditioning Products' total sales. Approximately 65% of total sales
is to the replacement, renovation and repair markets.
Segment income of Air Conditioning Products in 1998 was $386 million, at
the same level as in 1997, but increased 1% excluding the unfavorable effects of
foreign exchange. Gains in Worldwide Unitary Systems were substantially offset
by declines in Worldwide Applied Systems. Segment income of Air Conditioning
Products increased 4% (with little effect from foreign exchange) to $386 million
in 1997 from $372 million in 1996. The increase was attributable primarily to
higher volume in the U.S. in commercial applied and unitary products.
Worldwide Applied Systems -- In 1998 Worldwide Applied Systems' sales increased
8% (10% excluding foreign exchange effects) to $2,034 million from $1,879
million in 1997 as a result of strong market growth and higher volumes in the
U.S. and higher volumes in Europe and the Middle East. Applied Systems' sales in
the U.S. increased 15% over those of 1997 primarily because of acquisitions and
expansion of commercial sales and service operations and increased equipment
sales, partly offset by the effects of competitive pricing pressures on
chillers. Outside the U.S., Applied Systems' sales increased in most regions,
substantially offset by lower volumes in the Far East, where economic weakness
continues, and the adverse effects of foreign exchange. Segment income for
Worldwide Applied Systems decreased 27% in 1998 to $148 million from $201
million in 1997 as a result of global pricing pressure, lower margins in Europe,
lower volumes in the Far East and a strike at the Lexington air handling
products facility in the first quarter of 1998.
================================================================================
F-4
<PAGE> 27
================================================================================
In 1997 Worldwide Applied Systems' sales were $1,879 million, essentially
the same as 1996 sales of $1,878 million, but 2% higher excluding foreign
exchange effects. This primarily reflected higher volume in the U.S. from
improved markets, the acquisition of additional commercial sales and service
businesses and modest growth in the Middle East and Europe, offset by a decrease
in the Far East because of economic weakness. Segment income increased 2% (3%
excluding foreign exchange effects) to $201 million in 1997 from $198 million in
1996, primarily because of the increased U.S. volume. That gain was partly
offset, however, by lower income in Europe and the Middle East.
Worldwide Unitary Systems -- In 1998 sales of Worldwide Unitary Systems
increased 13% (14% excluding foreign exchange effects) to $1,906 million from
$1,688 million in 1997. Sales in the U.S. for unitary commercial and residential
products increased 14% in 1998 driven by strong new construction and increased
replacement demand due to warmer-than-normal summer weather. Outside the U.S.,
improved sales of unitary systems were led by strong increases in Europe and
Latin America. Segment income for Worldwide Unitary Systems increased 29% (with
little effect from foreign exchange) to $238 million from $185 million in 1997,
principally reflecting higher U.S. volume and margin increases.
In 1997 sales of Worldwide Unitary Systems increased 8% (9% excluding
foreign exchange effects) to $1,688 million from $1,559 million in 1996. Markets
in the U.S. for commercial unitary products grew in 1997 for both replacement
and new construction, resulting in significantly higher sales volume. That
improvement was partly offset by lower residential products sales because of
cooler-than-normal summer weather in many parts of the U.S. Overseas, sales of
unitary products increased 16% (24% excluding foreign exchange effects)
primarily from significantly higher volumes in Latin America and less
significant volume gains in most other markets. Segment income for Worldwide
Unitary Systems increased 6% (with little effect from foreign exchange) to $185
million in 1997 from $174 million in 1996, primarily as a result of the
increased volume of commercial products, partly offset by the weather-related
declines in U.S. residential unitary operations and the adverse effects of
economic weakness in the Far East.
Backlog -- The worldwide backlog for Air Conditioning Products as of December
31, 1998, was $651 million, an increase of 1% from the year-earlier level,
excluding foreign exchange effects. This increase reflected improvement in the
U.S., partly offset by decreases in the Far East.
<TABLE>
<CAPTION>
================================================================================
PLUMBING PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Europe and Far East $ 843 $ 852 $ 917
Americas 667 587 535
- --------------------------------------------------------------------------------
Total $1,510 $1,439 $1,452
================================================================================
Segment income:
Europe and Far East $ 60 $ 75 $ 79
Americas 59 44 31
- --------------------------------------------------------------------------------
Total $ 119 $ 119 $ 110
================================================================================
</TABLE>
Sales by Plumbing Products were $1,510 million in 1998, an increase of 5% (9%
excluding the unfavorable effects of foreign exchange), from $1,439 million in
1997. The increase (excluding exchange) reflected a 17% sales gain for the
Americas and a 4% gain for Europe and Far East. Sales of Plumbing Products were
$1,439 million in 1997 compared with $1,452 million in 1996, a decrease of 1%
(but an increase of 5% excluding the unfavorable effects of foreign exchange).
This exchange-adjusted increase was attributable to gains of 10% in the Americas
and 2% in Europe and Far East.
================================================================================
F-5
<PAGE> 28
================================================================================
Segment income of Plumbing Products was $119 million for 1998, the same as
for 1997, but increased 5% excluding the unfavorable effects of foreign
exchange, because of a 40% gain in the Americas, partly offset by a 16% decline
in Europe and Far East. Segment 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 improvements for both the
Americas and for Europe and Far East.
Americas -- In 1998 Plumbing Products sales in the Americas increased 14% (17%
excluding foreign exchange effects) to $667 million from $587 million in 1997.
Sales in the U.S. grew 15% due to strong markets and market share gains,
primarily attributable to higher volumes with major home improvement retailers
and expansion in the wholesale channel. In addition, sales increased 10% in
Latin America, primarily on higher volume in Mexico. The Company believes that
the multi-year trend of sales and market share growth in the U.S. retail market
channel will continue and lead to increased Company sales because of strong
product and brand-name recognition. The increase in segment income for the
Americas was primarily due to higher volumes and the benefits of lower-cost
sourcing from expanded facilities in Mexico.
In 1997 sales in the Americas increased 10% (with little effect from
foreign exchange) to $587 million from $535 million in 1997. This increase
resulted principally from higher volumes in the U.S., primarily in the retail
market channel, and from smaller gains in Mexico and Brazil. The 43% increase in
segment income for the Americas reflected a significant improvement in the U.S.
due to higher sales and lower-cost sourcing from facilities in Mexico, as well
as improvements in Latin America.
Europe and Far East -- In 1998 sales for Europe and Far East were $843 million,
a decrease of 1% (but an increase of 4% excluding foreign exchange effects)
compared with sales of $852 million in 1997. The exchange-adjusted increase was
principally attributable to the effect of consolidating operations in China
following acquisition of a majority interest in the fourth quarter of 1997.
Other Far East operations continued to suffer from adverse economic conditions
in the region. Europe was flat excluding foreign exchange effects because of
weak economic conditions and the loss of sales by the distribution business of
Porcher which was sold in the fourth quarter of 1998. Segment income declined
20% (16% excluding foreign exchange), principally due to the effects of weak
economic conditions in most parts of the Far East and restructuring-related
inefficiencies in Europe, despite a gain in China.
In 1997 sales for Europe and Far East decreased by 7% but increased by 2%
excluding foreign exchange effects. The exchange-adjusted increase was
principally attributable to the sales of the operations in China (consolidated
since the last quarter of 1997). Europe was flat due to weak economic
conditions. Segment income in 1997 decreased 5% (but increased 7% excluding
foreign exchange effects). The exchange-adjusted increase was principally due to
margin improvement in Europe (primarily from cost reductions in France) and
income contributed by operations in China (consolidated since the last quarter
of 1997). These increases were partly offset by the effects of weak economic
conditions in other parts of the Far East.
Backlog -- Plumbing Products' backlog as of December 31, 1998, was $142 million,
an increase of 13% from December 31, 1997 (excluding foreign exchange effects),
reflecting improvements in Europe and Far East.
<TABLE>
<CAPTION>
================================================================================
AUTOMOTIVE PRODUCTS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $1,106 $ 952 $ 916
Segment income $ 153 $ 127 $ 123
</TABLE>
Sales of Automotive Products for 1998 were $1,106 million, an increase of 16%
(18% excluding the unfavorable effects of foreign exchange), from $952 million
in 1997. This gain was driven 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 16% compared with 1997. Original equipment sales
volumes were higher in almost all markets for commercial vehicle braking and
other control systems, including increased sales to trailer manufacturers.
Export sales from Europe more than doubled, primarily from sales of antilock
braking systems (ABS) to the Company's North American braking systems joint
venture, reflecting the effect of the second year of the three-year phase-in of
U.S. regulations requiring ABS on all new heavy-duty trucks and strong
commercial vehicle production. Sales of original equipment declined in Brazil,
where truck production declined due to weak economic conditions.
F-6
<PAGE> 29
================================================================================
Sales of Automotive Products for 1997 were $952 million, an increase of 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 1997
compared with 1996. Original equipment sales volumes were higher, 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 ABS to the Company's North American braking systems joint venture
reflecting the effect of the first year of the three-year phase-in of U.S.
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.
Segment income for Automotive Products was $153 million in 1998, an
increase of 20% (22% excluding the unfavorable effects of foreign exchange).
This increase was principally in Europe and resulted from the higher volume and
improved margins due to productivity improvements. These factors were partly
offset by the effects of product mix (higher original equipment and export sales
in Europe), higher development and maintenance costs in Europe, lower volume in
Brazil and start-up costs of the new, majority-owned joint ventures in the U.S.
and China.
Segment 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. These
factors were partly offset by the effects of product mix, lower margins in
Brazil and start-up costs of the majority-owned joint ventures in the U.S. and
China.
Backlog -- Automotive Products' backlog as of December 31, 1998, was $440
million, an increase of 14% from December 31, 1997 (excluding the unfavorable
effects of foreign exchange), reflecting improved markets.
<TABLE>
<CAPTION>
================================================================================
MEDICAL SYSTEMS SEGMENT
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 98 $ 50 $ --
Segment loss $(21) $(20) $(13)
</TABLE>
Medical Systems sales were $98 million in 1998 and $50 million in 1997
reflecting the June 30, 1997, acquisition of the medical diagnostics businesses
of Sorin Biomedica S.p.A. and INCSTAR Corporation. New product sales were strong
but offset by the expected sales decline in older radio immunoassay product
markets. A continued high level of development costs for new diagnostic tests
and the effect of declining older-product markets resulted in a loss of $21
million in 1998, nearly the same as the $20 million loss in 1997. The segment
loss in 1996 reflected development costs of the Company's medical diagnostics
ventures.
OTHER FINANCIAL SUMMARY ITEMS
In 1998 the Company committed to restructuring plans designed to achieve lower
product costs and improved operating efficiency. Accordingly, the Company
recorded charges totaling $200 million ($186 million net of tax benefits)
comprised of $185 million for Plumbing Products, $7 million for Air Conditioning
Products, $5 million for Automotive Products and $3 million for Medical Systems.
The Plumbing Products charge includes costs related to the closure of five
plants in Europe and two in North America, a loss on the sale of the French
plumbing distribution operations, write-off of related goodwill and a workforce
reduction of approximately 1,600 people. The Air Conditioning Products charge
reflects the closure of one plant in Australia, one plant in Europe and a
workforce reduction of 115 people. The Automotive Products charge relates to the
closure of three plants in Europe and a workforce reduction of 75 people. A
restructuring charge was
F-7
<PAGE> 30
================================================================================
also recorded for Medical Systems, relating to asset write-offs and severance
payments. The charge of $200 million is comprised of non-cash asset write-downs
of $89 million and accrued charges of $111 million, of which approximately $18
million were paid during 1998. Of the $93 million unpaid balance of the accrued
charges as of December 31, 1998, the Company expects that $75 million will be
paid by the end of 1999. See Note 4 of Notes to Consolidated Financial
Statements.
In 1997 the Company acquired the European medical diagnostic businesses of
Sorin Biomedica S.p.A. and INCSTAR Corporation for approximately $212 million.
This transaction was accounted for as a purchase, and in connection therewith,
the portion of the purchase price allocated to the value of in-process research
and development was written off, resulting in a non-cash charge of $90 million,
on which there was no tax benefit. See "Liquidity and Capital Resources and Note
3 of Notes to Consolidated Financial Statements.
In 1996 the Company adopted the new accounting standard for the impairment
of long-lived assets. Applying the criteria established by that standard, 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 increase in equity in net income of unconsolidated joint ventures for
1996 through 1998 reflects the strong growth of Automotive Products' North
American braking systems joint venture, benefits from the restructuring of Air
Conditioning Products' scroll compressor joint venture in 1997 and increased
income from the Company's financing joint venture.
Interest expense decreased $4 million in 1998 compared with 1997, as lower
average interest rates achieved through debt refinancing more than offset the
effect of increased debt arising from share repurchases and the medical
diagnostics businesses acquisition in June 1997. On June 1, 1998, the Company
redeemed the $741 million principal amount of its 10 1/2% Senior Subordinated
Discount Debentures and the $200 million principal amount of its 9 7/8% Senior
Subordinated Notes with lower-rate Senior Notes, as described below. During 1998
American Standard Companies Inc. purchased $84 million of its common stock and
during 1997 purchased $311 million of its common stock (with funds loaned by
American Standard Inc.) and acquired the medical diagnostics businesses for $212
million (see "Liquidity and Capital Resources"). Interest expense for 1997
decreased $6 million compared with 1996 because lower overall interest rates
more than offset the effect of increased debt from the share repurchases and the
medical diagnostics businesses acquisition.
Corporate expenses for 1998 totaled $110 million, compared with $105
million in 1997 and $104 million in 1996 and reflect increased finance fees
related to the sale of receivables to the Company's financial services joint
venture.
The income tax provisions for 1998, 1997 and 1996 were $132 million, $117
million and $105 million, respectively. Those provisions reflect an unusually
high effective tax rate because there is little tax benefit on the restructuring
charges in 1998, and no tax benefits on the write-off of purchased research and
development in 1997 and asset impairment charges in 1996. Excluding those
special charges, the effective income tax rate was 40% in 1998, 35.8% in 1997
and 35.6% in 1996. The 1998 rate reflects foreign tax effects that include a
loss contingency related to certain German tax matters, substantially offset by
reversal of a U.S. deferred tax liability related to foreign investments. The
rates for 1997 and 1996 are somewhat lower than normal statutory rates,
primarily the result of higher levels of taxable income in the U.S., which
enabled the Company to recognize previously unrecognized tax benefits. No
similar benefits were available in 1998. Partly offsetting this are the effects
of rate differences and withholding taxes related to foreign operations and
nondeductible goodwill amortization. See Note 7 of Notes to Consolidated
Financial Statements. The Company expects that its effective income tax rate in
1999 will be somewhat higher than in 1998, because of higher foreign taxes and
higher U.S. state taxes.
As a result of the redemption of debt in 1998 and 1997 with refinancing
proceeds, those years included extraordinary charges of $50 million (net of
taxes of $7 million) and $24 million (net of taxes of $6 million), respectively,
including call premiums and the write-off of unamortized debt issuance costs.
See the following section, "Liquidity and Capital Resources" and Note 10 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 $140
million, was $413 million for 1998, compared with $395 million for 1997. The $18
million increase resulted primarily from higher income before extraordinary item
(excluding from 1998 the $200 million restructuring charge and from 1997 the $90
million non-cash write-off of purchased research and development). Operating
working capital as a percentage of sales (excluding Medical Systems) improved to
2.9% in 1998, from 4.7% in 1997, primarily as a result of improved net working
capital in foreign operations and the sale of the French plumbing distribution
business.
F-8
<PAGE> 31
================================================================================
Average inventory turnover for 1998 was approximately two-tenths of a turn
higher than the average turnover for 1997, primarily attributable to ongoing
improvements under Demand Flow Technology. Net investing activities totaled $263
million, principally capital expenditures of $278 million (including $22 million
of investments in affiliated companies) - see "Capital Expenditures." Net cash
used by financing activities of $113 million reflected net incremental borrowing
which, together with cash provided by operations, funded the net investing
activities and the share repurchases.
In January 1997 the Company entered into the 1997 Credit Agreement. This
agreement, which requires no repayment of principal prior to its expiration 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"), which by their nature are short term and (b) a $375
million multi-currency periodic access credit facility. Up to $500 million of
the Revolving Facilities may be used to issue 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 10 of Notes to Consolidated Financial
Statements.
As of December 22, 1998, the Company completed an amendment to its 1997
Credit Agreement. The amendment principally permits American Standard to issue
up to an additional $500 million principal amount of senior or subordinated
unsecured debt securities, and lowers the interest coverage ratios and increases
the debt coverage ratios applicable to the Company beginning for periods ending
December 31, 1998. The purpose of the amendment was primarily to accommodate the
refinancing of $150 million of American Standard's 10 7/8% senior notes due May
15, 1999 and the financing of other proposed capital expenditures, including the
acquisition of the Bathrooms Division of Blue Circle Industries PLC described
below.
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from 7 1/8%
to 7 5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the Company
used the net proceeds of these offerings (approximately $963 million, net of
underwriting discounts and interest rate hedge costs) to redeem its 10 1/2%
Senior Subordinated Discount Debentures and 9 7/8% Senior Subordinated Notes.
The total amount required to complete these redemptions, including call
premiums, was $954 million, net of the effect of settlement of certain interest
rate swap transactions related to the Senior Subordinated Discount Debentures.
On November 25, 1998, American Standard Companies Inc. and its
wholly-owned subsidiary American Standard Inc. jointly filed a shelf
registration statement with the Securities and Exchange Commission (SEC), which
was amended on February 16, 1999, and which is being reviewed by the SEC and has
not yet been declared effective, covering $750 million of debt securities to be
offered by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. (the "1998 Shelf Registration"). The Company intends to
use the net proceeds from the sale of such debt securities for general corporate
purposes, which may include the repayment of outstanding debt, including debt
incurred to finance the acquisition of the Bathrooms Division of Blue Circle
Industries PLC, as well as for stock repurchases, certain investments,
acquisitions, additions to working capital or capital expenditures.
On February 2, 1999, the Company acquired the Bathrooms Division of Blue
Circle Industries PLC, a manufacturer of ceramic sanitaryware, brassware and
integrated plumbing systems, for approximately $417 million with borrowings
under the Company's 1997 Credit Agreement. The acquired business had 1998 sales
of approximately $290 million (at December 31, 1998 exchange rates) and assets
at December 31, 1998 of approximately $250 million (at December 31, 1998
exchange rates). The acquired business has 3 major facilities and 9 smaller
facilities, located in the United Kingdom and Italy, and employs approximately
3,200 people. The primary markets for its products are in the United Kingdom,
Italy, Ireland and Germany. This transaction will be accounted for as a
purchase. The Company is in the process of valuing the assets acquired and
liabilities assumed for purposes of allocating the purchase price. This process
is not complete, but based upon preliminary estimates, the Company anticipates
that goodwill of approximately $250 million will be recorded. Temporary
refinancing of $60 million of the indebtedness incurred to fund the acquisition
was obtained pursuant to a short-term Credit Agreement dated as of February 2,
1999 between American Standard Companies Inc., American Standard Inc. and
Goldman Sachs Credit Partners L.P. (the "Temporary Facility"). The indebtedness
under the Temporary Facility is senior unsecured debt of American Standard Inc.,
and is guaranteed by American Standard Companies Inc. Interest accrues on the
amount borrowed under the Temporary Facility at the rate of 7 3/8% per annum
until March 22, 1999 and at rates that increase on a quarterly basis thereafter.
It is anticipated that the outstanding principal amount under the Temporary
Facility will be repaid with proceeds from the sale of debt securities to be
offered to the public from time to time following the effectiveness of the shelf
registration statement described above.
F-9
<PAGE> 32
================================================================================
The Company believes that the amounts available from operating cash flows,
funds available under its 1997 Credit Agreement and future borrowings under the
1998 Shelf Registration will be sufficient to meet its expected operating needs
and planned capital expenditures for the foreseeable future. Any material
increase in the Company's need for cash above current expectations, however,
could require the Company to take actions such as curtailing capital
expenditures, incurring additional indebtedness and related costs, issuing
additional equity securities or selling assets, any or all of which actions
could reduce the Company's liquidity and earnings and the scope of its strategic
competitive options. 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, 1998, the Company's total indebtedness was $2.4 billion
and annual scheduled debt maturities, excluding the 1997 Credit Agreement, were
$169 million, $30 million, $12 million, $13 million and $134 million for the
years 1999 through 2003, respectively. The Company had remaining availability
under the 1997 Credit Agreement of approximately $638 million after reduction
for borrowings and for $61 million of outstanding letters of credit. The
Company's foreign subsidiaries had $86 million available at December 31, 1998,
under overdraft facilities which can be withdrawn by the banks at any time. In
addition, the Company's operations in China have $5 million available under bank
credit facilities after reduction for borrowings of $10 million and letters of
credit usage of $11 million.
In 1997 American Standard Companies Inc. completed a secondary public
offering of 12,429,548 shares of its common stock owned by Kelso ASI Partners,
L.P. ("ASI Partners"), then American Standard Companies Inc. largest
stockholder. In conjunction therewith, American Standard Companies Inc.
purchased from ASI Partners 4,628,755 shares of American Standard Companies Inc.
common stock for $208 million, plus fees and expenses, and issued to ASI
Partners warrants, expiring in February 2002, to purchase 3,000,000 shares of
American Standard Companies Inc. common stock at $55 per share (the "Exercise
Price"). The warrants entitle holders to receive cash or shares, at the
Company's option, based on the difference between the market value of American
Standard Companies Inc. common stock and the Exercise Price. All shares sold in
the secondary public offering were previously issued and outstanding, and
American Standard Companies Inc. received no proceeds therefrom (see Note 11 of
Notes to Consolidated Financial Statements).
On July 9, 1998, the Company's Board of Directors approved the purchase of
up to $300 million of American Standard Companies Inc. common stock, not to
exceed $100 million per year, during the three-year period ending July 2001.
During 1998, American Standard Companies Inc. purchased 2.7 million shares of
its common stock for $84 million, 2.5 million of which shares were purchased for
$75 million pursuant to this plan. During 1997 American Standard Companies Inc.
purchased 6.9 million shares of its common stock for $311 million, including the
above-referenced shares purchased from ASI Partners. These share purchases were
funded with cash loaned to American Standard Companies Inc. by American
Standard Inc. under a non-interest-bearing demand note.
In January 1997 the Company formed its Medical Systems Segment to develop
and market medical diagnostics technology and equipment. The Company had
previously 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. and INCSTAR Corporation. The aggregate cost of the acquisitions
was approximately $212 million, including fees and expenses, and was funded with
borrowings under the 1997 Credit Agreement. The transaction was accounted for as
a purchase, and $90 million of the purchase price was allocated to the value of
in-process research and development and written off (for which there was no tax
benefit). Approximately $69 million of goodwill resulted after allocation of the
purchase price to the fair value of assets acquired and liabilities assumed. See
"Purchased In-process Research and Development" below.
The Company is a partner in American Standard Financial Services, a
financial services partnership with Transamerica Commercial Finance Corporation.
The partnership offers inventory and consumer financing, and plans to provide
commercial leasing and other lending programs. Programs thus far implemented
have enhanced the Company's cash flow and equity income.
The Company does not currently intend to pay dividends and is limited in
the amount it may pay under the terms of the 1997 Credit Agreement, the
Temporary Facility 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 1994. Having proposed to settle one of
the issues under dispute, the Company has recorded a loss contingency as of
December 31, 1998. See Note 7 of Notes to Consolidated Financial Statements.
F-10
<PAGE> 33
================================================================================
CAPITAL EXPENDITURES
The Company's capital expenditures for 1998 were $278 million (including
investments in affiliated companies) compared with $302 million for 1997. The
decrease for 1998 related primarily to lower capital expenditures for Air
Conditioning Products and Plumbing Products. Capital spending in 1998 was
devoted primarily to shifting production to lower-cost locations, expansion of
manufacturing capacity to meet demand, equipment for new products, the
acquisition of additional ownership interests in affiliated companies, and the
continuing implementation of Demand Flow.
Capital expenditures for Air Conditioning Products for 1998 were $91
million, including $5 million of investments in affiliated companies, a decrease
of 11% from the $102 million of capital spending in 1997. Major expenditures
included completion of the expansion of the operations in China, acquisition of
an additional equity interest in the Malaysia affiliate, projects related to new
products and product improvements and improvements related to Demand Flow and
productivity. In addition, Air Conditioning Products spent $17 million for the
acquisition of sales offices.
Plumbing Products' capital expenditures for 1998 were $126 million,
compared with capital expenditures of $154 million in 1997 (including
investments in affiliated companies of $51 million), a decrease of 18%.
Expenditures in 1998 included acquisition of additional equity in Thailand and
Indonesia ventures, and completion of a chinaware plant and expansion of the
fittings plant in Bulgaria.
Capital expenditures for Automotive Products in 1998 were $50 million,
compared with $42 million in 1997, an increase of 19%. Major projects included
expenditures related to capacity expansion in Europe to serve the U.S. market.
Capital expenditures for Medical Systems in 1998 were $11 million,
compared with $4 million in 1997. Expenditures in 1998 were primarily for
equipment and computer software. On June 30, 1997, the Company acquired the
medical diagnostics businesses for $212 million, as described above in Liquidity
and Capital Resources.
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 joint ventures and making
complementary acquisitions. The Company expects to make capital expenditures in
1999, including acquisitions of U.S. air conditioning commercial sales and
service operations, of approximately $250 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Management believes that
the adoption of Statement No. 133 will not have a significant effect on the
Company's results of operations or financial position.
CYCLICAL AND SEASONAL NATURE OF BUSINESS
The preponderance of Air Conditioning Products and Plumbing Products sales are
to the replacement, remodeling and repair markets. In 1998, 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 and related segment income tend to be seasonally
higher in the second and third quarters of the year because summer is the peak
season for sales of air conditioning products. 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 READINESS DISCLOSURE
The following is a Year 2000 Readiness Disclosure in accordance with the Year
2000 Information and Readiness Disclosure Act.
Year 2000 compliance plan. The Company has established a comprehensive Year 2000
initiative, having appointed teams responsible for all of its locations
worldwide, coordinated by team leaders reporting directly to the business group
leaders, and in some cases employing third-party experts. The Vice President of
Information Technology, who reports directly to the Chairman and Chief Executive
Officer, heads the project. Progress reports are made periodically to the Audit
Committee of the Board of Directors. The teams are responsible for assuring that
all core business systems and transactions with customers, suppliers, financial
institutions and other third parties will be Year 2000 ready. Additionally, a
consultant has been retained at corporate headquarters to provide overall
guidance and assistance with the compliance plan. Consultants have also been
employed at various operating locations to augment the efforts of the local Year
2000 teams or to provide expertise in certain areas. In general, a coordinated
approach has been undertaken by the Company's
F-11
<PAGE> 34
================================================================================
Year 2000 teams worldwide, with "best practices" shared among teams. The
principal phases of the initiative include:
Inventory -- identification of all technology and systems, including
imbedded technology in manufacturing and other operating and control
systems that could be affected by the Year 2000 issue. This phase is
essentially complete.
Assessment -- testing and evaluating whether remediation is necessary and
prioritizing tasks based on whether the system is evaluated as "critical",
the size of the system and the perceived risk. This phase is ongoing but
is expected to be essentially complete by the end of the first quarter of
1999.
Remediation and Testing -- Remediation includes the replacement or
modification of non-compliant technology with technology that is Year 2000
compliant. All new or modified systems are expected to be tested in a Year
2000 environment from the beginning of the transaction process to the end.
Completion is expected by mid-1999 for all core systems. Existing non-core
systems will be replaced or modified and tested, or contingency plans will
be put in place to minimize or eliminate the effect of Year 2000 problems.
Completion of non-core systems is expected in the third and fourth
quarters of 1999.
Contingency planning -- development of contingency plans in situations
where there is substantial risk that compliance will not be achieved at
any Company location or by any critical supplier in time to avoid Year
2000 problems. Contingency plans are expected to be in place by mid-1999.
Third party relationships -- communicating and working with suppliers,
customers and other third parties with whom the Company does business to
minimize the potential adverse effects of Year 2000 problems. This
includes evaluating new and previously sold products that incorporate
equipment controls with imbedded technology to identify and resolve any
problems that customers may have with Company products as a result of the
arrival of the year 2000.
State of readiness. Management believes that substantial progress has been made
towards the objective of having all core business systems Year 2000 compliant.
The project's phases are in varying degrees of completion. We define substantial
progress as the fact that at December 31, 1998, approximately 80% of the
Company's Year 2000 plan has been completed. When situations are identified
where there is substantial risk that any important objectives of the project
will not be met, the Company has dedicated and will continue to dedicate
additional resources.
For several years the Company has been converting most of its mainframe
computer applications and systems worldwide to client server technology and, in
conjunction therewith, has been installing software that is Year 2000 compliant.
For all systems other than mainframe, software that is Year 2000 compliant is
also being installed, including desktop applications. Most of these initiatives
were undertaken irrespective of any Year 2000 considerations and, except for a
few instances, implementation would have been completed before the year 2000.
Substantial progress has been made on these installations and many of the
individual projects have been completed. Completion of most others is expected
by mid-1999. For those installations not expected to be completed until the year
2000, revisions are being made to existing systems to ensure readiness.
Third-party relationships. The Company has initiated communications with
suppliers, customers and other third parties to identify and assess Year 2000
risks and to develop solutions that will minimize any adverse impact on the
Company. Over one-half, in number, of the Company's suppliers have responded,
and the Company expects to resolve timely any identified problems with critical
or non-responding suppliers or to develop contingency plans where possible. The
Company's manufacturing facilities are highly dependent on public utilities,
especially electrical power, natural gas, water and communications companies.
There is a risk that suppliers or others on whom the Company relies will not
successfully address Year 2000 issues. Should one or more critical suppliers be
unable to supply us with products or services at any of the Company's 120
manufacturing locations, and the Company or the supplier not have established
appropriate contingency plans, such failure could result in the inability of the
Company, at that location, to deliver products on a timely basis and have a
material adverse effect on the results of operations at that location.
The Company does not believe that it has material Year 2000 exposure with
respect to products sold to customers. The only Company products containing
imbedded electronic systems subject to Year 2000 issues are commercial air
conditioning and medical products. The Company is evaluating imbedded electronic
control systems in products sold to customers of its commercial air conditioning
systems and medical products. Computer controls for commercial air conditioning
systems and medical products are being checked and replaced where necessary.
This process is expected to be complete by mid-1999.
F-12
<PAGE> 35
================================================================================
The Company is evaluating delivery commitments to customers, product
warranties and representations made with respect to Year 2000 compliance of its
products. Management believes that it is adequately addressing such issues and
that, subject to the considerations described above, any potential material
liability to third parties for Year 2000 failures in its products or inability
to deliver products timely is remote.
Risks and contingency plans. Management believes that the Company's most
reasonably likely worst case scenario is some short-term, localized disruptions
of systems, manufacturing operations, facilities or suppliers that will affect
individual business operations, rather than broad-based, systemic, or long-term
problems affecting operating segments or groups of operations. The most
significant uncertainties relate to critical suppliers, particularly electrical
power, water, natural gas and communications companies, and suppliers of parts
and materials that are vital to the continuity of operations. Contingency plans
are being formulated and put in place, where possible, for all critical
suppliers. These measures include finding alternative sources of supply and
purchasing safety stocks of parts and materials if failure of a supplier is
expected, and forming emergency response teams at each operating location to
deal with any problems which develop.
Costs. The Company's estimated cost to become Year 2000 compliant is
approximately $21 million. Of this, approximately $14 million are costs being
charged to expense as incurred, including internal and external labor to repair
or modify existing software, and costs of consultants employed at various
locations to assist with implementation of the Company's plan. The balance of
estimated costs represent replacement hardware and software to be capitalized.
Through December 31, 1998, approximately $9 million had been expended, of which
$6 million had been charged to expense. These costs are generally not
incremental to existing information technology budgets, as existing internal
resources were redeployed and the costs of consultants employed are less than
10% of total Year 2000 costs. The costs of implementing client server technology
and other software changes made for reasons other than the Year 2000 and which
were not accelerated are not included in these estimates. There were no
significant deferrals of information technology projects because of the
Company's response to Year 2000 issues. Information technology planning has
incorporated client server and Year 2000 initiatives for several years and,
therefore, there has been little effect on the Company's operations because of
unexpected deferrals of projects important to growth or competitiveness. All
costs are being funded from operating cash flows or other resources available to
the Company. Based upon information currently available and current estimates,
management believes that the Company's costs to become Year 2000 compliant will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows in future periods. Total costs, anticipated impact
and the expected dates to complete the various phases of the project are based
on management's best estimates using information currently available and certain
assumptions about future events. However, no assurance can be given that actual
results will be consistent with such estimates and, therefore, actual costs,
impacts and completion dates could differ materially from those plans. See
"Disclosure Regarding Forward Looking Statements".
EFFECT OF THE EURO
The Company is currently evaluating the effects of the new European monetary
unit ("Euro") on the Company's operations as a result of the pending conversion
of many European currencies to the Euro. Changes are being made to existing
systems and procedures to complete a smooth and timely transition with minimal
disruption to operations or financial records. The Company believes that
conversion to the Euro will not have a significant effect on the Company's
financial position or results of operations. Costs related to the conversion are
not expected to be material and are being expensed as incurred.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
The portion of American Standard's Medical Systems segment formerly known as
INCSTAR Corporation ("Incstar") focuses on the assessment and monitoring of
diseases and related therapeutics, including: autoimmune, bone and mineral
(osteoporosis), infectious disease (HIV and hepatitis), nutritional status,
endocrine functionality, renal disease and dialysis, and transplantation. Its
products include individual test reagents and test-kits used for clinical
diagnostic and medical research purposes that are considered "open system"
(i.e., that work with many instruments, both proprietary and non-proprietary).
At the time of its acquisition in June 1997, Incstar was principally engaged in
the manufacture of individual test reagents and test-kits using radioactive
isotopic assays, non-isotopic immunoassays and enzyme-linked immunosorbant
assays.
The portion of American Standard's Medical Systems segment formerly known
as Sorin Diagnostics S.r.l. ("Sorin") performs research and development
activities and produces test-kits for advanced DNA probe technology and the
detection of blood diseases and other substances via enzyme and radioactive
immunoassay.
F-13
<PAGE> 36
================================================================================
Test kit manufacturers are required to submit a pre-market notification
submission to the U.S. Food and Drug Administration ("FDA") for each new
diagnostic product. Medical devices in the U.S. are regulated by and must have
approval from the FDA prior to marketing and selling any device or related
product. Investigation Device Exemption is required in order to market medical
devices, and Pre-Market Approval or Pre-Market Notification Approval is required
prior to commercial distribution of a device. Similar requirements exist in
other countries in which the Medical Systems segment does business.
In connection with the purchases of Incstar and Sorin, the Company made
allocations of the purchase price to acquired in-process technology. These
amounts were expensed as non-recurring charges on the acquisition date because
the acquired in-process technology had not yet reached technological feasibility
and had no alternative future uses. All Incstar and Sorin products under
development at the time of the acquisition which had not achieved technological
feasibility and had not received Pre-Market Approval or Pre-Market Notification
Approval were classified as in-process technology. Management believed that
these products under development had significant technological hurdles to
overcome to reach technological feasibility, such as the ability to perform
multiple tests simultaneously and confirm the results, and provide analysis of
the diagnosed condition status as acute or chronic. Certain in-process projects
contained a portion of core technology as many are second generation products.
The proportionate share of developed or in-process technology for each product
was determined based on the innovative content of each R&D project and its
reliance on core technology.
Each of the in-process projects was categorized into the following phases:
Research; Feasibility; Development; Clinical; and Filing in order to determine
the stage of development and the efforts necessary to complete. The in-process
projects were in the areas of: Bone and Mineral; Transplantation; Infectious
Diseases; Autoimmunity; Serum Proteins; and Prenatal Screening.
At the time of the acquisition, management anticipated the total costs to
complete the development of the Incstar and Sorin technologies at approximately
$10.4 million and $12.0 million, respectively. These costs were anticipated to
be incurred through the first quarter of the year 2000. Total research and
development expenditures on in-process technologies since the date of
acquisition through December 31, 1998, were approximately $5.5 million.
Revenue growth rates for the acquired medical diagnostic businesses used
in the valuation of the in-process technology started at 28% and declined to 4%
during the course of the estimation period which was from the date of the
acquisition (July 1, 1997) through 2010. Revenues for these businesses from the
date of the acquisition (July 1, 1997) through December 31, 1998 have remained
relatively flat, reflecting a decline in revenues related to the
radioimmunoassay product lines substantially offset by an increase in revenues
in the non-isotopic assay product lines. The industry has been shifting away
from the use of radioimmunoassay products in favor of non-isotopic assay
products.
Operating expense percentages used in the valuation of the in-process
technology ranged from 80% to 60% during the course of the estimation period.
Operating expense percentages for these businesses from the date of the
acquisition (July 1, 1997) through December 31, 1998 were in excess of 100%
reflecting the rapidly declining market for radioimmunoassay products and the
impact of delays experienced in the development and delivery to market of the
in-process technologies. The causes for the delays are further described below.
Revenues projected to be derived from in-process technologies for the
period from July 1, 1997 (date of acquisition) to December 31, 1998 were
significantly less than originally projected. This shortfall in revenue is
attributable to delays experienced in the development and delivery to market of
the technologies which were in process at the time of acquisition of the
businesses by American Standard. The delays are attributable to two principal
factors. Based upon a reevaluation of the business strategy in early 1998, the
newly appointed senior management concluded that it was more advantageous to
modify the in-process technologies from use on an open platform basis to use on
the Company's proprietary equipment, Copalis. As a result, project schedules
were extended substantially to allow for training on the new diagnostic
equipment and adaptation of the in-process technologies. Additionally, to a
lesser extent, the process of integrating the separately acquired medical
businesses of Sorin and Incstar with the smaller medical technology development
operation already owned by American Standard, to form one cohesive operation
managed by American Standard, resulted in the loss of some technical expertise
which in turn caused disruptions in the development efforts. The length of delay
will vary by each discrete product as the development and roll-out is influenced
by a variety of factors including allocation of resources, prioritization of
business objectives and shifts in use of changing technologies within the
marketplace; however, on average the delays are expected to range from 18 to 24
months. If the in-process projects contemplat-
F-14
<PAGE> 37
================================================================================
ed in the valuation of the acquired medical businesses are not successfully
developed, future revenue and profitability of the Company may be adversely
affected. Additionally, the amount of the Incstar and Sorin purchase price
allocated to goodwill may become impaired.
The discount rate selected for the in-process technologies was 26% for
both Incstar and Sorin. In selecting appropriate discount rates, consideration
was given to (i) the weighted average cost of capital ("WACC"; 17%) and (ii) the
weighted average return on assets (approximately 20% to 24%). The discount rate
utilized for the in-process technologies was determined to be higher than
American Standard's WACC because the in-process technologies had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than American Standard's WACC, management has reflected the risk
premium associated with achieving the forecasted cash flows associated with
these projects.
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, Indonesia, 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 33 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, 1998,
$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, 1998, approximately 53% 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 good faith 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 such 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 supplies or products or those of its
competitors, and other competitive pressures on pricing and sales; labor
relations; integration of acquired businesses; risks generally relating to the
Company's international operations, including governmental, regulatory or
political changes; changes in environmental, health or other regulations that
may affect one or more of the Company's products or potential products and the
inability to obtain regulatory approvals for one or more of the Company's
potential products; changes in laws or different interpretations of laws
including the risk that German judicial authorities will disagree with the
opinions of the Company's German legal counsel; 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.
F-15
<PAGE> 38
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
================================================================================
The accompanying consolidated balance sheet at December 31, 1998 and 1997, and
related consolidated statements of operations, stockholder's deficit and cash
flows for the years ended December 31, 1998, 1997 and 1996, have been prepared
in conformity with generally accepted accounting principles, and the Company
believes the statements set forth a fair presentation of financial condition and
results of operations. The Company believes that the accounting systems and
related controls which it maintains are sufficient to provide reasonable
assurance that the financial records are reliable for preparing financial
statements and maintaining accountability for assets. The concept of reasonable
assurance is based on the recognition that the cost of a system of internal
control must be related to the benefits derived and that the balancing of those
factors requires estimates and judgment. Reporting on the financial affairs of
the Company is the responsibility of its principal officers, subject to audit by
independent auditors who are engaged to express an opinion on the Company's
financial statements. The Board of Directors has an Audit Committee of outside
Directors which meets periodically with the Company's financial officers,
internal auditors and the independent auditors and monitors the accounting
affairs of the Company.
American Standard Inc.
February 19, 1999
REPORT OF INDEPENDENT AUDITORS
================================================================================
The Board of Directors
American Standard Inc.
We have audited the accompanying consolidated balance sheet of American Standard
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholder's deficit, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Standard Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its consolidated cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
February 19, 1999
F-16
<PAGE> 39
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
American Standard Inc.
<TABLE>
<CAPTION>
Year Ended December 31, (Dollars in thousands) 1998 1997 1996
<S> <C> <C> <C>
Sales $ 6,653,881 $ 6,007,509 $ 5,804,561
- ---------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 5,002,771 4,481,915 4,379,765
Selling and administrative expenses 1,092,921 979,036 905,427
Restructuring and asset impairment charges 200,300 -- --
Write-off of purchased research and development -- 90,300 --
Asset impairment loss -- -- 235,234
Other expense 4,076 27,254 28,337
Interest expense 188,437 192,216 198,192
- ---------------------------------------------------------------------------------------------------
6,488,505 5,770,721 5,746,955
- ---------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 165,376 236,788 57,606
Income taxes 131,784 116,928 104,324
- ---------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 33,592 119,860 (46,718)
Extraordinary loss on retirement of debt, net of taxes (49,909) (23,637) --
- ---------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shares $ (16,317) $ 96,223 $ (46,718)
===================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 40
CONSOLIDATED BALANCE SHEET
================================================================================
American Standard Inc.
<TABLE>
<CAPTION>
At December 31, (Dollars in thousands, except share data) 1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 64,824 $ 28,772
Accounts receivable, less allowance for doubtful accounts - 1998, $34,991; 1997, $30,226 938,846 831,285
Inventories 458,099 430,773
Future income tax benefits 42,751 40,048
Other current assets 86,741 62,392
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 1,591,261 1,393,270
Facilities, at cost, net of accumulated depreciation 1,240,959 1,139,184
Other assets:
Goodwill, net of accumulated amortization - 1998, $250,893; 1997, $225,020 832,789 844,238
Debt issuance costs, net of accumulated amortization - 1998, $9,542; 1997, $11,718 40,225 22,516
Other 845,239 579,827
- ------------------------------------------------------------------------------------------------------------------------
$ 4,550,473 $ 3,979,035
========================================================================================================================
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Loans payable to banks $ 731,972 $ 718,412
Current maturities of long-term debt 168,682 30,459
Accounts payable 544,489 466,119
Accrued payrolls 203,554 179,635
Other accrued liabilities 594,964 409,800
Taxes on income 115,395 45,717
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,359,056 1,850,142
Long-term debt 1,527,518 1,550,772
Other long-term liabilities:
Reserve for postretirement benefits 477,938 437,651
Deferred tax liabilities 48,327 94,961
Other 482,435 372,949
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,895,274 4,306,475
Commitments and contingencies
Stockholder's deficit:
Preferred stock, Series A, $.01 per value, 1,000 shares authorized, issued and outstanding -- --
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding -- --
Capital surplus 571,316 560,417
Accumulated deficit (691,581) (675,264)
Foreign currency translation effects (224,536) (212,593)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (344,801) (327,440)
- ------------------------------------------------------------------------------------------------------------------------
$ 4,550,473 $ 3,979,035
========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 41
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
American Standard Inc.
<TABLE>
<CAPTION>
Year Ended December 31, (Dollars in thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash provided (used) by:
Operating activities:
Income (loss) before extraordinary item $ 33,592 $ 119,860 $ (46,718)
Non-cash restructuring charges 88,688 -- --
Write-off of purchased in-process research and development -- 90,300 --
Asset impairment loss -- -- 235,234
Depreciation 134,529 124,855 117,951
Amortization of goodwill and other intangibles 55,519 39,107 27,580
Non-cash interest 31,599 59,857 61,794
Non-cash stock compensation 6,228 9,930 31,201
Changes in assets and liabilities:
Accounts receivable (94,133) (40,652) (25,479)
Inventories (31,562) (22,538) (32,499)
Accounts payable and accrued payrolls 90,033 18,739 (21,356)
Postretirement benefits 14,721 8,578 19,770
Other long-term liabilities (1,002) 46,785 24,455
Other, net 84,530 (59,437) (39,172)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 412,742 395,384 352,761
- -----------------------------------------------------------------------------------------------------------
Investing activities:
Purchases of property, plant and equipment (255,300) (245,258) (212,179)
Investments in affiliated companies (22,432) (56,925) (15,321)
Acquisition of medical diagnostics businesses -- (212,270) --
Proceeds from disposals of property, plant and equipment 30,743 19,099 15,105
Other (16,507) 18,696 6,293
- -----------------------------------------------------------------------------------------------------------
Net cash (used) by investing activities (263,496) (476,658) (206,102)
- -----------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of long-term debt 1,012,129 401,538 6,912
Repayments of long-term debt, including redemption premiums (996,578) (655,335) (73,429)
Net change in revolving credit facilities (23,860) 622,559 (106,332)
Net change in other short-term debt 4,912 8,673 (13,627)
Net loan (to) from parent (75,943) (303,010) 4,069
Minority partners' contributions to PRC venture -- 5,920 18,165
Financing costs and other (33,984) (24,019) (10,355)
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (113,324) 56,326 (174,597)
Effect of exchange rate changes on cash and cash equivalents 130 (5,979) (1,067)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 36,052 (30,927) (29,005)
Cash and cash equivalents at beginning of period 28,772 59,699 88,704
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 64,824 $ 28,772 $ 59,699
===========================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 42
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
================================================================================
American Standard Inc.
<TABLE>
<CAPTION>
(Dollars in thousands) Foreign
Currency
Capital Accumulated Translation Comprehensive
Surplus Deficit Effects Income
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 519,886 $(724,769) $(174,650)
Net loss -- (46,718) -- $ (46,718)
Foreign currency translation -- -- 1,492 1,492
-------------
Total comprehensive income $ (45,226)
=============
American Standard Companies Inc.
common stock purchased (9,897) -- --
Capital contributions from parent, principally related to
ESOP and stock bonus plans 50,825 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 560,794 (771,487) (173,158)
Net income -- 96,223 -- $ 96,223
Foreign currency translation -- -- (39,435) (39,435)
-------------
Total comprehensive income $ 56,788
=============
American Standard Companies Inc.
common stock purchased (16,937) -- --
Capital contributions from parent, principally related to
ESOP, stock bonus plans and related tax benefits 16,560 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 560,417 (675,264) (212,593)
Net loss -- (16,317) -- $ (16,317)
Foreign currency translation -- -- (11,943) (11,943)
-------------
Total comprehensive income $ (28,260)
=============
Capital contributions from parent, principally related to
the Employee Stock Purchase Plan and acquisition of sales offices 10,899 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 571,316 $(691,581) $(224,536)
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1. DESCRIPTION OF THE COMPANY
American Standard Inc. (the "Company") is a Delaware corporation incorporated in
1929. All of its outstanding common stock is owned by American Standard
Companies Inc., a Delaware corporation formed in 1988 to acquire American
Standard Inc. Hereinafter, "American Standard" or "the Company" will refer to
the Company, American Standard Companies Inc. or to American Standard Inc.,
including its subsidiaries, as the context requires.
American Standard is a global manufacturer of high quality, brand-name
products in three major product groups: air conditioning systems for commercial,
institutional and residential buildings; plumbing fixtures and fittings for
bathrooms and kitchens; and braking and control systems for medium-sized and
heavy trucks, buses, trailers and utility vehicles. In 1997 the Company formed a
medical diagnostics segment (see Note 3). Information on the Company's
operations by segment and geographic area is included on pages F-34 and F-35 of
this report.
NOTE 2. ACCOUNTING POLICIES
Financial Statement Presentation -- The consolidated financial statements
include the accounts of majority-owned subsidiaries; intercompany transactions
are eliminated. Investments in unconsolidated joint ventures are included at
cost plus the Company's equity in undistributed earnings.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. The most significant estimates included in the preparation of the
financial statements are related to postretirement benefits, income taxes,
warranties and asset lives.
Foreign Currency Translation -- Adjustments resulting from translating foreign
functional currency assets and liabilities into U.S. dollars are recorded in a
separate component of stockholder's equity. Gains or losses resulting from
transactions in other than the functional currency are reflected in the
Consolidated Statement of Operations, except for transactions which hedge net
investments in a foreign entity and intercompany transactions of a long-term
investment nature. For operations in countries that have hyper-inflationary
economies, net income includes gains and losses from translating assets and
liabilities at year-end rates of exchange, except for inventories and
facilities, which are translated at historical rates.
The losses from foreign currency transactions and translation losses in
countries with hyper-inflationary economies reflected in expense were $6.5
million in 1998, $4.2 million in 1997 and $2.3 million in 1996.
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.
Goodwill -- Goodwill is being amortized over 40 years. The carrying value 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 this review indicates that goodwill will not
be recoverable, as determined based on the estimated undiscounted cash flows of
the entity acquired, impairment is measured by comparing the carrying value of
goodwill to fair value. Fair value is determined based on quoted market values,
discounted cash flows or appraisals. In addition, the Company assesses
long-lived assets for impairment under Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Under those rules, goodwill associated
with assets acquired in a purchase business combination is included in
impairment evaluations when events or circumstances indicate that the carrying
amount of those assets may not be recoverable.
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
F-21
<PAGE> 44
================================================================================
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 $167 million in 1998, $161
million in 1997 and $160 million in 1996 for research activities and product
development and for product engineering. Expenditures for research and product
development only were $105 million, $112 million and $101 million in the
respective years.
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 $91 million, $111 million and $88 million of advertising costs
in 1998, 1997 and 1996, respectively.
Comprehensive Income -- In 1998, the Company adopted Statements of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income consists of net income and foreign currency translation
adjustments and is presented in the Consolidated Statement of Stockholder's
Deficit. The Company's investments in its foreign subsidiaries are considered to
be permanently invested and no provision for income taxes on the related foreign
exchange translation adjustments of those subsidiaries has been recorded.
Financial Instruments with Off-Balance-Sheet Risk -- The Company from time to
time enters into agreements to reduce its foreign currency and interest rate
risks. Gains and losses from underlying rate changes are included in income
unless the contract hedges a net investment in a foreign entity, a firm
commitment, or related debt instrument, in which case gains and losses are
deferred as a component of foreign currency translation effects in stockholder's
equity or included as a component of the transaction (see Note 10).
Stock Based Compensation -- The Company grants to employees options to acquire a
fixed number of shares of American Standard Companies Inc. common stock with an
exercise price equal to the market value of the shares at the date of grant.
Accordingly, the Company recognizes no compensation expense for stock option
grants under APB Opinion No. 25, Accounting for Stock Issued to Employees.
NOTE 3. ACQUISITION OF MEDICAL DIAGNOSTICS BUSINESSES
In January 1997 the Company formed its Medical Systems Segment to develop and
market medical diagnostics technology and equipment. The Company had previously
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 business of Sorin Biomedica S.p.A. and
INCSTAR Corporation. The aggregate cost of the acquisitions was approximately
$212 million, including fees and expenses, and was funded with borrowings under
the 1997 Credit Agreement. The transaction was accounted for as a purchase, and
$90 million of the purchase price was allocated to the value of in-process
research and development and written off in the third quarter of 1997 (for which
there was no tax benefit). Approximately $69 million of goodwill resulted after
allocation of the purchase price to the fair value of assets acquired and
liabilities assumed. Since the acquisition was not material to the Company's
financial position or results of operations, pro forma financial information is
not presented.
NOTE 4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
In 1998, the Company committed to restructuring plans designed to achieve lower
product costs and improved efficiency. Key elements of the plans include the
transfer of significant manufacturing capacity to locations with lower labor
costs and the sale of certain assets. In connection therewith, the Company
determined that certain long-lived assets were impaired. Accordingly, in 1998
the Company recorded charges totaling $200 million ($186 million net of tax
benefits), including $185 million for Plumbing Products, $7 million for Air
Conditioning Products, $5 million for Automotive Products and $3 million for
Medical Systems.
The Plumbing Products charge of $185 million reflects the closure of five
plants in Europe and two in North America. The charge includes a loss on the
sale of the French plumbing distribution operations, costs related to a
workforce reduction of approximately 1,600 people and, applying the criteria of
FAS 121, write-downs of impaired fixed assets and related goodwill.
F-22
<PAGE> 45
================================================================================
The Air Conditioning Products charge of $7 million involves the closure of
one plant in Australia, one plant in Europe, and a workforce reduction of 115
people. The Automotive Products charge of $5 million primarily reflects a
workforce reduction of 75 people in Europe related to having certain machining
work done by low-cost outside vendors rather than in the Company's own
facilities and the closure of three small plants. A restructuring charge of $3
million was also recorded for Medical Systems, relating to asset write-offs and
severance payments.
The Company recorded $35 million ($29 million net of tax) of these charges
in the third quarter of 1998 and $165 million ($157 million net of tax) in the
fourth quarter of 1998.
Components of the restructuring and asset impairment charges are (dollars
in millions):
<TABLE>
<CAPTION>
================================================================================
Balance
Initial Non-cash Paid Dec. 31,
Charge Write-off in 1998 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Termination payments
to employees $ 49.8 $ -- $ 10.4 $ 39.4
Other employee
related costs 33.6 -- 4.3 29.3
Facilities:
Write-downs, including
related goodwill of
$31.3 million (a) 72.4 72.4 -- --
Site preparation costs 15.9 -- -- 15.9
Loss on sale of French
distribution business,
including goodwill of
$12.3 million 19.1 14.9 3.6 .6
Other 9.5 1.4 .2 7.9
- --------------------------------------------------------------------------------
$200.3 $ 88.7 $ 18.5 $ 93.1
================================================================================
</TABLE>
(a) The goodwill write-down of $31.3 million related to the facilities
write-down was associated with the French plumbing manufacturing
operations. Based on the Company's decision to restructure its French
plumbing business, which included the sale of its distribution business
and the closure of three manufacturing facilities, management determined
that the long-lived assets, including goodwill, of its remaining French
manufacturing operations might have been impaired. Accordingly, management
estimated the undiscounted future cash flows of these operations to be
less than the carrying amount of the long-lived assets. This resulted in a
write-down which included $31.3 million of goodwill.
Closure of all facilities affected is expected to be completed by the end
of 1999. The charge of $200.3 million is comprised of non-cash asset write-downs
of $88.7 million and accrued charges of $111.6 million. Of the $93.1 million
unpaid balance of accrued charges as of December 31, 1998, the Company expects
that $75 million will be paid by the end of 1999 and the remainder in 2000.
The accrued termination payments to employees include only severance
payments after termination. Other employee related costs include negotiated
supplemental payments to pension funds and other payments to union organizations
for the benefit of terminated employees. Of the 1,800 employees being
terminated, approximately 1,500 are hourly factory workers and 300 are salaried
administrative personnel. As of December 31, 1998, approximately 260 employees
had been terminated.
The facilities being closed and written down include eight owned and four
leased manufacturing plants, and the related manufacturing equipment. The owned
plants are being held for disposal and, accordingly, were written down to the
lower of carrying amount or fair value, less costs to sell. Two of those
facilities will be demolished and the land held for sale. Leases on the four
rented facilities will be terminated upon payment of obligations specified or
negotiated under the lease contracts. Manufacturing equipment being scrapped was
written off and equipment being sold has been written down to the lower of
carrying amount or fair value, less costs to sell. The net carrying value of
land, buildings and equipment held for sale as of December 31, 1998 was $13
million. The closure of certain facilities necessitates the investigation of
potential environmental contamination or the legal or regulatory requirement to
remediate the facility. In addition, the sale of one facility contractually
obligates the Company to demolish and remediate the site. These costs are
included in site preparation costs in the table above.
The French plumbing distribution business was sold in October 1998 as part
of the restructuring plan. In 1998 that business generated $80 million of sales
and an operating loss of $6 million.
Approximately one-half of other restructuring costs is leasehold
termination costs, with the remainder consisting of cash grants forfeited upon
closure of a facility in Italy, inventory write-off and other miscellaneous
costs.
The tax benefit on the total charge is at lower than normal rates because
the goodwill write-off is not deductible for tax purposes and in certain
countries the tax benefits on these charges are not expected to be realized.
F-23
<PAGE> 46
================================================================================
NOTE 5. OTHER EXPENSE
Other income (expense) was as follows:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income $ 6.9 $ 5.9 $ 6.2
Equity in net income of
unconsolidated joint ventures 27.4 11.9 2.6
Minority interest (1.5) (10.1) (11.7)
Accretion expense (22.9) (26.7) (29.3)
Foreign exchange gain (loss) (6.7) (2.2) 2.1
Other, net (7.3) (6.1) 1.8
- --------------------------------------------------------------------------------
$ (4.1) $ (27.3) $ (28.3)
================================================================================
</TABLE>
The Company has investments in affiliates that are accounted for on the
equity method. The more significant of these investments is Meritor WABCO
Vehicle Control Systems ("Meritor/WABCO"). Meritor/WABCO, in which the Company
has a 50% equity ownership, is a U.S. sales and marketing organization serving
truck and bus manufacturers and aftermarket distribution for Automotive
Products' anti-lock braking systems.
Following is summarized financial information for Meritor/WABCO:
<TABLE>
<CAPTION>
================================================================================
For the Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Condensed statement of operations
Sales $ 226.2 $ 113.2 $ 66.5
Gross profit 63.7 31.8 17.1
Net income 47.2 19.6 6.7
Company's equity in net income 23.6 9.8 3.4
As of December 31,
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Condensed balance sheet
Current assets $ 55.1 $ 34.6
Noncurrent assets 2.4 2.3
Current liabilities 35.7 18.3
Net assets 21.8 18.6
Company's equity in net assets 10.9 9.3
</TABLE>
NOTE 6. POSTRETIREMENT BENEFITS
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("FAS 132"), which improves and standardizes disclosures
about pensions and other postretirement benefits. FAS 132 addresses disclosure
issues only and does not change the measurement or recognition provisions
required in Statements No. 87, Employers' Accounting for Pensions, No. 88,
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
For Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions.
The Company sponsors postretirement pension benefit plans covering
substantially all employees, including an Employee Stock Ownership Plan (the
"ESOP") for the Company's U.S. salaried employees and certain U.S. hourly
employees. The ESOP is an individual account, defined contribution plan. Shares
of American Standard Companies Inc. common stock held by 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 American Standard Companies
Inc. common stock based upon the closing price each Friday for shares of
American Standard Companies Inc. 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 American Standard Companies Inc. common
stock.
Benefits under defined benefit pension plans on a worldwide basis are
generally based on years of service and employees' compensation during the last
years of employment. In the United States the Company also provides various
postretirement health care and life insurance benefits for certain of its
employees. Funding decisions are based upon the tax and statutory considerations
in each country. Accretion expense is the implicit interest cost associated with
amounts accrued and not funded and is included in "other expense". At December
31, 1998, 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.
F-24
<PAGE> 47
================================================================================
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ending December 31,
1998 and 1997, and a statement of the funded status as of December 31, 1998 and
1997:
================================================================================
<TABLE>
<CAPTION>
1998 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Domestic Domestic
Domestic Health & Foreign Domestic Health & Foreign
Pension Life Ins. Pension Pension Life Ins. Pension
Benefits Benefits Benefits Benefits Benefits Benefits
<S> <C> <C> <C> <C> <C> <C>
Reconciliation of benefit obligation
Obligation at beginning of year $ 407.0 $ 191.4 $ 476.1 $ 373.9 $ 179.1 $ 482.6
Service cost 9.5 5.8 21.2 8.4 4.7 17.9
Interest cost 28.2 13.1 25.6 26.9 12.9 27.0
Participant contributions -- 4.0 2.1 -- 4.7 1.7
Plan amendments 6.9 -- -- 0.1 0.1 1.6
Actuarial loss 21.5 3.4 18.0 20.9 5.3 24.2
Acquisitions -- -- -- 3.6 -- --
Benefit payments (27.6) (15.9) (27.7) (26.8) (15.4) (32.4)
Foreign exchange effects -- -- 19.3 -- -- (46.5)
- ---------------------------------------------------------------------------------------------------------------------------
Obligation at end of year $ 445.5 $ 201.8 $ 534.6 $ 407.0 $ 191.4 $ 476.1
===========================================================================================================================
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $ 386.0 $ -- $ 241.6 $ 323.0 $ -- $ 228.6
Actual return on assets 69.9 -- 27.5 72.8 -- 34.6
Employer contributions 11.7 11.9 21.0 17.0 10.7 23.6
Participant contributions -- 4.0 2.1 -- 4.7 1.7
Benefit payments (27.6) (15.9) (27.7) (26.8) (15.4) (32.4)
Foreign exchange effects -- -- (2.1) -- -- (14.5)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 440.0 $ -- $ 262.4 $ 386.0 $ -- $ 241.6
===========================================================================================================================
Funded Status at December 31
Funded status $ (5.5) $ (201.8) $ (272.2) $ (21.0) $ (191.4) $ (234.5)
Unrecognized prior service cost 27.7 (8.8) 8.2 23.7 (9.5) 8.2
Unrecognized net actuarial (gain) loss (72.5) 31.4 (8.2) (56.4) 28.7 (12.8)
- ---------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (50.3) $ (179.2) $ (272.2) $ (53.7) $ (172.2) $ (239.1)
===========================================================================================================================
</TABLE>
F-25
<PAGE> 48
================================================================================
The following tables provide a summary of plans with assets in excess of
accumulated benefit obligations and plans with accumulated benefit obligations
in excess of assets for the foreign and domestic pension benefits as of December
31:
================================================================================
<TABLE>
<CAPTION>
1998 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Assets in Accumulated Assets in Accumulated
Excess of Benefit Excess of Benefit
Accumulated Obligations Accumulated Obligations
Benefit in Excess of Benefit in Excess of
Obligations Assets Obligations Assets
<S> <C> <C> <C> <C>
Domestic pension benefits
Projected benefit obligation $ 421.2 $ 24.3 $ 385.1 $ 21.9
Accumulated benefit obligation 413.7 18.1 378.0 16.5
Fair value of plan assets 440.0 -- 386.0 --
Accrued benefit liabilities (30.9) (19.4) (36.5) (17.2)
Foreign pension benefits
Projected benefit obligation $ 214.4 $ 320.2 $ 188.8 $ 287.3
Accumulated benefit obligation 191.1 289.9 167.8 260.0
Fair value of plan assets 240.1 22.3 221.5 20.1
Prepaid benefit costs (accrued benefit liabilities) 39.4 (311.6) 39.1 (278.2)
</TABLE>
================================================================================
The projected benefit obligation for postretirement benefits was
determined using the following assumptions:
================================================================================
<TABLE>
<CAPTION>
1998 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------
Domestic Foreign Domestic Foreign
<S> <C> <C> <C> <C>
Weighted-average assumptions as of December 31:
Discount rate 6.75% 3.00%-6.50% 7.00% 3.75%-7.00%
Long-term rate of inflation 2.80% 0.5%-1.80% 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% 4.00%-8.25% 9.00% 4.50%-8.25%
</TABLE>
================================================================================
The weighted-average annual assumed rate of increase in the health care
cost trend rate is 5% for 1999 and is assumed to remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. A change in the assumed rate of one percentage point
for each future year would have the following effects:
<TABLE>
<CAPTION>
================================================================================
(Dollars in millions)
1% Increase 1% Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on the health care component of
accumulated postretirement obligation $ 14.1 $ 13.2
Effect on total of service and interest cost
components of net periodic postretirement
health care benefit cost $ 2.8 $ 2.5
================================================================================
</TABLE>
F-26
<PAGE> 49
================================================================================
Total postretirement costs were:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pension benefits $ 42.1 $ 39.5 $ 41.7
Health and life insurance benefits 18.8 17.2 17.4
- --------------------------------------------------------------------------------
Defined benefit plan cost 60.9 56.7 59.1
Defined contribution plan cost,
principally ESOP 39.9 32.1 31.2
- --------------------------------------------------------------------------------
Total postretirement cost, including
accretion expense $ 100.8 $ 88.8 $ 90.3
================================================================================
</TABLE>
Postretirement cost had the following components:
<TABLE>
<CAPTION>
==============================================================================================================================
1998 1998 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
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
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned during the period $ 30.7 $ 5.8 $ 26.3 $ 4.7 $ 24.5 $ 4.7
Interest cost on the projected benefit obligation 53.8 13.1 53.9 12.9 55.6 12.5
Less assumed return on plan assets:
Actual return on plan assets (97.4) -- (107.4) -- (64.0) --
Excess asset gain deferred 49.4 -- 63.2 -- 22.7 --
- ------------------------------------------------------------------------------------------------------------------------------
(48.0) -- (44.2) -- (41.3) --
Amortization of prior service cost 4.0 (.7) 3.0 (.7) 2.2 (.6)
Amortization of net (gain) loss .4 .6 .5 .3 .7 .8
- ------------------------------------------------------------------------------------------------------------------------------
Defined benefit plan cost 40.9 18.8 39.5 17.2 41.7 17.4
- ------------------------------------------------------------------------------------------------------------------------------
Curtailment loss 1.2 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net defined benefit plan cost after curtailments $ 42.1 $ 18.8 $ 39.5 $ 17.2 $ 41.7 $ 17.4
==============================================================================================================================
Accretion expense reclassified to "other expense" $ 9.8 $ 13.1 $ 13.8 $ 12.9 $ 16.8 $ 12.5
==============================================================================================================================
</TABLE>
Amortization of prior service costs are computed on the straight-line method
over the average remaining service period of active participants.
F-27
<PAGE> 50
================================================================================
NOTE 7. INCOME TAXES
The Company's income (loss) before income taxes and extraordinary item, and the
applicable provision (benefit) for income taxes were:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes and
extraordinary item:
Domestic $ 183.2(a) $ 145.7(b) $ 162.6
Foreign (17.8)(a) 91.1(b) (105.0)(c)
- --------------------------------------------------------------------------------
$ 165.4 $ 236.8 $ 57.6
================================================================================
Provision (benefit) for income taxes:
Current:
Domestic $ 82.2 $ 96.2 $ 48.2
Foreign 113.9 67.5 70.2
- --------------------------------------------------------------------------------
196.1 163.7 118.4
Deferred:
Domestic (67.3) (42.9) (4.2)
Foreign 3.0 (3.9) (9.9)
- --------------------------------------------------------------------------------
(64.3) (46.8) (14.1)
- --------------------------------------------------------------------------------
Total provision $ 131.8 $ 116.9 $ 104.3
================================================================================
</TABLE>
(a) Includes $200.3 million of restructuring expense in 1998: domestic $22
million; foreign $178.3 million. Associated tax benefits were $14.5
million: domestic $8.5 million; foreign $6.0 million.
(b) Includes $90.3 million write-off of purchased research and development in
1997: domestic $32 million; foreign $58 million.
(c) Includes a foreign asset impairment loss in 1996 of $235.2 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 1998, 1997 and 1996 to the income (loss) before income taxes and
extraordinary item is as follows:
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, (Dollars in millions)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $ 57.9 $ 82.9 $ 20.2
Increase (decrease) in valuation
allowance 41.4 (27.4) (13.0)
Nondeductible goodwill amortization
and goodwill write-offs 23.5 8.3 8.3
Reversal of deferred taxes on
foreign investments (50.1) -- --
Other foreign tax effects 53.5 14.6 5.5
Nondeductible write-off of purchased
research and development -- 31.6 --
Nondeductible asset impairment loss -- -- 82.3
State tax provision 1.3 1.8 1.3
Other, net 4.3 5.1 (.3)
- --------------------------------------------------------------------------------
Total provision $ 131.8 $ 116.9 $ 104.3
================================================================================
</TABLE>
The increase in the valuation allowance in 1998 of $41.4 million was
primarily attributable to the generation of foreign net operating loss
carryforwards (related to restructuring charges) that are not expected to be
realized. The decrease in the valuation allowance in 1997 of $27.4 million, net
of a $12.4 million valuation allowance on the generation of foreign net
operating loss carryforwards and foreign tax credit carryforwards, was primarily
attributable to the fact that management believes it is more likely than not
that all of the net domestic deferred tax assets will be realized. The decrease
in the valuation allowance in 1996 of $13.0 million was net of a $10.8 million
valuation allowance provided on future tax benefits on certain foreign
operations.
In 1991, in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" the Company provided $50.1 million of
deferred U.S. taxes with respect to a transaction which had the effect of
reducing the U.S. tax basis, but not the book basis of its investment in a
foreign subsidiary. Under existing U.S. tax law, no mechanism was available in
1991 or future years to eliminate this outside book and tax basis difference
without incurring $50.1 million of U.S. tax cost. Therefore, the Company
provided $50.1 million to reflect this future U.S. tax liability. In December
1998 the Company completed legal
F-28
<PAGE> 51
================================================================================
reorganizations of certain foreign operations. These reorganizations, coupled
with two new U.S. tax law changes that were made effective from January 1997 and
July 1998, respectively, provided the Company with the opportunity to make a tax
election to treat, for U.S. tax purposes only, certain significant foreign
operations as a branch rather than a subsidiary without incurring any U.S. tax
cost. This election gives the Company greater future consistency with respect to
U.S. and foreign taxation of the subject businesses. This election also
eliminated the difference between the book and tax basis in the foreign
subsidiary. As a result, the $50.1 million deferred U.S. tax provided in 1991
was reversed as of December 31, 1998. The other foreign tax effects in 1998 of
$53.5 million include a loss contingency related to certain German tax matters,
rate differences and withholding taxes.
The following table details the gross deferred tax liabilities and assets
and the related valuation allowances:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Facilities (accelerated depreciation, capitalized
interest and purchase accounting differences) $ 122.0 $ 115.4
Inventory (LIFO and purchase accounting
differences) (2.3) (1.9)
Employee benefits 7.0 6.7
Foreign investments -- 50.1
Other 49.0 46.5
- --------------------------------------------------------------------------------
175.7 216.8
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement benefits 133.5 136.8
Warranties 76.3 66.0
Foreign net operating losses and
tax credits 99.0 57.6
Reserves 69.9 49.9
Other 6.1 9.9
Valuation allowances (99.0) (57.6)
- --------------------------------------------------------------------------------
285.8 262.6
- --------------------------------------------------------------------------------
Net deferred tax assets $ 110.1 $ 45.8
================================================================================
</TABLE>
In 1997, the valuation allowance with respect to U.S. deferred tax assets
was entirely eliminated because of higher levels of taxable income in the U.S.
in 1997 and in 1998. Deferred tax assets related to foreign tax credits and
foreign net operating loss carryforwards 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. 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 $117 million, $105 million, and $135 million in the
years 1998, 1997 and 1996, respectively.
As a result of audits of the Company's German subsidiaries by The State
Finance Administration for the State of North Rhine-Westphalia, Germany for the
periods 1984 through 1990 and 1991 through 1994, the Company has previously
received two assessments for the 1984-1990 audit period which the Company has
been contesting. The Company believes, based on the opinion of external German
legal counsel, that the Company's German tax returns are substantially correct
as filed and that any adjustments would be inappropriate. Unless the Company is
otherwise able to reach a satisfactory resolution of these matters with the
German tax authority, the Company intends to contest vigorously the pending
assessments and any other amounts that may be assessed.
The first assessment was issued in 1992 for approximately $18 million of
combined corporation and trade taxes and claimed a disallowance of a deduction
of interest expense related to an intercompany finance instrument. Later in 1992
the amount of the assessment was deposited with the German tax authority as
security for the disputed tax and a suit to recover that amount was promptly
commenced and is currently pending before the Tax Court for the State of North
Rhine-Westphalia in Cologne, Germany. As a result of making the deposit, no
interest will accrue on the amount under dispute. The second assessment,
received in March 1996, was for approximately $65 million of combined
corporation and trade taxes. Were the Company not to prevail in its dispute of
this assessment, the Company could be required to pay interest on the assessed
amount of approximately $16 million as of December 31, 1998. Interest on
assessed and unpaid taxes accrues, on a non-compounding basis, at the rate of
six percent per annum commencing fifteen months after the end of the tax year
for which the tax is assessed. The second assessment claimed
F-29
<PAGE> 52
================================================================================
primarily that earnings of a Dutch subsidiary should have been recognized as
income taxable in Germany. In early 1997, the German tax authority agreed to
accept a partial deposit of $18 million in respect of the second assessment and
the Company commenced an administrative appeal of the assessment with the German
tax authority. The amounts paid in 1992 and 1997 were recorded as assets on the
Company's consolidated balance sheets because the Company, expecting to prevail
in litigation of these matters, would recover such amounts and, therefore,
appropriately accounted for them as receivables. This position is based upon the
opinion of the Company's external German legal counsel, referred to above, that
the Company's German tax returns are substantially correct as filed and that
adjustments would be inappropriate.
In 1998, in connection with the development of the Company's plan to
restructure certain of its European plumbing operations, including some located
in Germany, the Company entered into discussions with certain German regulatory
authorities which could have resulted in an offer to settle the primary issue
under dispute with respect to the second assessment, including all corporation
and trade taxes and accrued interest. To facilitate further discussions, certain
agreed supplemental audit procedures were commenced in the second half of 1998
and completed in December 1998. In January 1999, it became evident that these
efforts would not result in a settlement of any of the disputed taxes. In
addition, on January 22, 1999 the Company's appeal of the second assessment and
any offer of settlement was rejected. In February 1999, the Company filed notice
of appeal with the German Tax Court and moved to join the Company's appeal of
the first assessment with its appeal of the second assessment. In addition, the
Company requested an order from the German tax authority staying the obligation
to pay the amount of the second assessment during the pendency of the Company's
appeal. On March 15, 1999, the staying order was granted. The Company has agreed
to leave the amount already deposited with the German tax authority pending
final resolution of the dispute. In the ordinary course, it is anticipated that
litigation of the Company's appeal before the State Tax Court will require five
to seven years and that any appeal thereafter to the federal Supreme German Tax
Court would require an additional two or three years. Although the Company's
proposal of settlement was rejected, the Company has continued to pursue
settlement on the terms of the proposal.
As a result of the replacement in Germany of the Christian Democratic
party by the Social Democratic party following national elections in September
1998, the Company's discussions with German regulatory authorities and the
completion of the supplemental audit in the fourth quarter of 1998 proving to be
inconclusive, and the rejection by the German tax authority of the Company's
appeal request and settlement efforts in January 1999, the Company has recorded
a loss contingency as of December 31, 1998 in the amount of the deposits related
to the first and second assessments, related trade taxes and accrued interest
thereon, which amount represents the amount for which the Company would have
been willing to settle the issue related to the second assessment. Based on the
opinion of the Company's external German legal counsel referred to above, the
Company intends to vigorously contest and to litigate these disputed German tax
matters, and no additional contingency with respect to such matters has been
recorded.
With respect to the 1991-1994 audit period, the Company engaged in
significant transactions similar to those that gave rise to the assessments in
the prior audit period and, with respect to a matter related to the intercompany
instrument at issue in connection with the first assessment, the German tax
auditors have proposed an adjustment of approximately $47 million. In addition,
because the German tax authority assessed additional taxes for the 1984-1990
audit period they might, after completing their audit of the later period,
propose further adjustments for the 1991-1994 audit period related to the
subject matter of the second assessment that might be as much as fifty percent
higher than the amount of the assessments in the first audit period. Although
the Company is unable to predict when the audit of its German tax returns for
the 1991-1994 period will be complete or the amount of any additional taxes that
may be assessed, the Company believes the audit may be completed prior to the
end of 1999.
If all matters currently under review by the German tax authority were
made the subject of assessments and either no orders staying the payment of such
amounts following assessment or during the pendency of the Company's appeal were
granted or the Company was finally determined to owe the full amount of all such
taxes, the Company could be required to pay all assessed amounts plus accrued
interest thereon, together with the amount of all related trade taxes. The total
amount of any payments made with respect to the tax matters described above, and
the timing thereof, could have a material adverse effect on the Company's
liquidity, cash flow and/or results of operation and, consequently, impair the
Company's competitive position. In addition, the Company might need to raise
additional capital and no assurance can be given as to the availability of debt
or equity financing if such need were to arise.
F-30
<PAGE> 53
================================================================================
NOTE 8. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 269.1 $ 255.0
Products in process 97.3 86.8
Raw materials 91.7 89.0
- --------------------------------------------------------------------------------
Inventories at cost $ 458.1 $ 430.8
================================================================================
</TABLE>
The carrying cost of inventories approximates current cost.
NOTE 9. FACILITIES
The components of facilities, at cost, are as follows:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 73.8 $ 72.0
Buildings 471.8 442.2
Machinery and Equipment 1,193.6 1,093.3
Improvements in progress 112.9 109.2
- --------------------------------------------------------------------------------
Gross facilities 1,852.1 1,716.7
Less: accumulated depreciation 611.1 577.5
- --------------------------------------------------------------------------------
Net facilities $1,241.0 $1,139.2
================================================================================
</TABLE>
NOTE 10. DEBT
In January 1997 the Company entered into the 1997 Credit Agreement which
requires no repayment of principal prior to its expiration in 2002. This
agreement provides the Company 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").
Each loan outstanding under the Revolving Facilities 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 0.75%. This rate is subject to
adjustment and will change based on the Company's financial leverage ratio.
Excluding the 1997 Credit Agreement which expires in 2002, the amounts of
long-term debt maturing in years 1999 through 2003 are: 1999 - $169 million;
2000 - $30 million; 2001 - $12 million; 2002 - $13 million and 2003 - $134
million.
As of December 22, 1998, the Company completed an amendment to the 1997
Credit Agreement permitting American Standard to issue up to an additional $500
million in aggregate principal amount of senior or subordinated unsecured debt
securities, lowering the interest coverage ratios and increasing the debt
coverage ratios applicable to the Company beginning for periods ending December
31, 1998. The purpose of the amendment was principally to accommodate the
refinancing of $150 million of American Standard's 10 7/8% senior notes due May
15, 1999 and the financing of capital expenditures, including the acquisition of
the Bathrooms Division of Blue Circle Industries PLC. See Note 15 of Notes to
Consolidated Financial Statements.
In the first half of 1998, the Company completed public offerings of $1
billion principal amount of Senior Notes with interest rates ranging from 7 1/8%
to 7 5/8% and maturity dates from 2003 to 2010. On June 1, 1998, the Company
used the net proceeds of these offerings (approximately $963 million, net of
underwriting discounts and interest rate hedge costs) to redeem its 10 1/2%
Senior Subordinated Discount Debentures and 9 7/8% Senior Subordinated Notes.
The total amount required to complete these redemptions, including call
premiums, was $954 million, net of the effect of the settlement of certain
interest rate swap transactions related to the Senior Subordinated Discount
Debentures.
On November 25, 1998, American Standard Companies Inc. and its
wholly-owned subsidiary American Standard Inc. jointly filed a shelf
registration statement with the Securities and Exchange Commission (SEC) which
was amended on February 16, 1999 and which is being reviewed by the SEC and has
not yet been declared effective, covering $750 million of debt securities to be
offered by American Standard Inc. and unconditionally guaranteed by American
Standard Companies Inc. The Company intends to use the net proceeds from the
sale of such debt securities for general corporate purposes, which may include
the repayment of outstanding debt, including debt incurred to finance the
acquisition of the Bathrooms Division of Blue Circle Industries PLC, as well as
for stock repurchases, certain investments, acquisitions, additions to working
capital or capital expenditures.
As a result of the redemption of debt in 1998 and 1997, the Consolidated
Statement of Operations included extraordinary charges of $50 million (net of
taxes of $7 million) and $24 million (net of taxes of $6 million), respectively
including call premiums and the write-off of deferred debt issuance costs.
Short-term -- The Revolving Facilities 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 currently pays a
commitment fee of 0.1875% per annum on the
F-31
<PAGE> 54
================================================================================
unused portion of the Revolving Facilities and a fee of 0.75% per annum plus
issuance fees for letters of credit. At December 31, 1998, there were $673
million of borrowings outstanding under the Revolving Facilities and $61 million
of letters of credit. Remaining availability under the Revolving Facilities was
$638 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 1998, 1997 and 1996 were $509 million, $574 million and $215
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, 1998, the Company had $60 million of such foreign short-term debt
outstanding at an average interest rate of 10% per annum. The Company also had
an additional $86 million of unused foreign facilities. These facilities may be
withdrawn by the banks at any time. The Company also has credit facilities for
its operations in China totaling $26 million, of which $10 million was
outstanding as of December 31, 1998, with remaining availability of $5 million
after $11 million letters of credit usage.
Average short-term borrowings for 1998, 1997 and 1996 were $571 million,
$639 million and $284 million, respectively, at weighted average interest rates
of 5.60%, 6.38% and 7.33%, respectively. Total short-term borrowings outstanding
at December 31, 1998, 1997 and 1996 were $732 million, $718 million and $109
million, respectively, at weighted average interest rates of 5.10%, 6.0% and
7.5%, respectively.
Long-term -- Long-term debt was as follows:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
<C> <C> <C>
1997 Credit Agreement $ 394.5 $ 354.1
9 1/4% sinking fund debentures, due in
installments from 1999 to 2012 105.0 127.5
10 7/8% senior notes due 1999 150.0 150.0
7 1/8% senior notes due 2003 125.0 --
7 3/8% senior notes due 2005 250.0 --
7 3/8% senior notes due 2008 350.0 --
7 5/8% senior notes due 2010 275.0 --
9 7/8% senior subordinated notes due 2001 -- 200.0
10 1/2% senior subordinated discount
debentures (net of unamortized
Discount of $23.9 million in 1997) -- 686.7
Other long-term debt 46.7 63.0
- --------------------------------------------------------------------------------
1,696.2 1,581.3
Less current maturities 168.7 30.5
- --------------------------------------------------------------------------------
$1,527.5 $1,550.8
================================================================================
</TABLE>
Interest costs capitalized as part of the cost of constructing facilities
for the years ended December 31, 1998, 1997, and 1996, were $4.5 million, $3.8
million and $3.9 million, respectively. Cash interest paid for those same years
on all outstanding indebtedness amounted to $140 million, $135 million and $140
million, respectively.
The U.S. Dollar equivalent of the 1997 Credit Agreement loans and the
effective weighted average interest rates were:
<TABLE>
<CAPTION>
================================================================================
Year Ended December 31, (Dollars in millions)
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Periodic access loans:
Deutschemark loans at 4.38% in 1998;
4.44% in 1997 $ 362.7 $ 324.5
Dutch guilder loans at 4.33% in 1998;
4.44% in 1997 31.8 29.6
- --------------------------------------------------------------------------------
Total Credit Agreement long-term loans 394.5 354.1
Revolver loans at 4.7% in 1998; 5.7% in 1997 672.7 672.0
- --------------------------------------------------------------------------------
Total Credit Agreement long-term loans $1,067.2 $1,026.1
================================================================================
</TABLE>
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 1999 to 100%
in 2006 and thereafter. The Company may, however, on any sinking fund payment
date, elect to redeem an additional $15 million principal amount of the sinking
fund debentures. The 10 7/8% Senior Notes are not redeemable by the Company but
are due May 15, 1999. The Senior Notes with due dates in 2003, 2005, 2008 and
2010 are not redeemable by the Company prior to maturity.
Obligations under the 1997 Credit Agreement are guaranteed by American
Standard Companies Inc., 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, as amended.
F-32
<PAGE> 55
================================================================================
Certain of 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 11. CAPITAL STOCK
The Company's Certificate of Incorporation authorizes the Company to issue up to
1,000 shares of common stock, par value $.01 per share and 1,000 shares of
preferred stock, par value $.01 per share. All of the outstanding common stock
is owned by American Standard Companies Inc.
In 1997 American Standard Companies Inc. completed a secondary public
offering of 12,429,548 shares of its common stock owned by ASI Partners, then
American Standard Companies Inc. largest shareholder. In conjunction therewith,
American Standard Companies Inc. purchased from ASI Partners 4,628,755 shares of
American Standard Companies Inc. common stock for $208 million plus fees and
expenses. All of the American Standard Companies Inc. shares sold in the
secondary offering were previously issued and outstanding, and American
Standard Companies Inc. received no proceeds therefrom. In addition, American
Standard Companies Inc. also issued to ASI Partners warrants expiring in
February 2002 to purchase 3,000,000 shares of American Standard Companies Inc.
common stock at $55 per share (the "Exercise Price"). The warrants entitle
holders to receive cash or shares, at the Company's option, based on the
difference between the market value of American Standard Companies Inc. common
stock and the Exercise Price. The estimated fair value of these warrants at the
date issued was $9.34 per share using a Black-Scholes option pricing model and
assumptions similar to those used for valuing American Standard Companies Inc.
stock options as described below.
On July 9, 1998, the Company's Board of Directors approved the purchase of
up to $300 million of American Standard Companies Inc. common stock, not to
exceed $100 million per year, during the three-year period ending July 2001.
During 1998, American Standard Companies Inc. purchased 2,675,750 shares of its
common stock for $84 million, of which 2,479,450 shares were purchased for $75
million pursuant to this plan. During 1997 American Standard Companies Inc.
purchased 6,949,655 shares of its common stock for $311 million, including the
shares purchased from ASI Partners. These share purchases were funded with cash
loaned to American Standard Companies Inc. by American Standard Inc. under a
non-interest-bearing demand note.
The Company has a Stock Incentive Plan (the "Stock Plan") under which
awards may be granted to officers and other key executives and employees in the
form of stock options, stock appreciation rights, restricted stock or restricted
units in shares of common stock of American Standard Companies Inc. In 1998 the
Board of Directors authorized an increase of 5 million shares under the plan to
be issued from available treasury shares held by American Standard Companies
Inc. The maximum number of shares or units that may be issued under the Stock
Plan and other incentive bonus plans is 12,604,475, of which 7,604,475 may be
granted as incentive stock options. Stock option awards granted under the Stock
Plan 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 1996, 1997
and 1998 follows:
<TABLE>
<CAPTION>
================================================================================
Weighted- Weighted-
Average Average
Exercise Fair Value
Shares Price of Grants
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Granted 1,426,000 40.77 $ 15.26
Exercised (460,016) 20.42
Forfeited (101,517) 32.29
- --------------------------------------------------------------------------------
Outstanding -
December 31, 1998 6,384,152 28.69
- --------------------------------------------------------------------------------
Exercisable at end of year:
1996 1,422,539 20.01
1997 2,661,450 20.04
1998 4,162,423 22.15
</TABLE>
In addition, on February 2, 1999, the Company granted awards in the form
of options to purchase 1,466,500 shares of American Standard Companies Inc.
common stock.
F-33
<PAGE> 56
================================================================================
Exercise prices for options outstanding as of December 31, 1998, ranged
from $20 to $47.22. The weighted-average remaining contractual life of those
options is 7.1 years. As of December 31, 1998, there were 5,133,850 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 loss in 1998 would have increased by $9.5 million; net income
in 1997 would have decreased by $12.1 million; and the net loss in 1996 would
have increased by $8.2 million. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.1% in 1998, 5.6% in 1997 and 6.3% in
1996; volatility of 32% in 1998, 25% in 1997 and 23% in 1996; an expected life
of 5 years in 1998 and 1997, and 6 years in 1996; and a dividend yield of zero.
These estimated expense amounts are not necessarily indicative of amounts in
years beyond 1998.
In 1997 shareholders of American Standard Companies Inc. approved the
establishment of the Employee Stock Purchase Plan commencing January 1, 1998.
The Company intends to implement the plan in as many countries worldwide as is
reasonably practical, given the applicable regulations in such countries. Upon
enrollment, employees purchase shares of American Standard Companies Inc. common
stock at the end of each calendar quarter, through payroll deductions, at a
discount of 15% from the market price, as quoted on the New York Stock Exchange
on the last trading day of each calendar quarter. Annual purchases are limited
to a maximum of $21,250. Shares purchased under the plan are deposited with a
custodian and must be held for one year before they may be sold. The Company
funds the plan as soon as practicable after the close of each quarter with
either treasury shares or newly issued shares, at the Company's discretion. In
1998 employees purchased 197,078 shares under this plan.
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of all of the Company's financial instruments at
December 31, 1998, approximate their carrying amounts. The fair values of the
Company's 1997 Credit Agreement loans were estimated using indicative market
quotes obtained from a major bank. The fair values of senior notes, and sinking
fund debentures were based on indicative market quotes obtained from a major
securities dealer. The fair values of other loans were estimated by the Company
to approximate their carrying value.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments under the terms of all noncancellable
operating leases in effect at December 31, 1998, are: 1999 - $62 million; 2000 -
$50 million; 2001 - $43 million; 2002 - $35 million, 2003 - $31 million and
thereafter - $55 million. Net rental expenses for operating leases were $69
million, $64 million and $70 million for the years ended December 31, 1998,
1997, and 1996, 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 7).
The Company has a minority equity investment in and guarantees $7 million
of the indebtedness of a company with operations unrelated to the Company's
businesses.
NOTE 14. SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" as of
December 31, 1998. In accordance with the requirements of this new standard, the
Company has changed its reporting of segment data to reflect its internal
management method of reporting and, as required, has restated all prior periods
presented for comparability. Accordingly, items which are excluded from segment
income for internal management reporting, such as restructuring charges in 1998,
the write-off of purchased research and development in 1997 and an asset
impairment charge in 1996, are excluded from segment income. Financing fees
related to the sale of receivables by Air Conditioning Products in the U.S. for
all years presented have been reclassified to Corporate expenses since they also
are excluded from the new measurement of segment income. In addition, the
segment data reflect the realigned organizational structure for Air Conditioning
Products into Worldwide Applied Systems Group and Worldwide Unitary Systems, and
for Plumbing Products into the Americas group and Europe and Far East group. See
also the Five-Year Financial Summary on page F-2 and Management's Discussion and
Analysis on pages F-3 through F-11.
F-34
<PAGE> 57
<TABLE>
<CAPTION>
================================================================================
SEGMENT DATA
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Air Conditioning Products $ 3,940 $ 3,567 $ 3,437
Plumbing Products 1,510 1,439 1,452
Automotive Products 1,106 952 916
Medical Systems 98 50 --
- --------------------------------------------------------------------------------
$ 6,654 $ 6,008 $ 5,805
================================================================================
Segment income (loss):
Air Conditioning Products $ 386 $ 386 $ 372
Plumbing Products 119 119 110
Automotive Products 153 127 123
Medical Systems (21) (20) (13)
- --------------------------------------------------------------------------------
637 612 592
Equity in net income of unconsolidated
joint ventures 27 12 3
Restructuring charges (200) -- --
Write-off of purchased research and
development -- (90) --
Asset impairment loss -- -- (235)
Interest expense (188) (192) (198)
Corporate expenses (110) (105) (104)
- --------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary item $ 166 $ 237 $ 58
================================================================================
Sales-Geographic distribution (a):
United States $ 3,426 $ 3,002 $ 2,856
Europe 2,129 1,955 2,050
Germany (included in Europe) 706 596 560
Other 1,269 1,194 1,041
Eliminations (170) (143) (142)
- --------------------------------------------------------------------------------
Total sales $ 6,654 $ 6,008 $ 5,805
================================================================================
Segment income-Geographic distribution:
United States $ 419 $ 364 $ 342
Europe 172 165 171
Other 46 83 79
- --------------------------------------------------------------------------------
Total segment income $ 637 $ 612 $ 592
================================================================================
Assets
Air Conditioning Products $ 1,807 $ 1,577 $ 1,474
Plumbing Products 1,094 1,092 1,042
Automotive Products 766 676 747
Medical Systems 181 170 6
- --------------------------------------------------------------------------------
Total identifiable assets $ 3,848 $ 3,515 $ 3,269
================================================================================
Geographic distribution:
United States $ 1,520 $ 1,363 $ 1,173
Europe 1,491 1,394 1,433
Other 837 758 663
- --------------------------------------------------------------------------------
Total identifiable assets 3,848 3,515 3,269
- --------------------------------------------------------------------------------
Prepaid charges 40 23 34
Cash and cash equivalents 65 29 60
Corporate assets 597 412 157
- --------------------------------------------------------------------------------
Total assets $ 4,550 $ 3,979 $ 3,520
SEGMENT DATA (CONTINUED)
(Dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Goodwill included in assets:
Air Conditioning Products $199 $196 $203
Plumbing Products 201 229 247
Automotive Products 359 350 419
Medical Systems 74 69 6
- --------------------------------------------------------------------------------
Total goodwill $833 $844 $875
================================================================================
Capital expenditures
Air Conditioning Products $ 91 $102 $ 93
Plumbing Products 126 154 88
Automotive Products 50 42 46
Medical Systems 11 4 --
- --------------------------------------------------------------------------------
Total capital expenditures $278 $302 $227
================================================================================
Depreciation and amortization:
Air Conditioning Products $ 66 $ 63 $ 51
Plumbing Products 59 53 50
Automotive Products 51 43 43
Medical Systems 14 5 --
- --------------------------------------------------------------------------------
Total depreciation and
amortization $190 $164 $144
================================================================================
</TABLE>
(a) Revenues from external customers are classified by country of origin.
NOTE 15. SUBSEQUENT EVENT (UNAUDITED)
On February 2, 1999, the Company acquired the Bathrooms Division of Blue Circle
Industries PLC, a manufacturer of ceramic sanitaryware, brassware and integrated
plumbing systems, for approximately $417 million with borrowings under the
Company's 1997 Credit Agreement. On February 8, 1999, the Company temporarily
refinanced $60 million of such indebtedness with the proceeds of a borrowing
under a short-term loan facility provided by Goldman Sachs Credit Partners L.P.
The acquired business had 1998 sales of approximately $290 million (at December
31, 1998 exchange rates) and assets at the end of 1998 of approximately $250
million (at December 31, 1998 exchange rates). The acquired business has 3 major
facilities and 9 smaller facilities, located in the United Kingdom and Italy,
and employs approximately 3,200 people. The primary markets for its products are
in the United Kingdom, Italy, Ireland and Germany.
This transaction will be accounted for as a purchase. The Company is in
the process of valuing the acquired assets and liabilities for purposes of
allocating the purchase price. This process is not complete, but based upon
preliminary estimates the Company anticipates that goodwill of approximately
$250 million will be recorded.
F-35
<PAGE> 58
================================================================================
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
- ---------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data) First Second Third(a)(b) Fourth(a)
<S> <C> <C> <C> <C>
Sales $1,493.3 $1,794.8 $1,727.9 $1,637.9
Cost of sales 1,124.2 1,315.2 1,297.9 1,265.5
Income (loss) before income taxes and extraordinary item 60.9 130.9 71.6 (98.0)
Income taxes 24.7 53.0 35.5 18.6
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 36.2 77.9 36.1 (116.6)
Extraordinary loss on retirement of debt -- (49.9) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) $ 36.2 $ 28.0 $ 36.1 $ (116.6)
===============================================================================================================
<CAPTION>
1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 (loss) 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 (loss) 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
===============================================================================================================
</TABLE>
(a) The third quarter of 1998 included restructuring charges of $35 million
($29 million, net of tax benefits). The fourth quarter of 1998 included a
restructuring charge of $165 million ($157 million, net of tax benefits).
(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.
F-36
<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of American Standard Inc.
as of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated February 19,
1998. Our audits also included the financial statement schedule listed in Item
14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young
New York, New York
February 19, 1999
F-37
<PAGE> 60
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Foreign
Balance Additions Currency Balance
Beginning Charged to Other Translation End of
Description of Period Income Deductions Changes Effects Period
<S> <C> <C> <C> <C> <C> <C>
1998:
Reserve deducted from assets:
Allowance for doubtful
accounts receivable $ 30,226 $ 15,236 $ (8,289)(A) $ (1,274) $ (908) $ 34,991
===============================================================================================================================
Reserve for post-retirement
benefits $437,651 $ 60,219 $(44,514)(B) $ 3,191(C) $ 21,391 $477,938
===============================================================================================================================
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)(D) $(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)(E) $(18,735) $473,229
===============================================================================================================================
</TABLE>
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) Primarily includes reclassification from current liabilities.
(D) Includes reclassifications to current liabilities, offset by effect of
acquisition of new businesses.
(E) Includes $10 million reduction in minimum pension liability.
F-38
<PAGE> 1
Exhibit 21
PARENTS AND SUBSIDIARIES
AMERICAN STANDARD INC. (DELAWARE) - REGISTRANT
Subsid-
iaries*
U.S. SUBSIDIARIES:
The American Chinaware Company (Delaware)
American Standard Credit Inc. (Delaware)
American Standard Financial Corporation (Delaware)
American Standard International Inc. (Delaware)
American Standard Medical Systems, Inc. (Delaware)
DiaSorin Inc. (Delaware)
DiaSorin International Inc. (Delaware)
Meretek Diagnostics, Inc. (Delaware)
Sienna Biotech, Inc. (Delaware)
American Standard Shared Services Inc. (Delaware)
American Standard Water Heaters Corporation (Delaware)
Amstan Air Inc. (Delaware)
Amstan Logistics Inc. (Delaware)
A-S Energy, Inc. (Texas)
Hermann Trane Harrisburg Inc. (Delaware)
It Holdings Inc. (Delaware)
Rand Trane Dallas Inc. (Delaware)
FACS Facility Services, Inc. (Texas)
Standard Compressors Inc. (Delaware)
Standard Sanitary Manufacturing Company (Delaware)
The Trane Company (Delaware)
Trane Central America, Inc.
Trane Export, Inc. (Delaware)
Trane Hellas Inc.
WABCO Automotive Control Systems Inc. (Delaware)
WABCO Automotive Holdings Inc.
WABCO Air Compressor Holdings Inc.
WABCO Korea Inc.
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)
(American Standard Inc. & 26 Delaware subsidiaries - Immediate Parents)
A-S Thai Holdings Ltd. (Delaware)
FOREIGN SUBSIDIARIES:
Air Conditioning Products
(Wabco Standard French Holdings SNC - Immediate Parent)
Societe Trane (France)
<PAGE> 2
PARENTS AND SUBSIDIARIES - (Continued)
Subsid-
iaries*
Air Conditioning Products (continued)
(The Trane Company - Immediate Parent)
Trane S.A. (Switzerland)
Trane Korea, Inc. (Korea)
TM Air Conditioning Sdn. Bhd. (Malaysia) (70%)
Trane Airconditioning Pte. Ltd. (Singapore)
TTS Limited (Taiwan) (60%)
Trane de Argentina S.A. (Argentina)
Trane de Colombia (Colombia)
(American Standard (U.K.) Limited - Immediate Parent)
Trane Limited (U.K.)
Trane (United Kingdom) Limited (U.K.)
Trane (Scotland) Limited (Scotland)
(American Standard International Inc. & WABCO Standard TRANE B.V. -
Immediate Parents)
American Standard Trane Japan, Ltd. (Japan)
Trane Reinetsu Service Co., Ltd. (Japan)
(WABCO Standard TRANE B.V. - Immediate Parent)
TDU Pty. Ltd. (Australia) (80%)
Trane AirConditioning B.V. (Netherlands)
Trane Espanola S.A. (Spain)
Trane Aire Acondicionado, S.A. (Spain)
Trane (Schweiz) AG (Switzerland)
Trane Italia S.r.l. (Italy)
(Trane Hellas Inc. - Immediate Parent)
Trane Hellas S.A. (Greece)
(WABCO Standard TRANE B.V. & Societe Trane - Immediate Parents)
Trane S.A.E. (Egypt) (91.58%)
(American Standard Inc. - Immediate Parent)
TAC Distribution Pte. Ltd. (Singapore)
(American Standard Inc. & 3 Delaware subsidiaries - Immediate Parents)
TROC Airconditioning Ltd. (Taiwan )
Transportation Products
(WABCO Standard GmbH and Wabco Standard Trane Holdings Inc. -
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 Espana S.A. (Spain)
WABCO Europe B.V. (Netherlands)
WABCO (Schweiz) AG (Switzerland)
WABCO Standard French Holdings SNC (France)
WABCO Westinghouse S.A. (France)
WABCO France SNC (France)
<PAGE> 3
PARENTS AND SUBSIDIARIES - (Continued)
Subsid-
iaries*
Transportation Products (Continued)
(Ideal Standard S.r.l. 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.r.l. - Immediate Parent)
WABCO Automotive Italia S.p.A. (Italy)
(WABCO Standard Trane Holdings Inc. - Immediate Parent)
WABCO-Standard GmbH (Germany)
WABCO Fahrzeugsysteme GmbH (Germany)
WABCO GmbH & Co. OHG (Germany)
WABCO GmbH (Germany)
WABCO Perrot Bremsen GmbH (Germany)
(WABCO Automotive Holdings Inc. - Immediate Parent)
WABCO GmbH (Bonn, Germany)
Building Products
(American Standard Inc. and A-S Thai Holdings Ltd. - Immediate Parents)
American Standard Sanitaryware (Thailand) Public Company Limited
(Thailand) (81.3%)
(American Standard Inc. - Immediate Parent)
EBS Eczacibasi Banyo Kuvetleri Sanayi Ve Ticaret A.S. (Turkey) (50%)
Egyptian American Sanitary Wares Co. S.A.E. (Egypt) (59.2%)
American Standard Philippine Holdings Inc. (Philippines)
(American Standard Inc. & American Standard Philippine Holdings Inc.-
Immediate Parents
Sanitary Wares Manufacturing Corporation (Philippines) (61.99%)
(WABCO Westinghouse S.A. - Immediate Parent)
Porcher, 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. & WABCO Standard TRANE B.V.
- Immediate Parents)
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) 2
(WABCO Standard Trane B.V. and Wabco Standard Trane Holdings Inc.
- Immediate Parents)
Ideal Standard s.r.l. (Italy)
Ideal Standard S.A. (Greece)
Sanistan B.V. (Netherlands) (94%)
Keramicke Zavody Teplice, AS (Rep. of Czechoslovakia) (76%)
<PAGE> 4
PARENTS AND SUBSIDIARIES - (Continued)
Subsid-
Iaries*
(Wabco Standard Trane Holdings Inc. - Immediate Parent)
WABCO-Standard GmbH (Germany)
Ideal Standard Sanitar GmbH (Germany)
Ideal Standard GmbH & Co. OHG (Germany)
American Standard Korea, Inc. (Korea )
(American Standard International Inc. - Immediate Parent)
Ideal-Standard GmbH (Hannover, Germany)
(American Standard International Inc. & Hermann Trane Harrisburg
Inc. - Immediate Parents)
PT Indo American Ceramics (Indonesia)
(American Standard International Inc. & WABCO Standard TRANE B.V.
- Immediate Parents)
Ceramic Sanitaryware Pte. (Singapore)
Amstan Sanitaryware Inc. (Vietnam) (84.21%)
(WABCO Standard TRANE B.V. - Immediate Parent)
Ideal Standard Europe B.V. (Netherlands) 2
(American Standard Inc., WABCO Standard TRANE B.V. & ESAN -
Immediate Parents)
Islamic Acrylic Company (MISR Acrylic) S.A.E. (Egypt)
Medical Systems
(WABCO Standard Trane B.V. and DiaSorin International Inc.
- Immediate Parents)
DiaSorin International B.V. (Netherlands)
DiaSorin, GmbH (Germany)
DiaSorin, S.A./N.V. (Belgium)
DiaSorin, S.A. (Spain)
DiaSorin S.A. (France)
DiaSorin 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.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-3 pertaining to the registration of $750,000,000 of debt securities
(Registration No. 333-67943) of our reports dated February 19, 1999 with respect
to the consolidated financial statements of American Standard Inc. and the
financial statement schedule included in this Annual Report (Form 10-K) of
American Standard Inc.
Ernst & Young LLP
New York, New York
April 6, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 64,824
<SECURITIES> 0
<RECEIVABLES> 973,837
<ALLOWANCES> 34,991
<INVENTORY> 458,099
<CURRENT-ASSETS> 1,591,261
<PP&E> 1,852,035
<DEPRECIATION> 611,076
<TOTAL-ASSETS> 4,550,473
<CURRENT-LIABILITIES> 2,359,056
<BONDS> 1,527,518
0
0
<COMMON> 0
<OTHER-SE> (344,801)
<TOTAL-LIABILITY-AND-EQUITY> 4,550,473
<SALES> 6,653,881
<TOTAL-REVENUES> 6,653,881
<CGS> 5,002,771
<TOTAL-COSTS> 5,002,771
<OTHER-EXPENSES> 4,076
<LOSS-PROVISION> 15,236
<INTEREST-EXPENSE> 188,437
<INCOME-PRETAX> 165,376
<INCOME-TAX> 131,784
<INCOME-CONTINUING> 33,592
<DISCONTINUED> 0
<EXTRAORDINARY> (49,909)
<CHANGES> 0
<NET-INCOME> (16,317)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit (99)(i)
NEWS RELEASE
FOR IMMEDIATE RELEASE
AMERICAN STANDARD'S DIASORIN
ANNOUNCES VIRUS DISCOVERY
Piscataway, NJ - February 24, 1999 - DiaSorin Inc., a member of the Medical
Systems Group of American Standard Companies Inc. (NYSE: ASD), today announced
that its scientists have discovered a previously unidentified virus with several
variants. The virus and its variants have unique genomic sequences that have
been characterized at the molecular level and a prototype assay has been
developed.
Preliminary studies on a limited number of subjects appear to link this virus to
advanced liver disease of as yet unknown cause. Furthermore, the virus has been
found in a high percentage of intravenous drug abusers. The prevalence of the
virus in healthy blood donors is low.
Recognizing the difficulty of linking a new viral agent to diseases of unknown
cause and the potential significance of these findings to blood banking,
DiaSorin intends to extend its studies to assess the biological significance of
this viral agent in an expeditious manner. To this end, DiaSorin is inviting
clinical investigators to participate in studies of this virus.
Patent applications covering this discovery have been filed. Its future
commercialization potential, however, is considered speculative at the present
time and will depend on, among other things, issuance of the patents applied for
and development of additional evidence confirming linkage of the virus with
disease of presently unknown cause.
American Standard is the global, diversified manufacturer of Trane(R) and
American Standard(R) air conditioning products, American Standard(R), Ideal
Standard(R), Standard(R) , Porcher(R), Armitage Shanks(R) and Dolomite(R)
plumbing products, WABCO(R) commercial and utility vehicle braking and control
systems, LARA(R) and Copalis(R) medical diagnostic systems and DiaSorin(TM)
medical diagnostic products.
For Further Information Contact:
Ray Pipes (732) 980-6095
The latest news release and corporate information can be heard on
1-888-ASD-NEWS. Additional information on American Standard is available on the
Company's Worldwide Web site at http://www.americanstandard.com
<PAGE> 1
Exhibit (99)(ii)
NEWS RELEASE
FOR IMMEDIATE RELEASE
AMERICAN STANDARD BOARD FORMS NEW
STRATEGIC COMMITTEE
Piscataway, NJ - March 9, 1999 - Emmanuel A. Kampouris, Chairman, President and
Chief Executive Officer of American Standard Companies Inc. (NYSE:ASD) today
announced that its Board of Directors has formed a new Committee, designated as
the Strategic Initiative and Management Development Committee. Among the
responsibilities of the new Committee is a plan of succession for corporate
management, including the offices of Chairman, President and Chief Executive
Officer, as well as an expansion of the board.
Mr. Kampouris stated that "As I approach retirement age, it is appropriate and
timely to select my successor to lead the Company in the 21st century and build
upon its outstanding growth over the two centuries preceding it."
The new Committee will also be evaluating strategic options for the Company's
Medical Systems business. Mr. Kampouris added, "In view of the Company's
recently announced discovery of a virus correlated with advanced liver disease,
our evaluations of strategic options for the Medical Systems Business have taken
on increased importance. The medical research community has responded to the
discovery with interest and we want to maximize its potential for our
shareholders."
Separately, the Company announced that it has determined that the Armitage
Shanks and Dolomite plumbing products businesses acquired in February are
expected to be accretive to earnings starting in the first quarter of 1999 and
that, based upon recent evaluations of the acquired businesses, significant
additional synergies are expected to be realized. Mr. Kampouris remarked, "We
are very pleased that our new associates in the UK and Italy are beginning to
apply our Demand Flow Technology skills to their manufacturing processes and we
are confident that their already profitable businesses can be further improved."
Comments in this release contain certain forward-looking statements which are
based on management's good faith expectations and belief concerning future
developments. Actual results may differ materially from these expectations as a
result of many factors, relevant examples of which are set forth in the
Company's 1997 Annual Report on Form 10-K and in the "Management's Discussion
and Analysis" section of the Company's Annual Report To Shareholders.
American Standard is the global, diversified manufacturer of Trane(R) and
American Standard(R) air conditioning products, American Standard(R), Ideal
Standard(R), Standard(R) , Porcher(R), Armitage Shanks(R) and Dolomite(R)
plumbing products, WABCO(R) commercial and utility vehicle braking and control
systems, LARA(R) and Copalis(R) medical diagnostic systems and DiaSorin(TM)
medical diagnostic products.
For Further Information Contact:
Ray Pipes (732) 980-6095
The latest news release and corporate information can be heard on
1-888-ASD-NEWS. Additional information on American Standard is available on the
Company's Worldwide Web site at http://www.americanstandard.com
